Current Economic Statistics and Review For the Week 
Ended January 13, 2007 (2^nd Weekly Report of 2007)

Theme of the week:

All-India Debt and Investment Surveys – A Factual Review*

Part 11C

“It is a sign of flourishing economic activity in the society if large numbers of households have taken loans and the loan taken is utilised for productive purpose”.

AIDIS

Introduction

The Part II A of the note dealt with an analysis of the magnitude of household debt in rural and urban areas and the role played by institutional and non-institutional credit agencies in the credit scene of rural and urban India .

The Part II B of the note brought out albeit briefly the different facets of interest burden or cost of debt such as rate of interest, terms of interest, duration of debt and type of loan and security as well distribution of debt by size of debt.

This part of the note (Part II C) reviews briefly the end use of debt incurred along with a brief analysis of current liabilities and kisan credit cards.

I

Debt According to Purpose

The reasons for which households contract loans is considered as the purposes of loans. Even if a loan mount was utilised for a purpose other than that for which it was borrowed, the original purpose of borrowing was considered. If more than one purpose were involved, the purpose for which the maximum amount of loan was originally intended to be spent was considered by NSSO.

Productive utilisation of debt incurred by households will help augment their economic activities and thereby promote economic welfare. On the other hand, if debt is incurred for purposes, which do not produce any increase in production of goods and services, is known as unproductive purposes. Hence, understanding of the purposes of loan taken becomes crucial. Broadly, purposes of loan taken can be classified as those which taken for productive purposes and those taken or utilised for household expenditure.

Productive Purposes

Productive purposes include expenditure incurred in farm business - both capital and current expenditures.

Farm business includes household economic activities like cultivation, including cultivation of plantation and orchard crops and processing of produce on the farm, e.g., paddy hulling and gur making if it is carried out in the firm by indigenous method. It also includes ancillary agriculture activities such as livestock raising, poultry, fishing, dairy, bee keeping, etc. Expenditure incurred in farm business on account of purchase, own construction, major repairs, building and other land improvements, etc., are included in capital expenditure. The current expenditure includes expenditure for purchase of seeds, manure, fodder, payment of wages, rent, land revenue, etc., and also expenditure on normal repairs and maintenance of building, machinery and transport equipment, furniture and fixtures and household durables meant for farm business.   

Non-Farm Business is defined as all other household economic activities, viz., manufacturing, mining and quarrying, trade, hotel and restaurant, transport, construction, repairing and other services. It is treated as capital expenditure, if the households spend the cash dues for own construction, additions, alterations, major repairs and improvement of buildings, etc., and machinery and transport equipment, furniture and fixtures. Current expenditure in non-farm business includes expenditure on account of purchase of raw materials, fuel and lubricants, payment of rent, salary and wages, hire charges of machinery and equipment etc., and normal repairs and maintenance of building, etc.

II

The Results

Productive Purposes

It can be seen from Table 1, out of 26.5 per cent indebted rural households as on June 30, 2002, 10.2 per cent households spent 41.0 per cent of their cash dues in farm business.  About 5.5 percentage points out of 26.5 per cent indebted households have contributed about 27 per cent of total cash dues as capital expenditure in farm business. The incidence and the share of cash dues on farm business in urban areas at 0.9 per cent and 5.2 per cent, as expected, are relatively, very low.

The incidence of indebtedness for the purpose of non-farm business at 2 percent is roughly the same in both rural and urban areas. The share of cash dues incurred in rural areas on non-farm business is 12 per cent, of which 9 per cent is on account of capital expenditure. In urban areas, the shares are 20 per cent and 17 per cent, respectively.

Non-Productive Purposes

Expenditure of Households: Expenditure for non-productive purposes or for household expenditure, is defined as purchase of residential plot, construction, addition, alteration, purchase of building for residential purposes, purchase of durable goods and assets, clothes, etc. and expenditure on medical treatment, education, marriages, ceremonies, was the single most important reason for taking loans in both rural and urban areas in 2002. The incidence in the case of household expenditure in rural areas is 13 out of 27 per cent of indebted households and 12 out of 15 in the case of urban areas and they absorbed 35 per cent and 58 per cent of cash dues, respectively, on such household expenditures. Taking other non-business expenses, about 16 per cent of indebted households in rural areas and about 15 per cent of urban households spent 47 per cent   and 75 per cent of their cash dues, respectively, for all non-business purposes.

Spending Habit by Occupational Categories

Table 2 portrays the spending habits of rural households by occupational categories, i.e., by cultivator and non-cultivator categories.

All rural households operating at least 0.002 hectare of land during the last 365 days preceding the date of survey are cultivator household.  On an average, they spend more on productive purposes, i.e., they spend about 62 per cent of cash due in June 2002 as compared 29 per cent by non-cultivator households.

  Rural households operating no land or holding land land less than 0.002 hectare,  are non-cultivator households and they are further sub-divided into agricultural labours and artisans.  As referred to above, they spend only about 29 per cent of their cash dues on productive purposes.

While cultivators thus spend 38 per cent of cash dues on non-business  expenditure,  non-cultivator households spend 72 per cent for such non-business purposes.

Table 3 explains the spending habits of urban households by occupational categories, i.e., by self-employed and others.

It can be seen therefrom that the self-employed households utilised about 55 per cent of their cash dues for productive purposes and 45 per cent on non-business purposes.  Out of which, about 44 per cent is on acquiring capital assets for business purposes, largely in non-farm business. As against this, other households in urban areas, which include all the other households except self-employed households, regular wage/salaries household and casual labour households incur a very meagre 7 per cent of their cash dues for productive expenditure. Their single most purpose is household expenditure at 72 per cent  as against 33 per cent in case of the self-employed in 2002.

III

Deterioration in Productive Spending Over the Years

      The reductions in the share of spending for productive purpose in recent decades is an eye opener as brought out in Table 4. The percentage of cash dues spent on productive purposes was at 43 per cent in 1951, which after falling to 38 per cent in 1962, picked up in the next two decades to reach 66 per cent by 1981. However, in the next two decades, there has been a drastic fall 53.0 per cent by 2002 (Data for 1991 in this respect appear an aberration).

            Broadly, the converse is true in case of non-productive purposes with corresponding increase or decrease over decrease in their share  of expenditure. Overall, a large portion of total rural debt is used for consumption rather than productive purposes.

Cultivator and Non-Cultivator Hosueholds

            A better insight in to the changing spending habits of rural households, is brought out by an analysis of the differing behaviour of cultivator and non-cultivator households in rural households (Tables 5 and 6).

Cultivator households obviously have a much higher proportion of debt earmarked for productive purposes than non-cultivator households.  But, the rising and falling trends shown above are generally valid for both the sets of rural households.  However, amongst the cultivator households, it is the receding of the share of farm business expenditure (from 63.8 per cent in 1981 to 52.5 per cent in 2002) and within it, that of capital expenditure (from 45.3 per cent to 34.3 per cent) stands out.  The increase in non-farm business expenditure for capital or current expenditures has not compensated for the decline in farm business expenditure. 

Interestingly, even the non-farm business expenditure of non-cultivator households has fallen from 23.3 per cent in 1981 to 19.0 per cent in 2002.  Non-farm households have always borrowed more than 50 per cent for pure household expeditures.

A similar analysis of urban households also reveals that the largest share is for household expenditure.  Also, amongst the self-employed, what is surprising is that their share in non-farm business expenditure has sharply dwindled from 57 per cent in 1981 to 44 per cent in 2002.

In case of self-employed though there was a fall in 2002 when compared to 1981, however, it was picked from an abysmal 35 per cent in 1991 to 55 per cent in 2002. In the case of household category, ‘others’, the share of non-productive purposes i.e., household expenditure during the last three decades has always been high at about 85 to 95 per cent of the total debt.

Poorer Households Borrow for Unproductive Purposes

            That poorer households borrow a larger proportion of debt for household expenditure purposes, is evident from data presented in Table 8.

From this table, the following results are discernible.  First, the proportion of expenditure spent on farm business increases steadily with the increase in the size of household assets.  Second, interestingly, the proportion of expenditure incurred on non-farm business remains generally uniform at around 12 per cent irrespective of the size of household assets.  Finally, the proportions spent on household expenditure fall with the increases in household assets, thus showing, as said above, an increase relationship between household expenditure and asset size.

The deterioration in spending for the productive purpose is brought out in Table 4.

*  This note is prepared by R  Krishnaswamy

Highlights of  Current Economic Scene

AGRICULTURE  

MMTC, the state-run trading firm, will import 1,000 tonnes of tur from Dubai-based Agricommodities at $412 per tonne and 1000 tonnes of moong from its Singapore-based subsidiary MTPL at $630 per tonne. In response to its tender floated in December 2006 to import 5,000 tonnes each of urad, moong and tur for February 2007 delivery, MMTC had received 3 bids and it has decided to buy only 2,000 tonnes of these 15,000 tonnes tender quantity.

The central government has plans to revive 4 of the 8 closed fertilizer units of Fertilizer Corporation of India (FCI) and Hindustan Fertilizer Corporation (HFC) with an investment of about Rs 1,000 crore. The efforts would be made to revive Barauni, Durgapur plants of HFC and, Sindri and Gorakhpur plants of FCI through public sector participation. These units are expected to add about 50 lakh urea to the domestic sector and in turn would save about $ 1.25 billion per annum on costly imports besides reducing the subsidy burden on government exchequer. Projects, based on gas as feedstock, would also be set up at existing sites. As per ministry of petroleum and natural gas, the gas for this pipeline is likely to be available by 2009.

The central government has lifted the ban on sugar exports in view of the high domestic production, projected to be about 240 lakh tonnes in the current season. The government had imposed a ban on sugar exports in July 2006 as part of measures to curb rising prices of the commodity.  As per the sugar industry experts timing of lifting the ban was wrong since the industry would not benefit from exports, as the international sugar prices are almost the same with that of the domestic market and the country has missed an opportunity to tap the export markets like Bangladesh and Sri Lanka as Brazil and Thailand have exported 6 million tonnes of sugar to these countries.

As per Coir Board, coir exports from the country have posted 10.8 per cent rise in terms of value and 9.5 per cent increase in terms of quantity during the April – December 2006. A total 1.97 lakh tonnes of coir and coir products worth Rs 421.18 crore have been exports during this period compared to 1.02 tonne worth Rs 380.28 crore a year ago. Value-added products like coir mats have registered the highest exports with exports going up to 51,499 tonnes worth Rs 325.83 crore from 48,409 tonnes worth Rs 295.43 crore. Other products like coir mattings, rubberised coir, Coir fibre etc, also posted remarkable increase in their exports. However, coir rugs and carpets have witnessed a drastic fall of 76 per cent (from 1,144 tonnes to 273 tonnes) in quantity to and 71 per cent (from Rs 6.6 crore to Rs 1.9 crore) in terms of value during the same period. The US continued to be a major export market for Indian coir products having a share of around 40 per cent with all European countries together taking up another equal share.

Seven state governments have asked for Rs 271.54 crore central assistance for development of seven agro export zones (AEZs). Maharashtra has sought Rs 51 crore for for its mango AEZ in Ratnagiri district. Kerala and Uttarakhand have asked the financial assistance worth Rs 27.25 crore and Rs 3.40 crore respectively for their medicinal plant AEZs. While Sikkim has sought Rs 3.65 crore for its floriculture AEZ, Andhra Pradesh has demanded Rs 91.48 crore for its mango pulp and fresh vegetable AEZs in Chittoor district. West Bengal has sought Rs 36.36 crore for infrastructure development around its AEZs for pineapples and potatoes ad Uttar Pradesh has sought Rs 58.40 crore for two mango AEZs around Lucknow and Saharanpur . The nodal agency for AEZs, Agriculture and Processed Foods Export Development Authority (Apeda), judging the performance of these states, has pleaded for assistance under the Assistance to States for Infrastructure Development for Exports (ASIDE) scheme

Union agriculture minister, Mr.Sharad Pawar, has appealed the state governments and the non-resident Indians (NRIs) to invest in farm sector through public-private partnerships in various areas like agriculture marketing, food processing, value addition, water conservation, seeds, e-agriculture and extension, contract farming etc. for achieving 4 per cent growth in the farm sector. The central government has also plans to support ventures for developing infrastructure such as cold storages and terminal markets, by way of equity participation.

As per the Solvent Extractors’ Association of India (SEA), oilmeals exports have posted a robust increase of 39 per cent to 1,542,550 tonnes during October-December 2006 as against 32 per cent recorded a year ago at 7,58,275 tonnes on account of surging demand in the overseas markets. While the exports of soybean meal have risen to 2,159,225 tonnes during April-December 2006 from 1,641,775 tonnes a year earlier, that of rapeseed meal have jumped to 6,56,825 tonnes from 4,41,500 tonnes owing to availability of rapeseed during off-season from National Agricultural Co-operative Marketing Federation of India. On the other hand exports of castor meal, have declined to 1,37,275 tonnes during the same period from 1,62,450 tonnes a year ago due to reduction in imports by South Korea .

Industry

Overall

Buoyed by strong performance in manufacturing, mining and intermediate goods, the Index for Industrial Production (IIP) has gone up by 14.4 per cent in November 2006 as compared to 6 per cent in November 2005, according to data released by the CSO. The cumulative growth during the April-November 2006 period has been 10.6 per cent as against 8.3 per cent in the corresponding period a year ago. As per user-based classification, the basic goods sector has grown by 11.6 per cent in November 2006, capital goods by 25.3 per cent, intermediate goods sector by 16.7 per cent and consumer goods by 11.9 per cent. In terms of industries, 16 out of the 17 industry groups have shown positive growth during November 2006 compared to the corresponding previous period. The basic metal and alloys industry group has recorded the highest growth of 25.4 per cent, followed by the rubber, plastic, petroleum and coal products group (23.2 per cent) and transport equipment and parts (21.8 per cent). On the other hand, the metal products and parts industry group, except machinery and equipment, has recorded negative growth of 1.5 per cent.

Automobiles  

The domestic passenger car market has recorded a historic 22.66 per cent growth in April-December 2006, second only to the 28.56 per cent in the fiscal year 2003-04. Analysts believe the industry will close fiscal 2006-07 with around 22-23 per cent growth against just 16 per cent in 2005-06. In the first nine months of 2006-07, the industry has sold 7.65 lakh units against 6.23 lakh in the same period of the last fiscal year. A slew of new launches and attractive discounts by leading carmakers helped the market grow at an explosive rate and is expected to maintain its growth momentum through the remaining three months.

The domestic automobile industry has asked the finance minister to implement a uniform rate of excise on passenger vehicles at 16 per cent in the upcoming Budget 2007-08, while asking import duty tariffs on vehicles not to be brought down below 12.5 per cent. The SIAM President expects that the government would remove the anomaly of punishing excise duty on utility vehicles and cars, which are not defined as small cars by reducing them to 16 per cent. At present, small cars with petrol engines of capacity up to 1,200 cc and not exceeding 4,000 mm in length and diesel cars of engine capacity not up to 1,500 cc and not exceeding 4,000 mm in length enjoy a benefit of 8 per cent cut on excise duty as announced in the last Budget. SIAM has commented that the current customs duties in India were amongst the lowest in the world, and hence should not go below 12.5 per cent. The industry body also asked the government to continue for another 10 years the tax incentives on research and development incentives which are due to expire in March 2007.

Paper

The Indian Paper Manufacturers Association (IPMA) expects the Indian paper industry to grow to 14 million tonnes in 2015-16 from 7.2 million tonnes in 2005-06. Along with growth in volumes terms, the industry would also attract huge investments in the next few years. The IPMA member mills alone would invest Rs 12,000-15,000 crore over the next ten years. One of the major constraints the industry faces is inadequate availability of quality raw material at a competitive cost. Yet, with only 7.2 kgs per capita consumption compared with 350 kgs in developed countries and 42 kg in China , the paper industry in India is seen to hold a huge potential for growth.

Infrastructure

Power

Even as the total annual plan budgetary support to central power PSUs and schemes of the power ministry is expected to be slashed by nearly Rs 6,000 crore for 2007-08, the Planning Commission has agreed to extend a Rs 8,000 crore gross budgetary support (GBS) for the implementation of Rajeev Gandhi Vidyutikaran Yojana (RGVY). There is a sharp reduction in the GBS to central power PSUs for the fiscal 2007-08 and as against the earlier GBS of Rs 2,434 crore proposed for central power PSUs, only Rs 706 crore is expected. The total GBS for the entire power sector, including central PSUs and schemes like APDRP and RGVY, stands at Rs 9,228.51 crore against the earlier Rs 15,094.27 crore.

Steel

Though the steel companies have been demanding ban on export of iron ores, the chief ministers of the three states — Jharkhand, Orissa and Chhattisgarh — have jointly written to Prime Minister that exports, particularly of lumps, should be frozen at the current levels and a mechanism be worked out to reduce them gradually. The joint memorandum to the PM states that the move will raise the availability of iron ore to the domestic value-adders at economic prices. During 2005-06, the country produced 150 million tones (MT) of iron ore, of which about 90 MT were exported. Out of the 90 MT, 80 per cent exports were of lumps, which are high-grade ores exports canalised through MMTC. The balance 20 per cent is fines. The CMs of three states, where iron ore mines are present and where steel companies are entering into MoUs for setting up new steel projects, have said that it is desirable to impose quantitative restrictions on the export of iron ore, especially on the iron ore of more than 60 per cent Fe content. They have said that eventually export of iron should be banned. The stand-alone mining companies are, however, against any ban of iron ore exports.

Cement

Given the strong demand and limited capacity additions during 2006-07, analysts predict cement prices to further increase by Rs 3-5 per bag in the fourth quarter of the year. Though despatches of the major companies have shown a lacklustre performance in December 2006 with a 3.1 per cent year-on-year rise to 5.8 million tonnes, the outlook on the cement sector remains positive. The reason could be that the transporters strike in November 2005 led to a spill over effect of despatches in December 2005 resulting in subdued year-on-year growth in December 2006 (base effect). The overall demand has grown by 10 per cent during April-November 2006. However, going forward, demand is expected to be buoyant and grow anywhere between 9-9.5 per cent for financial year 2007.

Banking

The RBI has simplified the procedures for project and service exports, such as deployment of temporary cash surpluses and inter-project transfer of machinery and funds. Under the modified procedures, the RBI has permitted exporters to deploy their temporary cash surpluses, generated outside India, in instruments such as deposits with overseas branches or subsidiaries of a bank in India, a triple ‘A’ rate short term paper abroad, including treasury bills and other monetary instruments with a maturity of one year or less. Now, exporters are required to approach the RBI for overseas deployment of their temporary cash. The central bank has also permitted exporters to open, maintain and operate one or more foreign currency account in a currency of their choice with inter-project transferability of funds in any currency or country.

Mahindra Finance, a leader in four-wheeler and tractor finance for the rural and semi-urban sectors, has set up a 100 per cent owned subsidiary for rural housing finance. The new subsidiary is waiting for a licence from the National Housing Bank to commence operations.

Financial Markets

Capital Markets

Primary Market

The government has decided not to extend budgetary support for 2007-08 to central power PSUs tapping the primary market with initial public offers. At present, Navratna PSUs are denied budgetary support. It has also been decided that equity participation by the government at any stage in companies going public will be through preferential allotment of shares. The government may decide to subscribe to this from time to time.  At a meeting held at the Planning Commission on January 5 to finalise the annual plan for 2007-08 for the power ministry, it was decided that no gross budgetary support would be provided to PowerGrid, NHPC and Damodar Valley Corporation (DVC), all of which have IPO plans.

Autoline Industries Limited tapped the market by offering 37.5 lakh shares in the price band of Rs 200-225 per share between January 8 and 12.

Secondary Market

The stock indices have been volatile during the week under review. The BSE sensex has fallen from 13652 on January 8 to 13362 on January 10 only to rise for the next two days of the week to close the index at 14057 points. Thus, over the week, BSE sensex has gained 196 points and NSE ‘s CNX Nifty has gained 69 points. The fall in the index in the initial part has been attributed to a correction in Asian markets, with the appreciation of the rupee, there were concern about the quarterly performance of the IT sector. However, following robust growth in IIP index of 14.4 per cent and Infosys announcing good results, the market sentiment has turned positive.       

Cairn India on Tuesday made its debut on the Bombay Stock Exchange with a 7.5 per cent discount to its issue price of Rs 160. The stock listed at Rs 148, went down to the day’s low of Rs 128.65 before closing at Rs 137.50.

About 48 lakh demat accounts have been frozen by the two depositories, National Securities Depository Ltd (NSDL) and Central Depository Services Ltd (CDSL), because investors failed to submit Income Tax Department’s Permanent Account Numbers.  NSDL, in a press release has said that of its 77 lakh demat accounts, 42 lakh accounts have been frozen. Of this, 16.6 lakh accounts have share holdings while 18.6 accounts had nil positions. 

Pursuant to the FDI Policy announced by the Government of India in respect of Foreign Direct Investment in the Indian stock exchanges, five Indian Institutions: IFCI, IL&FS, ICICI, PNB and GIC have entered into an agreement with a global stock exchange and three financial institutions to sell part of their holdings in the National Stock Exchange (NSE). The NYSE Group, General Atlantic, Goldman Sachs and Softbank Asian Infrastructure Fund will each acquire 5 per cent stake in the NSE from the above domestic Institutions.

The Authority on Advance Rulings (AAR) on income tax ruled that the income of two foreign institutional investors — Fidelity Advisory and Mathew International — will be taxed as capital gains and not as business income. The FIIs, which have the option to appeal to the Supreme Court, had contended that their business income could not be taxed since they did not have a permanent establishment in India.The AAR’s decision will be binding irrespective of whether India has a double taxation treaty with an FII’s country of origin. The FIIs had appealed to the AAR five months back. Interestingly, the order has overruled AAR ’s earlier order in case of Fidelity Advisory Series 8, where it had held that income would be taxed as business income. The income tax department had pointed out that “within the entire scheme evolved by the government for the purpose of investment by FIIs in the Indian stock market, the income will be taxed as capital gains irrespective of the frequency and volume of transaction.”The Authority on Advance Rulings (AAR) has been constituted by the government to help tax-payers plan their income-tax matters well in advance and to avoid long-drawn and expensive litigation. A non-resident or certain categories of residents could obtain a binding ruling from the authority on a question of law or fact arising out of any transaction/proposed transaction relevant for the determination of tax liability, said an official.

Derivatives                                  

Securities transaction tax (STT) continues to be a deterrent for options trading despite the NSE easing brokerage norms. Members said though the exchange has asked members to charge brokerage on the premium and not on the strike price from this month, STT continues to be levied on the strike price. As per a NSE circular, trading members should “charge brokerage for options contracts on the premium at which the option contract was bought or sold and not on the strike price. Brokerage on options contracts shall not exceed 2.5 per cent of the premium amount or Rs 100, whichever is higher. This would mean that if an option contract for a stock currently traded at Rs 100 was bought at a premium of Rs 10, earlier the investor was required to pay brokerage for the strike price of Rs 110. While as per the rationalised structure, investors are required to pay brokerage only on the premium of Rs 10, they still need to pay STT for the strike price of Rs 110. “This is illogical. If the government indeed wants to push the options segment, the STT should also be on the premium amount,” said a dealer. STT on the sale side is fixed at 0.017 per cent. In the derivatives segment, the daily turnover in futures segment is over Rs 25,000 crore, while the turnover in options is about Rs 2,500-2,800 crore. Vijay Singhania, president of the Association of NSE Members of India, said the association had requested before the authorities concerned on the need to bring down STT on par with the rationalised structure. He felt that the new structure was very complicated and difficult for the members to execute. “The expenditure in options is similar to stock futures. When an investor sells options, and if the price goes up, there is no requirement of mark-to-margin. But if the price comes down, we need to keep mark-to-margin,” he explained. Kirit Somaiya of the Investor Grievance Forum, however, was of the view that the derivatives segment encouraged day traders. He felt that the government should discourage speculative trading by tightening the rules in F&O segment, so that small investors stayed away from derivatives.

Government Securities Market

Primary Market

RBI conducted the sale (re-issue) of 8.33 per cent 2036 for a notified amount of Rs.4, 000 crore. The cutoff yield of security was 8.2379 per cent respectively, as against 7.63 per cent set in the previous month.

Four State Governments have announced the sale of 10-year State Development Loans (SDLs) for an aggregate amount of Rs.1, 214.59 crore through a yield based auction using multiple price auction method on January 18, 2007.

The cut-off yield in 91-day T-Bill auction remained steady at 7.1443 per cent as against 7.1443 per cent during the previous week. The cut-off yield in 182-day T-Bill auction moved lower to 7.1447 per cent as against the previous cut-off yield of 7.2954 per cent.

Secondary Market

During the week, the weighted average call rates during the period ranged between 7.68 per cent and 8.35 per cent, while weighted average repo rates ranged between 7.25 per cent and 7.58 per cent and the weighted average CBLO rates ranged between 7.23 per cent and 7.50 per cent. The average volumes of Call, Repo and CBLO segments were Rs.13375.49 crore, Rs.5976.22 crore and Rs.16370.93 crore respectively. The daily average outstanding amounts in the LAF (reverse repo) and LAF (repo) operations conducted during the period were Rs.278 crore and Rs.18555 crore respectively.

The weighted average YTM of 7.59 per cent 2016 bond was 7.5308 per cent on January 12, 2007 as compared to 7.5576 per cent on January 05, 2007.

The Union Cabinet approved the promulgation of an Ordinance to amend the Banking Regulation Act, 1949, which will give the RBI flexibility to set the statutory liquidity ratio (SLR) for banks. At present, the banks are required to maintain at least 25 per cent of the deposits under SLR by investing in government securities.

The Governing Council of the ECB left unchanged minimum bid rate on the main refinancing operations, the interest rates on the marginal lending facility and the deposit facility at 3.50 per cent, 4.50 per cent and 2.50 per cent, respectively.

The Monetary Policy Committee of Bank of England increased the official Bank Rate paid on commercial bank reserves by 25 basis points to 5.25 per cent.

Foreign Exchange Market

The six-month forward premia closed at 3.3 per cent (annualized) on January 12, 2007 vis-à-vis 3.56 per cent on January 05, 2007.

Commodities Futures derivatives

RBI has specified a minimum margin requirement of 50 per cent and minimum cash margin requirement of 25 per cent (within the margin of 50 per cent) to the guarantees issued by the commercial banks on behalf of commodity brokers in favor of national-level commodity exchanges.

Yashwant Bhave, secretary, department of consumer affairs said at  the inauguration of the sixth National Conference on Commodities Exchanges, that the guidelines for foreign direct investment (FDI) in commodities exchanges, was under preparation with the department of consumer affairs, would be announced in near future.  He further said that a record 277 per cent growth in commodities futures speaks for itself, with no other sector recording such a spectacular growth in a short span of time. This year, till December, commodities exchanges have clocked a turnover of Rs 27 lakh crore.  Commodities exchanges are a major component of the regulatory framework and the onus on enforcing market integrity and transparency, therefore, rests primarily on the exchanges, which are self-regulatory organisations (SROs). He asked the regulator and the exchanges to remain vigilant so that market participants would strictly adhere to the rules and regulations laid down by the government. 

On the Bill amending the Forward Contracts (Regulation) Act, 1952, which was introduced by the Parliament in March 2006 and examined by the Parliamentary Standing Committee, he added that the committee has already submitted its report considering the details on three important issues.  The issues include a need for balancing the interest of both the producers and the consumers, a need for market awareness among all stakeholders and quality control and grading of agricultural produce on a priority to align them with commodities futures.  The committee has also recommended the need to bring spot and futures commodities markets under a single regulator. 

National commodity bourses – the Multi Commodity Exchange (MCX) and the National Commodity & Derivatives Exchanges (NCDEX) – are planning to launch commodity-specific electronic spot trading in mandis of different states. For this, the comexes are awaiting clarifications from the state governments with regard to amendments in the Agricultural Produce Marketing Committee (APMC) Act. The purpose of an electronic spot exchange is to empower farmers with decision-making capabilities by disseminating the national data electronically at the mandi. In West Bengal , for example, the bourses are looking at “nai” (new) potato for trade on the electronic platform, while Rajasthan is eyeing guar, wheat etc. MCX and NCDEX have proposed to flag off the spot exchanges by the end of the month. But experts believe that would have to wait till the amendment in the APMC Act was done. MCX and NCDEX have obtained permission to launch spot exchanges in West Bengal and Rajasthan. While the former is awaiting permission from states including Kerala, Haryana, Andhra Pradesh and Maharashtra, the latter has applied for grants from Andhra Pradesh, Madhya Pradesh, Haryana, Maharashtra and Gujarat . The biggest advantage for a farmer would be not to transport goods physically but to know the prices first and decide whether he should sell or hold. For farmers’ benefit, the spot exchange would facilitate storing of goods in exchanges and sell or buy as per price convenience.  At present, farmers transport goods to mandis several kilometres away. When a farmer finds the prevailing price in a mandi lower than the expected level, he is left with no idea but to sell at that price, as he might be incurring losses for holding goods in trucks in the form of transportation costs. In this scenario, the farmer wants to sell goods as early as possible, offering the price advantage to the buyer.  “The electronic spot exchange will save the farmer from hara-kiri and unlike futures where contracts are settled at the end of expiry of the contract, the spot exchange will offer deal-to-deal settlement,” Kumar of NCDEX said. The exchange had started mock trading for the spot exchange in November last year. 

Domestic wheat prices are expected to remain rangebound despite the 2.2 million tonne (MT) rise in global output estimates for January on bumper harvest in Russia and EU-25, according to the US data released on Friday. The prices backwardation may continue till the new good quality crop arrives at the market in about 45-days.The commodity did not change much in the spot market in the last 13 days and closed at Rs 1099 per quintal on Saturday compared with Rs 1100 per quintal on January 1. Because of the Rs 56 rise in prices to Rs 1060 for near month contract on the Ncdex, the turnover and open interest on the India’s leading agri commodity derivatives platform slumped to Rs 1078.34 lakhs and 26830 contracts on January 12 from Rs 1617.61 lakhs and 32470 contracts on January 1 respectively. According to the US data, production estimates were raised 1.4 MT in Russia and 0.7 MT in EU-25. Global consumption was raised 1.2 MT this month reflecting the increase in demand from EU-25, Russia , Ukraine , and India .

Insurance

ICICI Prudential Life Insurance has hiked its capital base by Rs 230 crore to Rs 1815 crore. This is the third equity infusion in the current financial year and the total increase this year has been Rs 630 crore. The two partners, ICICI Bank and Prudential Plc, have contributed to the capital infusion based on their 74:26 per cent equity stake respectively.

Bharti Enterprises and French insurer AXA have signed a memorandum of understanding to establish a joint venture company in the domestic general insurance business. Bharti Enterprises will hold a 74 per cent equity stake while AXA will have the rest of the 26 per cent. The joint venture, which will be headquarted in Bangalore , is expected to commence operation in the second-half of 2007, subject to IRDA, FIPB and other statutory approvals.

Corporate Sector

Infosys Technologies Ltd has posted better than expected third quarter profit growth, though a strong rupee blunted its revenues and operating margins. Infosys reported a 51.5 per cent growth in its net profits at Rs 983 crore for the quarter ended December 31, 2006 over the corresponding quarter last year.

HDFC Bank has recoreded 31.74 per cent rise in third quarter net profit to Rs 296 crore for the quarter ended December 31, 2006 against Rs 224 crore for the corresponding quarter of the previous year, on a robust rise in net interest income and an improvement in net interest margin.

*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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