My comment in Live mint

Posted: Thu, Feb 5 2009. 9:31 PM IST

Inflation slows to 5.07%, near 1-yr low

The annual inflation rate was 4.78% during the corresponding week of the previous year

Cherian Thomas / Bloomberg

New Delhi: Inflation slowed to near a one-year low, giving the Reserve Bank of India (RBI) more room to cut interest rates and stimulate growth.

Wholesale prices fell 5.07% in the week to 24 January from a year earlier after gaining 5.64% the previous week, the commerce ministry said in New Delhi on Thursday. Economists expected an increase of 5.25%.

RBI governor D. Subbarao had said last week inflation will slow to below 3% by 31 March and indicated the central bank will reduce rates to help the economy weather the global recession. A top aide of Prime Minister Manmohan Singh said on Thursday that rate cuts may come after the government’s interim budget on 16 February.

“Interest rates are bound to fall as prices ease and the economy slows,” said N. R. Bhanumurthy, an economist at the Institute of Economic Growth in New Delhi. “The central bank will have to assess the government’s borrowing programme before it sets rates.”

The central bank will “have to figure out” the liquidity that will be needed in the banking system after seeing the government’s borrowing programme for the fiscal year starting 1 April, said Suresh Tendulkar, chairman of Prime Minister’s economic advisory council.
The government will announce an interim budget on 16 February as its five-year term ends in May. RBI kept interest rates unchanged last week after lowering them to a record on 2 January to help shield Asia’s third largest economy from a global slump.

RBI’s reverse repurchase rate is at 4% and the repurchase rate at 5.5%.

Wholesale prices in the week to 24 January fell after the index of manufactured products declined by 0.5%, Thursday’s statement said.. The index of fuel, power and light rose 0.6% on higher prices of naphtha and furnace oil. Thursday’s inflation rate may be revised in two months, after the government receives additional data. The commerce ministry cut the inflation rate for the week ended 29 November to 7.86% from 8%.

Anjali Said:
The inflation figures were in spotlight last year after it hit double digits. However end August 2008 proved to be a turning point as inflation figures have been declining since then and from November 2008 we have seen single digit inflation numbers, thanks to sharp decline in crude oil prices together with the slide in prices of metals, foodgrains and cement. Starting January 2009 inflation fell to an 11-month low of 5.24% on week ended 3 January 2009, but an eight-day nationwide truckers' strike that pushed up food articles prices caused the inflation to rise in the next two weeks. But with cut in domestic petrol prices by Rs. 5 a litre, diesel by Rs. 2 and cooking gas by Rs. 25 per cylinder the overall WPI based inflation is set to tumble down further. The Reserve Bank of India has also revised inflation projection downward to 3% by end fiscal year 2008-09 from 7% set earlier, in third quarter policy review 2008-09.
Posted On 2/6/2009 11:28:50 AM

My Comment in Business Standard

Monday, Aug 11, 2008

Industrial production likely to improve in June: Analysts
Bs Reporter / New Delhi August 11, 2008, 0:10 IST

Production output from factories in June is likely to improve with annual growth seen at 5-7 per cent as against 8.91 per cent in the same month last year, according to economists. The June data for the Index of Industrial Production (IIP) is to be released on Tuesday.
In May, the IIP grew 3.8 per cent due to dismal performance by the manufacturing sector.
“IIP growth is likely to be close to 5 per cent in June, which is an improvement from the previous month. However, the overall IIP growth is likely to remain subdued,” said Shubhada Rao, chief economist, Yes Bank.

Rao said the production growth in core industrial sectors like electricity remained subdued in June while that of crude oil declined. Moreover, due to a high growth of around 23 per cent in the capital goods sector in June 2007, growth in the sector is likely to soften this June.
According to an analysis by Saugata Bhattacharya, vice-president, Axis Bank, IIP growth in June is likely to be 5-7 per cent. However, the bank’s CLI (Consolidated Leading Indicators) suggests that industrial growth is likely to fall in July.

“Bank credit growth, for instance, has been increasing significantly since April, although a significant part of this is likely to have been short-term credit to oil-marketing companies (which seems to have been corroborated by the RBI data up to May),” said Bhattacharya.
“Although there is no clear idea of the relative contribution of this short-term credit on the growth rate, the overall effect of credit growth on the CLI level is clearly overstated. There was also an uptake in cement dispatches, which probably resulted in more railway freight movement in June, which is taken as a signal of logistics support. Currency with the public, an indicator of purchasing power, has also been increasing since April,” he added.

Comment
anjalir on 11-AUG-08
No doubt based on the above discussion the IIP may rise but the rising interest rates and high cost of inputs cannot be ignored. In a rising interest rates scenario, where easy money gets wiped out (thanks to equities turning unattractive), banks also turn stringent while lending to companies. continue...
anjalir on 11-AUG-08

For now, the fact that the prime lending rates (PLR), at which companies typically borrow from banks, have shot up and currently hover at about 15-17% as against the 12-13% 3 years back is a matter of concern. this increases the cost of production which leads to higher selling prices thus low demand and finally low production as there is no or very less demand. Also the rising interest rate reduces purchasing power and thus low demand n resultant low production.
anjalir on 11-AUG-08

Anchoring inflation at the cost of growth?

The first quarter review of Annual Monetary policy for the year 2008-09 came above the market expectation. The market expected a rise of 25 basis point in repo rate, which was hiked by 50 bps to 9.0% with immediate effect. This short-term rate at which the RBI lends cash to banks was last raised on June 24 by 50 basis points to 8.5%. The move is directed at cooling inflation that is running above 11.80% on an annual basis by containing demand.

The central bank has also raised the CRR (percentage of banks' deposits which they must keep with the central bank) by 25 basis points from the existing 8.75%. This will come into effect from August 30.

The reverse repo rate (the short-term rate at which the central bank absorbs cash from the market) remains unchanged at 6%. It has also held the Bank Rate (rates used to price long-term loans to firms and individuals) steady at 6.0%.

The RBI has maintained hawkish stance and given high priority to price stability, anchoring inflation expectations and orderly conditions in financial markets. This while sustaining the growth momentum.

The fresh hikes in rates have come at a time when previous hikes started showing their impact with inflation slightly moderating to 11.89% for the week ended 12 July 2008 above the previous week's annual rise of 11.91%. The twin hikes follows RBI’s assessment that inflation will remain high for some more time given the high global food and crude oil prices.


The rates hike will tighten liquidity in the system, making bond yields to rise. The investors’ fret of liquidity will part ways from Government securities making them unattractive investments. The prices of government securities remained bullish on 28 July since the market discounted a 25 basis point hike in the repo rate and unchanged cash reserve ratio in the monetary policy to be announced by the central bank. This led to buying demand, especially in the benchmark ten-year paper.

The bullish sentiment was further reinforced with the macroeconomic review of the Reserve Bank of India on the eve of its monetary policy review. In its review, the RBI has brought down its growth forecast to 7.9% from the earlier 8.1%. Since the growth forecast is moderate, the market assumed that credit offtake will be modest and in turn investments in government securities will grow. The prices of ten year benchmark 8.24% 2018 rose by 20-30 paise and therefore the yields fell from 9.17% last week to 9.07% on 28 July.

However, with the hike in key rates bond yields spiked up sharply to just short of seven-year highs. The yields are expected to remain firm and bond prices will move southward. The call rates may again zoom over 9%.

Also the rate hikes could lead to banks raising their deposit and lending rates again. However if the lending rates go up the credit demand may squeeze. The bank credit of all schedule commercial banks has witnessed acceleration in the month of June over last year (based on the week-on-week data) on above-normal demand from oil companies (as well as a degree of base effect). It will dent consumer sentiment, dampen housing demand, expansion plans of India Inc. and demand for inputs from cement to steel could slow growth more sharply when global environment is also uncertain. Growth has, in fact, already slowed down due to the tight monetary policy maintained by the RBI in the past year, as is borne out by the tempering GDP growth rate and IIP data. M3 yoy growth at 20.5% remains obstinately above the RBI’s comfort zone of 16.5-17%.

Thus overall the hike in rates by RBI can be seen impacting the economy in two ways. Firstly, reducing demand and thus anchoring demand driven inflation and secondly, impacting the economic growth which is already witnessing signs of moderation.

Exports up 35% in February 2008, FY08 goal can be achieved?

Merchandise exports registered a robust 35.25% growth to $14.23 billion during February 2008, as against $10.52 billion in the same month last year. This is the fastest export growth in the last four months and comes despite a strong rupee, which has risen over 10% against the US dollar in the last 12 months.

India’s export growth in the April-February 2007-08 period is pegged 22.9% higher than the comparable period in the previous fiscal. The modest performance in exports notwithstanding, exports from certain labour intensive sectors like textiles, handicrafts and some leather items are continuing to experience negative growth.

The buoyancy in exports, does not convey the real picture. Commerce ministry data show that the sectors with higher import content like petroleum products, gems and jewellery, engineering goods, pharmaceuticals, chemicals, and agriculture have provided the momentum for growth in exports, which have been hit by the appreciation of the rupee and infrastructure bottlenecks.

The real benefit to the economy is when sectors with less import content like textiles, handicrafts and leather show a higher export growth instead of petroleum products or gems and jewellery where the import content is high.

India’s imports during February 2008 are valued at $18.46 billion, representing an increase of 30.53% over imports valued at $14.14 billion in February 2007. Cumulative value of imports for the period April- February, 2008 was $210.89 billion against $161.95 billion exports in the comparable period of the previous year registering a growth of 30.21%.

Oil imports during February 2008, valued at $6.27 billion was 39.52% higher than oil imports worth $ 4.49 billion in the corresponding period last year. Oil imports during April-February 2008 were valued at $ 66.01 billion which was 26.81% higher than oil imports of $52.05 billion in the corresponding period last year.

Non-oil imports during February, 2008 were estimated at $ 12.19 billion which was 26.35% higher than non-oil imports of $ 9.65 billion in February 2007. Non-oil imports during April-February 2007-08 were valued at $ 144.88 billion which was 31.83% higher than the level of such imports valued at $ 109.902 billion in April-February 2007.

The country’s trade deficit for April-February 2007-08 was estimated at $ 72.46 billion which was higher than the deficit at $ 49.32 billion during April- February 2006-07.

Though the country has witnessed an impressive growth in exports in February 2008, narrowing the trade deficit, it looks a bit uncertain for the country to achieve its export target of $160 billion for FY 2007-08 (with only month remaining). Despite exports recording a surge of 35% in February 2008 to $14.23 billion, pulling the eleven months export figures to $138.4 billion, meeting the export target of $160 billion for FY 2007-08 is a tough call as it would require exports to touch $21 billion in March 2008.

Outlook

India’s monthly merchandise trade deficit narrowed during February. Although import demand remained robust in February, inbound shipments will likely moderate in the coming months as consumption by both households and businesses eases.

Nevertheless, India’s demand for imports will continue to remain firm on support from the country’s heavy dependence on imported energy and machinery and capital equipment to build domestic infrastructure.

FIIs focus on government debt market

On 31 January 2008, the Securities and Exchange Board of India (Sebi) increased the investment limit by foreign institutional investors (FIIs) or their sub-accounts in government securities (T-bills) to US$ 3.2 billion from US$ 2.6 billion.

The investment by FIIs in debt-oriented mutual funds (including the units of money market and liquid funds) will be hereafter considered as corporate debt investments and reckoned within the stipulated limit of $1.5 billion, which is earmarked for FII investments in corporate debt.

The capital market regulator has cancelled the individual limits on investment in debt allocated to FIIs.

In less than a week after the Sebi raised the limit for FII investment in government bonds, foreign institutional investors (FIIs) are now knocking on the doors of the markets regulator asking for a hike in their individual limits.

Yields in the government bond market have been on the rise in recent times. The interest rate differential is best computed between the 90-day secondary market rate on government bonds in the US and in India. On January 31, the 90-day rate in the US was 1.92%. The Indian 90-day rate is roughly 7.27%, yielding a massive differential of 5.35%. This, coupled with the rising rupee and lower borrowing rates in overseas markets, makes it lucrative for overseas investors to look at the gilt market.

SEBI has already been flooded with applications from FIIs, intending to invest in the gilt market on an incremental basis. There have been significant amounts of outflows due to the fact that SEBI has categorised all investments in liquid mutual funds as corporate debt investments.

Once approvals from SEBI come through, investments by FIIs in government bonds will see a huge spurt. In fact, the rise in investments could be so sharp, that it could even bring down the yields from their current levels. FIIs who ended up bidding aggressively for the Reliance Power public offer will now find the surplus bid amounts finding their way back to them, in the post-allotment phase.

Market sources said that these funds, which were initially channelised into the stock market, may now find an entry into the debt market rather than getting reinvested in forthcoming public offerings. Demand from overseas funds, subscribing to the IPO, totalled $100 billion. The public offer was oversubscribed by 73.04 times.

Typically, FIIs invest in government securities of a shorter tenure, when there is an uncertainty about where rates may head towards in the medium to longer run. These include bonds under the market stabilisation programme or treasury bills.

Bonds are likely to be in ample supply for the last quarter of the financial year, with an upsurge in issuances under the market stabilisation scheme (MSS). Bonds, which are issued under the MSS route, are mostly of a shorter tenure, too.

Now, the Reserve Bank of India (RBI) has been aggressively intervening in the foreign exchange market to curb the rupee from rising against the dollar. In this process, it does infuse rupee funds into the system, as it mops up surplus dollars flowing into the country. In order to absorb the rupee funds back, RBI sells bonds through the MSS route.

On the other hand, the corporate bond market has seen fresh issuances drying up substantially January 2008, and to some extent, even this month. Issuers were wary of coming out with bond issuances in January since most of them were anticipating that RBI would lower rates in its quarterly policy review. However, rates were left unchanged and the pipeline for corporate bond issues is still extremely thin.

This leaves very less room for foreign investors to look for investment options in the corporate bond segment, and in turn, makes gilts a more viable proposition. As of December 2007, the outstanding FII investment in government securities and treasury bills through the normal route was $326.64 million. The outstanding investment in corporate debt securities was $ 480.83 million.

FIIs have two routes to enter India. One is the 70:30 route for equity, for FIIs, who can invest a maximum 30% of the money in debt here. The second is the route for pure debt FIIs, where the foreign investor has to register with Sebi as an FII.

My comment in Economic times

IIP grows at 11.8% in Oct on festive demand

15 Dec, 2007, 0058 hrs IST,Pallavi Mulay, TNN

The index of industrial production (IIP) grew at 11.8% in October 2007. Driven by a 13.3% manufacturing growth, this is the fastest in the past six months. A robust festive demand has been the key factor. This is evident from a 12.5% increase in consumer goods on account of strong growth in durables as well as non-durables.

Capital goods and intermediate goods are other sectors that recorded an accelerated growth at 20.5% and 14.2%, respectively. However, production of basic goods slipped to 6.2% this month. Overall industrial performance is satisfactory in October 2007.

Such a spectacular growth was obvious for two reasons: pre-Diwali buying buoyed demand while a low growth of 4.5% in October 2006 improved the present number. Whether this can be sustained is another point.

ABN Amro’s purchase manufacturing index, which is an indicator of manufacturing activity, has slowed down to 60.9 in November 2007 from the highest level of 61.7 attained in October 2007. Nevertheless, the survey has signaled an improvement in operating conditions in the Indian manufacturing sector this month. The order book is estimated to be healthy. However, mounting input cost is a concern. So far, manufactures have managed to hold on to their margins as they were able to hike output prices, says the survey.

Going forward, the Reserve Bank’s policy stance will be a deciding factor. Inflation numbers may go up in the coming weeks, thanks to base effect and a possible hike in fuel price. In addition, demand factors are expected to be benign. Capital flows following rate cuts may build inflationary expectations and leave RBI with little room to cut rates.

India Inc, on the other hand, is expecting a rate cut. Rate hikes and liquidity tightening in recent times may have affected the overall industrial growth, which has marginally dipped to 9.7% during April-October 2007 as against 10.7% in the year-ago period. Under the circumstances, if RBI holds interest rates and goes for a further hike in the cash reserve ratio, industrial growth may be adversely affected.

Anjali R,Pune,says:The numbers are encouraging!! But are they sustainable? Looking at the tight monetary policy, high interest rates and thereby suffering manufacturing sector, appreciating rupee which is discouraging exports especially from employment-intensive sectors and high base effect in index of industrial production may play a spoil sport in coming months. India's blistering economic growth slowed to 8.9% in the second quarter to September 2007, from a year earlier, hit by a downturn in manufacturing as higher interest rates and a strong rupee dragged on manufacturing and exports.

Though exports battled a rising rupee and an impending US slowdown to grow a healthy 35.65% in October 2007 to a seven-month high of $13.3 billion against the $9.8 billion recorded a year ago, the low base effect cannot be ignored. The exports registered a sequential slowdown from $10.7 million in September 2006 (growth of 47.06%) to $9.8 million in October 2006, clocking an annual growth of 21%. However, the October figures failed to cheer the economy fully, as exports from employment-intensive sectors like textiles, handicrafts and marine products had dipped significantly and exports would still fall way short of the target of $160 billion for the current financial year.

The rupee which has appreciated to 39.36 a dollar on 12 December 2007 from 39.56 a dollar on 3 December 2007 on back of capital inflows, will affect the exports growth. A close watch on inflation is necessary. The country's inflation is driven largely by spurt in agri commodity prices. With the global commodity prices on up heal and poor expected wheat crop in rabi season domestically, coupled with recent rise in global crude oil prices could un bottle the inflation genie. 15 Dec 2007, 1243 hrs IST

My comment on Business Standard news

Oct industrial growth jumps to 11.8%
BS Reporter / New Delhi December 13, 2007

Experts cite festive buying, robust exports and low-base effect.

Festive buying, robust exports and low-base effect pushed up industrial output growth during October to a seven-month high of 11.8 per cent as against 4.5 per cent in the same month of the previous year.

This comes after industrial production dipped to a six-month low of 6.77 per cent during the previous month, mainly on account of high interest rates and a strong rupee.

“This was expected. Festive buying, coupled with a 35 per cent growth in exports in dollar terms and a lower industrial output in the same month of the previous year are responsible for the October numbers,” said Shubhada Rao, chief economist, Yes Bank.

According to Rao, the impact of the tightening monetary policy has not worn off and it will be difficult to sustain the October growth. “During 2007-08, industrial growth should be around 9.5 per cent.”

However, signs of moderation in industrial output were visible in the April-October period of this year as cumulative industrial production growth stood at 9.7 per cent, which was lower than the 10.1 per cent rise in the corresponding period of the previous year.

Finance Minister P Chidambaram said it was early to comment if the growth rates in October could be sustained in the coming months.

“The April-October figures are slightly lower than previous year’s (figures). We will have to wait and see the November figures,” he told news agencies.

Analysts assured one should not be alarmed by the moderation in the industrial output in the April-October period. “Such moderation is normal under current circumstances. I expect the cumulative growth in industrial output to be around 9 per cent by the end of 2007-08,” said Samiran Chakrabarty, chief economist, ICICI Bank.

Industrial output during the month was fueled by a seven-month-high growth in the manufacturing sector (comprising 80 per cent of India’s industrial production), which stood at 13.3 per cent during the month as against 3.8 per cent in the year-ago period.

But in the April-October period, the cumulative growth was 10.4 per cent, marginally lower than the 11.1 per cent a year ago.

Festive buying pushed up sales of consumer durables to a seven-month high of 9.3 per cent as against 0.2 per cent a year ago. But in the April-October period, the sector recorded a dip of 1.3 per cent as against a 12.7 per cent growth in the corresponding period of the previous year.

The mining sector’s output in October slowed to 3.7 per cent as against 5.9 per cent a year ago. Electricity production also went down in October with a growth of 4.2 per cent as against 9.7 per cent in the same month of the previous year.

A slowdown was also seen in the basic goods sector, where output increased by 6.2 per cent as against 10.5 per cent during the month under consideration.

The sectors that have performed well during the month include capital goods, whose production increased by 20.5 per cent as against 6.5 per cent in the same month of the previous year.

Intermediate goods also saw a healthy growth rate of 14.2 per cent during the month as against 5.9 per cent in the same month of the previous year.

Story Comments

Total Post : 3

Posted By : anjalir on 13 December,2007
The numbers are encouraging!! But are they sustainable? Looking at the tight monetary policy, high interest rates and thereby suffering manufacturing sector, appreciating rupee which is discouraging exports and high base effect in IIP may play a spoil sport in coming months. India's blistering economic growth slowed to 8.9% in the second quarter to September 2007 hit by a downturn in manufacturing as higher interest rates and a strong rupee dragged on manufacturing and exports.


Posted By : anjalir on 13 December,2007
Though exports battled a rising rupee and an impending US slowdown to grow a healthy 35.65% in October 2007, the low base effect cannot be ignored. However, the October figures failed to cheer the economy fully, as exports from employment-intensive sectors like textiles, handicrafts and marine products had dipped significantly and exports would still fall way short of the target of $160 billion for the current financial year.


Posted By : anjalir on 13 December,2007
The rupee which has appreciated to 39.36 a dollar on 12 December 2007 over 39.56 a dollar on 3 December 2007 on back of capital inflows, will affect the exports growth.With the global commodity prices on up heal and poor expected wheat crop in rabi season domestically, coupled with recent rise in global crude oil prices could un bottle the inflation genie.

My comment on Business Standard article

RBI raises MSS limit
BS Reporter / Mumbai November 08, 2007

In a measure to combat excess liquidity, the government today revised the ceiling on the Market Stabilisation Scheme (MSS) to Rs 2,50,000 crore as against Rs 2,00,000 crore.

With the MSS auction of Treasury bills held on Wednesday, the MSS outstanding (face value) will be Rs 1,80,155 crore, as on November 8, 2007.

The threshold at which the limit will be further reviewed is now at Rs 2,35,000 crore. The limit was earlier reviewed from Rs 1,50,000 crore to Rs 2,00,000 crore on October 4. This is the fifth time the MSS ceiling has been revised by the government in the same financial year.

The MSS is a scheme of issuing bonds and treasury bills for sucking out excess liquidity from the system.

Anticipating greater requirement of cash with banks in the festive season during the weekend, RBI today accepted bids worth Rs 500 crore in the 91-day T-bill auction out of the total notified amount of Rs 3,500 crore (Rs 3,000 crore towards the MSS).


Story Comments
Total Post : 3
Posted By : anjalir on 08 November,2007
Yet another step to curb excess liquidity!!! RBI in its monetary policy review, with increasing CRR by 50 bps, also indicated that it will continue to respond swiftly with all possible measures as appropriate to the evolving global and domestic situation impinging on inflation expectations, financial stability and the growth momentum. Continue...

Posted By : anjalir on 08 November,2007
RBI's moves suggest that monetary tightening is far from over given that the capital inflows are unlikely to abate despite restrictions on participatory notes, derivatives used by foreign investors that are not registered in India to trade on the Indian stock markets and CRR hike. RBI is facing record foreign investments that have pushed the rupee to a 9 1/2 year high and increased money supply. Continue....

Posted By : anjalir on 08 November,2007
Concld....Though the hike in MSS ceiling will raise the fiscal cost (sterilization puts an extra cost on the fiscal and cannot be done indefinitely. Moreover, with FRBM act in place, government has to control its expenditure and would not want to bear the cost of sterilization), the immediate concern of RBI is to curtail excess liquidity in market, which along with soaring oil prices may raise the inflation figures, which are currently well under the RBI's tolerance limit.

My Comment on Business Standard news

Get ready for lower bank deposit rates
Shriya Bubna & Rajendra Palande / Mumbai October 26, 2007

After nearly three quarters of generosity , banks are now facing pressure to reduce deposit rates. Most face a margin squeeze with the rise in interest expenditure outpacing the increase in interest income at the start of the third quarter of the financial year.

Union Bank, a Mumbai-based public sector bank, has taken the lead. Irrespective of competitive pressures, the bank has cut rates on one-year deposits to 8.5 per cent from 9 per cent, the rate most banks are offering on one- and two-year deposits.

“The revision in deposit rates will help the bank contain the cost of resources and improve margins,” said M V Nair, chairman, Union Bank.

Union Bank of India’s interest income grew 27 per cent during the quarter from a year earlier but its interest expenditure rose faster at 38 per cent. As a result, the bank’s net interest margin (NIM) in the second quarter fell to 2.56 per cent, from 2.76 per cent a year ago.

Other banks are expected to follow suit. Banks like IDBI, ICICI Bank, HDFC Bank and Vijaya Bank have reported a sharper rise in interest expenditure than interest income in July-September 2007 from a year earlier.

ICICI Bank’s interest income, for instance, grew 37 per cent while its interest expenditure rose by 47 per cent.

Most banks are waiting for the mid-term review of the Reserve Bank of India’s monetary policy, due on October 30, before they take action.

“There is scope to reduce deposit rates 50 to 100 basis points but we are awaiting policy signals,” said a senior IDBI Bank official. Analysts suggest that cutting deposit rates is a fait accompli.

“Irrespective of the policy signals, based on the observation of growth in interest earned and interest expended, it would be rational for banks to reduce deposit rates by 25 to 50 basis points across maturities,” said Roopa Rege-Nitsure, chief economist, Bank of Baroda.

The sharp slowdown of credit growth will also require banks to cut deposit costs to sustain profit growth.

Since April 2007, bank credit grew only 5 per cent with just Rs 96,486 crore added to advances against Rs 1,54,000 crore a year earlier.

Poor credit off-take in the first half of 2007-08 has led to slower growth in banks’ net interest earnings.


Story Comments
Total Post : 2

Posted By : anjalir on 26 October,2007
This is an expected move. Earlier also with the CRR hike by 50 bps in the first quarter review of the Annual Monetary Policy, many banks had to roll back high deposit rates being offered on tenures 1 year and above. In addition high interest rates domestically encouraged companies to borrow funds through ECBs from outside India. This also lowered credit offtake from domestic banks.

Posted By : anjalir on 26 October,2007
The ample liquidity in the market coupled with poor credit offtake and accelerating deposits are increasing the cost of banks, which will force them to reduce the deposit rates. However the condition will be clear after 30 October 2007.

My comment on Economic Times article

Industrial output rose 10.7% in August
13 Oct, 2007, 0031 hrs IST, TNN

NEW DELHI: The bulls may have left the Street for an early weekend but those buying the India Story were proved right on Friday. Industrial output rose 10.7% in August compared to 10.3% in August 2006. The output had slipped to 7.1%(now revised to 7.5%) in July fuelling concerns that economic growth was moderating.

What makes it sweeter is that the higher growth is on a high base of 10.3% in August 2006, which was mainly boosted by lower growth of 7.4% in August 2005.

“Last month’s drop in the index of industrial production (IIP) was an aberration. I expect the industry to average a growth of 9% this year,” economist Omkar Goswamy said.

The April-August industrial growth, however, slipped to 9.8% from 11% logged in the first five months of the previous fiscal year. Industrial output had been consistently at sub-10% levels in the past three months with higher interest rates slowing down manufacturing and consumer spending.

Optimism about the Indian growth story is all-pervasive. ADB, on Friday, upped India’s FY08 economic growth forecast to 8.5% against the earlier projection of 8%.

“The numbers are above our expectations and show that concerns about an impending slowdown are greatly exaggerated,” said ICICI Securities analyst A Prasanna.

All the three industrial sectors — mining, manufacturing and electricity — showed double-digit growth in August. The manufacturing sector notched 10.4% growth, marginally down from 11.9% in the same month previous fiscal year. It has, however, bounced back from last month’s 7.2%. Manufacturing contributes about 15% to GDP and nearly 80% to industrial output.

The industrial data released on Friday showed demand for consumer goods fell, hurt by monetary tightening, but was more than offset by demand for capital goods and a pick-up in mining activity and electricity generation. The mining sector showed stupendous recovery, recording a growth rate of 17.1% against a decline of 1.7 % in the corresponding month of 2006. Mining had grown by just 4.9% in July 2007.

Electricity generation during August grew by 9.2% compared to 4.1% a year ago.

In the manufacturing sector, the capital goods sector kept the flag flying with a robust 30% growth in August, compared to 16.6% in the corresponding month of 2006.

Consumer durables continue to remain a concern area declining 6.2% compared to 19% growth in August 2006.

Analysts hope the festival season will help consumer demand rebound. Some banks have cuts rates for consumer loans to push demand for homes, cars and TVs.

Basic goods and intermediate goods recorded growth rates of 13.3% and 12.3%, respectively, during August, compared to 4.8% and 8.7%, respectively, in the corresponding period last year.

With industrial growth showing signs of recovery, some analysts feel inflation may resurface. They said in this backdrop, the central bank may not go for cut in rates.

Anjali R,Pune,says:A good sign!! After registering a single digit growth in July 2007, the market expected a slow down in economy. But the impressive, above-expected growth in IIP in August 2007 has rebuilt more confidence in Indian growth story. India's industrial production growth exceeded expectations in August, accelerating for the first time in four months, as record investment in factories, roads and power plants boosted demand for cement and steel. The continuous slowdown in inflation, more efforts towards infrastructure development, rising income leading to rise in demand has all led to rise in IIP. However, the high interest rates have hit the consumer durable segment, which has registered a decline in August. Also the continuous appreciation in rupee and excess liquidity in the market is a cause of concern. RBI may increase the CRR to curtail the liquidity in the system after having low inflation and impressive IIP figures. But the central bank has to look at the decelerating credit off take from banks which may further get affected because of CRR hike.

13 Oct 2007, 1042 hrs IST

My comment on Business Standard news

IIP back to double-digit growth

BS Reporter / New Delhi October 13, 2007

Reversing a four-month trend, industrial growth rose sharply this August, pushing the Index of Industrial Production (IIP) back to double digits for the first time since June.

The rebound came on the back of robust manufacturing production, especially in capital goods. Even mining, which had lagged significantly, recorded a massive and unexpected growth during the month.

Mining accounts for 10.47 per cent of the index of which coal and crude oil account for the bulk.

The IIP rose 10.7 per cent this August against 10.28 per cent a year ago. Overall, for the first five months of the current fiscal, industrial growth stood at 9.8 per cent.

Manufacturing, which accounts for nearly 80 per cent of the index, grew 10.4 per cent in August, against 11.94 per cent in 2006. Although this is much better than the growth in the previous two months, it is lower than last year.

The good showing by manufacturing was dented only by consumer goods that continue to reel under the impact of high interest rates.

The sector grew 0.5 per cent in August against 5.69 per cent in July and much lower than a year ago. This is the lowest growth rate the segment has seen so far.

Experts said the decline in consumer goods was a cause for concern. “This indicates a slowdown in consumption,” said Siddhartha Roy, economic advisor, Tata group.

Story Comments
Total Post : 2
Posted By : anjalir on 13 October,2007
A good sign!! After registering a single digit growth in July 2007,growth exceeded expectations in August, accelerating for the first time in five months, as record investment in factories, roads and power plants boosted demand for cement and steel. The continuous slowdown in inflation, more efforts towards infrastructure development, rising income leading to rise in demand has all led to rise in IIP. The growth in IIP in August 2007 has rebuild more confidence in Indian growth story.

Posted By : anjalir on 13 October,2007
However, the high interest rates have hit the consumer durable segment, which has registered a decline in August. Also the continuous appreciation in rupee and excess liquidity in the market is a cause of concern. RBI may increase the CRR to curtail the liquidity in the system after having low inflation and impressive IIP figures. But the central bank has to look at the decelerating credit offtake from banks which may further get affected because of CRR hike.

My comment on Business Standard news

Friday,Oct 05,2007

MSS limit increased; CRR hike concerns ease
BS Reporter / Mumbai October 05, 2007

The government today raised the limit on the Market Stabilisation Scheme (MSS) to Rs 2,00,000 crore, easing pressure on the Reserve Bank of India (RBI) to increase the cash reserve ratio (CRR).

The market has been abuzz with speculation over the last couple of days about the RBI considering the CRR hike.

The MSS limit has been raised from Rs 1,50,000 crore in the current financial year. This is the fourth time the government has raised the limit.

The move gives the RBI additional room to absorb excess liquidity in the system by issuing government bonds.

Under MSS, dated securities and treasury bills are auctioned by the RBI at the market rate and the cost of the coupon payments is borne by the government.

CRR is the proportion of deposits mobilised by banks and parked with RBI for statutory requirement. It currently rules at 7 per cent.

In the pre-credit policy meeting held earlier in the day, bankers had urged RBI not to raise the CRR and pay interest on the liquidity impounded through the earlier hikes.

Prior CRR increases have hurt banks since interest income through advances has been sluggish due to low credit offtake. Bank credit has grown only 21 per cent so far this year, against 31 per cent in 2006.

Surging foreign capital inflows have forced the RBI to mop up dollars to stem the appreciation in the value of the rupee.

In the process of buying dollars, the RBI released rupees that created excess liquidity in the system.


Story Comments
Total Post : 1
Posted By : anjalir on 05 October,2007

It was an expected step from government for curbing liquidity in near term. RBI is not expected to raise CRR as it will further slowdown the credit offtake and increse the cost of banks. As deposits with banks are rising and growth in credit is decerelating, a further rise in CRR may increase this gap.Also the coming IIP data for August may clear the picture about credit demand RBI's stand towards CRR in the coming mid term credit policy review due on 30th October 2007.

My comment on Business Standard news

Oil price above $83 on storm fears
Press Trust of India / Singapore September 28, 2007

Oil traded above $83 a barrel in Asia today as dealers watched a new storm developing in the Gulf of Mexico, which could impact oil production, dealers said.

New York's main futures contract, light sweet crude, was 46 cents higher at $83.34 a barrel for November delivery in late morning trade.

The contract had surged $2.58 to $82.88 in late US trades yesterday, when it edged closer to the all-time intra-day high of $84.10.

Brent North Sea crude for November delivery was at $80.45, up 42 cents after breaching the $80-level for the first time in London, where the contract soared $2.60 yesterday.

Tensions in the market were heightened on news that a storm developing in the Gulf of Mexico could affect oil production facilities, analysts said.

According to the US National Hurricane Centre, a tropical depression was heading toward the coast of Mexico and could become a tropical storm.

The Gulf of Mexico is a leading oil-producing region for the US and Mexico and investors are worried that, during the long Atlantic hurricane season that ends in November, a storm will damage oil rigs and other infrastructure.

"I think the storm sort of got people on edge," said Jason Feer, Asia Pacific vice-president and general manager of energy market analysts Argus Media, in Singapore.

He said that while US crude stocks have been building, refinery run rates have dropped.

"That sort of indicates there's a potential bottleneck" heading into the North American winter when demand for heating oil picks up.

Story Comments
Total Post : 1
Posted By : anjalir on 28 September,2007
This is a bad news. Though domestically the inflation is persistently moving down (WPI at 3.32% for the week ending 15 September 2007) the rising crude oil prices have become a cause of worry and may lead to rise in inflation. Along with it the appreciating rupee and strong inflows may also lead to rise in inflation with rising consumer demand.

My comment in Mint

Posted: Wed, Sep 26 2007. 12:16 AM IST
Columnist



Credit jitters are not over

As corporate borrowers leave the global credit market and seek bank funds here, interest rates could go up


Cafe Economics Niranjan Rajadhyaksha

The stock market has been giddy with elation ever since the US dropped interest rates on 18 September. Its dramatic recovery from the scare of August has been the cynosure of all eyes. Few seem to bother about what is happening in the credit market, where the trouble started in the first place. Is that market, too, back on track? A lot depends on the answer, especially for Indian companies.

The signals are expectedly mixed. There are some signs that the pipeline carrying bond deals is no longer choked with fear. Last week, Suzlon Energy raised $200 million through convertible bonds—only the third such Asian issue since the markets started recovering, according to Finance Asia. The pricing seems tougher than before, but that is only to be expected. The fact that investors lined up to lend to an Indian company is noteworthy. There are also stray news items of companies announcing their intention of testing the global bond markets again.
Meanwhile, the prices of emerging market bonds, too, have started inching up again. This seems to be an improvement over early September, when credit rating firm Moody’s said that the cross-border bond market “has shut down”.

Whereas, the International Monetary Fund (IMF) has warned in its new Global Financial Report, which was released on Monday: “Credit conditions may not normalize soon.” And: “Corporations have, for the most part, been able to secure the financing they need to maintain their operations. However, the adjustment period is continuing and if the intermediation process stalls and financial conditions deteriorate further, the global financial sector and real economy could experience more serious negative repercussions.”

Tata Steel may be one company that will be put to the test soon, according to Moody’s. Around $3.1 billion of its debt matures in the coming months, and will have to be refinanced. This debt was part of the bridge finance (or short-term loans) taken by Tata Steel when it bought Corus earlier this year. But Moody’s has also recognized the “banking support” that Tata Steel enjoys. In other words, if the bond markets are not willing, then the company’s bankers are likely to step into the breach and provide Tata Steel with the money it needs.

Indian companies have been soaking up money in large quantities from the global bond and credit markets over the past two years. This is part of a far larger trend—of companies bypassing banks and funding their growth with the help of alternative sources of money.
Here are the numbers. In 2006-07, bank credit to industry was Rs1,41,543 crore. External commercial borrowings were Rs88,472 crore. Corporate profits after tax (which is the internal pool of money) were Rs1,11,107 crore. That’s a far cry from the hoary old days when domestic banks financed most of the working capital and capital expenditure of Indian companies. The bigger and better companies have cut their dependence on banks over this decade, as it became easier for them to borrow abroad.

What this means is that even though banks are still the single largest source of funds for Indian companies, there are still at least two other founts of money that are close to bank funds in terms of their importance to Indian CFOs—global borrowing and internal resources.

One of these founts was frozen in August and is thawing very slowly. It could present a huge challenge to the corporate sector.

If the global bond and borrowings markets do not ease significantly in the months ahead, companies will have to figure out how to make up for the money they will be unable to borrow. Let me restate this in a more blunt fashion. Indian companies borrowed close to Rs90,000 crore last year from the global markets. It is likely that they may have to depend on domestic banks and their own balance sheets to fund their growth this year. Don’t be surprised if the rush back to banks pushes up interest rates, as demand for bank loans increases.

Bankers have an ugly word to describe the trend of companies bypassing them and raising money directly from investors—disintermediation. Will the global credit crunch push them back into the banking fold? And if it does, will this put increasing pressure on the domestic market for loanable funds, thus pushing up interest rates?

The return of large Indian companies to the domestic banking system could unsettle the local credit market. The “homecoming” of these 820-pound gorillas could squeeze out the smaller fellows. Small businessmen often complain that they anyway pay interest rates that are far in excess of the headline prime lending rates that banks charge their best customers. Things may just be getting worse for them.

Recent Comments

The rising deposits with banks and slowing credit offtake is increasing the cost of banks. As a result banks are looking out for giving more credits. Also the market is flooded with liquidity. The banks can use this money for giving credit. So in the near future there seems to be less chances of hike in bank loan rates. Also a hike (if) in bank cerdit rates will only come with a further hike (if) in CRR by RBI, to curtail excess liquidity in the market. But slowing economic growth and inflation almost near 3% may not support this act of RBI.

Anjali

My comment on BS news

Wednesday,Sep 26,2007

RBI relaxes capital outflows further
BS Reporter / Mumbai September 26, 2007
Takes great leap forward towards capital account convertibility.

The Reserve Bank of India (RBI) today eased overseas investment and loan repayment norms for companies, mutual funds and individuals, seeking to stem the rupee’s gains by encouraging capital outflows and signalling another step towards fuller capital account convertibility.

The rupee today rose to the highest since May 1998 on speculation that the rallying stock market will attract investment from overseas. The rupee strengthened 0.1 per cent to 39.73 against the dollar.

Companies can now repay overseas loans of as much as $500 million ahead of maturity without RBI’s express permission. The earlier limit was $400 million.

The ceiling on investments in overseas ventures has been raised to 400 per cent of their net worth from 300 per cent, and interestingly this allowance has also been extended for the first time to partnership firms.

Listed companies have now been allowed to make portfolio investments in any company abroad, with the removal of a stipulation that such investments could be made only in companies which have a 10 per cent reciprocal share holding in the Indian company. The limit for such portfolio investments has also been raised to 50 per cent of the net worth from 35 per cent now.

Mutual funds would now be allowed to invest overseas an aggregate of $5 billion against $4 billion hitherto and the ceiling on remittances resident individuals can make has been doubled to $200,000 from $100,000.

After the US Federal Reserve cut its key rates by 50 basis points on September 18, foreign institutional investors’ (FIIs’) investments in India increased with $1.54 billion of investments during September 19-21.

RBI has been intervening heavily since December 2006 to absorb foreign currency flows and, in turn, had to hike the ratio of deposits that banks have to keep with the central bank several times to suck out liquidity and prevent it from impacting inflationary expectations.

The RBI bought $21.10 billion of dollars during April-July 2007, with $11.42 billion in July alone, resulting in infusion of rupee liquidity of Rs 84,934 crore.

Union Bank of India Chairman M V Nair said the liberalisation of overseas investment norms are enabling provisions. “These will provide enough scope for companies to plan their business strategies for overseas business and growth plans. However, the impact of these changes will be seen only over a period of time. These steps also make inflows and outflows of investments much easy,” he said.

The RBI, in a statement, said these liberalisation measures are acceleration of the implementation of the third phase of the recommendations of the Committee on Fuller Capital Account Convertibility (CFCAC) on foreign exchange outflows.

Nair said the use of higher pre-payment limit would depend on the interest rate differential at home and abroad, while the doubling of the existing limit under liberalised remittance scheme for individuals has marginal significance.

Investments overseas by individuals are yet to take off with returns available in Indian markets outstripping most markets.

Opening the floodgates

Individuals can remit up to $200,000 against $100,000
Companies allowed to invest overseas up to 400% of net worth overseas against 300% till now
Partnership firms also allowed to invest overseas 400% of net worth
Ceiling on portfolio investments by companies raised to 50% of net worth from 35%
The requirement of 10% reciprocal shareholding in listed Indian companies done away with for overseas portfolio investment
Companies can prepay ECBs up to $500 million against $400 million now
Mutual funds allowed to invest an aggregate of $5 billion overseas against $4 billion now


Story Comments
Total Post : 1
Posted By : anjalir on 26 September,2007
With the high interest rates domestically why will the investors move out of India to invest, when they have good returns domestically only? Surely in the near term it will help MFs to foray into global markets as they are many schemes being recently launched in this arena. Presently, RBI needs to focus on curbing Rupee appreciation. The unrelenting rupee rise is forcing exporters to take the unusual step of covering their foreign currency risks over a longer term.
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Thursday,Sep 20,2007

Fed cut may prod RBI to soften rate regime
BS Reporter / Mumbai September 20, 2007

Bankers expect the Reserve Bank of India to soften its view on interest rates in the light of the US Federal rate cut. Domestic loans and overseas borrowing may become cheaper.

The Indian financial system is driven more by the domestic factors and “Fed rate cut is one of the triggers to review rates “, said Union Bank Bank of India chairman M V Nair.

“There may not be direct correlation between the US Federal Reserve action and the RBI’s moves. But the country is more tuned to global trends especially capital flows which has implications on exchange rate and relative difference in interest rates,” said a chairman of medium size public sector bank.

Nair said: “the low domestic inflation, need to provide philip to credit growth (which has dipped to 22 per cent) and fed rate cut should see softening of stance (by the RBI)”.

The Federal Reserve lowered its benchmark federal funds target rate by 50 basis points to 4.75 per cent to avert any slowdown in the world’s largest economy. On the extent of decline in lending rates, S K Goel, chairman and managing director of UCO Bank, said the domestic interest rates could soften by about 50 basis points in the coming days.

This also means reducing deposit rates to control cost of resources. “The incentives for deposits may decline and the rate offered for bulk deposits would move down from 25-50 points from present level of 9-9.25 per cent”, he added.

The implications of Fed decision are not restricted just to lending rates. The Indian capital market may witness higher inflow from overseas. This has a impact on value of rupee which will make the RBI to do tightrope walk to avert sudden appreciation in value of the rupee versus dollar.

Another factor that will weigh on the RBI’s mind is the fact that the elevated domestic interest rate may attract funds further to take benefit of rate arbitrage.

Kaushal Sampat, chief operating officer of Dun and Bradstreet said ``the widened interest rate differential between India and the US could result in a further surge of capital inflows (especially FIIs), which may lead to an appreciation of the rupee”.

The RBI may be under pressure to intervene in the forex market to preclude appreciation of the rupee beyond its comfort zone. However, a sustained intervention in the forex market to support the rupee would lead to a further increase in the domestic money supply, which is already growing at above RBI’s target rate.

S S Mundra, general manager (treasury) with Bank of Baroda said the RBI may not follow Fed Reserves footsteps immediately but eventually will take cue and change monetary policy stance (read adopt soft rate policy).

The bond market has not impacted much here like what we saw in the US since some rate cut was discounted and the response from bond market players will evolve in coming trading sessions.

On the cost of overseas borrowing of banks and Indian corporates, BOB official said we can expect better pricing. Thus cost of funds may reduce slightly. The spreads (over the benchmark rates like LIBOR) may not change much.


Story Comments
Total Post : 2
Posted By : anjalir on 20 September,2007
RBI should not resort to rate cut immediately as a reaction to Fed's move. Firstly, ours is an emerging economy with domestic fundamentals entirely different from those of developed economies. Secondly, the rising oil prices, which may put inflationary pressures, cannot be ignored. Above this if RBI cuts rates it may further enhance inflationary pressures.The immediate and major concern for RBI in near term will be rising liquidity and rupee appreciation because of high inflows.

Posted By : anjalir on 20 September,2007
RBI should not resort to rate cut immediately as a reaction to Fed's move. Firstly, ours is an emerging economy with domestic fundamentals entirely different from those of developed economies. Secondly, the rising oil prices, which may put inflationary pressures, cannot be ignored. Above this if RBI cuts rates it may further enhance inflationary pressures.The immediate and major concern for RBI in near term will be rising liquidity and rupee appreciation because of high inflows.
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“A blessing in disguise”

Sub-Prime markets offer loan/credit facilities to individuals that have weak credit history and have higher probability of defaulting on the loan (principal or interest or both). Sub-Prime markets are present in most credit categories housing, credit cards, automobile loan etc. Concerns over a crisis in the US sub prime lending market - where loans are offered to borrowers who do not qualify for market interest rates because of poor credit history - had sent global markets into a tailspin since the mid-week of July.

Impact on Indian Economy and Financial Markets

As India has large number of Foreign Institutional Investors that invest in the equity markets and if there is an effect on foreign economies, the FIIs may withdraw funds from Indian equity markets. A simple analysis shows that covariance between US equity market (Dow-Jones) and India's equity market (BSE-Sensex) has increased in 2007 and in August 2007 the covariance is even higher. This indicates that markets have not only been tracking US markets, the change is higher than what it was in US markets previous day. This is a concern for Indian equity markets as US and other Markets are expected to correct post sub-prime meltdown. However, in the long run, with Indian economy still going strong (IMF has revised India's GDP growth rate for 2007-08 upwards from 8.5% to 9%), the Indian equity markets should track India's growth pattern.

FIIs sold Rs 7770.5 crore worth of stocks in August 2007 as problems in the subprime loan segment resurfaced in the US, sparking a sell off in the equity market everywhere. The last time foreign funds had sold as aggressively was in May 2006, when they pulled out Rs 7354.2 crore in a single month.

The US subprime meltdown has to a certain extent proved as a blessing in disguise for Indian market. Surplus liquidity in the market which resulted in rupee appreciation and fears of inflationary pressures regaining grounds subsided as result to a certain extent. The domestic market was flooded with capital from foreign investors which created surplus liquidity in the market along with absence of any sterilization methods adopted by RBI to rein in liquidity.

The impact of withdrawing of money by FIIs has put a downward pressure on the rupee and INR has depreciated with respect to USD. The rupee has appreciated to as much as 40.24 a dollar since the beginning of the FY 2007-08 tracking the surge in FII inflows. Till 31 July 2007 FII inflow was about USD 10.9 billion. However, because of the meltdown in equity markets in August 2007, the FII outflow in August has been around USD 1.9 billion so far. This has led to depreciation of the rupee. The rupee depreciated by 1.29% to 40.96 a dollar on 31 August 2007 over 40.44 a dollar on 31 July 2007. Hence, the future level of rupee with respect to USD would also depend on overall effect of the sub-prime meltdown.

This along with measures taken by RBI like hike in CRR, removal of Rs 3000 crore cap on reverse repo auctions and modification in the external commercial borrowing (ECB) policy to modulate capital inflows, resulted in relatively tight liquidity situation in the market. ECB of more than $20 million per borrowing company would be permitted only for foreign currency expenditure for permissible end-uses. Accordingly, borrowers raising ECB more than $20 million would have to park the proceeds overseas.

However, Indian economy would continue to grow resulting in sustained capital inflows. As a result upward pressure on rupee would continue, thus remaining a concern for the policymakers.

Market Volatility: Recites a new story!!

DIIs come to rescue

August volatility in the markets has come out with a new story. Investors and Market observers feel that the key risks in the Indian stock market is its overdependence on foreign fund flows. But that may not be the case for long, judging by the institutional inflows so far in August, which has been a very volatile month for equity investors across the world.

FIIs have sold Rs 8,841 crore worth of stocks so far in August as problems in the subprime loan segment resurfaced in the US, sparking a sell off in the equity market everywhere. The last time foreign funds had sold as aggressively was in May 2006, when they pulled out Rs 8,247 crore in a single month.

Large inflow or outflow of foreign money continues to influence sentiment, but domestic institutional investors — mutual funds, banks, insurance companies — are now beginning to emerge as a strong counterbalancing force.

In the current month, according to the Securities and Exchange Board of India (Sebi), MFs have been net buyers at Rs 2,869.2 crore (till 27 August 2007), which is the highest-ever since May 2006 (Rs 7893.36). In fact, August 2007 will feature among the top 10 months in terms of net inflows ever since January 2000. In the previous month, fund houses were net sellers at Rs 900.60 crore. Inflows are a result of money mobilised through new fund offerings and also because many of the asset management companies were sitting on cash.

It seems that the investors and the fund houses have changed their investment style. They have started looking current volatility in the market as an opportunity to invest. While Indian investors have become more resilient to volatility, the inflows in the mutual fund industry have also been good. There was a 21.41% rise in AUM of mutual fund industry in the month of July 2007 when it recoded an AUM of Rs 4.87 lakh crore highest since April 2006 (a rise of 89%). Most fund houses were sitting on 15-20% cash in July month, which seems to be flowing in the market now. Further, around 30% of the new fund money was also lying idle that seems to have made to the bourses now.

Meanwhile, it is not only the fund houses that have upped the ante in the recent past. Insurance companies and some of the public sector banks (PSBs) are also believed to be using the current volatility as a good buying opportunity. Incidentally, LIC is believed to have mobilised a few thousand crore in its recently-closed unit-linked plan (ULIP) — Money Plus. According to market buzz, agents were pushed into overdrive to garner money in the ULIPs as it came to a close in mid-August.

Recent instances of the Sensex shedding 400-500 points in one single day could have been much worse, if LIC and SBI had not come to the rescue. However, this can’t be corroborated with figures as there is no data available for insurance companies and banks separately.

BSE provides data under the heading ‘domestic institutional investors (DII)’ that includes banks, domestic financial institutions, insurance companies and MFs. In August, according to BSE, this group is said to have invested Rs 8,518 crore (BSE and NSE), which is only marginally lower than what FIIs have pulled out.

However India’s growth story remains intact. The strong fundamentals will continue to attract foreign investments in the economy along with domestic investors.

Inflation-What the picture depicts?

India is in the midst of a rapid growth regime, thanks to growing consumerism, increasing global competitiveness and massive investment in infrastructure and capacity building. The long-term growth potential of the country is tremendous, and as the global markets has realized this, there are huge and rising forex inflows through FDI, and Indian debt, quasi equity and equity instruments attract huge interests. Also, strong corporate earnings, better visibility for the long term and general rally in the global markets together have facilitated BSE to surpass 15000 mark in July 2007.

One of the characteristic features of the economic performance in the first six-month of the Calendar year 2007 has been easing of headline inflation, which slipped from 6.69% for week ending 27 January 2007 to around 4.40% in July. Higher base effect, impact of monetary and fiscal policies and also sharp appreciation of rupee together facilitated taming down of inflation.

The headline inflation, which is measured by change in Wholesale Price Index (WPI), stood at 4.05% during the week ended 4 August 2007 lower than the previous week at 4.45%. The recent WPI figures though are well in RBI’s tolerance limit, the whole sale price index of all commodities which are given in the lack of eight weeks are being continuously revised upwards, considering the calendar year 2007 creating a high base for corresponding next year figures (though the final index for the week ending 9 June 2007 remains unchanged).

The impact of this high base will be witnessed in the WPI growth figures next year, which may show deceleration as a result. The continuous rise in final all commodity inflation figures has been the result of rising inflation of primary articles as well as manufactured products group index, which grew on an average by 0.07% and 0.27% in January-May 2007 period respectively. Among the manufactured products group edible oil group index grew on an average 0.48% and iron and steel group index grew 0.54% during January-May 2007 (final inflation figures).

Also though the overall inflation rate was barely above the 4% mark in early August, official statistics reveal that the price index for the food articles group had risen by 8.36% over a twelve-month period. Within this group, cereal prices have hardened by 8.72% and fruits and vegetables by 10.42%.The spurt in pulses is a modest 3.33% because large-scale imports have beefed up their availability.

The rise in edible oil prices has been the sharpest at 13.46%, implying that, despite liberal imports, the supply-demand equation is skewed.

Though, sugar and gur have charted a downward course, with their prices plunging by nearly 18% and 13%, respectively, the soaring food prices are a reality but this is not reflected fully in the wholesale price index- measured index. This is because of low weights accorded to food items in this index.

The food articles group has a weightage of about 15%; if to this, the 11.5% weight assigned to a subgroup —- food products in manufactures—-is reckoned with; just 26% of the weight is allotted to the food group in this index. That’s too low to impact on the final inflation figure. Though overlooked, the food inflation contained in the wholesale index is substantial and should engender concern.

Outlook
While there is an abatement of inflation in the recent period, upward pressures persist emanating from high and volatile international crude prices, the continuing firmness in key food prices and the uncertainties surrounding the evolution of demand-supply gaps, both globally as well as in India. In this regard, it is essential to carefully monitor developments relating to continuously assess the risks to the inflation outlook. It is also necessary to assess aggregate supply conditions and the supply response to the impulses of demand in the short-term, while stepping up efforts to expand production capabilities over the medium-term.

Infrastrucuture: Losing Momentum

Slower growth in five of the six core sectors pulled down the overall growth rate in the index of infrastructure industries to 5.3% in June 2007 against 7.7% in the year-ago period.

This is the slowest growth rate in the past year in the country, raising concerns about an overall economic slowdown.

This is a significant drop. On the supply side, the economy is dependent on the infrastructure industries so the June numbers are a cause of concern as it could have an impact on overall growth.

The highest dip in growth of production was in coal. This is not good news as a dip in coal production growth will have an impact on all the sectors, including steel and power and this is another area of concern. Coal production during June this year stood at 32.34 million tonnes.

Another crucial sector which saw a dip in production growth was crude petroleum, which recorded a negative growth of 1.8% against 1.2 %during the same month of the previous year. Data also showed that the growth in crude oil production has been slowing down since December 2006. The dip in coal production and crude petroleum shows the problem is on the supply side.

The only core infrastructure sector which showed healthy growth during June was electricity. Electricity generation registered a growth of 6.8% (provisional) in June 2007 compared with a 4.9% growth rate in June 2006. Electricity generation grew 8.3% (provisional) during April-June 2007-08 compared with 5.3% during the same period of 2006-07.

The slowdown in the infrastructure index follows a similar deceleration in industrial growth in June, which slipped into single digits of 9.8%, the lowest in the past three months, from 10.92% in May.

The slowdown in industrial growth is attributed to a dip in manufacturing production, which stood at 10.6% in June as against 11.7% in May.

The economy has shown signs of a moderate slowdown due to the monetary tightening measurers initiated by the Reserve Bank of India as well as the appreciation of rupee, which is impacting export growth.


The growth of the six infrastructure industries, with a combined weight of 26.7% in the index of industrial production (IIP), during the April-June quarter also decreased to 6.9% from 7.4% in the first quarter of 2006-07.

Crude petroleum production declined to 1.8% in June 2007 compared with a growth rate of 1.2% in June 2006. Crude petroleum production declined 0.7% during April-June 2007-08 compared with 0.2% during the same period of 2006-07.

Though petroleum refinery output did not decline, its growth slowed down to 9.8% in June 2007 from 10.5% in June 2006. However, petroleum refinery production registered a growth of 13.2% during April-June 2007-08 compared with 11.9% during the same period of last year.

Coal production growth plunged 1.3% in June 2007 compared with 11.8% in June 2006. Similarly, it fell drastically to 0.7% growth during April-June 2007-08 compared with an increase of 8.0% during the same period of 2006-07.

Cement production growth slowed down to 5.6% in June 2007 compared with 11.7% in June 2006. For April-June 2007-08, it slipped to 6.8% compared with an increase of 10.2% during the same period of 2006-07.

Also witnessing a decline in growth rate was finished (carbon) steel production at 5.6% in June 2007 compared with 10.2% in June 2006. Finished (carbon) steel production growth rate declined to 7.7% during April-June 2007-08 compared to an increase of 10.3% during the same period of 2006-07.

Led by roads and ports, power and telecom sectors, credit disbursement by banks to the infrastructure sector has grown in the last two years at 43 %and 36 per cent, respectively, according to industry chamber Assocham.

The chamber conducted a study covering financial years 2000 to 2007 on sectors such as iron and steel, construction, petroleum, power, telecommunication, roads and ports.

The study revealed that compounded growth in credit disbursement has been highest in the power sector at the rate of 58%, followed by roads and ports at 46%.

Lending to power as a share of infrastructure lending was 22% in 1998, which grew to more than half of the total infrastructure lending to Rs 57,863 crore in March 2006.

Outlook
The government may increase the credit exposure limits of banks to corporate groups taking up infrastructure projects. The finance ministry has asked the Reserve Bank of India to allow banks a bigger credit window for such companies, with the aim of helping credit flow to infrastructure sectors like roads, airports, power and ports.

At present, the credit exposure ceiling is 15% of the bank’s capital funds (equivalent to net worth) in case of a single borrower and 40% of capital funds in case of a borrower group. Borrowers belonging to a group may exceed the exposure norms of 40% of a bank’s capital funds by an additional 10% (a total of 50%), provided the additional credit exposure is on account of extension of credit to infrastructure projects whereas in the case of a single creditor, the limit can go up by 5%.