Current Economic Statistics and Review For the Week Ended September 15

The growth rate in the index of six core infrastructure industries has slowed down in the fiscal year 2004-05, resulting in a worrisome situation. The rate of expansion for these industries at 4.4 per cent in 2004-05 is lower than 6.2 per cent registered in 2003-04. The slowdown in the growth of these core industries would have an adverse impact on the performance the industrial production during 2004-05 and has also raised questions on the medium-term growth prospects of the industrial sector.

Of the six industries, three have witnessed slow down in their growth rates during 2004-05. These are petroleum refinery products (from 8.2 per cent in 2003-04 to 4.3 per cent in 2004-05), coal (from 5.8 per cent to 3.9 per cent) and finished steel (from 9.8 per cent to 3.7 per cent). The remaining three have posted higher growth rates during 2004-05. Production of crude petroleum increased by 1.8 per cent in 2004-05, as compared to a lower rate of 1 per cent in the previous year. Electricity generation and cement industry have witnessed growth rates at 5.2 per cent and 6.6 per cent, respectively. Output of these two industries had expanded by 5 per cent and 6.1 per cent, respectively, in fiscal year 2003-04. The acceleration in the growth rates of these industries, however, has not been enough to maintain a high growth rate for the group as a whole. This has happened because the deceleration in the first three industries has been much steeper than the acceleration in the remaining three industries.

The Reserve Bank of India has decided to encourage flow of credit to medium industries and facilitate coordination between branches of commercial banks and Small Industries Development Bank of India (SIDBI) in the delivery of credit to small-scale industries. The RBI, in its Annual Policy Statement for the year 2005-06 has taken following measures to strengthen the flow of credit:

• Review of all its existing guidelines on financing SSI, debt restructuring, nursing of sick units etc. with a view of rationalising, consolidating and liberalising them.
• Encourage banks to establish mechanisms for better co-ordination between their branches and branches of SIDBI, which are located in 50 clusters identified by the Ministry of Small Scale Industries. Under this scheme,

a) The existing branches of SIDBI re-designated as ‘Small Enterprises Financial Centres’ (SEFC) will take up co-financing of term loan requirements of SSI units along with the bank branches and the working capital requirements of these units will be met by banks.
b) The expertise of SIDBI in appraisal of credit requirements of SSI units will be leveraged by the branches of commercial banks, by payment of a nominal fees.
c) SIDBI will provide other expert services to banks in simplifying administrative procedures.
The services of SEFCs will also be available for tiny industrial units.

Corporate performance
The results that have been reported by 280 companies in January-March quarter of 2005, have showed a 29 per cent rise in sales and a 74 per cent increase in net profit. Engineering, shipping, steel, sugar and information technology companies posted a healthy growth in net profit, while cement, fertilizer, paper and pharmaceutical companies have reported an erosion in their bottomlines. Value-added tax, MRP-based excise and competition in overseas market have affected January-March 2005, quarter profit for pharma majors.

New ventures
Consumer goods major Hindustan Lever is planning to revamp its food business. It is looking at broadening its product basket by introducing products in the children nutrition segment under the Annapurna and Kissan brands.

General Motors India (GM) is set to expand the capacity of its manufacturing plant at Halol in Gujarat so as to produce 80,000 vehicles a year compared with 60,000 vehicles at present. The Rs 150-crore expansion plan is expected to be completed by the middle of next year. GM is going to launch two new products next year-one in the first quarter and another by the end of the second quarter.

Consumer durables major LG Electronics India announced that it would invest $ 30 million over the next five years to enhance its air-conditioning (AC) business.

Coal India is considering the possibility of setting up a joint venture power plant in collaboration with the National Thermal Power Corporation (NTPC).

BG India along with consortium partners Oil and Natural Gas Corporation (ONGC) and Reliance Industries Ltd has decided to invest approximately $ 500 million for development and expansion of the Tapti gas field, offshore Mumbai.

Mitsubishi Heavy Industries Ltd in collaboration with Mitsubishi Corporation, has signed a contract with the Indian Farmers Fertiliser Cooperative (Iffco) for setting up two carbon dioxide recovery units at its Anola and Phulpur fertilsier plants.

SKF India is investing Rs 130 crore this year on capacity expansion at its Pune and Bangalore manufacturing facilities. In Pune company will expand its taper bearing capacity, while the investment in Bangalore will be to enhance its deep-groove ball bearing capacity.

The board of directors of TVS Electronics have approved in principle to examine a proposal to establish a manufacturing unit in Himachal Pradesh. The initiative has been undertaken to take advantage of the state’s excise duty and other tax concessions.

Wipro Technologies, the global IT services business of Bangalore based Wipro Ltd, will help Dutch coatings and chemical maker, Akzo Nobel, better manage a string of data centers in the US and the Europe, in a three year multi-million Euro infrastructure management deal. Akzo Nobel NV, based in the Netherlands, serves customers throughout the world with healthcare products, coatings and chemicals.

Reliance Industries has received consent from the government for production of natural gas in the Bay of Bengal.

Adidas India is set to become the German sportswear maker’s largest subsidiary in Asia after China and Japan overtaking the likes of Malaysia and the Philippines at the end of this year.

Kingfisher Airlines, south Asia’s newest budget airline will take off from Mumbai for its maiden flight from Bangalore, becoming India’s second low-cost carrier.

Dr Reddy’s Laboratories has entered into an agreement with Pharmascience Group to develop, manufacture and commercialise 11 generic pharmaceutical products for the Canadian market.

Hindalco Industries has completed the expansion of its copper smelter at Dahej in Gujarat from 250,000 tonne per annum to 500,000 tpa.

Tata Steel, the country’s largest integrated private sector steelmaker, is looking at opening at least 15 branded retail outlets across the country during the current financial year. The first store is likely to come up in Kolkata in a month.

Pakistan Prime Minsiter Shaukat Aziz has given Bajaj Auto the go-ahead to establish a venture with the Saigol family in the country to assemble completely-knocked-down kits of two-wheelers imported from India.

On a strong demand, the country’s leading paper producers have lined up investments of over Rs 5,400 crore to set up fresh capacity of almost 700,000 tones per annum.

eBay, among the established global auction sites, is mulling over an investment of around $ 21 million in its Indian operations over the next two years. eBay had acquired Indian auction site Baazee.com during last year and is planning to expand its activities.

Company issues
The dispute between Reliance Industries Chairman and Managing Director Mukesh D Ambani and his brother, Reliance Industries Vice-Chairman and Managing Director Anil D Ambani, has erupted again at Reliance Industries Ltd (RIL) board meeting. Anil Ambani abstained from signing the final accounts of the company citing the absence of relevant information, details and disclosures for the year ended March 31, 2005. At the three hour board meeting, the younger Ambani brother raised a host of questions seeking information and disclosure on various issues.

Bharat Sanchar Nigam Ltd (BSNL) and Mahanagar Telephone Nigam Ltd (MTNL) have combined arrears of Rs 4,470 crore, with 95 per cent accounted for by private companies and individuals. The defaulters list also includes central and state governments.

Crisil said an analysis of its rating trends suggests that the credit quality of corporates rated by it is stronger than it has been any time in the recent past. Initiatives in cost cutting coupled with lower finance costs, have contributed to sustainable improvements in competitiveness across sectors.

Mergers & Acquisitions
IVRCL Infrastructures & Projects has said that it was acquiring 70 per cent stake in Hindustan Dorr-Oliver from the Chhabria family’s Jumbo World Holdings and their associates for Rs 53.9 crore. The sum includes a non-compete fee.

Tractor and Farm Equipment Ltd (TAFE) proposes to retain the Eicher brand in the market even after it acquires the tractor business of the Delhi-based Eicher Group.

The Mehsana-based Sintex Industries Ltd, a leader in the field of plastics in the country, has signed a memorandum of understanding (MoU) for acquiring a strategic majority stake in Zeppelin Mobile System India Ltd, which features among the top two telecom shelter manufacturers in India.

Reliance Capital has sold its 23 per cent stake in Indian Petrochemicals Corporation Ltd (IPCL).

Joint ventures
Grasim’s equity investment in the proposed joint venture with Canada’s Tembec for acquisition of St Anne Nackawic Pulp Mill will be Canadian C$9 million i.e., about Rs 32 crore. The acquisition will be made by a joint venture amongst Grasim, other overseas Aditya Birla Group companies and Tembec, in which ABG will be the majority partner and Tembec, the lead operator.

Policy issues
The Securities and Exchange Board of India (Sebi) has discussed Reliance Capital Ltd’s sale of its equity in Indian Petrochemicals Corporation Ltd (IPCL) to other Reliance group companies. The Sebi board has also discussed the issue of Reliance Industries Vice-Chairman and Managing Director Anil Ambani’s refusal to sign the Reliance Industries Ltd accounts.

The Bombay High Court has asked Reliance Energy Ltd to furnish a bank guarantee of a nationalized bank for Rs 100 crore on or before June 6, 2005, in connection with the installation of a flue gas desulphurisation unit at its Dahanu thermal power station.

The government’s decision to allow women to work in night shift would aid the textile industry so as to cater to the increased demand for readymade garments from the export market.

Storage battery major Exide Industries has appealed to the environment and commerce ministry to enforce the existing rule of filing of environment compliance report by importers of batteries.

The revenue department is likely to receive 45 per cent of the proceeds from the sale of Daewoo Motors India Ltd’s assets.

Company results 2004-05
Power
Kolkata-based power utility and RPG group company CESC Ltd’s net profit has increased by 86 per cent to Rs 160 crore for 2004-05 against Rs 86 crore in the previous year. Turnover rose 1.25 per cent at Rs 2,416 crore. The rise in profit has been mainly due to decline in interest cost and amount expended on power purchase.

Fertilizers
Mangalore Chemicals and Fertilisers’ profit before tax has increased to Rs 36.68 crore and net sales to Rs 878 crore for 2004-05. The overall improvement in performance in 2004-05 was due to volume growth, energy savings and cost control, specially reduction in marketing costs.

National Fertilizers net profit has increased by 89.2 per cent to Rs 160.88 crore for 2004-05 as compared with Rs 85.03 crore for 2003-04. Total income has increased to Rs 3490.50 crore from Rs 3417.87 crore.

Telecommunications
Reliance Infocomm, the telecom venture of the Reliance group, has recorded turnaround to a net profit at Rs 51 crore in 2004-05 from a net loss of Rs 390 crore in 2003-04. During the year, the company’s revenue has increased by 99 per cent to Rs 5,387 crore from Rs 2,707 crore in 2003-04.

Tractors
Punjab Tractors Ltd’s net profit has increased by 49.69 per cent to Rs 62.9 crore for 2004-05, as compared to Rs 42.02 crore in the previous financial year. Total revenues has increased to Rs 863 crore from Rs 603.3 crore. The board of directors has recommended a dividend of Rs 5.50 per share subject to approval of the shareholders.

Automobiles
Hinduja group flagship’s Ashok Leyland Ltd net profit has increased by 40 per cent to Rs 271.4 crore, as against Rs 193.6 crore registered in 2003-04. The turnover has increased to Rs 4,811.3 crore as against a turnover of Rs 3,927.3 crore in the previous financial year.

Beverages
UB group company’s MCDowell’s net profit has increased by 56 per cent to Rs 33.26 crore as against Rs 21.35 crore in 2003-04. Net sales has increased to Rs 1,802.6 crore during the year from Rs 1,651.3 crore in the previous year.

Petroleum and Natural Gas
With increase in production and higher international crude prices, ONGC Videsh Ltd’s net profit has increased by 130 per cent to Rs 982 crore during 2004-05. The gross revenue of OVL has increased by 58 per cent to Rs 5,546 crore in 2004-05 from Rs 3,502 crore the previous year.

Pharmaceuticals
Cipla Ltd’s net profit has increased by 37.48 per cent to Rs 406.38 crore for 2004-05, compared with Rs 295.59 crore in the previous financial year. Total income has increased to Rs 2,317.86 crore from Rs 1,958.59 crore.

Glenmark Pharmaceuticals’ net profit for 2004-05 has increased to Rs 63.48 crore from Rs 42 crore. Sales income has increased to Rs 536.43 crore from Rs 380.66 crore. The board of directors have announced an interim dividend at 35 per cent for 2004-05. It also has allotted bonus shares in the ratio of 1:1.

Hyderabad-based Matrix Laboratories’s net profit has marginally increased by 6 per cent to Rs 131.97 crore for the year 2004-05, from Rs 124.61 crore in the previous year. Net sales has increased 21 per cent to Rs 641.31 crore from Rs 530.02 crore.

Zydus Cadila Healthcare’ profit after tax is down 5.3 per cent at Rs 143.80 crore, from Rs 151.88 crore in 2003-04. Net sales are lower at Rs 1,063.40 crore for 2004-05 from Rs 1,172.27 crore in the previous year.

Vadodara based Alembic’s profit after tax is down 5.3 per cent at Rs 143.80 crore, from Rs 151.88 crore in 2003-04. Total revenue is down 6.7 per cent at Rs 572.42 crore for 2004-05 from Rs 613.82 crore in the previous financial year. This was mainly on account of lower domestic formulations sales during the year.

Orchid Chemicals and Pharmaceuticals’ net profit is marginally lower to Rs 31.01 crore from Rs 31.02 crore. Sales is lower by 3.37 per cent for 2004-05 at Rs 689.29 crore, from Rs 713.40 crore. The board has recommended a dividend of 40 per cent on equity (face value of Rs 10).

Textiles, garments
Arvind Mills’ net profit has increased by 31 per cent to Rs 127 crore for 2004-05, compared with Rs 97 crore for the previous year. Sales has increased at 17 per cent to Rs 1,679 crore. The board has recommended a 10 per cent dividend for 2004-05.

Indo Rama Synthetics’ net profit has declined 59.1 per cent to Rs 70.21 crore from Rs 171.71 crore. However, annual sales registered growth of 10.6 per cent at Rs 2,198.71 crore for 2004-05. The chairman stated that the rising prices of raw materials specially crude oil and the decline in other income have been the causes for the fall in profit.

Indian Rayon & Industries’ net profit has declined by 13.37 per cent to Rs 113.72 crore for 2004-05 compared with Rs 131.28 crore for the previous financial year. This has been attributed to the exceptional items including the voluntary retirement scheme at the rayon division at Rs 9.54 crore and a gain on sale of investments at Rs 1.89 crore against a profit of Rs 19.95 crore in the previous year. Total income has increased to Rs 1,870.69 crore from Rs 1,591.62 crore. The company also announced a capital expenditure plan of Rs 300 crore for 2005-06.

Software, IT
For 2004-05, I-flex solutions’s profit has increased by 12.37 per cent to Rs 197.64 crore as compared with Rs 175.88 crore for the previous year. Revenues increased 31.90 per cent to Rs 902.86 crore from Rs 684.46 crore during the period. The board has recommended a dividend of 100 per cent.

Polaris Software’s net profit has decreased by 0.15 per cent to Rs 74.26 crore for 2004-05 as compared to Rs 74.37 crore in the previous year. Total revenue has increased by 21.76 per cent to Rs 787.12 crore from Rs 646.42 crore. The board has recommended a dividend of 35 per cent (face value of Rs 5).

Others
For 2004-05, Tube Investments’s net profit has increased by 19.46 per cent to Rs 98.55 crore, from Rs 82.49 crore of the previous year. The total revenue is up by 24-04 per cent to Rs 1,468.72 crore from Rs 1,184.06 crore.

For 2004-05, Hindustan Construction Company’s (HCC) net profit is up 107 per cent to Rs 74 crore from Rs 35.7 crore. Gross income is up by 34.6 per cent to Rs 1,577 crore from Rs 1,171 crore.

Maharashtra Seamless Ltd’s net profit has increased by 19 per cent to Rs 85.06 crore for 2004-05 from Rs 71.46 crore in the previous financial year. Total income has increased to Rs 785.22 crore from Rs 504.99 crore.

Zee Telefilms’s net profit for 2004-05 has increased by 40 per cent at Rs 160.06 crore compared with Rs 115.02 crore for 2003-04. Total income is up by 31 per cent at Rs 704.28 crore from Rs 537.11 crore in 2003-04.

Everready Industries India’s profit after tax has increased to Rs 46.31 crore in 2004-05 from Rs 38 lakh in 2003-04. However, sales are lower at Rs 745.71 crore in 2004-05 compared to Rs 968.23 crore during 2003-04. The figures are not comparable as it was prior to demerger of the tea business.

Manufacturer of flexible packaging films, Jindal Poly Film Ltd’s profit after tax increased by 35.7 per cent to Rs 75.8 crore in 2004-05 from Rs 55.8 crore in 2003-04. Net sales increased by 29.7 per cent to Rs 703 crore during 2004-05 from Rs 542 crore in 2003-04. For the year 2004-05, The company has recently expanded its capacities for flexible packaging films at its plant at Nasik.

Infrastructure Development Finance Company profit after tax has increased by 17 per cent to Rs 304 crore for 2004-05, while its total income rose 14 per cent to Rs 728 crore. The company declared a dividend of 10 per cent.

Container Corporation of India Ltd (Concor)’s net profit has increased by 19.58 per cent to Rs 439.58 crore for 2004-05. Income from operations has increased by 13.18 per cent to Rs 1,996.96 crore during the period.

Dredging Corporation of India’s net profit and revenues are down at Rs 111.36 crore and Rs 546.10 crore, respectively for 2004-05 from Rs 170.02 crore and Rs 560.93 crore, respectively during the previous year.

Company results for the quarter ended March 2005
Shipping
GE Shipping’s net profit has increased by 36 per cent to Rs 251.68 crore in the quarter ended March 2005. Total income has increased by 19 per cent to Rs 571.16 crore.

Paper
The country’s largest paper company, Ballarpur Industries Ltd’s net profit has increased by 36.11 per cent to Rs 44.21 crore for the quarter ended March 2005 from Rs 32.48 crore during the corresponding period of the previous year. The company’s turnover has increased by 0.84 per cent to Rs 565.35 crore from Rs 560.63 crore.

Engineering
Siemens Ltd’s net profit has increased by 89 per cent to Rs 79.37 crore for the quarter ended March 2005 from Rs 42 crore in the corresponding quarter of the previous year. Total income for the quarter has increased to Rs 744.60 crore from Rs 498.24 crore.

Electronics
Bharat Electronics Ltd’s net profit has increased by 35.78 per cent for the quarter ended March, 2005 to Rs 429.2 crore. Revenues has increased 15 per cent to Rs 3,326.7 crore.

Chemicals & Fertilizers
United Phosphorous’ net profit is higher at Rs 21.48 crore for the quarter ended March 2005 as compared with Rs 10.35 crore during the cooresponding period of last year. Total income has increased to Rs 354.94 crore from Rs 262.47 crore. The board has recommended 40 per cent dividend on the equity shares and 7 per cent on the preference shares of Rs 10 each.

FMCG
FMCG major Nestle India’s net profit has increased by 21.3 per to Rs 78 crore during the quarter ended March 2005 following focus on product innovation and improvement of operational efficiencies. Sales has increased by 5.5 per cent to Rs 613.5 crore.

Indian arm of Unilever, Hindustan Lever’s net profit has declined by 15.13 per cent for the quarter ended March, 2005 at Rs 250.25 crore from Rs 294.88 crore in the corresponding period of the previous year. This is the seventh consecutive year in which HLL has reported a decline in net profit. The company’s net sales has however increased by 6.5 per cent in the quarter-ended March, 2005 to Rs 2,506.38 crore from Rs 2,353.34 crore during the corresponding period of the previous year, after a flat growth last year.

Others
KEC International Ltd has recorded almost a flat net profit of Rs 13.36 crore for the quarter ended March 2005 as against a net of Rs 13.30 crore recorded in the corresponding period of 2003-04. The company has recorded a 55 per cent increase in its turnover to Rs 459.78 crore for the quarter ended March 2005 as against Rs 295.26 crore in the corresponding quarter of the previous year.

The Indian arm of Cincinnati-based Procter & Gamble, Procter & Gamble Hygiene and Health Care’s net profit stood at Rs 14.66 crore for the quarter ended March 2005. Sales has increased by 26 per cent to Rs 172.43 crore during the quarter ended March 2005 from Rs 137.27 crore in the corresponding period of the previous financial year.

J K Industries has reported a net loss of Rs 1.99 crore for the quarter ended March 2005 compared with a net profit of Rs 6.40 crore in the comparable quarter of the previous year. Turnover has increased by six per cent to Rs 566 crore for the quarter ended March 2005 from Rs 532.50 crore in the corresponding period of the previous year. Increasing raw material cost and lack of commensurate price increase led to the net loss.

Motor Industries Company (Mico)’s net profit has declined by 18.3 per cent to Rs 91.74 crore for the quarter ended March 2005 as compared with Rs 112.37 crore for the corresponding quarter of the previous financial year. Total income increased to Rs 662.29 crore from Rs 577.31 crore.

Tyre
MRF’s net profit for the quarter ended March 2005 has plummeted by 94 per cent to Rs 0.78 crore versus Rs 13.19 crore reported in quarter ended March 2004. Net sales has increased by 13.32 per cent to Rs 701.79 crore compared to Rs 619.27 crore in the quarter ended March 2004.

Pharmaceuticals
GlaxoSmithKline Pharmaceuticals’ net profit has declined by 26.68 per cent for the quarter ended March 2005 at Rs 46.91 crore from Rs 63.98 crore in the corresponding period of the previous year. Net sales has declined by 24 per cent to Rs 296.11 crore from Rs 389.34 crore.

Ranbaxy Laboratories Ltd’s net profit has declined by 62.8 per cent in quarter ended March 2005 to Rs 70.8 crore as the VAT regime, Quinapril Litigation in the US and phasing of European launches have drawn sales down by 13 per cent to Rs 1,138.3 crore.

Cement
Aditya Birla group flagship Grasim Industries’ net profit has declined by 17 per cent to Rs 230 crore for the quarter ended March 2005 after an extra-ordinary provision. Grasim made an exceptional provision of Rs 92 crore towards permanent diminution in the value of its investment in and loans to its subsidiary, Shree Digvijay Cement Company. The company’s turnover for 2004-05 is up by 19 per cent at Rs 6,247 crore. The board has recommended a dividend of 160 per cent for 2004-05, up from 140 per cent.

Banking
The National Bank for Agriculture and Rural Development (Nabard) in a joint collaboration with the Gujarat government has chalked out plans to set up rural knowledge centres across the state to impact know-how pertaining to the agricultural sector to farmers in Gujarat. The bank has sent a proposal to the state government to implement this project across all districts. As part of the Rural Infrastructure Development Fund (RIDF) implemented by the Centre, for which the bank has earmarked Rs.100 crore to be disbursed across the country, it will impart scientific knowledge to farmers and inform them about the latest technological development.

State Bank of India (SBI) is witnessing maximum demand for consumer loans, housing loans and commercial vehicle loans from rural and semi-urban areas. SBI has about 6,000 branches in rural and semi-urban areas, and the growth in retail demand for credit is growing compared to urban and metro branches. The northern states accounted for the largest growth in car purchases, followed by western and southern region.

Infrastructure Development Finance Company (IDFC) has reported a 17 per cent rise in its net profit in 2004-05 at Rs.304 crore as against Rs.259 crore in the previous fiscal. The board has recommended a dividend of Re 1 per equity share of Rs.10 each.

The RBI said that banks could now shift branches within the municipal ward/locality in metropolitan/urban and semi-urban centres, without seeking its approval. In a notification, the RBI said it has permitted banks to shift even their rural branches within the block/service area without obtaining its permission. This however, has been allowed subject to conditions that both, the existing and the proposed centres are situated within the same block and service area of the branch.

In a significant move to achieve additional business, customer satisfaction and profitability, Allahabad Bank has decided to implement centralised banking solution (CBS) in 400 branches in the first phase. The bank has earmarked Rs.250 crore to implement computerisation in the bank.

Given the rising interest rate scenario and rising yields in the government securities market, Corporation Bank is planning to double its exposure in the equity market to Rs.600 crore in 2005-06, from Rs.300 crore in 2004-05. The bank has identified primary issues as a lucrative investment option. Apart from this, the bank plans to enhance its exposure in fundamental stocks like auto-engineering, oil and banking. The bank’s exposure in the equity market is currently less than 1 per cent of its total investment portfolio.

Life Insurance Corporation of India (LIC) and Dena Bank have signed a memorandum of understanding (MoU) and have entered into a strategic tie-up for developing bancassurance. The MoU will enable the bank to become the corporate agent of LIC and to provide insurance cover to its large customer base.

Punjab National Bank has tied up with Nabard Consultancy Services (Nabcons) for utilising Nabcoms expertise in areas of techno-economic appraisal of projects, capacity building, micro-finance et al.

A study of 38 information technology (software) companies, which have declared their yearly results, indicates that their aggregate net profit increased by 46.1 per cent to Rs.4,924 crore during 2004-05 compared to Rs.3,371 crore in 2003-04. As many as six software companies recorded lower net profit during 2004-05, while eight companies namely Adam Comsof, Aztec Software, Brels Infotech, ERP Soft Systems, Igate Global Solutions, Silicon Valley Infotech, Soffia Software and Teledata Informatics witnessed an increase of 100 per cent or more. The top five IT companies in terms of net profit during 2004-05 are as follows:

Top 5 IT Companies according to PAT
(Rupees Crore)
Company	PAT (Profit After Tax)		Per cent Change
Company	2004-05	2003-04	Per cent Change
Infosys Tech	1904	1243	53.1
Wipro	1495	915	63.4
Satyam Computer	750	556	34.9
HCL Tech	326	332	4.2
GTL	98	82	19.2
Total (38 companies)	4924	3371	46.1

(TCS company has registered net profit of Rs.1831 crore in 2004-05. However, TCS is not included in the study as the company’s previous year figures are not comparable, as it does not include the TCS Division, which was transferred to the company with effect from April 1, 2004). The return on sales (net profit to sales) increased from 19.9 per cent in 2003-04 to 21.9 per cent in 2004-05. This has happened probably due to the increase in net profit of major software companies like Satyam Computers, Wipro, Infosys Technologies, iGate Global Solutions, Soffia Software and Aztec Software. During 2004-05, Indian companies have ramped up revenues by greater client mining, increased focus on higher value added services such as systems integration and consulting. In addition, operational efficiency as measured by employee utilization rate increased during the year 2004-05. However, high attrition rate remains as an area of concern.

Capital Markets
Primary Market
CyberMedia Ltd is to enter the market with a public issue of 28.22 lakh equity shares of Rs 10 each for a cash premium of Rs 50 per share aggregating to Rs 16.93 crore. The issue is to open on May 4 and close on May 9. The funds mobilized will be used to start four new publications, one of which will be the first of its kind, catering to the Indian ITES-BPO industry.

India Infoline Ltd has fixed its issue price at Rs 76 per equity share. The offer had been through 100 per cent book build process for 1.19 crore shares in the price band of Rs 70 –80. The issue closed on April 27 and was oversubscribed by 7.22 times, wherein the qualified institutional portion was oversubscribed by 10.49 times and non-institutional investors portion was oversubscribed by 5.64 times.

Shringar Cinemas has been listed on BSE and NSE at Rs 54 and Rs 57, respectively, against its issue price of Rs 53. On BSE, the stock touched an intra-day high of Rs 70 and a low of Rs 44.70 and closed at 45.15; even on NSE the stock closed below its issue price at 44.10.

The IPO of Oriental Bank of Commerce (OBC) was oversubscribed by 3.10 times on the last day of the offer on April 29. The bids were received for 17.97 crore shares against 5.8 crore shares on offer in the price band of Rs 235 to Rs 260 per share.

Sebi has stalled the IPO of shopper’s stop, which was to open for subscription on April 27 and close on May 3, following the instructions from the Shillong bench of Guwahati High Court.

According to the Prime Database, of the 10 public issues that got listed in the calendar year 2005, 5 of them ended the first day of their debut on stock exchanges for trading below their listing prices. They are Dena Bank, PNB, IVRCL Infrastructure, Jaiprakash Hydro Power and 3i Infotech.

Secondary Market
During the week, the stock markets grappled with interest rates worries amids rising inflation rate along with mixed corporate results and slowing down of FII inflows. As a result, the BSE sensex closed lower by 192.13 points over the previous week’s close at 6346.57 and the NSE nifty, too, registered a loss of 64.85 points over the previous week’s close, to end at 1902.50. Following the announcement of he Annual Credit policy by the RBI, the BSE bankex index fell by 6.36 per cent or 238.08 points over the week as the reverse repo rate has been hiked by 25 basis points. Further, pharmaceutical companies like Ranbaxy Laboratorise and Nicholas Piramal announced disappointing results, this pulled the indices lower. Despite impressive results announced by the Reliance Industries, the stock price has fallen due to the open feud between the Ambani brothers.

The FIIs have been net sellers of equities during the month of April to the extent of Rs 654.10 crore, with sales at Rs 16,696.10 crore and purchases at Rs 16,041.90 crore. Even in debt, they have been net sellers of Rs 821.40 crore, with sales at Rs 989.70 crore and purchases at Rs 168.40 crore. During the week under review, the FIIs were net sellers in equities on three days of the week.

In the week ended April 29, all the sectoral indices of BSE have recorded decline with the BSE Bankex and BSE Metal registering the highest loss of 6.4 per cent and 6.5 per cent, respectively. While the BSE sensex has fallen by 3 per cent, the BSE small-cap and BSE mid-cap have fallen by 1.9 per cent and 2.5 per cent, respectively.

The BSE has reshuffled its BSE sensex index by adding scrips of Tata Consultancy Services and National Thermal Power Corporation and removing scrips of Hindustan Petroleum Corporation and Zee Telefilms from it with effect from June 6.

Derivatives
The trading in the F&O segment of NSE remained subdued during the week amid expiry of April contracts on Thursday, April 28. The rollover activity started on a subdued note but later on gained momentum nearing the expiry date. The rollover has been lower for both Nifty futures and stock futures as compared to last month’s rollover.

All the three Nifty futures with expiry in April, May and June continued to trade at discount to NSE Nifty index.

Government Securities Market
Primary Market
On May 3, the government is to re-issue 8.07 per cent 2017 and 7.50 per cent 2034 for notified amounts of Rs 5,000 crore and Rs 2,000 crore, respectively.

Secondary Market
In the Annual credit policy for 2005-06, the RBI has increased the reverse repo rate under the LAF by 25 basis points from 4.75 per cent to 5 per cent with effect from April 29. The fixed repo rate under LAF remained unchanged at 6 per cent, thus the spread between the reverse repo and repo has narrowed from 125 basis points to 100 basis points. The RBI governor said that the hike in reverse repo rate has been to absorb any liquidity overhang in the market and contain inflationary expectations. However, the overnight rates ended the week higher in the range of 4.90- 5.10 per cent in a bid to realign itself to the new reverse repo rate of 5 per cent.

Ahead of announcement of the credit policy, the market remained cautious. After the announcement of the credit policy, the yields on government securities across maturities increased sharply in response to the reverse repo rate hike. The yield on the benchmark 10-year security, 7.38 per cent 2015, ended in the week ending April 29 at 7.24 per cent as against the preceding week’s close at 7.10 per cent. In addition, the rise in inflation rate to 5.64 per cent mainly on account of costlier food and manufactured goods has affected the market sentiments.

With effect from fortnight beginning June 11, non-bank participants, except PDs, would be allowed to lend, on average in a reporting fortnight, up to 10 per cent of their average daily lending in call/ notice money market during 2000-01. And from August 6, they will be completely phased out from the call/notice market.

Also, the benchmark for fixing prudential limits on exposure to call/notice money market in the case of scheduled commercial banks from April 30 would be linked to their capital funds (sum of Tier I and Tier II capital).

In order to facilitate further deepening of the government securities market, the RBI has permitted sale of government securities allotted in primary issues with and between constituent SGL account holders also on the same day. Earlier, it was allowed only between SGL account holders.

The Finance Ministry has ratified 9.5 per cent interest rate for subscribers to Employees’ Provident Fund (EPF) for 2002-03 and 2003-04, however, a formal communication from the Central Board of Trustees (CBT) with regard to the interest rate for 2004-05 is awaited.

Bond Market
In the credit policy, the minimum maturity period of certificates of deposits (CDs) has been reduced from 15 days to 7 days.

Foreign Exchange Market
The rupee-dollar exchange rate has appreciated from Rs 43.75 on April 21 to Rs 43.65 on April 29 even as the dollar strengthened against the euro and the yen, on account of anticipation of revaluation of Chinese Yuan, which is expected to boost India’s export competitiveness.

The six-month forward premia firmed up over the week from 1.74 per cent to 1.85 per cent, while the 12-month premia remained static.

Commodities Futures
As per the directive from Forward Markets Commission (FMC), NCDEX has revised the timing for trading in agricultural commodities from April 25 to start at 10 am and close at 5 pm. The timings remain unchanged on Saturdays.

The total commodities exchanges turnover has been lower at Rs 48,676 crore in the first fortnight of April as compared to Rs 51,000 crore in the first half of March. Of the total 24 exchanges, 5 exchanges account for nearly 99 per cent of the total turnover; with the turnover on NCDEX at Rs 31,737.7 crore, followed by Rs 12,575.50 crore on MCX and by National Borad of Trade (NBOT) at Rs 1,957.68 crore.

The centre has collected Rs 3,03,856 crore as revenue till the end of March 2005, as against the revised estimate target of Rs 3,05,314 crore for the fiscal year 2004-05.

Indirect tax collection at Rs 1,71,131 crore was a little more than the revised target of Rs 1,71, 120 crore. Excise tax collection stood at Rs 99,352 core while customs collections totalled to Rs 57,645 crore. Service tax collections stood at Rs 14,134 crore-an increase of 79.2 per cent from the collections in the last fiscal year. On the other hand, the direct tax collection fell short of its revised target due to a shortfall in the collection of personal income tax. Direct tax collections increased by 26.3 per cent to reach 1,32,725 crore by the end of March 2005. Income tax collections increased by 17 per cent from fiscal year 2003-04 to reach Rs 48,321 crore. Corporate tax collection surpassed the revised target of Rs 83,000 crore to be recorded at Rs 83,581 crore. Wealth tax and Securities transaction tax contributed to Rs 823 crore to the total tax collection. The collection of tax arrears for the fiscal year 2004-05 stood at Rs 9,725 crore.

The empowered committee of state finance ministers has decided that all industrial inputs, medicines, medical equipment and devices will attract a uniform 4 per cent tax rate under VAT. The same rate would also apply to capital goods, barring a small list of items like building materials. The committee has also decided to expand the list of exempted items to include branded and unbranded salt, all kinds of bread, khadi, gur, jaggery and goods distributed through the public distribution system. States have been given the option to impose either VAT at 4 per cent or no tax on atta, maida and suji. In addition, states have also been given the option to levy 4 per cent or 12.5 per cent VAT rate on dry fruits.

The empowered committee of state finance ministers has come up with a novel solution to encourage states to adopt a uniform floor rate of 20 per cent for diesel. It has been suggested that states like Delhi could continue with 20 per cent VAT rate, but reduce the effective rate to 12.5 per cent. The differential could be extended as subsidy by the Delhi government to the oil companies directly. Similarly for LPG, Delhi government can maintain the 12.5 per cent rate, but reduce the effective rate to the earlier rate of 8 per cent.

The Centre has conveyed to the Empowered Committee of state finance ministers its willingness to increase the compensation amount of Rs 5,000 crore, which has been earmarked in the Budget for 2005-06, for reimbursing states which face revenue loss on account of VAT. This has been seen as another attempt to convince the non-VAT states to switch to VAT. According to Ramesh Chandra, member secretary of the committee, the total compensation package, which has been set by the government, may be doubled if the need arises. He further added that the states would have to convince the centre that they have actually incurred losses due to the new tax regime, with the help of a certificate issued by their respective auditor-generals. Later an audit would be undertaken by the Comptroller and Auditor-General of India.

A new electronic internal data reporting system, which is aimed at streamlining the tax administration will be introduced by the government from May 1,2005. It will cut down the number of periodic reports to be filed by assessees to indirect tax authorities

from 133 at present to just seven. In addition, the format of reports has also been revised so as to make them amenable to electronic filing and processing. The new system would reduce the interface between tax assessees and taxmen, ensure greater efficiency, substantial saving in resource and availability of reliable data in a timely manner

The annual inflation rate based on wholesale price index has risen to 5.6 per cent during the week ended April 16, 2005 from 5.5 per cent registered during the previous week. The annual inflation rate was at 4.7 per cent in the corresponding week last year.

The WPI has risen to 191.2 from the last weeks’ level of 190.7 (Base:1993-94=100) during the week in review. The index of primary articles’ group has risen marginally to 187.1 from the previous week’s level of 187, mainly due to a rise in the prices of both, food and non-food articles. The index of fuel, power, light and lubricants group has gone up fractionally to 292.7 from the previous week’s level of 292.5. The heavy-weighted manufactured products’ group constituting 63.7 per cent of total weight has risen considerably as compared to other groups from the previous weeks’ level of 169.2 to 170, especially due to rise in the prices of food products, textiles, paper and paper products, non-metallic mineral products, basic metals alloys and metal products and machine tools.

The latest final index of WPI for the week ended February 19, 2005 has been revised upwards; as a result both, the absolute index and the implied inflation rate moved up to 188.9 and 4.89 per cent instead of the provisional levels of 188.8 and 4.83 per cent, respectively.

After a reasonable decline in the rate of inflation in March 2005, it has consistently moved up during the last couple of weeks. Sustaining a moderate level of inflation rate at around 4 to 5 per cent in coming weeks, pose as a major challenge in front of the government.The current surge in the rate is due to a strong base effect and the RBI expects the same to hover around 5 to 5.5 per cent for the year 2005-06.

The Finance Ministry has finally approved the rate of interest of 9.5 per cent for nearly 4 crore subscribers of the Employees Provident Fund (EPF) for the year 2002-03 and 2003-04. This would mean an additional burden of Rs.927 crore on the government, since the income generated by the Fund will not be enough to meet a higher interest obligation. The EPF balance sheet shows that it can afford only a rate of 8.5 per cent to its four crore subscribers. The Finance Minister made it clear that the applicable rate of interest on the fund would be 9 per cent plus a 0.5 per cent bonus for 2003-04 being a Golden Jubilee Year. While the Employees Provident Fund Organisation (EPFO) earned a surplus of Rs. 204.92 crore during 2002-03, there was a shortfall of Rs. 271 crore in the year 2003-04, resulting in a net deficit of Rs. 66 crore. The Central Board of Trustees (CBT) had initially recommended a rate of 8.5 per cent for the year 2004-05, but eventually raised to 9.5 per cent on the insistence of trade unions and especially form Left Parties. According to CBT, even an interim interest rate of 8.5 per cent for 2004-05 would result in a deficit of Rs. 128 crore for EPFO.

An analysis of data compiled by DGCI&S reveals that export in thrust area, for the period April-January 2005, has increased by a mere 4 per cent; to Rs 75295 crore as against Rs 72536 crore during the same period in the previous year. In its five-year foreign trade policy, announced on July 31, 2004, the government had identified plantations, agriculture and allied products, leather goods, gems and jewellery, textiles and handicrafts as thrust areas. The data also indicates that the exports from thrust area, as a percentage of total merchandise exports, declined to 26.3 per cent during April-January 2005 as compared to 31.6 per cent during April-January 2004.

Exports have surpassed the annual target of $75 billion and have reached $79.59 billion in the financial year 2004-05. This is a growth of 24.14 per cent.
According to Economic and Social Commission for Asia and Pacific’s (Escap) Economic and Social Survey of Asia and Pacific 2005, despite a projected slowdown in the growth rate of Asia-pacific region to 6.2 per cent, India is expected to buck the trend and grow at 7.2 per cent.

The government is considering a ban on export of kerosene oil (jet kero) and aviation turbine fuel (ATF), which are similar to kerosene, so as to boost supplies of kerosene for public distribution system.

The chief minister of Maharashtra has asked the centre to allow the state government to export 17.5 lakh bales of cotton, as sanctioned by Cabinet Committee on Economic Affairs in December. This year Maharashtra has witnessed a bumper cotton crop.

The Special Economic Zones (SEZs) Bill will be discussed at the next Union Cabinet meeting. Under the revised SEZ bill, units and developers will get a tax holiday of 15 years. Developers of SEZs would be required to set up the zones by 2014 and would get tax breaks upto 10 years within a block of 15 years. Units in the SEZs would get a 15 year tax holiday from the date of establishment of the unit in the zone.

Crisil has assigned P1+ rating to the 200 crore short-term debt programme and reaffirmed AAA rating to the bond issue programme and FAAA rating to the FD progammes of Bharat Petroleum Corporation (BPCL). The ratings continue to reflect BPCL’s strength as one of India’s foremost-integrated oil company with a strong and well-established marketing and distribution network (market share of 23 per cent).

Icra has reaffirmed the earlier assigned MAAA rating for the FD programme and the A1+ rating for the Rs 50 crore CP programme of T V Sundram Iyengar & Sons (TVSI). Both these ratings, take into account TVSI’s strategic position as a holding company for a majority of the companies in the TVS group, the considerable market value of its investment portfolio, its strengths in the automotive and auto spares dealership business, favourable growth prospects for its dealership businesses and strong management

In an another exercise, Icra has assigned CGR2 rating to the corporate governance practices of Andra Bank; the rating implies that the bank has adopted and follows such practices, conventions and codes as would provide its financial stakeholders a high level of assurance on the quality of corporate governance.

CARE has assigned AA- (SO) rating to the proposed bonds programme for an amount of Rs 60 crore to Neelachal Ispat Nigam (NINL). In another exercise, it has also retained the AA- (SO) rating assigned to the outstanding bonds amounting to Rs 49.6 crore of NINL (erstwhile Konark Met Coke).

The Reserve Bank of India’s annual policy statements have become a rich fare of studied discourse on macro-economic developments, evolving structural and institutional changes in the financial system, regulatory policies constantly sought to be perfected to achieve efficiency in the functioning of the financial markets, and the stance of monetary policy followed by packages of monetary and credit policy changes effected from time to time. The latest statement for 2005-06 is one such document which is truly comprehensive and illuminating.

The background
Over the past two decades since the mid-1980s, and particularly since the early 1990s when economic reforms began, mindboggling changes have occurred in the structure and functioning of financial markets in India, and more significantly, in the way the monetary regulations are undertaken by the RBI. After the Chakravarty Report on the Monetary System (April 1985) and the Vaghul Working Group Report on the Money Market (1987) began to be implemented, the monetary policy perspectives underwent a radical change. Price stability became a major concern of monetary policy. Direct instruments of monetary control began to give way to indirect instruments which depend on the money market as an efficient mechanism for the transmission of monetary policy impulses. Moving away from administered interest rates, banks today enjoy complete freedom to prescribe the deposit rates and interest rates on loans except in the case of saving deposit rate, NRI deposit rates, very small loans and export credit. The government began borrowing at market rates of interest for which an auction system was introduced. Pre-emptions in the form of high cash reserve ratio (CRR) and statutory liquidity ratio (SLR) have been drastically reduced.

With a view to resolving the question of monetisation of deficit, the system of ad-hoc treasury bills was phased out and it was replaced by a system of ways and means advances which has a fixed ceiling. The Reserve Bank of India has continued to subscribe to dated securities at its discretion. Widening and deepening of the money market with new institutions and instruments have been the fulcrum of monetary policy. ‘Repo’ and ‘reverse repo’ operations have emerged as an effective instrument of monetary control (Rangarajan 2001).

Thus, the monetary policy since the beginning of the 1990s has been circumscribed rather overwhelmingly by the objective of price stability. Though it is claimed that the objectives of monetary policy are the same as those of the broader economic policy, namely, (i) price stability and (ii) faster economic growth, the so-called “assignment rule” favours monetary policy as the crucial instrument to achieve the objective of price stability. This appears an ingenuous intellectual method of sidestepping the importance of money and credit in the process of economic growth.

The operation of monetary policy, which has embraced the above theology, is further circumscribed by the compulsions of financial sector reforms. The latter have comprised (i) reductions of non-performing assets of banks and financial institutions; (ii) fulfilment of adequate capital adequacy standards; and (iii) adherence to prescribed prudential norms relating to asset classification and income recognition as well as adequate provisioning for bad and doubtful assets. While implementing these reforms, no attempt was made to study banks’ behaviour in response to such reforms and protect the interest of the economy for an assured supply of institutional credit and its sectoral distribution.

The same policy perspective has guided the latest monetary policy stance of the Reserve Bank of India. The monetary policy framework, combined with financial sector reforms of the past decade and a half, have given mixed results. While they have helped to strengthen the banking and financial system with improved financial base and better risk-weighted capital assets, the objectives of the system for adequate credit and wider credit distribution seem to have been neglected. The adverse consequences of such a neglect are seen in two distinct indicators: (i) reduced manufacturing investment and output for a prolonged period; and (ii) sharp reductions in the relative distribution of credit for agriculture, small-scale industries, and other informal sector borrowers. It is surprising that despite these adverse consequences writ large on the socio-political scenario, the RBI has sought to pay only some lip sympathy to these crucial issues of public policy. More on it later.

Monetary policy stance for 2005-06
The stance of monetary policy proposed for 2005-06 has a significant conventional bias in favour of worries on mineral oil prices and the consequential impact on inflation, which has prompted the RBI to focus on demand management “to maintain macro and price stability”. No doubt, large non-food credit expansion, increases in credit elasticity of GDP, and unprecedented levels of government borrowing programmes, may call for careful management of liquidity during 2005-06, but it has to be done in such a calibrated way that the actions do not impinge, directly or indirectly, on the economic recovery process.

In an economy with serious structural disabilities, the ingenuity in public policy should be to resist market sentiments which go counter to the achievement of broader public goals and which prevent appropriate transmission of those policy prescriptions. In this respect, a singular failure since last year has been the inability of pubic policy to contain the edging up of interest rates in domestic financial markets. The US interest rates may have been rising but there has not been any compelling reason for the Indian domestic rates to firm up. The interest rate cycle had reached the trough in 2003-04 and it should have been allowed to stabilise around that level for a longer period. The liquidity considerations did not call for allowing the government security rates to rise. As policy prescriptions have been highly sensitive to market sentiments, the system has swing with interest rate cycles and therefore, interest rates on government securities have firmed up. The weighted average cost of central government borrowings through primary issuance of dated securities rose by 40 basis points from 5.71 per cent in 2003-04 to 6.11 per cent during 2004-05. This could have been avoided if adequate RBI support for primary issuances were coming forth in the form of devolvement and private placement as in the past. Again, the market yield on the 10-year benchmark, 7.38 per cent 2015, has shot up from 7.11 per cent to 7.23 per cent on the very day of policy announcement. Insofar as yield rates on government paper are concerned, market sentiments will be further stimulated after the RBI withdraws from participating in primary issues of government securities, effective from April 1, 2006, as per the Fiscal Responsibility and Budget Management Act, 2003 (FRBM). Once the gilt-edged paper yields begin to rise on a firm basis, banks would adopt various devices to increase their lending rates. Some of the banks have also begun to raise their deposit rates. They may pretend that their prime lending rates (PLR) are unchanged but the chances are that their spread over the PLR will be pushed up.

Banking and monetary trends
The stimulus to market sentiments has emanated from the shift in emphasis in policy stance in favour of demand management that effectively began in the October 2004 credit policy. Continuously for eight years after 1995-96, there have been moderate increases in non-food credit but now during 2004-05, there has occurred a sudden jump in commercial credit but admittedly from non-agriculture and non-industrial sectors, particularly housing and real estate, share market and retail loans.

This increased demand for bank credit is yet to gather momentum from manufacturing industries. The increased flow of credit to the infrastructure industries, namely, roads, ports, power and telecommunications at 38.6 per cent during 2004-05 (April-February) and at 33.2 per cent during the corresponding period of 2003-04, may have its multiplier effects on industrial activity in general and hence in the demand for bank credit form that sector. It is this momentum which may get scuttled as a result of rising interest rates.

That the emphasis on demand management is somewhat premature, is evident from the fact that broad money (M3) growth has drastically come down from 19.2 per cent in 2003-04 to 13.4 per cent during 2004-05 (Table 1). This deceleration has occurred in all components of M3 despite the presence of massive liquidity in the financial system. In the case of scheduled commercial banks, the rate of increase in term deposits has not only decelerated but there has also occurred an absolute reduction in the size of this increase from Rs. 199,185 crore (19.2 per cent) in 2003-04 to Rs 173,168 crore (13.8 per cent) in 2004-05. The increase in non-food credit has no doubt been impressive – Rs 213,464 crore (or 28.1 per cent) during 2004-05 against Rs 125,088 crore (or19.7 per cent) during 2003-04 (Table 2), but this has occurred first, after eight years from 1995-96 onwards and second, the growth has been largely in retail sectors.

Monetary measures
One may get the impression that the RBI has not made any significant changes in its monetary instruments, but the upward revision in the reverse repo rate by 25 basis points to 5.0 per cent is enough of an indication of the policy stance, that is, one of going away from an easy interest rate policy. The reverse repo rate is the most potent instrument amongst the policy-determined rates of interest in the Indian financial markets. Apart from the bank rate (retained at 6.0 per cent) which has less operational significance, the other four regulated interest rates, namely, (i) savings deposit accounts, (ii) non-resident Indian (NRI) deposits, (iii) small loans up to Rs 2 lakh and (iv) export credit, are a holy cow which cannot be touched due to socio-political considerations. Importance of the reverse repo rate is evident from the fact that secondary market prices of gilt-edged papers have already begun to fall, thus pushing up the market yield rates.

The worry on the interest rate outlook would be all the more because increasing attention is paid to global factors. These global factors like the US Fed benchmark rate (which has again been raised by 25 basis points to 3 per cent) have their own logic which may be contrary to our domestic requirements. In fact, in such a situation we ought to help reduce the spread between domestic rates of interest and foreign rates. In any case, it is necessary to insulate, to the extent possible, the domestic rates of interest from global influences which are less related to the local conditions.

Possible pressure on liquidity
Once the monetary policy thus sets a higher level of interest rate, the chances are that future possible pressures on interest rate outlook would build on it thus presaging a severely firm interest rate structure. All indications provided in the policy document – oil prices, rise in credit-elasticity of GDP and credit penetration, and large government borrowing programme – point to such possible renewed pressures on interest rates in the year 2005-06.

Policy thrust on credit delivery mechanisms – the most disappointing perspective
Except for the proposed strategic alliance between bank branches and SIDBI insofar as the credit requirements of small-scale industries are concerned, the policy on credit delivery has been most disappointing. An intriguing aspect of the discussion in the policy statement concerns the distortions that have set in the prescriptions relating to priority sector lendings. This part of the statement is entirely couched in an academic discourse leaving the subject for further debate. An overwhelming implication is that monetary policy is not concerned with distributional aspects of bank credit. The RBI is obviously taking a non-chalant attitude on this important aspect of public policy. There is the 40 per cent target for ‘priority sectors’ because the government wants it. With a view to scuttling the broader socio-economic goal embedded in this target, backdoor corrections have been made by incorporating a number of big-size loans which by no stretch of imagination require policy crutches of directed credit arrangement. Banks should on their own find such lendings an attractive proposition. Because the banks have been given such an escape clause, they have neglected agriculture and small-scale industries and moved in favour of other newer areas. Such a distortion ought to have been corrected, if the RBI truly believed in the urgency of meeting the credit needs of “large population, weaker sections and other employment-intensive sectors such as agriculture, tiny and small industry”. The RBI shows no such a concern; instead it seeks a debate.

Reform measures for the financial markets
As stated above, while policy perspectives imparted on societal goals leave much to be desired, the RBI’s attempts at improving the working of the financial markets and reforming them have been commendable. In the latest policy statement, the reform on the role of non-bank participants in the money market has been brought to its logical end; in four or five phases, the non-bank participants, except primary dealers, are proposed to be completely phased out with effect from August 6, 2005. As stated above, in the government securities market, the stipulation that the RBI should not participate in the primary issuance of government securities, effective from April 1, 2006, will have serious implications for the government borrowing programme. The burden on the market would be much larger as the states have been asked to approach the market for their plan loan portions.

In regard to the forex market area, two major reforms effected relate to (i) permission granted to participants for cancellation and rebooking of all eligible forward contracts, irrespective of tenor; and (ii) banks to be allowed to approve proposals for commodity hedging in international exchanges from their corporate customers.

Prudential measures
In this section too, the policy statement has proposed a number of fresh measures. First, guidelines would be issued regarding merger and amalgamation between private sector banks and NBFCs. Second, in regard to supervision of financial conglomerates, a system of exchange of information amongst lead regulators, namely, RBI, SEBI and IRDA, has been put in place.

Finally, three other areas where concerted actions are proposed are:

(i) Interests of depositors: (a) Banks are urged to refocus on deposit mobilisaiton and empower the depositors, by providing wider access and better quality of banking services, and
(b) RBI will persist with its efforts to ensure quality of banking services, in particular, to small individual depositors.

(ii) Financial exclusion: RBI will implement policies to encourage banks which provide extensive services while disincentivising those which are not responsive to the banking needs of the community, including the underprivileged.

(iii) Customer service: It has been decided to:
(a) set up an independent Banking Codes and Standards Board of India on the model of the mechanism in the UK in order to ensure that comprehensive code of conduct for fair treatment of customers are evolved and adhered to;

(b) issue appropriate guidelines to banks to ensure transparency and disclosure of information by the card issuing banks and customer rights protection including facilitating enforcement of such rights, and
(c) hiden the scope of the Banking Ombudsman inter alia to cover all individual cases/grievances relating to non-adherence to the fair practices code evolved by IBA and adopted by individual banks.

These measures, if implemented effectively, should go a long way in improving the overall banking services in the country.
References

Rangarajan, C (2001): Monetary Policy in a Developing Economy – The Indian Experience, K R Narayanan Oration, Australia South Asia Research Centre, (ASARC), The Australian National University, November 19.

*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.