India Inc says credit still tight, see more steps

MUMBAI: Companies are still finding liquidity conditions tight despite some aggressive moves by policy makers over the past two months, and more steps might be needed to keep credit flowing, senior executives said on Tuesday. Analysts increasingly expect economic growth could slow to below 7 per cent in the 2008/09 year ending March 2009, with forecasts being downgraded as fears of a global recession grow, from rates of 9 per cent or higher in the past three years. "We have not seen any sharp slowdown in business so far, but there are issues of funding and there are issues of interest rates," K Chandrashekar, senior vice-president of corporate finance at Mahindra and Mahindra, India's top utility vehicle and tractor maker, told reporters at a corporate treasury conference in Mumbai.

Read more at The Economic Times

PM expects GDP growth to decline to 7-7.5% next fiscal

Muscat: The global financial crisis is expected to hurt the Indian economy more than previously anticipated, with Prime Minister Manmohan Singh on Sunday projecting gross domestic product (GDP) growth to decline to 7-7.5% next fiscal.
Although the government and the Reserve Bank of India (RBI) are battling contraction in credit growth, Singh said the fundamentals of the economy were strong and banks were safe, and promised accelerated efforts to prop up growth.
“Due to the current international economic and financial situation, our growth rate may come down somewhat next year. However, we still hope to achieve a growth rate of 7-7.5% next year,” he said, addressing the Indian expat community here.
RBI had last month said Inida’s $1.2 trillion (Rs57.36 trillion) economy may grow at 7.5% this fiscal as opposed to 9% in 2007-08. The rate in 2008-09 would be the weakest since 2005.

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Funds sell record Rs22,271 crore of debt in Oct

Mumbai: Indian mutual funds sold debt worth Rs22,271 crore in the first three weeks of October because investors are reluctant to infuse fresh money to replenish outflows caused by a surge of redemptions in a volatile market.

Analysts say the measures taken by the Reserve Bank of India (RBI) to ease a cash and credit crunch will take time to soothe the Rs5.29 trillion mutual fund industry, but inflows should return soon with the overnight inter-bank money market rate declining to around 6.5% from around 20% at the peak.
Higher call rates encourage investors in debt funds, particularly banks, to withdraw money from mutual funds and lend in the overnight call money market to earn more.
RBI has cut its policy rate by 100 basis points and banks’ cash reserve ratio (CRR), or the proportion of deposits that banks need to keep with the central bank, by 250 basis points to release Rs1 trillion into the banking system. One basis point is one-hundredth of a percentage point. Besides, it also created a Rs20,000 crore liquidity window for mutual funds.
So far, mutual funds have drawn only Rs8,800 crore from this window. On Friday, there was no taker.

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Markets offer early warning signals

India now has the distinction of being one of the rare countries to introduce new derivatives markets this year, at a time when most countries are clamping down with bans or more regulations.

Derivatives, especially the exotic kinds, have become a bad name across the world. India, too, has had its share of problems with over-the-counter (OTC) forex derivatives. One good outcome of all this is that the case for exchange-traded derivatives has only become stronger vis-a-vis OTC markets. It has become increasingly clearer to more policymakers and market participants that wherever standardization is possible, a derivatives contract must be listed on an exchange to avail of the benefits of transparency and the elimination of credit risk through centralized clearing and settlement.

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Finance ministry limits ECB inflows to $20mn

The finance ministry today released revised guidelines for external commercial borrowings (ECBs) limiting inflows from such borrowings into the country at $20 million, and for use only for foreign currency expenditure for permissible end-uses of ECB.

According to a release on the website of the finance minsitry, "borrowers raising ECBs more than $20 million shall park the proceeds overseas for use as foreign currency expenditure for permissible end-uses. The above modifications would be applicable to ECB exceeding $20 million per financial year both under the automatic route and under the approval route."

The release added that borrowers proposing to avail ECB up to $20 million for rupee expenditure for permissible end-uses would require prior approval of the Reserve Bank under the approval route. However, such funds shall be continued to be parked overseas until actual requirement in India.

"All other aspects of ECB policy such as $500 million limit per company per year under the automatic route, eligible borrower, recognised lender, average maturity period, all-in-cost ceiling, pre-payment, refinancing of existing ECB and reporting arrangements remain unchanged," the release added.

The release further said that the new conditions would not apply to borrowers who have already entered into loan agreements and obtained loan registration numbers from the Reserve Bank.

RBI mulls currency futures exchange

Foreign institutional investors unlikely to get a look-in.

The Reserve Bank of India (RBI) is exploring a dedicated currency futures exchange, after taking an in-principle decision to launch rupee-denominated futures.

In its meeting with market participants in Juyly, the RBI has also decided to revive interest rate futures which have failed to take off after being introduced in June 2003.

The central bank is not in favour of currency futures being traded on stock or commodity exchanges as they are regulated by the Securities and Exchange Board of India and Forward Markets Commission (FMC), respectively.

This could dilute RBI’s regulatory power on domestic foreign exchange market which, in turn, could have implications on exchange rate management — RBI’s sole prerogative.

Moreover, the discussion also highlighted the legal issues if futures are allowed on commodity exchange as it happens internationally or on stock exchanges like NSE or BSE.

Read more in Business Standard

Liquidity management on top of RBI`s agenda

Liquidity management is expected to top the agenda in the first quarter review of the monetary policy by the Reserve Bank of India (RBI) tomorrow.

The immediate task at hand for the RBI would be to convey whether it is still in the tight monetary policy mode, irrespective of an extended pause in interest rate increases.

Flush liquidity, apart from softening short-term money market rates, poses inflationary risks and also threatens to push credit growth back towards the peak of around 30 per cent witnessed in the previous three years.

The liquidity has been largely on account of the RBI’s purchases of dollars from the market to check the rupee’s sharp rise. Though foreign fund inflows into equities have remained strong, overseas borrowings and foreign direct investment have equally contributed to a glut in inflows.

Read more at Business Standard

Credit Policy Impact: Re moves up to 40.38/$

The rupee rallied sharply today on buying by global investors as the Reserve Bank of India lifted the daily borrowing limit for money market operations. A surging stock market also attracted inflows, dealers said.

The rupee ended at 40.38 per dollar rising from Monday's close of 40.54 per dollar, and moved within the striking distance of last week's peak of 40.20 per dollar.

RBI hikes CRR rates by 50 basis pts to 7 pc

NEW DELHI: The Reserve Bank Governor Dr Yaga Venugopal Reddy has hiked cash reserve ratio by 50 basis points to 7 per cent while the CRR repo and reverse repo rates as well as the bank rates remain unchanged.

Inflation target for 07-08 remain at 5 per cent according to the first quarter credit policy review unveiled on Tuesday. GDP forecast for FY-08 has been set at 8.5 per cent. The new CRR rate will come into effect from August 04.

The RBI has also removed 3000 crore reverse cap from August 06 The other highlights of the policy are as follows:

• Hedge funds pose significant risks to the markets says credit policy.

• Financial stability to add to market stance says RBI.

• Inflation targeted at 4 to 4.5 % in the medium term. Holding inflation within 5.0 per cent in 2007-08 assumes priority in the policy hierarchy, while reinforcing the medium-term objective to condition policy and perceptions to reduce inflation to 4.0-4.5 per cent on a sustained basis.

• CRR to be used for managing liquidity.

• Domestic outlook was favourable.

• Monetary stance spelt out in February 2007 continues.

• Credit policy guided by domestic policy.

ADB in talks with India on currency swap

The Asian Development Bank (ADB) is in talks with India about a currency swap that would help fund infrastructure projects without adding to the inflows that are complicating monetary policy, senior officials said on Thursday.

Officials from the Manila-based ADB told the media on a visit to Mumbai a dollar-rupee currency swap could help fund India's infrastructure development needs, now estimated at $475 billion over five years, without currency risk to the end-user.

India's strong rate of economic growth and soaring stock market is attracting billions of dollars in direct and portfolio foreign investment, pushing up the rupee and causing a monetary policy headache for the Reserve Bank of India (RBI).

Read more in The Economic Times

RBI's hands-off strategy irks IT industry

India's IT industry, the flag bearer of a resurgent economy, wants the government to step in and check the rupee's unprecedented rise to nine-year highs in an effort to protect their earnings.

The rupee has gained almost 10 per cent this year and 14 per cent over the past 12 months against the dollar, denting the earnings of an industry that gets two-thirds of its 50 billion dollars in annual revenue from the US.

"It's not a market driven by market forces alone," said Kiran Karnik, president of the National Association of Software and Services Companies (NASSCOM), in an interview here. "These are not normal times."

Read more in The Economic Times

RBI hikes CRR by 50bps, repo by 25bps

The Reserve Bank of India (RBI) today abandoned its monetary policy stance of equal emphasis on price stability and growth, and decided to remain solely focussed on inflation containment. As part of its further monetary tightening, the central bank raised the cash reserve ratio (CRR) for third time since December 2006 by 50 basis points to 6.50% with effect from April 28 and also raised the repo rate by 25 basis points to 7.75%, the rate at which it lends to banks against securities. “The stance of monetary policy has progressively shifted from an equal emphasis on price stability along with growth, to one of reinforcing price stability with immediate monetary measures, and to take recourse to all possible measures promptly in response to evolving circumstances,” RBI said. RBI MOVES AGAINST INFLATION Date Action March 30, 2007 CRR hiked by 50 bps to 6.5%; Repo rate hiked by 25 bps to 7.75% Feb 14, 2007 CRR hiked by 50 bps to 6% Jan 31, 2007 Repo rate hiked by 25 bps to 7.5% Jan 31, 2007 General provisioning on standard commercial real estate loans, personal loans & capital market loans doubled to 2% Dec 11, 2006 CRR hiked by 50 bps to 5.5% Oct 31, 2006 Repo rate raised by 25 bps to 7.25% July 25, 2006 Reverse repo and repo rates hikes 25 bps each to 6% and 7% respectively June 8, 2006 RBI raises reverse repo and repo rates by 25 bps to 5.75% and 6.75%, respectively The central bank’s monetary tightening measures came even as the banking system was reeling under severe liquidity strain, with call rates having in recent days shot up to ridiculously high rates of 70-80% and year-on-year inflation at around 6.5% for the third week in succession up to March 17, 2007. Since the February 13 measures, when CRR was raised by 50 basis points, RBI said data has shown that industrial production increased by 11% during April 2006-January 2007 as against 8% a year earlier and the year-on-year money supply (M3) growth up to March 16, 2007 was 22% as against 16.9% a year ago. At a disaggregated level, prices of primary articles, fuel group and manufactured products registered a year-on-year increase of 12%, 1% and 6.6% as on March 17, 2007 as against 3.7%, 8.9% and 1.7% a year ago. The year-on-year growth in non-food bank credit of scheduled commercial banks (SCBs) was 29.5% as on March 16, 2007 as against 32.7% a year ago. The third increase in CRR in five months will drain Rs 43,000 crore from the banking system. The RBI has also reduced the interest it will pay on CRR balances to 0.50% from 1%. The RBI release issued this evening:

In the recent period, monetary policy has been engaged in managing the transition to a higher growth path while ensuring that pressures on actual inflation and inflation expectations are contained. At this juncture, it is important to reinforce the measures already taken for maintaining price stability and anchoring inflation expectations in order to sustain the growth momentum. The role of monetary policy is to maintain stability and so contribute to growth on an enduring basis.

As indicated in the Third Quarter Review of the Annual Statement on Monetary Policy for the year 2006-07, "the outlook for inflation assumes criticality in terms of policy monitoring and action" (paragraph 76). Furthermore, "a judicious balancing of weights assigned to monetary policy objectives would accord priority to stability in order to support growth on a sustained basis" (paragraph 82). Accordingly, it is necessary to reinforce the emphasis on price stability and well-anchored inflation expectations, as set out in the stance of the Third Quarter Review, with a demonstrated commitment in terms of credible policy monitoring and actions. The conduct of monetary policy should continue to demonstrate that inflation beyond the tolerance threshold of the Reserve Bank is unacceptable and that the resolve to ensure price stability is always backed by timely and appropriate policy responses.

In recognition of the cumulative and lagged effects of monetary policy, the Reserve Bank began a graduated withdrawal of accommodation in mid-2004. Since September, 2004 repo/reverse repo rates have been increased by 150 basis points each, the CRR has been raised by 100 basis points, risk weights have been raised in the case of housing loans (from 50 per cent to 75 per cent), commercial real estate (from 100 per cent to 150 per cent) and consumer credit (from 100 per cent to 125 per cent) and general provisioning requirement for standard advances in specific sectors has been raised to 1.0 per cent of standard advances. On February 13, 2007 a further two-stage increase of 25 basis points each in the CRR was announced, effective from the fortnights beginning February 17 and March 3, 2007. Liquidity management was modified on March 2, 2007 to put in place an augmented programme of issuance under the market stabilisation scheme (MSS) with a mix of treasury bills and dated securities in a more flexible manner. In view of the enhanced MSS programme and the need to conduct LAF as a facility for equilibrating very short-term mismatches, daily reverse repo absorptions were limited to a maximum of Rs.3,000 crore, effective March 5, 2007. The stance of monetary policy has progressively shifted from an equal emphasis on price stability along with growth to one of reinforcing price stability with immediate monetary measures and to take recourse to all possible measures promptly in response to evolving circumstances

Since the monetary measures that were announced on February 13, 2007 there have been some notable developments, namely,

(a) The general index of industrial production increased by 11.0 per cent during April 2006 to January 2007 as against 8.0 per cent a year ago, as per the release of the Central Statistical Organisation (CSO) of March 12, 2007.

(b) Year-on-year inflation based on the wholesale price index (WPI), has ruled around 6.5 per cent for the third week in succession up to March 17, 2007 as per the data released today. At a disaggregated level, prices of primary articles, fuel group and manufactured products registered a year-on-year increase of 12.0 per cent, 1.0 per cent and 6.6 per cent as on March 17, 2007 as against 3.7 per cent, 8.9 per cent and 1.7 per cent a year ago.

(c) inflation based on the consumer price index for industrial workers (CPI-IW), urban non-manual employees (CPI-UNME), agricultural labourers (CPI-AL) and rural labourers (CPI-RL) showed year-on-year increase to 7.6 per cent, 7.8 per cent, 9.8 per cent and 9.5 per cent in February 2007, respectively, from 5.0 per cent, 4.8 per cent and 5.0 per cent and 4.7 per cent, a year ago.

(d) The year-on-year growth in non-food bank credit of scheduled commercial banks (SCBs) was 29.5 per cent as on March 16, 2007 as against 32.7 per cent a year ago.

(e) The year-on-year growth in aggregate deposits of SCBs was 24.8 per cent as on March 16, 2007, over and above 18.0 per cent a year ago.

(f) The year-on-year money supply (M3) growth up to March 16, 2007 was 22.0 per cent as against 16.9 per cent a year ago.

(g) Continuation of accelerated external inflows has resulted in accretion of US $ 18.6 billion to the foreign exchange reserves, taking their level from US $ 179.1 billion at the end of January, 2007 to US $ 197.7 billion on March 23, 2007.

(h) Additional liquidity amounting to Rs.23,894 crore was absorbed under the market stabilisation scheme (MSS) during February 1 - March 30, 2007.

(i) Globally, the process of withdrawal of accommodation in monetary policy is being vigorously pursued. Since mid-February, 2007 among the leading central banks, the European Central Bank and the Bank of Japan have raised key policy rates by 25 basis points each, while the People’s Bank of China raised one year lending rates by 27 basis points and the reserve requirements by 50 basis points. There has been no change in the policy rates of the US Federal Reserve, the Bank of England, the Bank of Canada, the Reserve Bank of Australia and the Reserve Bank of New Zealand all of which had undertaken prior policy action.

In the light of the current macroeconomic, monetary and anticipated liquidity conditions, and with a view to containing inflation expectations, it is critical to take demonstrable and determined action on an urgent basis. Accordingly, the following monetary measures are being taken consistent with the stance of the monetary policy:

i) It has been decided to increase the fixed repo rate under the LAF by 25 basis points from 7.50 per cent to 7.75 per cent with immediate effect.

ii) The other arrangements regarding the operations of LAF announced on March 2, 2007 will continue until further notice.

iii) The policy of withdrawal of semi-durable and durable elements of liquidity through treasury bills and dated securities under MSS will continue. Accordingly, the Reserve Bank would, subject to variations in liquidity conditions, announce auctions of MSS covering issuances of treasury bills and dated securities on a weekly basis. The auction for Treasury bills under MSS would continue to take place by notifying the amounts under MSS every week along with the regular auction calendar as has been the existing practice. The Reserve Bank would retain the flexibility of reviewing the schedule of auctions under the MSS from time to time, in response to evolving circumstances.

iv) The cash reserve ratio (CRR) of scheduled commercial banks (SCBs), regional rural banks (RRBs), scheduled co-operative banks and scheduled primary (urban) co-operative banks is being increased by one-half of one percentage point of their net demand and time liabilities (NDTL) in two stages, effective from the fortnights indicated below:

Effective Date (i.e., the fortnight beginning from) CRR on net demand and time liabilities (per cent)

April 14, 2007 6.25%

April 28, 2007 6.50%

As a result of the above increase in the CRR, an amount of Rs.15,500 crore of resources of banks would be absorbed.

v) The interest rate applicable on eligible CRR balances (i.e., the amount of reserves between the statutory minimum CRR and the CRR prescribed by the RBI) shall be reduced to 0.5 per cent per annum from the present 1.0 per cent per annum with effect from the fortnight beginning April 14, 2007.

Active monitoring of macroeconomic, overall monetary and liquidity conditions will continue and all monetary policy actions would be considered in response to the evolving situation.

Direct entry for hedge funds

The lure of the much-feared participatory notes, through which hedge funds now invest in the Indian stock markets, may soon wane.

The Securities and Exchange Board of India (Sebi), the capital markets regulator, has for the first time directly invited hedge funds to register with it and participate in the Indian stock markets without the cover of participatory notes.

Participatory notes are often seen as tools for money laundering and there have been numerous calls, including from the Reserve Bank of India, to curtail them.

Read more at Business Standard

FM confident about reigning in prices, inflation

Expressing confidence about checking soaring prices, Finance Minister P Chidambaram today said inflation would be controlled step by step following a series of measures announced by the Reserve Bank of India.

Admitting that inflation had not come down in the last six weeks, he said: "It is 6.1, 6.3..6.05..6.4 per cent etc... not a big rise in inflation nor a steep fall. It has remained above 6% on an average. I agree it is there."

Inflation surged to 6.46% during the week ended March 3 as against 6.10% in the preceding week.

Similar inflation rates were witnessed in 2000-01 continuously for 48 weeks, and for 22 weeks it even crossed 7%, Chidambaram told reporters at Sivaganga, about 60 km from here, after reviewing various on-going projects in the district.

Read more at Business Standard