Current Economic Statistics and Review For the Week 
Ended November 24, 2007 (46^th Weekly Report of 2007)

Theme of the week:

In the past few years, that is, from 2004-2007, there has been an upward shift in the structure of interest rates as reflected in the rise in the money market rates, increases in the yields set on the central and state dated securities, firmness in the coupon rates offered on corporate bond issues and rise in the prime lending rates charged by the banks for borrowers. These increases in the rates have generally occurred at a time when there has been surplus liquidity situation except for few periods when liquidity was under pressure. Accompanying these increases in rates, there have been hikes in the benchmark rates such as reverse repo and repo rates as well as increases in the cash reserve ratio (CRR). The benchmark rates have been revised upwards in pursuit of the goals such as synchrony with global rates, inflation containment and minimising the impact of upsurge in international flows on the financial markets. However, recently the rates in some of the advanced countries have been eased but the domestic policy has not moved in sync with the rates in those countries. For instance, though the market participants had expected a cut in benchmark rates following the cut in US fed rate ahead of the mid-review of policy announced on October 30, 2007. However, the RBI increased the CRR rate by 50 basis points.

Increases in Yield Rates

As shown in Table 1, the yield rates offered on the central and dated securities shows that it has gone through three phases. In the first phase, the weighted average yields on central dated securities increased from 11.78 per cent in 1991-92 to 13.75 per cent 1995-96 as it was felt that the rates offered on them were not high enough to attract voluntary subscriber (Narashimam Committee Report, 1991). Simultaneously, the weighted average yield on stated loans was increased from 11.84 per cent to 14 per cent over the same period.

In the second phase, there has been sharp easing of rates of interest due to a number of macroeconomic factors such as declining inflation rate, capital flows and associated liquidity surge and softening of interest rates abroad. More importantly, it was shift in the monetary policy that favoured soft interest rates. Consequently, the yields on central dated securities eased from a peak of 13.75 per cent in 1995-96 to 5.71 per cent in 2003-04 and those on state government eased from 14 per cent to 6.13 per cent.

As a result of the high interest rate policy pursed had adverse repercussions on the cost of borrowing and the government took advantage of the then prevailing soft interest rates by undertaking debt re-structuring. The central government undertook buy back for securities whose market value amounted to Rs 19,394 crore and the government had to offer premium amount of Rs 3,472 crore to the market participants. The debt swap arrangements for the states aggregated over Rs 100,000 crore contracted at interest rates of over 13 per cent (Money Market Review, July 29, 2007). Similar debt restructuring was also undertaken by the corporates in view of their increased debt burden.

In the third phase, the yields on central dated securities have increased from 6.11 per cent in 2004-05 to 7.89 per cent in 2006-07 and then further rose to 8.20 per cent (upto October 22, 2007), an increase of around 200 basis points. Similarly, the yields on state government securities increased from 6.45 per cent to 8.33 per cent over the same period.

                Thus, the Graph 1 shows the movement of yield rates offered on central and state government securities. The wherein they touched a peak in 1995-96 and then a trough in 2003-04 and have risen again in 2007.

Rise in Prime Lending Rate (PLR)  

            The prime lending rate has decreased from 10.25 –11.00 per cent in March 2004 to 10.25-10.75 per cent in September 2004. It remained steady until June 2006 when it rose to 10.72-11.25 per cent and then jumped to 11.75-14.50 per cent in March 2007 and further to 12.50-16.50 in October 2007 (Table 2).

            This high interest rate appears to have affected the borrowers as there are reports of increasing bad loans, even in housing sector, which sometime ago, had least non-performing assets (NPAs) and was considered to be among the safest option.   

Increases in Benchmark Rates

            In this period, the benchmark rates have increased sharply. The reverse repo rate has increased from 4.5 per cent in March 2004 to 6 per cent in July 2006; thereafter, it has remained steady at it. Also, the repo rate has risen from 6 per cent in March 2004 to 6.25 per cent in October 2005 and then to 6.50 per cent in January 2006. Thereafter, it has risen to 7.75 per cent in April 2007. Thus, the reverse repo has increased by 150 basis points and repo by 175 basis points between March 2004 and November 2007. The CRR  has increased from 4.5 per cent to 7.5 per cent over the same period.   

Reasons for Increases in Policy Rates

            Inflation Targeting

            With the inflation regaining its strength in the latter half of 2004 amidst a robustly growing economy, galloping non-food credit expansion and in sync with global trends, the RBI began with monetary tightening process by increasing the reverse repo rate and repo rate (as shown in Table 2). Despite, the increases in these benchmark rates, the inflation and non-food credit off-take increases continued to surge and RBI began using the CRR as an extensive measure for absorbing liquidity.

Recently, RBI changed its policy towards exchange rate management and allowed the rupee to appreciate at such a rapid pace that the Indian rupee appreciated the most among the emerging market economies, which has begun to hurt the exporters, and though sops have been extended to them, the concerns regarding slow down in exports growth and consequent job loss.

Global Synchronisation

The RBI began assigning more weight to global factors than before while formulating the policy stance (First Quarter Review, July 25, 2006; pg 26). Thus, as the global rates were firmed up, the domestic rates were also increased.

Liquidity Management

In the recent period, though the inflation has been brought under control through a comprehensive policy of increasing imports, allowing rupee to appreciate, and increases in benchmark rates, the RBI has again continued the policy of increasing the CRR.  In the recent policy announced on October 31, 2007 wherein CRR was increased by 50 basis points with effect from November 10, the RBI has said, “the biggest challenge is the management of capital flows and the attendant implications for liquidity and overall stability. A visible reflection of the sheer magnitude of the inflows is the accretion to the foreign exchange reserves which has been of the order of US $ 62 billion during the current financial year up to October 19, of which US $ 48 billion has been built up since end June 2007”  (Pg 55) 

Conclusion

Thus, the usage of the monetary instruments for achieving short-term goals has led to the RBI got into a cycle wherein it increased the rates to be in ynchronization of the global trends instead of focusing on the domestic economy and then later, it used these instruments to fight inflation. Further, they allowed the rupee to appreciate. As a result, the RBI has now faced with copious inflows and now again has to resort to increases the reserve requirements to contain its impact on the financial markets.

* This note has prepared by Piyusha D Hukeri.

Highlights of  Current Economic Scene

AGRICULTURE  

MMTC Ltd has issued a tender to import 3.5 lakh tonnes of wheat to help the government to boost its stockpiles. Bids have been invited for issuing tender, which would sought the imports either in bulk or in containers and the same would required to be delivered on the basis of cost and freight before February 10, 2008. The tender would be closed on November 19, 2007 and offers would be valid till November 24,2007. It is expected that the country is likely to get bids ranging between US $ 440 to US $ 450 per tonne and the ports of delivery given as per the schedule are Mundra, Kakinada, Kandla, Chennai, Vishakapatnam, Tuticorin, Kochi, and Mumbai.

The central government has announced an additional bonus of Rs 50 per quintal for paddy, which would be procured by government agencies in the current marketing season (October-September) 2007-08. Hence, final and effective procurement prices for common varieties of paddy would be Rs 745 per quintal (MSP of Rs 695 plus bonus of Rs 50) and that for grade ‘A’ varieties would be Rs 775 per quintal (MSP of Rs 725 plus bonus of Rs 50). Thus, after factoring the current MSP levels with that of the last year, the effective increase has come to Rs 125 per quintal, marking one of the largest jumps for any crop year.

Rabi sowings are picking up across the country. As per the data by Crop Weather Watch Group, till November 15,2007, wheat and mustard acreages are fallen down drastically. Wheat acreage is down by 34.75 lakh hectares as compared with the corresponding year coverage of 52.71 lakh hectares. While, area under rapeseed-mustard have decline to 35.10-lakh hectares as compared with last year coverage of 52.76-lakh hectares. On the other hand sown acreages of oilseeds have dropped to 47.24 lakh hectares as compared from last year’s corresponding level of 68.18 lakh hectares. While in some sates oilseeds sowing is yet to pick up mainly due to late sowings. Pulses acreages has also register a huge decline from 69.85 lakh hectares to 67.50 lakh hectares including from 47.25 lakh hectares to 42.76 lakh hectares for gram (chana), 7.95 lakh hectares to 5.87 lakh hectares for lentil (masur), 4.31 lakh hectares to 3.53 lakh hectares for peas and 3.66 lakh hectares to 3.54 lakh hectares for kulthi. Whereas more area has been come under urad from 1.51 lakh hectares to 3.18 lakh hectares, moong from 0.38 lakh hectares to 1.13 lakh hectares and lathyrus from 3.22 lakh hectares to 4.10 lakh hectares.

According to Solvent Extraction Association of India (SEA) imports of non-edible oil have slipped downwards for the last oil year (November-October) 2006-07 by 11 per cent to 6.29 lakh tonnes from 7.09 lakh tonnes in the same corresponding year. While, imports of edible oil for the oil year (November-October) 2006-07, have gone up radically by 7 per cent at 47.15 lakh tonnes, of which, crude palm oil (CPO) and sunflower oil imports have risen sharply mainly on account of duty cut from 70 per cent to 45 and 40 per cent respectively. Imports of crude palm oil (CPO) have increased by 26.16 per cent to 29.94 lakh tonnes in oil year 2006-07 and that of sunflower oil have improved by 93.06 per cent at 1.95lakh tonnes during the same period. Whereas, soyabean oil imports have declined by 22.30 per cent to 13.23 lakh tonnes. As a result, share of the palm group of oilseeds in the total oil import has increased to 67 per cent. Thus, total imports of palm group of oil including CPO have increased by 23.47 per cent to 31.72 lakh tonnes.

According to Soyabean Processors Association of India (SOPA), soymeal export from the country for the oil year 2007-08 season is likely to jump by 38 per cent to 45 lakh tonnes due to expected higher production of soyabean in the county as compared to the exports during previous season, when it had stood at 32.56 lakh tonnes. The other reason is perceived to be competitive freight advantage of US $ 40-50 per tonne for exporters as compared with the prices quoted by exporters in Brazil and Argentina .

The central government has ruled out any plan to reduce the import duty of edible oil, even though landed prices of crude palm oil have risen by around US $ 130 per tonne and that of de-gummed soyaoil by over US $ 200 per tonne since last round of duty cut on July 25, 2007. However, decision regarding undertaking other moves like banning exports of sesamum seeds and groundnut kernel have yet to be reached.

As per the review by Centre for Monitoring Indian Economy (CMIE), the overall growth in crop production during 2007-08 would be around 4.1 per cent owing to rise in kharif crop production and expected increase in rabi crop. An area under foodgrain, oilseeds, sugarcane and cotton in the kharif 2007 was more than 2006. As per CMIE’s estimates oilseed production would be at 27 million tonnes during financial year 2008 as compared with 23.9 million tonnes produced in the corresponding period of the last year. Among oilseeds, production of groundnut would rise to 8 million tonnes in financial year 2008 from 4.9 million tonnes in 2007, while soyabean production is also expected to rise by 8 per cent due to increase in acreage. Sugarcane production is estimated to be around 365 million tonnes in financial year 2008.

As per the report by Mr. Wallace Tyner an agricultural economist from Prude University , energy and food industry would be linked at a larger scale in the future, due to world’s expanding needs for green fuels. For instance, a product created by a blend of crude oil and soyabeans would act as a new source of biodisel fuel from soyaoil. It is predicted that due to linkage between both the industries prices would increase tremendously and demand for new energy would also increase usage of more and more crops for making biofuel, which would help struggling farmers to earn profit in the future.

International Cotton Advisory Committee (ICAC) has predicted that there would be a decline in the world cotton production by 2 per cent in 2007-08 to 26.1 million tonnes. This dip would be attributed to the fall in cotton acreage. Mill offtake at global level would increase by 3 per cent to 27.5 million tonnes. The production decline would be coupled with increased use of cotton by mills due to which it is expected that it would push up the stock levels by 11 per cent to 11.4 million tonnes. While, the world cotton imports would rise by 10 per cent to 9.1 million tonnes in 2007-08 due to rebound in imports by China . Exports from the US , India and Brazil are expected to rise significantly.

The central government has approved an amount of Rs 30 crore per annum to be spent towards pepper replantation programme, which would cover 20 thousand hectares per year over the period of next 10 years under the National Horticultural Mission in Kerala. It has plans to provide a grant of Rs 47 lakh under HRD grant scheme to 4,664 workers from 8 tea gardens in the state that have remained closed since long period.

As per the Rubber board, target set for both exports and imports of natural rubber has been revised on account of distinct changes in domestic and international market conditions. As per the revised estimates, imports would increase to 80,000 tonnes as against its earlier target of 60,000 tonnes. Imports of natural rubber, during April-October 2007 were 50,865 tonnes as against that of 28,879 tonnes last year showing a growth of 41 per cent. However, the board has scaled down the exports target to 25,500 tonnes as against its earlier projection of 70,000 tonnes. During April- October 2007, nearly 17,495 tonnes were exported as against that of 49,702 tonnes during the same period last year.

As per the projection, India ’s black pepper imports are likely to exceed exports in the fourth quarter (January-March) of the current financial year 2007-08 due to higher domestic prices and serious crisis on export front. It is projected that country is likely to import 2,000 tonnes from Indonesia and 1,000 tonnes from Brazil .

High court of Uttar Pradesh has relieved sugar mills from high cane prices and falling realisations and has allowed mills to pay Rs 110 per 100 kg for cane during the current crushing season (October-September). This price, however, is lower than the price fixed by the Uttar Pradesh Government (on October 31, 2007) at Rs 125 per quintal for normal cane and at Rs 130 per quintal for early maturing varieties.

Hatsun, one of the largest private diary in the country would be launching Hatsun Agro Project to encourage farmers to take up dairying as a mainstream investment as traditionally it has been supplementary activity in farms. The main objective of this project is to enhance milk yields and farmers income, which would improve the quality and quantity of milk it procures for marketing.

Mother Diary, subsidiary of National Dairy Development Board would be expanding its edible oil portfolio by venturing into olive and rice bran oil segment as it have been already selling vegetable and mustard oils under Dhara brand. The company aims to achieve 10-15 per cent market share in the olive oil segment within a year of the launch. It is expected that it would add 2,000 tonnes of oil per year to the domestic market.

India’s first online delivery based spot trading of horticulture crops is formally expected to start by December2007 as it is in the process of completing the enrollment of its members this month. This trading would be commenced under the Safal National Exchange of India (SNX).

As per the book released by Mr.P.K.Joshi and Mr.P.S.Barithal reveals that the contract farmers have earned profits more than their counterparts especially by milk contract farmers, vegetable farmers and boiler farmers. Milk contract farmers have attained the profit double than that of the non-contract milk farmers, while corresponding difference has been seen of 78 per cent for vegetable farmers and 13 per cent for boiler farmers. Cost of production for contract farmers was less by approximately 21 per cent in the case of milk and 26 per cent in case of vegetables as compared to that of non-contract farmers. This lower production costs were mainly due to massive fall in transaction costs. The share of transaction cost in the total cost for non-contract farmers was around 20 per cent, while it was only 2 per cent for contract farmers. In case of boiler contract farmers, they hardly incurred any cost on extension communication and transportation for acquiring inputs. These costs were as high as 80 per cent of the total transportation cost in boiler production.

Inflation

The annual point-to-point inflation rate based on wholesale price index (WPI) remained unchanged at its previous week’s level of 3.11 percent for the week ended November 03,2007. During the comparable week of the earlier year, it was 5.45 per cent.

During the week under review, the WPI rose by 0.2 per cent to 215.6 from 215.1 for the previous week’s level (Base: 1993-94=100). The index of ‘primary articles’ group, (weight 22.02 per cent), declined marginally to 224.2 from its previous week’s level of 224.5.Food articles prices decline by 0.3 per cent due to lower prices of jowar, poultry chicken, fruits and vegetables, maize and arhar. As against this prices of moong, fish mrine and eggs and bajara and pork moved up.

Non-food articles rose by 0.4 per cent because of acceleration in the prices of raw rubber, copra, soya bean raw cotton and castor seed while mesta prices declined..

Higher prices of furnace oil, aviaton fuel, naptha and bitumen pushed up the prices of   ‘fuel, power, light and lubricants’ group (weight 14.23 per cent) by 0.6 per cent to 325.7.

The index of ‘manufactured products’ group (weight 63.75 per cent) rose by 0.2 per cent to 188.0 from 187.6 for the previous week. Higher prices of some edible oils, ghee and khandsari pushed up the food products prices by 0.8 per cent to 191.2 from 189.6 for the previous week.

Textile group, Chemicals group and machinery and machine tools are some of the other groups which looked up. However, there was a decline in the prices index of non-metalic mineral produtcts.by 0.2 per cent mainly because of th fall in the prices index of cement by 1.0 percentage point.

The latest final index of WPI for the week ended September 08,2007 has undergone upward revision; as a result, both the absolute index and the implied inflation rate stood at 215.0 and 3.46 per cent as against the provisional data of 214.7 and 3.32 per cent.

Banking

Union Bank of India will add 1200 personnel, close to 5 per cent of its existing employee strength, in specific functions such as information technology and rural development during this financial year. The bank’s current manpower strength is 26,000.

RBI’s Deposit Insurance and Credit Guarantee Scheme (DICGS) had shelled out over Rs 123.37 crore in the first half of this financial year towards payment to depositors of 17 insolvent banks which have failed to repay the deposits to customers during April – September 2007. Under DICGS insurance norms, a maximum of Rs 1 lakh is paid to a depositor in case the bank goes insolvent.

Public Finance

During the month of October the excise duty collection of the government has grown by 14 per cent totalling to Rs 10,293 crore over the corresponding month of the previous year whereas Customs duty collections have increased by 25 per cent to Rs 9,353 crore, from Rs 7,503 crore during the same month the previous year. Cumulatively during first seven months of the current fiscal year Excise duty collections have stood at Rs 64,948 crore against Rs 60,401 crore registered during the same period a year ago, an increase of 8 per cent. Customs duty collections have surged by 17.4 per cent to Rs 57,833 crore during the period against Rs 49,276 crore during the same period a year ago. For fiscal 2007-08, the budget estimate for excise duty collections has been pegged at Rs 1,30,220 crore while customs duty collections has been estimated at Rs 98,770 crore.

Financial Sector

Capital Market

Primary Market

Jyothy Laboratories Ltd, a fast moving consumer goods (FMCG) company, is to enter the capital market with an initial public offering of 44.30 lakh equity shares of Rs 5 each through an offer for sale by the selling shareholders, which include Canzone Ltd, ICICI Bank Canada, ICICI Bank UK Plc, South Asia Regional Fund and CDC Investment Holdings Ltd. The offer for sale is for cash at a price to be decided through a 100 per cent book building process, which opens on November 22 and will close on November 27. The price band has been fixed at Rs 620- 690.

 Renaissance Jewellery Ltd, a company exporting studded-gold and-platinum jewellery, will tap the capital market with an IPO of 53.24 lakh equity shares of Rs 10 each for cash at a price to be decided through a 100 per cent book-building process along with one detachable warrant for every two equity shares allotted by the company. The price band had been fixed between Rs 125 and Rs 150 per equity share. The offer opened on November 19 and will close on November 21. The equity shares and warrants are to be listed on both the BSE and NSE.

Kaushalya Infrastructure Development Corporation Ltd will be foraying into the capital markets with an IPO of 85 lakh equity shares of Rs 10 each for cash at a premium to be decided by 100 per cent book building process. The price band has been fixed between Rs 50 and Rs 60. The issue is to open on November 20 and close on November 23. The shares are proposed to be listed on the BSE and NSE. The company plans to use the proceeds from the issue to fund land acquisition, land development rights and real estate development, investment in BOT/BOOT projects for joint ventures, and purchase of capital and infrastructure equipment for the execution of projects.

The major promoters of the NSE, banks and financial institutions have suggested to the stock exchange that it should float an initial public offer which will provide a easy exit route to the banks and FIs to bring down their respective stake holding to 5 per cent as required under the new demutualisation guidelines of the Sebi.  Under the guidelines, any single entity holding in a stock exchange either in the form of institutions or banks or single individual should not exceed 5 per cent. Following these guidelines, NSE has written to most of the promoters to bring down the stake to 5 per cent by October 2008, and the matter will be discussed in the board meeting of the exchange scheduled to be held in the last week of November 2007.   

According to Rajnish Rangare, Head-Capital Markets, Karvy, several brokerage houses have back-to-back arrangements with banks for IPO financing. The over subscription of recent IPOs shows that liquidity conditions are very good. Spectacular returns by the recent initial public offerings (IPOs) on listing day are prompting a growing number of retail investors and even high net worth investors (HNIs) to borrow funds at a costly 16 to 17 per cent (for two or three weeks) to bid for IPO shares. Trend has accelerated as some offerings have given 100 per cent returns within days of listing. 

Secondary Market

Despite gaining in only two out of five trading sessions, markets ended with gains of a little over 4 per cent. BSE sensex and NSE nifty were up by 790 points and 250 points at 19,698.36 and 5,906.85, respectively, led by banking, capital goods, power and oil and gas stocks. Mid and small-cap companies galloped by more than six per cent each.  It was a late Diwali for the Indian stock markets as they joined the rally across the globe on November 14, 2007 on buying by domestic institutions led by insurance companies and short covering by traders towards the end of the trading session propelled the BSE Sensex to its biggest single-day gain. After rising more than 6 per cent market slid by 0.7 per cent on November 15, 2007 as worries about the fallout of US credit troubles came back to haunt the global markets.

All the sectoral indices of BSE gained over the week except BSE-IT. Among the gainers, BSE FMCG surged by 11.16 per cent due to ITC’s interest in Parle’s confectionery, which pushed up the index, followed by BSE Bankex was up 7.74 per cent.

On November 14, 2007, Securities and Exchange Board of India (Sebi) taken a decision on its board meeting to introduce seven new derivative products, to encourage domestic markets and make it largely to move onshore. The suggested derivative products were based on the interim recommendations of the Sebi Committee on Derivatives, headed by Prof. M. Rammohan Rao. The seven products are: mini-contracts on equity indices, options with longer life, volatility index and F&O contracts, options on futures, bond indices and F&O contracts, exchange-traded currency (foreign exchange) futures and options and exchange-traded products to cater to different investment strategies.          

Sebi has proposed a comprehensive review of its Disclosure and Investor Protection (DIP) guidelines.  The suggestion for a complete review of the DIP guidelines came from the Sebi board, when its views were sought on exemptions needed by Reliance Power. At present, the public issues are governed by guidelines, which do not have the same force of law as regulations. Once the DIP guidelines are converted into regulations, these would come under parliamentary scrutiny as any other rules and regulations.  After the DIP norms become regulations, Parliament will have the right to seek a review of the provisions if it is not convinced about any of them. Any amendments to the DIP guidelines are currently carried out through administrative decisions by executive authorities at Sebi.

According to mutual fund-tracking firm Value Research, 60 out of 154 mutual funds have under performed their benchmarks by over 30 per cent or so in a year that saw the BSE Sensex gain more than 40 per cent. These 60 funds were under performers with a big margin; overall, 84 schemes under performed benchmarks in this year's bull rally, reflecting bad investment strategies or poor stock selection by the fund managers.  The sensex and BSE 200 have gained by 43 per cent and 47 per cent this year, respectively. The redeeming quality for the Indian mutual fund industry is that the figure is better than 2006, when 85 per cent of funds lagged the sensex.

Overseas investors are rushing to invest in the booming Indian stock markets directly by applying for Foreign Institutional Investor (FIIs) licenses, less than three weeks after the curbs on participatory notes (P-notes).  Nearly 50 applications for FII registrations, including from Morgan Stanley, Citigroup, Bank of America, CLSA and hedge fund DE Shaw, have been cleared since October 16 when the Sebi imposed the curbs on P-notes, derivatives that allowed foreign investors to trade on the Indian markets.

Derivatives  

The spot nifty closed at 5,906 with the November series settled at 5,913.5 and December at 5,898.5 while January was settled at 5,881.5. The Junior closed at 11,121 in spot with the November future settled at 11,179. The Bank Nifty (which was the best-performing index) closed at 9,474 with the November future settled at 9,484. The CNX IT, which lost ground, closed at 4,374 in spot with the future settled at 4,368. Only the Nifty has liquidity in mid and far term contracts.  There is no difference to speak of in the CNXIT and the BankNifty.

Government Securities Market

Primary Market

Seven State Governments auctioned 10-year paper maturing in 2017 through an yield based auction using multiple price auction method on November 13, 2007 at cut-off yields ranging from 8.39-8.69 with the lowest for Tamil Nadu and the highest for Kerala. RBI has set the underwriting commission cut-off rate at 39 paise per Rs.100 in respect of the auction of West Bengal State Development Loan.

RBI is to re-issue 7.99 per cent 2017 and 8.35 per cent 2022 for Rs.3,000 crore and 4,000 crore, respectively on November 23, 2007 through price based auctions using multiple price method.  

On November 14, 2007, RBI auctioned 91-day and 182-day T-bills for the notified amounts of Rs.3,500 crore (out of which Rs.3,000 crore under MSS) and Rs.2500 crore (out of which Rs.2,000 crore under MSS), respectively. The cut-off yields for 91-day and 364-day T-bills were 7.52 per cent and 7.60 per cent respectively.  

Secondary Market

Inter-Bank call rates ended at 7.75-8 per cent, up from the previous week’s close of 6.50-6.75 per cent; intra-day it touched a high of 9.25-9.75 per cent due to acute shortage of funds. Over the weekend, the outstanding repo balance was Rs 30,655 crore suggesting a tighter-than-expected cash conditions. The cumulative CBLO volumes for the week rose to Rs 1,41,259.65 crore from Rs 1,36,058.85 crore. The overnight weighted average yield was higher at 7.65 per cent against 5.90 per cent in the previous week. The 10-year slipped to the lowest in two weeks, to 7.87 per cent in line tracking US yields, which hit 2-year lows.

At the weekend repo auction, 28 banks/primary dealers (PDs) accessed the repo window for Rs 28,000 crore. Part of the tightening was triggered by arbitrage opportunities that came up on high call rates as it touched nine per cent, throwing up an arbitrage opportunity for banks. Another small part of the repo access also stemmed from redemption of bulk deposits by corporates. The tight situation pushed up the yields at the weekly treasury bill auctions. The yield on the 91-day T-bill rose to 7.51 per cent. However, the tightening ensured that the ten-year weighted average yield to maturity (YTM) remained unchanged at 7.94 per cent, as in the previous week.

On November 16, the New York Federal Reserve carried repurchase operations of over $28 billion. Of these, at least $3.7 billion was in the form of repurchase of mortgage-backed securities. But the Fed’s infusion has conveyed the impression that liquidity support would continue for some more time and interest rates would be allowed to soften, despite financial market troubles. As a result, inflows into the domestic markets from foreign institutional investors gathered pace.

Bond Market    

Corporate bonds remained more or less constant and trades were far and few as markets were bereft of cash.  LIC, the government-owned insurer, is bailing out the financially-strapped oil marketing companies by buying up the oil bonds issued to them by the government, though at a discount.  LIC is pretty much the sole buyer of these bonds, confirmed a senior official of Indian Oil Corporation (IOC), the largest government-owned marketing company.

Other financial institutions together buy a minuscule amount of the bonds on sale by IOC and the other two oil-marketing companies, Hindustan Petroleum Corporation Ltd (HPCL) and Bharat Petroleum Corporation Ltd (BPCL). These bonds are issued by the oil marketing companies to compensate for charging consumers less than market price on petroleum products like fuel, LPG and kerosene.  

Power Finance Corp is tapping the market by the issuance of floating rate bonds to mobilise Rs 100 crore through book building, to be linked to 1 yr Gilt yield for 10 years. The bond has been rated AAA by crisil and icra.

Foreign Exchange Market

Oil companies’ rush to take advantage of the reversal in oil prices marginally pulled down the rupee. The rupee dropped to Rs 39.35 against the dollar, as PSU oil companies took advantage of the firm exchange rates.

According to bankers, a firm rupee was far from over. This was evident from the softening forward premia. Forward premia for one month was down to 1.3 per cent. Three, six and 12-month premia were down to 1.42, 1.43 and 1.17 per cent respectively. The drop in premia at the long end was partly led by exporters and foreign direct investors resorting to long-term hedges.

After a choppy week, the rupee once again ended at 39.33/$, the same levels where gains were capped in the preceding week. The unit dipped to as low as 39.49 in the first half of the week but high dollar levels were too hard to resist for exporters and the rupee gained to as high as 39.28 mid-week. Once again, a wave of suspected bids by state-run banks along with strong dollar demand from oil companies pushed back the rupee. Forward premia edged up, leaving absolute dollar levels higher. Annualised levels were up by almost 30 bps.

The yen strengthened against all 16 of the most-traded currencies, rising beyond 110 per dollar for the first time in 1 1/2 years, as investors reduced holdings of higher-yielding assets bought with loans in Japan .  The currency rose as much as 3 per cent versus the Australian dollar and 1.3 per cent against the euro as speculators retreated from so-called carry trades. The appreciation of the Japanese yen beyond 110 a dollar is set to worry Indian companies, which have borrowed in the Japanese currency. The yen has risen by a sharp 11.27 per cent since June 2007 to 109.29 a dollar, which is seen as a case of dollar depreciation rather than appreciation of the Japanese currency. A large part of the incremental overseas borrowings by Indian companies in over more than a year has been in yen-denominated loans and the foreign currency risk is hedged at around yen 111-112 to a dollar.  A lot of ECBs (external commercial borrowings) has been in yen, based on the assumption that yen would not appreciate beyond 111-112. These companies would be adversely affected if not fully hedged.   

An RBI panel has recommended the introduction of trading in currency futures to enable market participants to better manage currency risk exposures. RBI’s internal working group has suggested setting up of dedicated exchanges for currency futures to ensure that regulatory and supervisory control rests solely with the central bank. It has also suggested initially allowing only resident entities to participate in currency futures without any limits. The group suggested that once the systems were in place, only two categories of entities outside India , foreign institutional investors (FIIs) and non-resident Indians (NRIs), could be allowed in the market only as hedgers through designated banks. It has recommended the imposition of suitable position limits on FIIs and NRIs.               

Commodities Futures derivatives

According to Yashwant Bhave, Consumer Affairs Secretary, the government is likely to decide on setting up the fourth national commodity futures exchange in two to three weeks. The Forward Markets Commission has received the application for setting up the new exchange, and will review the application. Last month, state-run MMTC and IndiaBulls Financial Services announced their intention to jointly set up India ’s fourth commodity exchange. Currently, there are three national commodity bourses, National Commodity and Derivatives Exchange, MCX and National Multi-Commodity Exchange.   

In October, the total turnover of 23 commodity exchanges in the country increased by approximately Rs 59,000 crore compared with that of the previous month. Of this, the Multi-Commodity Exchange (MCX) alone contributed Rs 57,000 crore or 97 per cent. What is more surprising is that just four international commodities — gold, silver, crude oil and lead have laid the foundation of MCX’s stellar performance during the month. The Forward Markets Commission data show that nine international commodities (gold, silver, copper, zinc, lead, nickel and natural gas) traded on MCX contributed 96 per cent of the total turnover between April and October this year. Together these commodities — traded on MCX — recorded a higher turnover of Rs 56,000 crore, contributing approximately 95 per cent of the total growth posted by all the exchanges put together. Market sources are unanimous that by and large, Indian commodity markets may be witnessing concentrated trading in international commodities, without much influence on the prices of these commodities.

After a rally for two months, the much-awaited downturn in gold prices has taken place. Standard gold in the domestic markets has dropped by Rs 340 per 10 grams in last one week to Rs 10,315, while silver has plunged Rs 1,000 per kg to Rs 19,750 on 14 November 17, 2007. London spot gold has fallen over 6 per cent from an intra-day high of $848 an ounce on November 7 to $791 an ounce on November 17, 2007. Gold ended the week with a gain of $26 an ounce.

Gold prices have jumped 15 per cent during this third quarter and it is the most since 1999. The yellow metal has climbed 27 per cent this year. Since the US Fed rate cut in September, prices have gone up by almost 14 per cent. Gold climbed 18 per cent in the past two months as lower interest rates sent the dollar tumbling, and crude prices rose to a record. In October, gold prices gained 6 per cent and have tracked the softening crude prices, which fell from $100 a barrel to $91 a barrel in one week.

The Rubber Board has scaled down the country’s natural rubber production by 4 per cent in 2007-08 as production during the April-September period fell sharply by 62,000 tonnes.  According to the board’s revised estimates, total rubber production will be 819,000 tonnes, against the earlier projection of 874,000 tonnes. Last year, the production was 853,000 tonnes.  Loss in tapping days due to deadly epidemics such as chikungunya and heavy rainfall caused the fall in production during the first half of current financial year. The loss could have been serious but the Rubber Board has projected the production during October-January at 409,000 tonnes, up 32,375 tonnes over last year as an estimated good production, which the main production season world over.  

According to monthly review of the Centre for Monitoring Indian Economy (CMIE) the overall growth in crop production during 2007-08 (FY08) works out to 4.1 per cent owing to rise in kharif crop production and expected good rabi crop.  Production of all major crops is expected to see growth in FY08 and the growth would be more pronounced in case of non-food crops such as oilseeds, cotton and sugarcane. Higher commodity prices and satisfactory rainfall encouraged farmers to bring more area under these crops. This will be the third consecutive year of good growth. After falling by 3 per cent in FY05, crop production was up by 7.4 per cent in FY06 and 3.2 per cent in FY07.

Cardamom prices are likely to witness a sharp rise unless there is a quantum leap in the imports, mainly from Guatemala .    According to the projections by leading growers of Idukki district in Kerala, the prices may touch the Rs 700-750 a kg level by the beginning of next year as arrivals to major auction centers have declined considerably, indicating a fall in production.  

The Forward Markets Commission (FMC) will soon take up the issue of allowing banks to participate in commodity futures as some banks have already started providing finance to commodities that are hedged on comexes.  Federal Bank has financed up to 85 per cent of the price of some of the plantation commodities hedged on comexes. The bank is planning to finance up to 90 per cent. FMC is promoting the idea of aggregators for helping small farmers to hedge their crops on comexes. It also planning to register such aggregators and adopt a liberal regulatory framework.

Corporate Sector

L&T in a consortium with Paul Wurth has bagged a Rs 581 crore order from SAIL for upgradation of its blast furnace at the Bokaro Steel plant on a turnkey basis. The project is to be completed in 21 months.

Network services major GTL has acquired a Malaysia-based network planning and optimization company, ADA Cellworks, in an all-cash deal of $25 million (around Rs 100 crore). The acquisition will conclude in the next few weeks.

Bombay Rayon Fashions is investing Rs 1,100 crore to set up new fabric and garment facilities in Maharashtra . The project will include expansion in weaving, processing, garments and yarn dyeing. The firm has signed a memorandum of understanding with the state government for these plants which will come up in Tarapur, Latur, Islampur, Nanded and Osmanabad.

Information Technology

Global IT giant Google will be investing up to Rs 22 crore in Ventureast TeNet Fund – II, a seed-stage fund that will invest in technology companies trying to establish their foothold. The fund is promoted by Tenet Group of Chennai IIT and Hyderabad-based Ventureast Fund Advisors.

TCS has signed a four-year, $200 million (around Rs 800 crore) contract with the Social Security Institute of Mexico. This is one of the its biggest deals and its first government contract in the region.

A supercomputer from a wholly-owned subsidiary of Tata Sons, Computational Research Laboratories has been ranked fourth among 500 supercomputers the world over. It is one of the most powerful one in the Asia and Asia-Pacific regions.

Telecom

The Department of Telecom (DoT) has announced the introduction of “number portability” in Delhi , Mumbai, Kolkata and Chennai. Under this system, subscribers do not have to change their mobile number it they shift from one operator to another. The facility will be available to mobile customers by the fourth quarter of 2008.

*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.

LIST OF WEEKLY THEMES

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