Current Economic Statistics and Review For the Week 
Ended February 18, 2005 (8^th Weekly Report of 2005)

  I

Highlights of  Current Economic Scene

Infrastructure

Tata Steel completed the process of its Rs.810 crore acquisition of Nat Steel Asia, having market operations in Australia, China, Malaysia, the Philippines, Thailand, Singapore and Vietnam, to raise its consolidated installed capacity to 6 million tonnes per annum from the present 4 million tonnes. After the scheduled completion of its Jamshedpur plant in March 2005, the capacity will be 7 million tonnes per annum. 

Tata Steel proposed to hike steel prices with effect from April 1, 2005 as a result of global rise in prices.

OPEC proposed to reduce oil production from March 2005, while oil cartel projected global oil demand growth at 1.7 million barrels per day (bpd). 

Corporate Sector
New ventures

Indian Oil Corporation’s (IOC) plans to convert the Kandla-Bhatinda pipeline usage from petroleum products to crude may end up hurting the interests of the refinery players operating in the western region in the long run. 

California based Metricstream Inc, a leader in enterprise quality and compliance solutions space plans to invest at least $ 10 million over the next three years in India in building infrastructure, manpower and leadership across all functions.

Tecumesh Products India Private Ltd bagged an order worth Rs 20 crore from South African firm Defy Appliances for its THK compressors. 

The Tata group won a bid to acquire 26 per cent stake in South Africa’s second network operator that would give the company a mandate to develop and operate both national long distance and fixed line networks in the country.

Private sector power utility company Reliance Energy Ltd, is introducing automated meter reading for its customers in Mumbai, Delhi and Orissa in order to reduce the human intervention in the meter reading process.

Automobiles

The UK based Vectra group through its Indian truck manufacturing operations, Tatra Trucks India Limited launched the next generation passenger seating systems-Gala-in collaboration with Fainsa of Spain. 

With Hyundai’s plan to hike its installed capacity by 1.5 lakh to 4 lakh units, the total installed capacity of passenger vehicles in India is set to jump 44 per cent from 1.3 million units to 1.87 million in the next two years. 

Aprilia’s new owners Paigio SpA group was looking to source auto components and engines from Hero Motors. At the same time, the company is looking at India as a manufacturing hub for three wheelers and expects to kick off three wheeler exports to Sri Lanka and Bangladesh from June. 

Metals

Sterlite Industries (India) signed a long term contract with the world’s largest copper mine Escondida in Chile for the supply of copper concentrate to Sterlite Copper Smelter at Tuticorin. 

India’s second biggest steel maker, Tata Iron and Steel Company Ltd was considering listing its shares in New York or London and flagged price rises for all its products. 

The Steel Authority of India Ltd plans to cut exports by over 60 per cent to enable greater supply of steel for the domestic market. In 2003-04, SAIL exported 1.1 million tonne of steel. 

Airways

Jet Airways (India) Ltd will spend as much as $ 7.5 million to buy the Jet Airways brand name from a company belonging to its owner Naresh Goyal. 

US-based IndUS Aviation is making an India foray, with plans to set up low cost flying academics across the country and manufacture sports category aircraft in India.

Insurance

The state-owned General Insurance Corporation (GIC) bagged the reinsurance account of the Russian Insurance Centre (RIC), which was hitherto with a UK-based company. GIC has been primarily re-insuring for the Indian companies.

Software

Sonata Software Ltd announced the expansion of its Micorsoft competence centre to its latest facility at Hyderabad. 

Delphi-TVS Diesel Systems Ltd – a joint venture between US based Delphi Corporation and the TVS group is setting up a state-of-the-art technical centre at its existing facility in Manur at a cost of Rs 50 crore. 

US chip maker Intel Corporation plans to add 1,500 professionals at Intel India Development Centre (IIDC), Bangalore, during the next two years. It has also decided to broaden the scope of its research and development (R&D) activity in India, with special emphasis on development of chipsets for new mobile platforms and other communication software. 

Pharmaceuticals

The research and development (R&D) spend of the top five domestic pharma majors approached the Rs 1,000 crore mark as on December 31, 2004. R&D spend of two of the largest pharma firms, Ranbaxy Laboratories and Dr Reddy’s Laboratories, touched a new high of Rs 360 crore and Rs 200 crore, respectively, at the end of December 31, 2004. 

Hotels

As part of major expansion plans, ITC Ltd will build three new super deluxe hotels in Chennai, Bangalore and Hyderabad at a cost of Rs 1,000 crore. 

International ventures

The Hinduja Group flagship Ashok Leyland signed an agreement for the supply of Stallion 4x4 army trucks and Falcon buses to the Sudan defence ministry. 

GAIL (India) Ltd decided to invest $ 1.5 billion in Iran for setting up a gas cracker project there. The project, with a capacity of one million tonne per annum will be set up jointly with NPC International in South Pars in Iran. 

Commercial vehicles major Ashok Leyland Ltd (ALL) is likely to enter China in a joint venture with its technology partner IVECO.IVECO is the commercial vehicle arm of the FIAT group. Ashok Leyland is the fifth Indian auto maker with plans to enter China. 

GAIL (India) Ltd lined up a Rs 1,500 crore investment for setting up an LPG plant in Myanmar. 

Company results

Blaming the India division’s downturn in performance primarily on rising input costs, Coco-Cola major singled out India and Phillipines for destabilizing the otherwise double-digit growth of the company’s Asia business unit. 

Company issues

Tata Motors reached a five lakh production mark in passenger cars at its vehicle manufacturing facility in Pune. 

Complying with the TRAI directive, Idea Cellular stopped levying the one time migration fee from one of its tariff plans to the other and refunded the subscribers their due amount.

Fiat SpA, which will get 1.55 billion euros from General Motors Corp to resolve dispute over a failed auto venture was seeking more focused partnerships to turn around the car company.

Mergers and Acquisitions

Mitsubishi Tokyo Financial Group Inc., Japan’s second biggest lender, agreed to buy UFJ Holdings Inc for $ 29 billion in stock, to create the world’s biggest bank by assets. 

The New York Times Co intends to buy online information portal About.com for $ 410 million from publisher Primedia Inc as it looks for new ways to build advertising revenue over the internet. 

Pantaloon Retail (India) announced that it is taking a stake in Galaxy Entertainment. Pantaloon will subscribe 0.2 crore equity shares of Rs 10 each fully paid up at a premium of Rs 34 per share to acquire 15.73 per cent equity in PlanetGalaxy Entertainment through a preferential issue. 

State run ONGC is likely to bid for a 10-15 per cent stake in Russian oilfield Sakhalin-3. 
Global credit rating major Standard & Poor’s (S&P) planned to make a conditional open offer at Rs 680 a share to acquire control of Indian ratings company Crisil Ltd. S&P, a division of the McGraw-Hill companies Inc was seeking to eventually hold a minimum of a little over 51 per cent in Crisil, and could end up owning just over 65 per cent in the company if the open offer was subscribed to in full by shareholders. S&P already holds 9.48 per cent in Crisil. 

State-owned Life Insurance Corporation is likely to increase its market exposure to 10 per cent of its investible funds from the current 7-8 per cent. 

Four Indian pharma companies-Ranbaxy, Dr Reddy’s, Sun Pharma and Lupin-are weighing options to bid for the branded pharma business of two US-based generic majors-Andrx Pharmaceutical Inc and Watson Pharma. Both these companies have put their branded pharma business on the block. 

HPCL is keen to pick up a 10 per cent stake in the Delhi and Mumbai airports where the government plans to offload 74 per cent equity. 

Siemens announced the acquisition of 100 per cent stake in its telecom company Siemens Public Communications Networks Ltd (SPCNL) and 51 per cent in Bangalore based Siemens Shared Services Pvt Ltd (SSSPL) for a total consideration of Rs 206.2 crore. 

US local telephone company Verizon Communications Inc. clinched a deal to buy long distance carrier MCI Inc. for $ 6.8 billion, outflanking rival Qwest Communications International Inc. 

The Chennai based Murugappa group picked up a 2.5 per cent strategic stake in South African fertilizer major Foskor Ltd for a consideration of approximately Rs 30 crore. 

Policy issues

The finance ministry ruled out any plan to take the Rs 20,000 crore burden of oil marketing companies’ under-recoveries on LPG and kerosene sale into the budget given the adverse impact it would have on the centre’s fiscal and revenue deficits in 2004-05. 

After allowing private Indian carriers to operate to the UK and South East-Asia, government permitted Jet Airways to launch operations to New York from the ensuing summer season starting April. 

Inflation

The annual rate of inflation on point-to-point basis slipped to 5.01 per cent for the week ended February 5, 2005 from 5.25 per cent in the preceding week, the lowest since the UPA government took office. The rate of inflation a year ago in a comparable period was 6.15 per cent. The Wholesale Price Index (WPI), however, rose by 0.1 per cent to 188.6 points from 179.6 points, mainly due to higher prices of fuel products, even as primary items showed declining prices with manufacturing prices unchanged at previous level. The index of mass consumption Primary articles group was down by 0.1 per cent to 184.9 points. Fuel, power, light and lubricants’ group index rose by 0.3 per cent points to 288.9 points as against 262.7 points in the corresponding period last year, due to costlier aviation turbine fuel, furnace oil and naphtha. The index of manufactured products’ group remained constant at the previous week’s level at 167.5 points as against 160.3 points in the comparable period last year, despite cheaper food products and textiles. The government revised rate of inflation and WPI upwards to 6.84 per cent and 188.9 points instead of provisional figures of 6.73 per cent and 188.7 points for the week ended December 11, 2004. 

Labour

According to ILO’s annual ‘Global Employment Trends’ released recently, global unemployment has shown a decline from 6.3 per cent (185.2 million) to 6.1 per cent (184.7 million) at the end of 2004 for the first time since 2000. Region-wise, the sharpest decline in unemployment was seen in Latin America and Caribbean countries, where it dropped from 9.3 per cent to 8.6 per cent. In Southeast Asia and the pacific, the rate fell to 6.4 per cent in 2004 from 6.5 per cent in 2003. South Asia recorded a rate of 4.7 per cent from 4.8 per cent. The job growth was weak at 47.7 per cent in 2004, a rise of only 1.7 per cent in the total number of jobs worldwide. The report added that the robust economic growth rate of 5 per cent in 2004 played a big role in this positive trend. 

Banking

According to a report by the National Institute of Bank Management (NIBM), public sector banks (PSBs) have disbursed more SHG-linked loans in the southern states as against other regions. As per the report on ‘SHG bank linkage – regional spread of physical progress, out of the total 5,02,891 SHGs which received bank loans, 3,58,689 (71.33 per cent) are from southern region and the Union territory of Pondicherry. Among the southern states Karnataka is the most favoured state with 2,43,714 SHG’s getting bank loans, representing 48.46 per cent. The central region is in the second position with 48,181 SHGs receiving loans, representing only 9.58 per cent of the all India total. The northern region and the eastern region share stood at 3.84 and 0.30 per cent respectively. 
The top 10 defaulters in the banking industry have Rs.2,000 crore outstandings against their names. The biggest defaulters include well-known names like DCM Ltd., Llyods Steel, Core Healthcare, Prakash Industries, Malvika Steel, Usha Ispat, Uniworth, Pyrites Pvt. Ltd., Bellary Steel and IG Petro. Notably, out of the top 10 defaulters, four belong to the steel industry. 

Kerala-based Federal Bank Ltd. has come under the banking watchdog’s lens for violation of ‘Know Your Customer’ (KYC) guidelines. 

Insurance 

According to figures compiled by Irda, general insurance industry grew by about 15 per cent to Rs.13,570 crore during the first nine months of fiscal 2004-05. While New India, National Insurance and Reliance General saw decline in their business in December 2004, ICICI Lombard, Bajaj Allianz and Cholamandalam recorded impressive growth.

Life Insurance Corporation of India (LIC) is likely to increase its market exposure to 10 per cent of its investible funds from the current 7 – 8 per cent. In absolute terms, this would mean an investment of over Rs.10,000 crore into equity.

Intense competition in the urban market has forced private life insurers to look towards rural India for growth business. The insurance companies are exploring tie-ups with rural-based agencies like non-government organisatons (NGOs), micro financing institutions, agriculture marketing and fertilizer co-operatives and banks for promoting their schemes. Life insurance companies like ICICI Prudential Life, Max New York Life and ING Vysya Life have designed rural specific low-premium products targeting the rural households. 

Information Technology

In order to strengthen its UK presence, Mphasis BFL group has acquired London-based Princeton Consulting for 7.73 million pounds (approximately Rs.60 crore) including cash of 3.23 million pound in an all cash deal. Princeton Consulting, with annual revenue of 6 million pound is a niche consultancy services company that offers integration of CRM solution and provides back office support for its clients. 

US chip maker Intel Corporation plans to add 1500 professional at Intel India Development Centre (IIDC), Bangalore during the next two years. It has also decided to broaden the scope of its research and development (R&D) activity in India, with special emphasis on development for new mobile platforms and other communication software.

IT Services company Cognizant Technology Solutions India Pvt. Ltd. has entered into the business process outsourcing BPO business. Its first client in the BPO space is Pfizer. Cognizant will be doing high-end data analytics work for Pfizer. Cognizant had also announced its plan to expand its Pune facility with fresh investments of Rs.81 crore and reach a headcount of 2200 by the end of 2005. 

Telecom

The Tata group has won a bid to acquire 26 per cent stake in South Africa’s second network operator (SNO) that would give the company a mandate to develop and operate both national long distance and fixed-line networks in the country. 

Public Finance

The government has raised customs duty on crude palm oil by 15 per cent and lowered their tariff value from $ 454 a tonne to $ 400 a tonne, following a fall in global prices. The customs duty on crude palm oil and its factions have been increased from 65 per cent to 80 per cent. The aim of this move is to safeguard the interests of the domestic industry and oilseed growers. The effective incidence of duty on imported crude palmolein will be raised from $ 311.35 a tonne to $ 329.60 tonne.

The Cabinet Committee on Economic Affairs (CCEA) has given a go ahead for implementing the Rs 167.05 crore project for connecting all excise commissionerates and 70 locations to central servers through a computer network. The project, once implemented, would create a consolidated infrastructure for Customs, Central Excise and Service tax applications to provide a robust information system to the Central Board of Excise and Customs (CBEC).

The union cabinet has approved a Rs 918.21 crore relief package for tsunami affected Andaman and Nicobar Islands. The committee also approved replacing the existing “Accelerated Electrification of One Lakh Village and One Crore Household Scheme” with a new scheme called “Scheme of Rural Electricity Infrastructure and Household Electrification.”

The committee of secretaries (CoS) has approved a Rs 290-crore capital subsidy programme for technology upgradation in the leather sector. The proposal has been cleared by the finance ministry and has been sent to the cabinet for the final approval. The government has also approved another Rs 110 crore for industrial parks, capacity building, productivity improvement and training in leather sector.

As per a ruling by the Supreme Court, the customs duty on imported good will apply on the price actually paid by the buyer, regardless of any fluctuation in the global price of the commodity. The court further said that neither ONGC nor the UK based Pride Foramer would have to pay the differential duty on the oilrig leased to ONGC by the latter in 1999. The customs department had demanded payment of the duty on the true value of the rig at the time of transaction, which was higher than the price paid by ONGC.

Budget 2005-06

The Gross Budgetary Support (GBS) to states for the year 2005-06 could be at Rs. 1,72,000 crore. This includes Rs. 26,000 crore additional outgo from the center to the state as recommended by the 12th Finance Commission. The planning commission had advocated a higher GBS at Rs. 1,96,000 crore for the next fiscal year. Finance minister is likely to justify the modest rise in GBS as a result of low tax base, rising expenditure for social schemes and implementation of the 12th Finance Commission’s recommendation on hiking the state’s share of central taxes, debt relief and grant to states.

The government is likely to allot Rs.6,200 crore for two new rural infrastructure schemes. The amount will be given to the rural development ministry for the new food for work programme, which will use it to launch a people’s water conservation mission. Bharat Nirman Programme is the other programme for which funds are likely to be put aside. This programme is launched as part of the Swarozgar Yojana, which aims at making availability of loans easier for self-help groups to get small loans and micro-credit.

A Rs 10,000 crore urban employment scheme, covering 10 million families below the poverty line is being worked out by the National Commission on the Unorganised Sector. The scheme is looking at one-time expenditure of Rs 10,000 per person, of which, Rs 6,000 would be for wages and Rs 4,000 would be for training.

The government is likely to allocate Rs 2,000 crore for rural electrification in the budget. The programme aims at supplying electricity to all rural areas over the next five years. The scheme is to be jointly implemented by the central government and the state governments.

The government is expected to keep Rs 5,000 crore for the Backward States Grant Fund. The fund will be used to take up social and physical infrastructure programmes in the poorest and the most backward states.

The government is likely to set up a fund for the revitalisation of public sector companies. The finance minister is considering allocating Rs 1,500 crore as seed capital for the fund. The fund will be used for strengthening 39 out of the 48 companies under it purview. The total expenditure for the heavy industry ministry in 2004-05 stood at Rs 631 crore, of which Rs 471.13 crore were capital expenditure. The central plan outlay stood at Rs 384 crore, including budgetary support amounting to Rs 131 crore.

Ministry recommendations 

The petroleum minister has stressed at the need for a shift from ad valorem to a specific excise duty regime atleast in the case of petrol and diesel in the forth-coming budget. This, according to the minister would minimise the impact of price rise in the international oil markets on domestic consumer prices. The ministry has also asked for zero excise on kerosene and LPG. The ministry has further demanded zero customs duty for kerosene and LPG and 10 per cent on both petrol and diesel. For industrial fuel like ATF, fuel oil, LSHS, bitumen and feedstock like naphtha, the proposed duty is at 15 per cent. These proposals differ significantly from the recommendations put forth by the Lahiri committee on restructuring oil duties. The committee had recommended 4 per cent and 8 per cent excise duty on kerosene and LPG, respectively. Also, the Lahiri committee had recommended a 5 per cent customs duty on subsidised products and 10 per cent for all others.

The ministry of Social justice and empowerment has asked for a budgetary allocation of Rs 1,533 crore for the fiscal year 2005-06. This is an increase of 33.22 per cent over last year’s outlay. The ministry plans to spend most of the funds Rs 1,040 crore for development of Scheduled Caste and Scheduled Tribes.

Duties and taxes

Customs duty on alloy steel is likely to be cut from 15 per cent to 5 per cent, to reduce production costs of capital goods, engineering and automobile component industries. This move is aimed at aligning the import duty on various grades of alloy steel, including stainless steel, with that of non-alloy steel. Customs on non-alloy steel is 5 per cent.

The central government is likely to do away with import duties on 35 specialised fibres and filament yearn like high denier yarn, micro denier staple fibre, stainless steel fibre and moda acrylic staple fibre.

It is expected that the securities transaction tax (STT) would be hiked from the present 0.15 paise on every Rs 100 to 0.30 paise on every Rs 100 for delivery-based trade. The tax is likely to go up from 0.015 per cent to 0.025 per cent for non-delivery based trade. In the futures and option segment, the rates are expected to go up from 10 paise on every Rs 1,000 worth trade to 15 paise. The Bombay Stock Exchange and National Stock Exchange are believed to have collected Rs 380 crore as STT in the last four months. The Budgeted estimate for STT collection was Rs 2,000 crore.

The prime minister’s office will propose uniform stamp duty regime of 5 per cent on all across India, in order to unearth black money and develop a robust secondary market in real estate. At present, states levy stamp duties ranging from 5 per cent to 15 per cent.

State updates

The annual plan outlay for Jammu and Kashmir has been fixed at Rs 4,200 crore. This is Rs 1,000 crore more than last year’s allocation. The planning commission has appreciated the state for embarking on land reforms besides empowering local bodies.

Prime minister has assured Kerala an estimated amount of Rs 20,000 crore. The projects under this include international container trans-shipment terminal (ICTI) and the expansion of project of NTPC at Kayamkulam

Capital Markets
Primary Market

The price band for the second public offer of Punjab National Bank (PNB) is likely to be around Rs 350 –375. The issue is to open in March; through this the bank is expecting to raise Rs 3,000 crore. Post issue, the bank will remit to the government the amount raised from the issue of 30 million shares, thereby the government’s share would decline to Rs 61.47 per cent, but post capital reduction, it would dip further to 57.8 per cent.

The IPO of Jet Airways was fully subscribed within five minutes of the opening of the issue and was oversubscribed 4.4 times by the end of the day. This is a first major IPO from the aviation sector. 

UTV software communications’s IPO of 69.9 lakh equity shares of Rs 10 each is to hit the market on February 18 in a price band of Rs 115-130 per share. The IPO proceeds will be used to fund the company’s expansion plans. 

Secondary Market

The BSE sensex reached an all-time high on February 14 at 6679.33 points, thereafter it drifted lower to close at 6584.32 by end the week, after registering a loss of 49.44 points over the previous weeks close. The broader NSE nifty too registered a loss of 1.29 per cent over the same period to close at 2055.55. 

Till February 18, net FII’s investment in equities has been Rs 6853 crore (US $ 1663 million) with purchases at Rs 16,279.2 crore and sales at Rs 9,426.40 crore. 

World’s largest fund house Fidelity, which manages assets worth US $ 1.2 trillion has received an approval from the Sebi to launch its mutual fund products in India. 

In February, of the 26 interntaional indices, as many as 13 have hit their lifetime highs, another 11 scaled their 52-week highs, only Nasdaq and Hang Seng have not been able to do it. The BSE sensex scaled to an all-time high of 6719 on February 14 and S&P CNX Nifty reached its life time high of 2110. Of these 13 indices, four are from Europe, three from America, two each from Asia and Pacific and one each from Africa and Middle East. 

Templeton Mutual Fund’s latest offering of the Flexi Cap Fund raised Rs 1,950 crore, this is the largest amount mobilized by an MF in last ten years. In the October – December 2004 quarter, six new equity schemes garnered Rs 1,881 crore. 

The finance minister is targeting mopping of around Rs 2,000 crore from the securities transaction tax (STT) appears to be ambitious, as in the last four months both BSE and NSE have collected approximately Rs 380 crore. 

Derivatives 

The gap between nifty spot and futures is widening and it has been observed in past that the markets are then in for a correction. Also, the open interest has been on a rise, which signals a higher risk appetite as market players are actively holding open positions. 

During the week, the volume of trading on F&O segment of NSE ranged between Rs 10,659.2 crore and Rs 12,638.70 crore.

Government Securities Market
Primary Market

Sixteen states have offered to sell 7.17 per cent 2017 for an aggregate amount of Rs 6,300 crore on February 22.

Secondary Market

With the deposit rates rising and lendings falling down, there appears to be income mismatch with the banks deploying their funds in reverse repo, wherein they cannot service the high cost of deposits this could give rise to asset –liablity mismatch. 

The overnight rate hovered around the reverse repo rate given the surplus liquidity in the system. 

Despite the fall in the inflation rate, the secondary market for gilt-edged securities remained cautious ahead of the Budget announcement. The weighted average YTM on 7.38 per cent 2015 rose to 6.47 per cent on February 18 from 6.46 per cent on February 11.

Bond Market

ICICI bond is planning to raise Rs 450 crore through an issue of bonds. 

Canara Bank has issued unsecured redeemable, non-convertible, subordinated bonds aggregating Rs 500 crore on a private placement basis. The bond has a maturity of 111 months and were rated AAA by Crisil. 

Also, Bank of India raised Rs 300 crore to boost its tier –II capital. The bonds offered a coupon of 7.10 per cent for a tenure of nine-years. Crisil has rated it AA+. 

Standard and Poor’s are examining the circumstances wherein the interest payments on bonds issued by Instrumentation India and HMT have not been repaid. As per S&P’s, this would have a potential impact on the sovereign’s credit rating. Also, CARE has downgraded the rating assigned to the long-term and medium –term bonds of HMT. 

Provident Funds are concerned about their investments in PSU bonds, which enjoy the guarantee from the central government for structured payment mechanism and timely servicing, as some of these bonds have failed in interest payments which is likely to affect their portfolio; also, given the compulsions of paying interest at the rate of 9.5 per cent, they are forced to hold on to these high yield bonds. Even exit through such bonds for them is not easy, as they can sell them only if two rating agencies downgrade them. 

The Finance Ministry, in consultation with the RBI, is considering raising the cap on FII investment in corporate debt. 

Foreign Exchange Market

The rupee has depreciated from Rs 43.79 on February 11 to Rs 43.84 on February 18 as the RBI intervened in the currency market to modulate the rupees movements keeping in view the exporters interests

The six-month forward premia rose to 1.70 per cent on February 18 from 1.55 per cent on February 11.

External Sectors
Trade update

Exports grew by 26 per cent during April-January to $ 61 billion. It is likely that exports by the end of the current fiscal year, will exceed the targeted growth rate of 16 per cent. According to commerce minister Kamal Nath, high growth rate has been achieved despite strengthening of rupee vis-à-vis dollar and over all impact of rise in fuel prices on competitiveness. Despite this increase, the trade deficit of the country has widened owing to a large import bill. Imports increased by almost 35 per cent in the concerned period due to a huge oil import bill. While oil imports are estimated to increase by about 40 per cent, non-oil imports recorded an increase of 33 per cent.

The export of oil meals during January 2005 fell to 2.15 lakh tonne from 6.45 lakh tonne in January 2004. Export out of the current kharif oilseed crop between October 2004 and January 2005 fell by 54 per cent. This is attributed to the disparity in soyabean processing and low free on board (FOB) realisation of exports. Soyabean meal exports touched 1.45 million tonnes in the first ten months of the current fiscal year. Rapeseed meal export in the concerned period added upto 499,075 tonne, while groundnut exports in the same period stood at 106,625 tonnes.

Edible oil imports have gone up by about 9 per cent in the first quarter of oil year 2004-05. During the period November 2004-January 2005, the total imports of oil was at 9.46 lakh tonnes compared to 8.69 lakh tonne in the corresponding period last year. The imports of edible oil during January 2005 saw a fall of 10 per cent at 3.16 lakh tonne, compared to 3.54 lakh tonne in January 2004.

Gems and jewellery, in the first 10 months of the current fiscal year has crossed Rs 50,000 crore worth of exports. It is expected to further grow to reach Rs 70,000 crore by the end of the fiscal year. Exports of cut and polished diamonds were Rs 38,985 crore during April 2004-January 2005. Gold jewellery exports rose by almost 75 per cent to reach Rs 9,613 crore in the concerned period. Exports of coloured gems increased to Rs 632 crore in April 2004-January 2005. Exports of pearls, non-gold jewellery and synthetic stones increased from Rs 383 crore in April 2003-January 2004 to Rs 478 crore in April 2004-January 2005. However, rough diamonds exports witnessed a fall to be recorded at Rs 1,167 crore in the concerned period.

The total exports of castor oil in the 2004-05 season could cross 200,000 tonne. Of this about 25,000 tonne is expected to be through containers, while the rest would be bulk. Exports stood at 161,619 tonne (excluding container export) in 2003-04 and 163,862 tonne in 2002-03. India is the largest exporter of castor oil and its derivative products to countries, including USA, China, Thailand and Brazil.

The country’s tea exports stood at a total of 177.6 million kg during April-December 2004 compared to 173.7 million kg in the corresponding period of the previous year. This was an increase of about 2.2 per cent. In the month of December, exports of tea stood at 21.5 million kg as compared 20.4 million kg in the same month 2003.

Foreign exchange reserves

The country’s foreign exchange reserves fell by $ 806 million dollars during the week ending February 4, 2005. Foreign exchange reserves stood at $ 128.914 billion. As per the weekly statistical supplement released by the RBI, the fall in the reserves has been mainly due to a decrease in the foreign currency assets, gold reserves and the country’s reserve tranche position in the International Monetary Fund. The decline is apparently due to the revaluation of all the major currencies such as the Euro, Sterling and Yen. (FE). By the week ending February 11, 2005, forex reserves registered an increase of almost $ 1 billion to reach $ 130 billion. This was mainly due to an increase in the foreign currency assets, which is believed to be a result of high intervention by the central bank in the week.

The net investments by FII in February so far (February 15) has been recorded at $ 1 billion.

Bilateral trade

India and Italy have set s target to increase bilateral trade to 5 billion euro in two years from the existing level of 3 billion euro. According to the commerce minister, bilateral trade between the two countries was growing at 10 per cent, which was below satisfaction. It was further added that bilateral trade could be encouraged in the fields of textile, leather, leather footwear and gems and gems and jewellery.

Policy issues

The government has declared eight special economic zones (SEZs) as ports for imports and exports, enabling exporters with advance licences or licences under any duty exemption scheme from these SEZs. The Director General of Foreign Trade has notified eight special Economic Zones at Santa Cruz, Kandla, Kochi, Chennai, Vishakapatnam, Falta, Surat and Noida as specified ports.

Exporters in the country may have something to look forward to in the forth-coming budget as the central government is set to propose a reduction in transportation cost from 22 per cent to 10 per cent. Out of the 10 per cent cost, the Central government proposes to refund 4-5 per cent. The cottage sector may get Income Tax sops in tune with EOUs and SEZs.

The union ministry of commerce is considering removing export cess, which is levied in small quantities on certain commodities in order to boost exports. It was further added that centre has decided to abolish all such levies in phases.

Kerala chief minister has sought Central government’s intervention on the import of pepper from Sri Lanka under the Free Trade Agreement. The state’s farmers are forced to sell pepper at low prices due to Sri Lankan imports. Due to huge imports from Sri Lanka, pepper prices have fallen from the domestic market average of Rs 65 per kilogram to Rs 55 per kilogram.

The government may allow the sugar industry to import three million tonnes of raw sugar this year instead of 1.8 million tonnes as was anticipated earlier. This would help to keep the domestic prices in control. This would also help to end the sugar year with a carryover stock of a three-month consumption requirement of 4.5 million tonnes. 

Credit Ratings

Icra has assigned the rating of LAA+ to the Rs. 66 crore subordinate bonds of IDBI Bank, rating factors in IDBI Bank’s satisfactory asset quality, improving profitability and growing retail franchise. 

In an another exercise, it has also assigned LAAA to the Rs. 40 crore long-term debt and reaffirmed the A1+ rating given to the Rs. 120 crore short-term debt of SBI Factors and Commercial Services, the rating takes into account the financial support from the parent SBI, market pretence, financial flexibility and relatively low level of gearing.

Icra has also assigned an A1+ rating to the Rs. 50 crore CP programme of the Haryana State Cooperative Supply and Marketing Federation (HAFED), it takes into account HAFED’s leading share in the foodgrain procurement activity in Haryana.

It has also assigned MAAA and A1+ ratings to the short-term deposits programme and Rs. 7,000 crore certificates of deposits programme of the ICICI Bank, the rating takes into consideration the strong position of the bank, improving profitability and extensive corporate relationships. 

It has also assigned LAAA (so) rating to the Rs. 1000 crore government of India guaranteed bonds programme of Food Corporation of India. 

YES Bank has obtained an A1+ rating for tranche III (Rs. 200 crore) of its certificate of deposits programme aggregating Rs. 500 crore. 

Care has assigned an AA rating to the proposed tier-II promissory note (unsecured and redeemable) issue of United Bank of India (UBI) of Rs. 300 crore (including a greenshoe option for Rs. 100 crore). The rating is, however, constraint by UBI’s higher dependence on treasury gains, moderate credit quality of borrowers, low credit growth and geographical concentration in eastern and north-eastern states.

Fitch has reaffirmed the A+(ind) rating assigned to the Rs. 125 crore NCD programme and F1+(ind) rating to the Rs. 100 crore CP programme of Bhushan Steel and Strips (BSSL). The outlook on the long-term ratings is stable. The rating factors in the successful commercialisation of the company’s expansion project at Khopoli, leading to higher than projected accruals supported further by a strong growth in exports and continued buoyancy in demand and prices of steel products.

In an another exercise, Fitch has assigned a long-term foreign currency rating of BB+ and a short-term foreign currency rating of B to ICICI Bank. It has also assigned a rating of C/D and support rating of 3, with stable outlook on all the ratings. The ratings reflect the bank’s strong management and improved financial conditions.

Crisil has assigned AAA/stable rating to the Rs. 2,000 crore bond issue of NABARD, while it has reaffirmed the AAA/stable rating assigned to the bank’s three earlier bonds issue aggregating Rs. 4,057 crore.
. 

Theme of the week:

Uncertainty Linkers : Hedge Funds

1. The term hedge fund generally identified an entity that holds a pool of securities and perhaps other assets, that do not register its securities offering. Funds using the hedge funds appellation follow all kinds of strategies and can hardly be considered as homogenous assets class. And while appropriately named hodges funds where they were first used there is nothing strictly hedge like about their nature. Thus, while some hedge funds actually hedge, some may take large macroeconomic bets on countries currencies, interest rates, etc. while yet others may be technical funds in pursuit of gaining from any arbitrage opportunity that the market were to provide. In fact, the common denominator that identifies all hedge funds is their investment objective and legal/organized structure.

2. Firstly, they are stretched as investment partnership or limited liability companies with the general partners who acts as the hedge fund managers and other partners who are investors. Secondly, they compensate for their managers based upon the funds performance. In addition to the base management fee ( typically 1-2 per cent of assets under management) , hedge fund managers are also entirely to perform fee (typically 15-20 per cent profit) which are sometimes applied to hurdle rate. Thirdly, hedge funds generally require significant investment, restrict number of investors/partners; restrict transferability of interest, limit when an investor may reduce his interest and are prohibited from advertising. Additionally, most hedge funds have a ‘lock up’ period (usually one year) during which period investments cannot be reduced. Fourthly, while mutual funds are highly regulated, restricting the use of leverage, short selling and derivatives, hedge funds are less restricted and are allowed various strategies designed to accelerate performance or reduce volatilities including leverage and short selling. However, an informal restriction is generally imposed on all hedge funds managed by professional investors who understand the different strategies and typically invest in a particular investment strategies.

3. These funds usually take low positions ( sometimes short) to attempt to profit from pricing anomalies among securities issued by companies going through bankruptcy or reorganization. Because of their distressed situation, the managers can buy such securities at the discounted prices. These funds stands to gain significantly the company shares fully reorganize and return to profitability. These funds attempt to profit from pending merger transactions by, for example, taking a long position in a stock of the company to be acquired in a merger, leverage buoyant or take over and simultaneously taking a shore position in the stock of this company to be acquired in a merger, leverage buyout or takeover and simultaneously taking a short position in the stock or the acquiring company. Before, the effective date of a merger, the stock of the acquired will typically sell at a discount to its acquisition value as officially announced. The possibility that the announced merger may fall through explains much of the discount.

4. These strategies which exploit pricing discrepancies between closely related securities are designed to be among the less risky hedge funds strategies. Arbitrage may also be a significant strategy component for funds in the event driven and long/short categories. It may, however, be stressed that while termed as arbitrage, funds using these strategies are not less risky because of the possibility of model error or ridden market movements which may make the hedge untenable. This strategy involves taking long position in a company’s convertible bonds, preferred stocks or warrant that seems to be undervalued, while taking short position in the company’s common stocks. Funds also use futures to hedge out interest rate risk. Funds in this category attempt to profit from pricing inefficiencies identified through the use of mathematical model. Statistical arbitrage attempt to profit from the likelihood that the profit will turn towards a historical norm. These strategies are exposed to significant modeling risk and require sound stress testing techniques to probe themselves during sudden market movements. 

5. Also referred as multi-manager funds, these funds invest in other hedge funds rather than directly investing in securities such as securities, stocks, bonds, etc. These underlying hedge funds may follow a variety of investment strategies or may all similar approaches. Because investor capitals is diversified among a number of different hedge fund managers, funds of funds generally exhibit lower risk than do single-manager hedge funds. The principle drawback of fund of hedge funds is the double layer of fees. In fact, the underlying hedge funds also charges a fee thereby translating into “layers of fees” before the investor receives his first return.

6. Hedge fund managers are among some of the brightest, the financial services has to offer. The fee structure and the flexibility of hedge funds attract talented fund managers and traders in brokerage firm wanted to start on their own. And this is truly reflected in the hedge fund performance. Hedge fund managers decide themselves, whether they want to be included in a database or not . Many good funds may not report their performance because they are not seeking additional and many poor funds may not report due to an unimpressive track records. Since hedge funds are not required to report their performance consistently, managers may be more likely to report performance in a good month than in a bad one. If a fund begins to perform, perhaps even starting to go out of business, the fund may stop reporting its performance entirely than inflating the reportage average performance of hedge funds. Thus, hedge funds perform indexes may be included only those funds that have survived. 

7. Many hedge funds tend to invest in investment that have low liquidity or securities that are not exchange traded. Because, prices used for valuation are not up-to-date market prices but fair value estimates. This can lead to both an upwards bias in return and downward bias in risk measures. This problem is amplified by the fact that unlike mutual funds, hedge funds are not governed by regulating authorities as far as portfolio valuation guideline are concerned. Because of various bias, judging the average performance of the hedge fund industry can be difficult. Thus, to appraise individual hedge funds, one needs to look at the persistence, some have found evidence that managers have only a short life cycle of good performance with a half life –of three to three and half years.

8. However, hedge funds had been able to bend this rule by describing themselves in terms other than hedge funds. Thus, hedge funds managed to invest through participatory notes (PNs) of other foreign institutions investors (FIIs) registered with Sebi. As at the end of March 2004, total investment by hedge funds through PN route totalled Rs.81 billion, representing about 8 per cent of total net equities investments of all FIIs investment. Robust economic fundamentals, strong corporate earnings and improvement in market micro-structure seemed to be driving the hedge fund interest in India. Notwithstanding the alleged concern, hedge funds do offer some economic value and provide market and investor’s with substantial benefits. For example, many hedge funds take speculation, value driven trading position based on expectation about the value of securities. These position can enhance market efficiency. In addition, hedge funds offers investors an important risk management tool by providing valuable portfolio diversification because of hedge funds return in many cases are not correlated to broader debt and equity market. Hedge funds plays an important role in a financial system where various risks are distributed across a variety of innovative financial instruments. By actively participating in the secondry market for these instruments, hedge funds can help such entities to reduce or manage their own risks because of a portion of financial risks are shifted to investors in the form of these traditional financial instruments.
9. For 2004, the popularity of hedge funds has not sagged, internationally. For instance, in 2004 alone around 400 new hedge funds were created, bringing the known to total, 7000 into rough parites with the number of mutual funds. The start up fever is especially acute in many hedge-villas dotting Greenwich, Darien, Rowalyton and other affluent towns in southern Connecticut. Caxton Associates, Moore Capital Renaissance Technologies, SAC Capital Advisors, Maverick Capital and Highbridge Capital Management, all carrying excellent records and managed billions of dollars are considered too inaccessible to be included in a Standard and Poor’s Index of investible funds. Some hedge funds actually hedge, meaning they attempt to investment in a manner that offset adverse market movement. Since they also want to capture, the hedge is never complete and many funds do not even bother. Hedge funds have some common characteristics. They are usually pooled investments (like mutual funds), structured as private partnership ( unlike mutual funds). Many carry substantial leverage and are quite rigid about the flow of money from clients. Initially, ‘lockups’ for as long as four or five years are not uncommon; rarely is money allowed to come in or go out more than monthly.

10. Oddly, given the spectacular wealth that hedge funds produce for their own management and for investment firms, they do not overall, seem to produce much wealth for clients. Certainly, the highest performing funds have produced breathtaking returns. Renaissance has earned almost 40 per cent for more than a decade, SAC in excess of 30 per cent. The most evident is the drag which the fee put on performance. Historically, an investor is able to outperform the broad market by few percentage points annually has been considered something of a genius. But that barely covers the maintenance of the average hedge fund. High fees tied to performance also encourage hedge funds to take a big risk. Winner might just be lucky and their luck may be offset by the losses of others. A third problem caused by high fees is attrition. Successful managers becomes rich possibly too rich to care about work in just a few years. Managers that disappoint are quickly put out of business by angry client or they may shut down voluntarily. 

*These statistics and the accompanying review are a product arising from the work undertaken under the joint ICICI research centre.org-EPWRF Data Base Project.

In case of any query, please write to us at epwrf@vsnl.com