Current Economic Statistics and Review For the Week 
Ended November 11, 2006 (45^th Weekly Report of 2006)

Theme of the week:

India’s Balance of Payments: A Brief Review*

After a dismal performance in 2001-02, India ’s balance of payments (BOP) exhibited positive developments in the current as well as the capital account in an environment dominated by global recovery during 2002-03 and has continued with a healthy performance till 2005-06 (Table 1). A surge in exports of merchandise and invisibles posted the current account into a surplus during 2002-03; in 2001-02 also current account was in surplus but that was due to depressed export and import demand. Exports and imports both rose sharply during 2002-03 after posting negative growth rates during the previous year and since then exports have maintained above 20 per cent growth rate on BOP basis.

Since the 1970s, India ’s invisible exports have provided crucial support to the balance of payments, including the difficult years of the major oil shocks. Rising surpluses on account of invisible transactions have financed a significant portion of merchandise trade deficit that has traditionally characterised India ’s balance of payments. In fact, buoyant earnings on invisible account have been the key factor that contained the current account deficit at 1.0 per cent of GDP over the period 1993-2001. What is more, during the three years, 2001-02 to 2003-04, considerable invisibles earnings were able to offset merchandise trade deficit and thus helped to convert a traditional current account deficit situation to one of current account surplus. While many of the export-oriented Asian economies, including South Korea , Malaysia , Philippines and Thailand , have improved their current account through strong growth in merchandise exports relative to their imports, India has done it through improved invisible performance.

India ’s invisible earnings are dominated by private transfers comprising mainly worker’s remittances followed by software. Remittances from Indians employed abroad have traditionally been the principle source of invisible earnings. India is the largest recipient of private transfers in the developing world. These receipts constitute remittances by non-residents for family maintenance, repatriation of savings by Indian residents abroad and personal gifts and donations to religious and charitable institutions in India . Over the years, “private transfers” have remained as one of the dominant sources of earning under invisibles account.

An important development of the 1990s was the emergence of software service sector as a dynamic area of export activity, resulting from IT revolution. Software services (with an average share of around 50 per cent in net invisible earnings for the past 4 years), have surfaced as an important source of invisible earnings and business process outsourcing (BPO) as the fastest growing segment in software exports. Within this sector, India is making its mark in IT-enabled services (ITES) and the business process outsourcing (BPO) segment. Within the ITES, service lines, customer care and finance have been the fastest growing segments. In terms of outsourcing of IT services, India has an edge over its competitors like China and Mexico due to its proficiency in English. In the BPO segment, India has maintained its lead as the best outsourcing destination, particularly for the US and European companies.

Travel has been the traditional services export from India . Even though gross receipts from travel have shown a steady rise (except 2001-02 when tourism industry was hit by terrorist attack in the US ), there has been a deceleration in the rate of net receipts (Appendix Table A). This is because of a steady rise in payments under this account. This could be attributed to the fact that more and more of Indians are taking up foreign travel and business travel accounts for the largest payment made under this account. A seasonality is also observed as far as travel receipts are concerned with third and the fourth quarter (Appendix Table B) receiving the maximum inflow as is clear from the graph 1.

Despite huge net earnings form software exports, the contribution of net miscellaneous services in total net invisible earnings is not high (Table 2). Miscellaneous receipts have risen as a consequence of higher earnings from software services. However, at the same time, payments for communication services, construction services, financial services, royalties, copyrights and license fee and other services have also risen. There is a significant outflow on account of other services. A large and rising negative net receipts under other services along with net outflows under financial services and royalties, copyright and license fee services has led to a smaller contribution of net miscellaneous services in total net invisible earnings.

The income account under invisibles has traditionally been in deficit on account of interest payments on external debt, profit/dividend and other payments related to foreign investment in India . The largest component of investment income receipts is the earnings on RBI investment, which are the earnings on deployment of foreign currency assets of the RBI. A steady rise in these receipts reflect continuous building up of foreign exchange reserves. India ’s investment income receipts have been increasing steadily on account of huge earnings on RBI investment. However, investment payments have also risen and have been able to more than offset the increase in receipts leading to a deficit on income account. Investment income payments move in tandem with India ’s external liabilities. The spurt in investment income payments from 2000-01 onwards was due to the inclusion of reinvested earnings as payments following adoption of the revised definition of FDI.

India ’s merchandise deficit has been widening from past two years on account of high oil-imports which in turn are the result of high international crude oil prices. However, current account deficit has been contained at the back of healthy earnings on invisible account.

Capital Account

India ’s capital account has been marked by surges in capital inflows since 1993-94 (except 1995-96), indicative of the sustained international confidence in the strength of the economy. A striking feature of the developments in the capital account in recent times has been the growing significance of non-debt creating flows in line with the policy preference for such flows. With the result India has witnessed a steady rise in foreign investment – both direct and portfolio.

Another important element of capital account is external commercial borrowings (ECBs). The appetite for ECBs remained weak till 2002-03 due to a slowdown in the industrial activity but the following years have witnessed a healthy rise reflecting the increased domestic investment activity as well as favourable financing conditions oversees. Net disbursement under ECBs during 2005-06 has been lower due to one-off effect of IMD repayment.

Net inflows under NRI deposits underwent compositional changes in 2002-03. There was a sharp increase in balance under the repatrible rupee-denominated external rupee accounts as maturing balances of discontinued non-repatrible rupee deposits poured into the repatrible scheme.

First quarter performance

The preliminary data on India 's balance of payments (BoP) for the first quarter (Q1) of 2006-07 i.e., April-June 2006 has been released by the Reserve Bank of India . The major items of the BoP for Q1 of 2006-07 are presented in Table 3 below.

India ’s merchandise exports, on a BoP basis, have posted a growth of 17 per cent in Q1 of 2006-07 as compared with 35.4 per cent in the corresponding quarter of the previous year. Import payments have moderated in Q1 by registering a 23.8 per cent growth, representing mainly a strong base effect as imports had grown by 64.5 per cent in the corresponding quarter of 2005-06. However, this growth is mainly at the back of high international crude oil prices.

Net surplus under the invisibles account continued to exhibit buoyancy during the first quarter of 2006-07, on the back of higher exports of software and business services, and private transfers. Net surplus under software services during April-June 2006 ($5.9 billion) increased by 22.5 per cent over that during April-June 2005; the surplus under business and other services more than trebled to $1.7 billion (Table 49). Private transfers at $5.8 billion were almost five per cent higher than a year ago. Investment income balance continued to record a deficit, as payments associated with servicing of India ’s external liabilities remained in excess of earnings on India ’s external assets. On balance, the net surplus under invisibles (services, transfers and income taken together) increased from $10.0 billion during April-June 2005 to $12.4 billion during April-June 2006. The net invisibles surplus continued to finance bulk (67 per cent) of the merchandise trade deficit during April-June 2006. However, in view of the large expansion in merchandise trade deficit, current account deficit widened to $6.1 billion from $3.6 billion during April-June 2005.

For the first time RBI has given the break up of non-software miscellaneous receipts and payments which is given below in Table 4.

In the capital account, net inflows under external commercial borrowings, foreign direct investment and banking capital have recorded a steady increase resulting in higher net capital flows (Table 5). The increase in banking capital has been on account of higher inflow under NRI deposits and draw-down of foreign assets of commercial banks. A rise in ECB reflected buoyant investment activity by the corporate sector.

Mobilisation through external commercial borrowings (ECBs) during April-June 2006 was considerably higher as compared to the corresponding period of the previous year in consonance with strong investment demand in the economy. Commercial bank loans and foreign currency convertible bonds (FCCBs) accounted for majority of the increase in the ECBs during the quarter.

Highlights of  Current Economic Scene

AGRICULTURE  

The Cabinet Committee on Economic Affairs (CCEA) has fixed the minimum support price (MSP) of the wheat, to be procured during (April-March) 2007-08, at highest ever rate of Rs 750 per quintal, registering a hike of Rs 100 compared to Rs 650 per quintal set for procurement period (April-March) 2005-06. The decision has overruled the MSP recommended by Commission for Agricultural Costs and Prices (CACP) of Rs 700 per quintal. On the other hand, the MSP for rapeseed-mustard has been set at Rs 1,715 per quintal, the same level as was fixed in 2005-06 against the CACP recommendation of Rs 1,600 per quintal. 

The central government has revised the summer oilseed output estimate for the fiscal year 2006-07 from 13.2 million tonnes projected in the first advanced estimates (I^st AE) 2006-07 to 14.6 million tonnes. Groundnut output estimate has also been raised marginally to 4.6 million tonnes from 4.1 million tonnes (I^st AE 2006-07), while soyabean output has been pegged at 8.1 million tonnes, 7.8 per cent higher from 7.5 million tonnes estimated in I^st AE 2006-07.

 The central government has plans to propose lifting up of the ban on sugar exports and allowing exports of sugar up to 10 lakh tonnes, over and above the re-export obligation of roughly 11 lakh tonnes under the advance licence scheme. The present ban on sugar exports has been in place since July 04, 2006. However, owing to this ban and due to projected increase in the output, the domestic sugar industry has set to experience an excess supply. While the total domestic production of sugar is forecast at about 230 lakh tonnes in 2006-07, up by 40 lakh tonnes over the last year, the carry-over stock is estimated at about 25 lakh tonnes as on November 1 2006 and the annual consumption is estimated at about 185 lakh tonnes.

The International Grain Council has revised wheat output estimate for July-June 2006-07 downwards to 585 million tonnes, 33 million tonnes lower from last year on account of less-than-expected wheat output in Australia , which is facing exceptionally severe drought. Australia ’s wheat output is now estimated to fall over 60 per cent on year. The drop in Australian output has offset the small increases projected for the CIS countries, North America and China . The closing stocks of wheat are forecast to fall to 114 million tonnes for July-June 2006-07 from 135 million tonnes in the year ended June 2006.  Global carry-over wheat stocks for five major exporters– Argentina , Australia , Canada , EU and US–are likely to be down by 23 million tonnes at 32 million tonnes in July-June 2006-07 compared to previous year, the lowest since 1995-96.

The Rubber Board has plans to re-plant 50,000 hectare plantations, costing a total subsidy expense of Rs 150 crore. In its proposal, the board has sought increasing subsidy for rubber re-planting to Rs 30,000 per hectare from the present rate of Rs 20,000. With an enhanced subsidy rate, the board is continuing with the rubber plantation development scheme. A major chunk of the subsidy would be availed by Kerala and Tamil Nadu, which account for more than 90 per cent of the rubber-planted area in the country. 

The West Bengal government is planning to procure surplus paddy from the farmers through women self-help groups in order to resist distress sales.  The state government is expected to procure close to 1.5 million ton of rice through the SHGs.

Industry 

Pharmaceuticals

Effective from November 2, 2006, the prices of a 886 drugs including antibiotics and anti-diabetic drugs, cough syrups, pain killers as well as those used during surgery, infectious diseases, hyper-tension, dermatological medicines, eye drops, hormones and gastrointestinal medicines have reduced in the range of 2-75 per cent as announced by the Ministry of chemicals and fertilisers. Some of the drugs are Ibuprofen, Diclofenac, paracetamol, chloroquine, Albendazole, Ampicilin, Amoxycilin, Cephalexin, Ciprofloxacin, Amlodipine, Atenolol, Enalapril, Losartan, Nifedipine etc as also includes Sulphadiazine, Gentamicin and Progsetirone. The new margins have been fixed at 15 per cent for wholesalers and 35 per cent for retailers, calculated on the over the cost of manufacturing of generic medicines. The prices have been reduced voluntarily by 11 leading drug manufacturers and cover nearly 100 types of basic drugs.

Maharashtra ’s Industrial Policy

The Maharashtra Cabinet has approved a new ‘state industrial, investment and infrastructure facilities policy 2006.’ The policy has been framed with the aim of emphasis on development of sectors including agro-based industries, textiles, automobiles, electronics, pharmaceuticals, gems and jewellery, information technology, biotechnology, retail, tourism and entertainment. The new policy also focuses on employment generation, dispersal of industries to less developed and backward areas, removal of regional imbalance and addresses the issue of increasing cost burden on investors. The policy envisages increasing the industrial growth rate to 10 per cent and the service sector growth rate to 12 per cent by 2010 while providing jobs to 20 lakh people. It also aims at boosting infrastructure including power, roads, rail network, airports and ports to achieve desired industrial growth rate. He said development of the Mumbai-Pune-Nasik-Aurangabad quadrangle and creation of a gas distribution network in industrial areas across the state are on the anvil.

Infrastructure

Overall

A rise in crude oil production coupled with high refinery production and growth in power generation has propelled the overall infrastructure growth to 9.9 per cent in September 2006 as compared with 6.3 per cent during the same month of the previous year. During April-September 2006-07, six core-infrastructure industries have registered a growth of 7.3 per cent as against 6.1 per cent during the corresponding period of the previous year.

Petroleum, Petroleum Products and Natural Gas

Government will sign contracts for 9 out of the 10 blocks awarded under the third round of coal bed methane (CBM) offering on November 7. The signing of the contract for 1 block, awarded to British Petroleum has, however, been deferred as the UK-based company is yet to give its consent to the two additional conditions, proposed by the government for being incorporated in the model contracts, to be signed with the developers for these blocks. The two new conditions in the contracts relate to bank guarantee for the minimum work programme and the time extension sought by the developers. While all other developers including Arrow Energy of Australia, GAIL, Tata Power and CoalGas Mart and Reliance Energy had agreed to these additional conditions, BP had sought further time to revert back on the two fresh conditions in the contract. While imposing these conditions, the government has also agreed to a host of modifications, suggested by the awardee companies of these blocks. Following a request by the consortium of Arrow Energy, GAIL and Tata Power, it has been agreed to give the developers 30 days from the date of contract to produce bank guarantees. It has also been agreed to allow the developers to market the gas at any time during the development phase. The consortium of Coal Gas Mart and Deep Industries had proposed that in case the test wells, drilled during the development phase, starts producing gas to the commercial scale, such production shall be allowed to be marketed prior to the implementation of Phase IV by submitting required proposal in this regard. It has accordingly been agreed that the contractor will be free at any time during Phase 1, II, III or IV to market the gas produced.

Non-Conventional Energy

The country's first micro-turbine project using biogas, launched with partial assistance from the US , has been commissioned in Purulia. It will generate 30 KW of power benefiting around 100 families and a local dairy farm, which is hosting the project. The project is estimated to cost Rs 13.5 crore with US government funding of approximately Rs 29.5 lakh. Initiated in September 2003, the US-Asia Environmental Partnership (USAEP) provided funding for a pre-feasibility study on potential of micro-turbine technology in India based on biomass/biogas applications and also organised an orientation visit led by the power minister and other key stakeholders to the US in June 2004. Capstone Turbine, the US company, participated in the pilot project and supplied micro turbine and other equipment for the project. The entire project, coordinated by WBREDA, has been supported by the USAID.

The government so as to give solar water heating business in the country a major boost has planned to install 10 million sq metre of solar collectors in the 11th Plan and has projected a major scale-up from the current installation in 1.5 million sq metre. The proposed installation plan would involve solar heaters in about 3.5 million homes and installations expected in industry and in commercial establishments like hotels, hospitals, guest houses. The government intends to expand the renewable energy programmes through various financial and fiscal incentives and changes in building by-laws. According to plans, the programme would result in peak saving of about 5,000 MW, besides saving up to 7.5 billion units of electricity and abatement of 7.5 million tonne of carbon dioxide emissions every year and the availability of solar energy up to 300 days a year in various parts of the country. Along with other renewable sources of energy like wind, hydro and biomass, India has a total potential for generating about 200,000 MW of energy from non-conventional sources. A total renewable power capacity of around 8100 MW, which contributes about 7 per cent to the power grid, has so far been set up. Another 12,000 MW is projected to be added by 2012 which would raise the contribution to the power grid to 10 per cent.

Coal

The union government's decision to open up coal mining for the private sector has evoked mixed reactions among power generation firms and steel companies in Maharashtra . Most private and state power utilities have welcomed the move as they feel it would reduce dependence on Coal India Ltd and its subsidiaries for supply. On their part, power generation companies said the involvement of private players would resolve issues like the demand-supply mismatch and availability of quality coal and hence bring about efficiency. Power and steel companies hold an opposing view stating that even though coal mining has been opened for the private sector, it will take at least three to five years for mine development and production and they argue that if the mines are developed first then how will the coal be used if construction of power plants is delayed.

Orissa’s Energy Sector

Even though Orissa has abundant coal reserve, mainly power-grade coal, the size of operation has been very small. The state has 60,983.3 million tonne of coal, which is about 27.59 per cent of the country’s total coal reserves. But, the coal exploitation is as low as 65 million tonne a year, which is a meagre 0.10 per cent of the total coal reserve of the state. In terms of value, coal raised revenue of Rs 3000 crore per annum against Rs 50,000 crore - the total value of coal raised in the country. Two major coal areas in the state being exploited are Talcher and Ib Valley and currently, the Mahanadi Coalfield Ltd is the only operating mines in the state. The coal ministry has, however, allotted as many as six coal blocks with a total reserve of over 750 million tonne to as many private as government companies as part of its policy to provide captive mines to user industries.

Orissa is currently witnessing a surge of investment in the thermal power sector. As many as 13 independent power producers (IPPs) have signed MoUs to build up a total capacity of 17,000 mw of power with a huge investment of Rs 68,000 crore. There are several other IPPs, including the Reliance Energy Generation Ltd, waiting to sign MoUs for setting up thermal power plants resulting in a rise in demand for coal.

Roads

The public private partnership appraisal committee (PPP-AC) has cleared 9 road projects including construction of the access-controlled highways near Bangalore, 3 projects of four-laning of highways in Karnataka under National Highways Development Project-III (NHDP-III), 4 projects in Tamil Nadu and 1 project in Himachal Pradesh. The projects, each estimated to cost between Rs 200 crore to 1,000 crore, will be implemented on a build-operate-transfer basis. Another 7 highway projects are likely to be taken up by the PPP-AC in the near future which would be the last of the projects finalised under the old model concession agreement (MCA) for highway projects on BOT basis. The committee has also decided to implement the new MCA as soon as the toll policy for national highways is finalised. Meanwhile, the appraisal of the Mumbai Metro Rail projects, seeking a viability gap funding of Rs 650 crore has been deferred. The project has been jeopardised with the finance ministry unwilling to consider it under the PPP-AC as it had been bid out before the committee was formed and being keen that the project be taken up under the Jawaharlal Nehru Urban Renewal Mission.

Inflation

The annual point-to-point inflation rate based on wholesale price index (WPI) rose by 5.41 percent for the week ended October 21,2006 as compared to 5.26 per cent in the last week or at a lower rate of 4.49 per cent during the corresponding week last year.

During the week under review, the WPI has gone up to 208.4 from the previous weeks’ level of 208.2 (Base: 1993-94=100). The index of ‘primary articles’ group, (weight 22.02 per cent), increased by 0.2 percent to 212.9 from its previous week’s level of 212.4, mainly due to increases in prices of ‘food article like urad, fruits and vegetables, gram, eggs, moong and wheat. The index of ‘fuel, power, light and lubricants’ group (weight 14.23 per cent) remained unchanged   at the last week level of 329.5. The index of ‘manufactured products’ group has risen to 179.8 from 179.7 during the week under review thereby registering a growth rate of 0.1 per cent. Though, the groups’ beverages, tobacco and tobacco products and textiles registered decline in their prices, prices of food products, paper and paper products, chemicals and chemical products, basic metals etc., and machinery & machine tools gone up during the week.

 The latest final index of WPI for the week ended August 26, 2006 has been revised upwards; as a result both, the absolute index and the implied inflation rate stood at 205.8 and 5.27 per cent as against their provisional levels of 205.3 and 5.01 per cent, respectively.

Banking

Rabo India Finance is contemplating a host of new lines of business such as launching of derivative products in the carbon credit space, debt syndication, leading IPOs and offering advisory to corporates in restructuring their stressed assets.

Bank of Baroda (BoB) is contemplating entering the stock-broking space and would prefer to acquire an existing firm with a wide network to foray into the business.

Public Finance

During the first six months of the current fiscal year the government has managed to rein in the fiscal deficit to Rs 86,461 crore, which is 58.2 per cent of the Budget estimate for the entire year 2006-07. The fiscal deficit has been sustained at these levels largely due to curtailing of Plan expenditure, which stood at Rs 68,879 crore during April-September 2006, 40 per cent of the budgetary estimate (2006-07) of Rs 1,72,728 crore. This has increased 16 per cent from Rs 59,406 crore during the corresponding period of the previous year.  Non-Plan expenditure stood at Rs 1,83,065 crore, 47 per cent of the Budget estimate of Rs 3,91,263 crore and higher by around 21 per cent over the year ago. The overall expenditure during the period was higher by over 19 per cent at Rs 2,51,944 crore compared with Rs 2,10,983 crore in the same period last year.  However, despite the buoyancy in tax revenues, the revenue deficit increased to Rs 69,277 crore which is 82 per cent of that estimated in the Budget 2006-07.  Revenue receipts during April-September stood at Rs 1,61,406 crore, which is over 31 per cent higher than the Rs 1,2,845 crore collected during the same period last year. The revenue receipts in the first six months are 40 per cent of the Budget estimates.  The buoyancy in revenue receipts is primarily due to a 35 per cent increase in tax revenue at Rs 1,29,986 crore against Rs 96,249 crore during April-September last year.  Non-tax revenue was also 18 per cent higher during the period under review at Rs 31,420 crore compared with Rs 26,596 crore in the same period last year. Non-tax revenue in the six-month period is over 41 per cent of the Budget estimate against 35 per cent in the corresponding period last year. 

The net direct tax collections of the government have continued to remain buoyant and have recorded a growth of 38.3 per cent during April 1, 2006 to October 28, 2006. The collections have increased to Rs 91,374 crore, compared with Rs 66,069 crore in the same period last year. If this trend continued, the direct tax collections would exceed the budgeted target. The Centre has pegged the direct tax collection target at Rs 2,10,000 crore for 2006-07, which is about 27.7 per cent more than the Rs 1,64,500 crore during 2005-06. While corporate tax collections during April 1, 2006 to October 28, 2006 have increased by 45.42 per cent to Rs 55,549 crore (Rs 38,199 crore), the personal income tax collections (including fringe benefit tax) have augmented by 25.13 per cent to Rs 32,886 crore (Rs 26,281 crore). Fringe benefit tax collections have seen an increase of 23.5 per cent to Rs 2,127 crore (Rs 1,722 crore). The `other taxes' collections stood at Rs 2,939 crore (Rs 1,589 crore). This includes banking cash transaction tax (BCTT) and securities transaction tax (STT).  STT collections for the period under review stood at Rs 2,556 crore (Rs 1,304 crore) and BCTT collections at Rs 269.50 crore (Rs 119.50 crore).

The value added tax (VAT) revenues of States continue to be buoyant, with collections in the first half of the current fiscal up by 32 per cent to Rs 34,019.46 crore from Rs 25,786.07 crore in the corresponding period last year. This is mainly due to the potency of VAT itself and also due to the vigilance of the states regarding tax collection leakages and loopholes. Tax revenues (includes items that are not under VAT) of these States surged by about 27.3 per cent to touch Rs 54,616.57 crore compared with the collection level of Rs 42,913.60 crore in April-September 2005. This is nearly double the rate of growth achieved last year. All the States and Union Territories other than Tamil Nadu, Uttar Pradesh and Pondicherry have implemented State-level VAT. While Tamil Nadu has expressed intent to implement VAT from January next year, Pondicherry is expected to soon decide on the issue.

Financial Markets

Capital Markets

Primary Market

The initial public offer (IPO) of Info Edge India Ltd, the first Indian dotcom to go public on domestic bourses, has received an overwhelming response from investors with the IPO getting oversubscribed by more than 50 times.  Info Edge India , which owns popular job and matrimony websites, such as naukri.com and jeevansathi.com, is the first internet company in the country to get listed on the domestic bourses. Firms such as Rediff and Sify have gone public, but they were listed on the US Nasdaq. The retail portion of the issue, which closed on Thursday, has been oversubscribed by about 15 times. The qualified institutional participant (QIP) category has responded heavily to the IPO, oversubscribing by almost 85 times than the allocated size

 Parsvnath Developers is entering the stock markets with an offering of 3.30 crore shares, priced within a band of Rs 250 to 300 each.  The real estate developer plans to raise funds in the range of Rs 826 crore to Rs 991 to fund its eleven residential and commercial projects spread over the next four years.  While money raised through the issue will fund a large part of the total requirement of Rs 1,428.5 crore, the rest will be financed by borrowings and customer advances. 

Secondary Market

Market has continued its winning streak to settle at lifetime high; the BSE sensex rose 223.98 points or 1.73 per cent for the week ended 3 November 2006 to 13,130.79. Nifty gained 66 points or 1.76 per cent for the week to settle at 3,805.35. The BSE sensex has finally closed above the 13,000 mark on Monday, based on India ’s strong GDP growth numbers and spectacular corporate results by most top-rung companies. The sensex has jumped from just over 9,000 to 13,000 in the first 10 months of this year. Monday's rally has been initially led by Reliance Industries, after its feat of localising damage and not closing down the Jamnagar refinery after the recent fire, which is the global practice. In calendar year 2006, the sensex has been witness to several milestones, including the breaching of four psychological barriers, namely, 10k, 11k, 12k and now 13k. Never before in the history of the Indian markets have so many milestones been crossed in the same calendar year. The index is trading at a PE multiple of 21.48, which has been only marginally lower than that of May 11, when it was trading at a multiple of 21.84. At that time, it was said that many foreign funds would move away from India due to the high PE.

In the credit policy announced by the RBI governor, the extant ceiling of overseas investment by mutual funds of US$2 billion has been enhanced to US$3 billion.

Derivatives   

The stock market continued to move up although the breadth of the movement was unfavourable. While cash market volumes dropped, the futures and options markets saw an increase in volumes as well as in the open interest numbers. In the futures market, the November Nifty is held at 3814, December shield at 3815 and January is at 3818. This positive cost of carry and premium on the futures contracts is unusual—it has rarely happened even in strong bull runs. In the options market, the Nifty put-call ratio remains quite high, which is an indicator that the market could rise further in the very short term.

Government Securities Market

Primary Market

RBI has conducted the sale (re-issue) of 7.40 per cent 2012 and 7.50 per cent 2034 for a notified amount of Rs.6,000 crore and Rs.3,000 crore, respectively. The cut-off yields for the 7.40 per cent 2012 and 7.50 per cent 2034 were 7.5 per cent and 8.0 per cent, respectively.

Under the weekly T-Bill auctions, the RBI has mopped up Rs.2602.40 crore and Rs. 669.51 crore through 91-day T-Bill and 182-day T-Bill. From this, the RBI has raised Rs 102.40 crore and Rs.115 crore under the Market Stabilisation Scheme (MSS) through 91- day T-Bill and 182-day T-Bill respectively. The cut-off yields for the 91-day and 182-day T-Bill have been 6.65 per cent and 6.93 per cent respectively. The cut-off yield in 91-day T-Bill auction has remained steady at 6.65 per cent. The cut-off yield in 182-day T-Bill auction moved higher to 6.93 per cent as against the previous cut-off yield of 6.89 per cent.

It has been announced in the credit policy review that the When issued trading to be extended to fresh issues of Central Government securities on a selective basis.

Secondary Market

The mid-term monetary policy review announced by the Reserve Bank of India alerted the market of an impending liquidity shortage.  By hiking the repo rate by 25 basis points (bps) from 7 per cent to 7.25 per cent, the central bank has sent a signal towards keeping interest rate stable while tightening the liquidity. There is near consensus among bankers that interest rates will not rise for the time being despite a quarter percentage point hike in the repo rate, announced by the Reserve Bank of India .

Scheduled commercial banks and primary dealers have been allowed to cover their short positions in Central Government Securities within an extended period of five trading days and to deliver a shorted security by borrowing it through the repo market. As the extended short-selling may result in banks carrying short positions across settlement cycles, they would be allowed to deliver a shorted security by borrowing it through the repo (repurchase) market. 

The existing limit of US$2 billion on investments in Government securities by foreign institutional investors (FIIs) will be enhanced in phases to US$2.6 billion by December 31, 2006 and further to US$3.2 billion by March 31, 2007.

The weighted average YTM of  7.59 per cent 2016 bond was 7.60 per cent on November 03, 2006 as compared to 7.64 per cent on October 27, 2006. The 1-10 year YTM spreads decreased by 5 bps to 62bps.

Bond Market

As per the revised limit, the banks could borrow up to 50 per cent of their unimpaired tier I capital or $10 million, whichever is higher against the overall limit of 25 per cent prescribed earlier. Short-term borrowings up to a year or less should not exceed 20 per cent of unimpaired tier I capital within the overall limit of 50 per cent. 

It has been clarified that this limit excludes all borrowings in the form of subordinated debt placed by headoffices of foreign banks with their branches in India as tier-II capital , capital funds raised / augmented by issue of innovative perpetual debt instruments and other overseas borrowing. 

Foreign Exchange Market

Some of the measures announced in the credit policy review, resident individuals would be free to remit up to US$50,000 per financial year for any current or capital account transaction or a combination of both, as against the earlier limit of US$25,000.

All categories of foreign exchange earners may retain up to 100% of their foreign exchange earnings in their Exchange Earners’Foreign Currency accounts.

Authorised dealer banks may borrow funds from their overseas branches and correspondent banks (including borrowing for export credit, external commercial borrowings (ECBs) and overdrafts from their Head Office/Nostro account) up to a limit of 50% of their unimpaired Tier I capital or US$10 million, whichever is higher, as against the earlier overall limit of 25% (excluding borrowing for export credit).

Borrowers eligible for accessing ECBs can avail of an additional US$250 million with average maturity of more than 10 years under the approval route, over and above the existing limit of US$500 million under the automatic route, during a financial year.

The indication for tighter liquidity hit the forward foreign exchange market the most. Fearing rising cost of the rupee, there was high demand for booking fresh positions in dollars and also rolling over existing ones by cancelling and re-booking. The six-month forward premia closed at 1.98 per cent  (annualized) on 03 November, 2006 vis-à-vis 1.65 per cent on 27 October, 2006.

Commodities Futures derivatives

Forward Markets Commission (FMC)’s chairman S Sundareshan has said that they will levy stiff penalties for traders who don’t comply with delivery obligations under mandatory delivery contracts.

The price of potato has gone up by nearly 25 per cent in the futures market over the last two weeks, primarily on account of delayed arrivals and increasing demand. At the National Commodities and Derivatives Exchange (Ncdex), the price of potato futures for November delivery has moved from Rs 769 per quintal on October 17 to Rs 961 per quintal. The spot market also saw a significant rise due to supply side constraints. 

Corporate Sector

FMCG major, Hindustan Lever Limited (HLL), has clocked a 12 per cent rise in net sales at Rs 3,066 crore during July-September 2006 as compared to Rs 2,731 crore over the same period a year ago. The company’s net profit has galloped by almost 60 per cent to Rs 520.7 crore from Rs 326 crore. all the business categories have reported double-digit growth.  HLL has innovated several products during the quarter under review that include launch of Lux Uplifting Firm, Lux White Glow, Fair & Lovely Menz Active, Ponds Face Wash, and the re-launch of Surf Excel and Clinic Plus. To strengthen its brand portfolio, the company’s advertisement and promotion spending has moved up to 11.1 per cent of sales in quarter ended September 2006 from 8.8 per cent of sales in the same period a year ago.

Tata Chemicals has posted a 13 per cent rise in net sales for the second quarter ended September (Q2) 2006 to Rs 1,166 crore as compared to Rs 1,032.8 crore in Q2 2005 and a 25.3 per cent increase in net profit at Rs 157.7 crore compared to Rs 126 crore in the corresponding quarter a year ago.

Reliance Retail, a subsidiary of Reliance Industries, has recently unveiled Reliance Fresh, the first of its multi-format retail foray involving an investment of Rs 25,000 crore. Reliance Fresh is the company’s brand for fresh food outlets. It will also sell kitchen equipment and other edibles. Besides, it has planned hypermarkets, supermarkets, discount stores, department stores, convenience stores and specialty stores, to be unveiled shortly. 

Buoyed by oil bonds, issued by the government, Indian Oil Corporation (IOC) has posted a whooping 221 per cent jump in net profit to Rs 3,050 crore for the quarter ended September 2006 as compared with Rs 949 crore in the corresponding quarter last year. The country’s largest refiner and oil marketing company-received approval for oil bonds worth Rs 7,168 crore during the quarter. The company’s income has shot up 44 per cent to Rs 58,384 crore during the second quarter of 2006-07. For April-September 2006, IOC’s net profit has zoomed by 442 per cent to Rs 4,831 crore on the back of the exceptional income of Rs 3,225 crore that accrued from the sale its 20 per cent shareholding in ONGC in April 2006. Refinery throughput during April-September 2006 has stood at 20.54 million tonne (MT), up from 18.57 MT for the same period last year, while pipeline throughput at 24.38 MT, up from 22.08 MT last year.

Leading domestic manufacturer and exporter National Aluminium Company (Nalco) has achieved a 110 per cent jump in net profit to Rs 595 crore for Q2 2006 against Rs 283.04 crore recorded in the corresponding period previous year. For the first half of the 2006-07, Nalco has achieved a net profit of Rs 1,217.3 crore, a jump of 116 per cent over Q2 2005. The company has also reported improved production of aluminium in the first half of 2006, which has increased to 1,80,087 tonne from 1,78,097 tonne a year ago. 

Commercial and passenger vehicles manufacturer Tata Motors has reported a 31 per cent rise in net profit to Rs 441.7 crore for the quarter ended September 2006 and its sales revenue has increased by 37 per cent to Rs 6,571.8 crore over the same period a year ago. 

ITC has reported 18 per cent increase in net profit at Rs 679 crore in the Q2 2006 from Rs 572 crore over the same period previous year due to higher profits from its cigarette and hotels businesses. In terms of segment revenues, cigarette sales have risen to Rs 3,101 crore in Q2 2006 (from Rs 2,723 crore in Q2 2005), other FMCG to Rs 409 crore (from Rs 246 crore), hotels to Rs 200 crore (from Rs 153 crore), agri-business to Rs 868 crore (from Rs 465 crore) and paper products group to Rs 522 crore (from Rs 469 crore). 

Information Technology

TCS has acquired 75 per cent stake in its Swiss partner, TKS-Technosoft for CHF 100.5 million (around $80 million) in a move aimed at giving it direct access to continental Europe and which also aids the consolidation of its banking products. The acquisition gives its management control of the company distributing rights in Europe for the Quartz wholesale banking product and two new products Alpha (for private banking) and e-Portfolio (for wealth management). TKS has revenues of $57 million and net profit of $7.7 million in 2005. TCS also giants the 115 employees of the Swiss firm through the acquisition. The employees are primarily in sales and product engineering.

Telecom

India ’s largest GSM operator, Bharti Airtek has signed a $400 million contract with Finnish telecom vendor Nokio to expand its managed GSM/GPRS/EDGE network in eight circles and deploy a pan-India wireless application protocol (WAP) solution across its network which will be carried out from Nokio’s Global Network Service Centre in Chennai.

*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.

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