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Current Economic Statistics and Review For the
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Theme
of the week:
Importance of Invisibles in India’s Balance of Payments*
1.
Introduction Since
the eighties, a large number of developing countries have ushered in an era
of liberalisation of their international transactions in invisibles for
making their service sectors more efficient. While some countries have
followed unilateral efforts to overcome the barriers to international trade
in invisibles, others have pursued a multilateral process of liberalisation
to establish a free and equitable global order for trade in services. Concerted
efforts at progressive liberalisation of international trade in services on
a multilateral basis were started with the beginning of Uruguay Round of the
General Agreement of Tariffs and Trade (GATT) in 1986, which culminated in
to the General Agreement on Trade in Services (GATS) under the aegis of the
World Trade Organisation (WTO) in 1995. Along with economic liberalisation in the early 1990s, a major turnaround in policy was the decision to move to a regime of a stable and realistic exchange rate which meant at that time a drastic downward adjustment in rupee’s exchange rate that was effected in July 1991; this provided the first step in the liberalisation of invisibles trade. While a transitional system of dual exchange rate was followed during 1992-93, the market-based exchange rate regime was set in motion in March 1993. Norms for foreign direct investment (FDI) and portfolio investment by foreign institutional investors (FIIs) on the capital account were substantially watered down, resulting in substantial relaxations in the exchange control procedures for invisible transaction. In
India’s BoP, invisibles transactions have recorded in pursuance to the
guidelines given in the 5th edition of IMF’s, BoP manual 1993,
with minor modifications to adopt to the specifics of the Indian situation;
these modifications are enumerated in the RBI’s BOP manual 1993. Indian external sector, in
recent times, has witnessed a distinct feature in the form of huge and
steadily rising invisible surpluses. These surpluses are indeed a source of
comfort for the external sector, though the current account remains in
deficit due to the burgeoning merchandise deficit. This is not surprising
for a developing economy like 2.
Collections, Compilation and Dissemination of BOP Data In
RBI publishes these data on a quarterly basis and on a fiscal year basis. The data are published on gross credit/debit basis as also on a net basis. Key
Concepts i) BOP A balance of payments statement is essentially a double entry system of record for a given period of an economy's two-way international transactions in the form of goods and services, receipts and payments of incomes, transfers without quid pro quo and financial assets and liabilities. With a view to standardising the concepts and definitions, classificatory schemes and conventions have been applied in the compilation of balance of payments statistics by various countries, the International Monetary Fund (IMF) has prescribed a Balance of Payment Manual. The manual defines ‘Balance of Payment as a statistical statement for a specific period showing economic transactions in goods, services, and income between a resident entity of an economy with the rest of the world’. Transaction is defined as ‘an economic flow that reflects the creation, transformation, exchange, transfer, extension of economic value and involve changes in ownership of goods and/or financial assets and the provision of services of labour and capital’. Principally, the balance of payments (BoP) account records transactions between a resident economic entity and rest of the world. Though the resident status of an individual is conceived in terms of the permanence of interest within a given territory, the rule of thumb adopted for recognition of such permanence is a stay of one year or more. Tourists and commercial travelers, employees of foreign governments and international bodies on a mission of less than one year and seasonal workers from foreign countries are all considered as residents of the economy in which they normally live. Major exceptions to this are the official diplomatic and consular representatives, members of armed forces and other government personnel of a foreign country stationed in a given country who are treated (together with their dependents) as non-residents for the country of their posting or as residents of the country they represent. ii)
Current and Capital Accounts
In
BoP accounting, transactions relating to goods, services and income, and
current transfers constitute the current account, while those
relating to claims and liabilities of a financial nature and capital
transfers and acquisition or disposals of non-produced, non-financial assets
which go to finance the deficit on current account, or to absorb its
surplus, form the capital account. The sum of these current and
capital account transactions together constitutes the basic balance on BoP
and theoretically it should be finally balanced. The double-entry accounting
has been closed with the help of: a) purchase and repurchase from the IMF
essentially as a multilateral agency for the countries’ BoP support, b)
allocation of the IMF’s Special Drawing Rights (SDRs) intended to
supplement the relatively inadequate international reserves and also to
serve as a principle reserve asset of the international monetary system, and
finally, c) the build-up or draw down of the country's own reserve assets.
Incidentally, the objective of SDRs serving as a principal reserve asset was
scuttled in the midst of the controversy regarding the justification or
otherwise for additional reserve assets.
The above is the theoretical position; in reality, due to myriad
discrepancies arising from differences in timing, coverage, valuation and
possible inaccurate estimation (which also includes clandestine capital
flight through various devices), the credit side of the double entry
accounting does not exactly match the sum of all debit entries. Therefore,
the balancing act is performed by an item called “errors and omissions”—
a negative sign in it implying an overstatement of receipts and an
understatement of payments, generally a combination of both, and the
positive sign signifying the reverse. It is very often found that in years
of large depreciation of the rupee, the ‘errors and omissions’ remain
negative. The
item Non-Monetary Gold Movement has been deleted from invisibles in
conformity with IMF Manual on BoP (4th edition) from May 1993
onwards and have been included under merchandise. Similarly, in accordance
with the provisions of IMF Manual on BoP (5th edition), gold
purchased from the government of iii)
Invisibles
As distinguished from the ‘visible’ (merchandise) transactions,
the invisible account encompasses costs of services, income and transfer
payments (i.e., payments and remittances unrequited or without quid pro
quo or without any repayment obligations). As per the IMF manual, there
are 13 non-merchandise current account transactions, which they collect from
the reporting countries and publish them after including its own estimates
in its BOP yearbook. In the regular dissemination of BOP data, the Indian
authorities now provide the 'invisibles’ account data under seven broad
heads grouped under three main headings, viz., non-factor services, income,
and transfers. 3.
Magnitude and Trends in Invisibles Gross
invisible receipts have registered a 16 fold expansion from US $ 7.5 billion
in 1989-90 to US $ 119.2 billion in 2006-07 - a mind boggling US $ 111.7
billion addition during the 17-year period with an average annual growth
rate of 18.3 per cent in nominal terms. As against this, the merchandise
receipts have grown 8 fold from US $ 17.0 billion in 1989-90 to US $ 128
billion in 2006-07 and the average annual growth rate during the period had
worked out to 13.1 per cent. But, what is important is that the share of
invisible receipts in current account has risen from 31 per cent to 46 per
cent during the same period. As against this, the merchandise receipts have
fallen from about 69 per cent to 54 per cent (Table
1). Invisible receipts
as percentage to GDP at current market price rose to 12.5 per cent from 2.4
per cent during the 17-year period. Plan
period-wise; during the 10th plan period (2002-03 to 2006-07) the
growth rate in invisible receipts have averaged 26.7 per cent per annum
compared to 11.5 percent per annum during the 9th plan period.
Invisible receipts as percentage to GDP formed 11.1 per cent during the 10th
plan period compared to a lower ratio to 7.2 per cent in the 9th
five-year plan or 4.7 per cent in the 8th five-year plan (Table
2). The average share of invisible receipts in the current account receipts
has risen to 46 per cent during the 10th five-year plan period
compared to 44 per cent in the 9th plan period or 36 per cent in
the 8th plan period. As a reverse of this, the share of
merchandise receipts fell to 54.3 per cent in 10th plan period
from 57.1 per cent in the 9th plan period and 64.2 per cent in
the 8th plan period. In
Average
annual growth rate for invisible payments has been 22.9 per cent during the
10th five-year plan period compared with 22.2 per cent in 9th
plan and 16.3 per cent in 8th plan period. The invisible payments
accounted for 25 per cent of the current account payments
in the 10th plan period marginally lower than 26 per cent
during 9th plan period. The ratio of invisible payments to GDP
has grown from 3 per cent during 8th plan period to 4.5 per cent
in 9th plan period and to 6.0 per cent during 10th
plan period. During
the 17-year period, the net invisible surpluses have touched US $ 55,296
million in 2006-07 from a deficit of US$ 242 million in 1990-91. As a
percent of GDP the net invisible surpluses have risen to 5.8 per cent in
2006-07 from a deficit ratio of 0.1 per cent in 1990-91. The average ratio
for the 10th plan has worked out to 5.1 per cent compared to 2.7
per cent and 1.7 per cent during the earlier two five year plans
respectively. In
2006-07, invisible surpluses have financed around 84 per cent of the trade
deficit as against 74 per cent in 2000-01. The 10th plan period
on an average has witnessed the invisible surpluses financing trade deficit
to the tune of 98 per cent as against 78 per cent and 73 per cent during the
9th plan and 8th plan period respectively. As against
this, due to faster growth in import during the period merchandise balance
was in deficit and the trade balance widened from US $ 7.5 billion to US $
63.2 billion in the 17-year period. 7.
Composition of Invisibles Invisibles
consist of services, transfers and income. An important feature of services
exports has been a structural shift, driven by emergence of new avenues of
services exports. The services exports have contributed about 66 per cent
followed by 26 per cent by transfers and 8 per cent from income in 2006-07
as against 57 per cent, 38 per cent and 6 per cent, respectively, in 1989-90
to the growth in invisibles. It can be seen from the Table 3 that the share
of service exports receipt in invisible receipts has been widely fluctuating
in the early nineties, has become stable around 50 per cent since 1998-99.
As against this, share of services payments has risen more or less steadily
from a low 46 per cent in 1990-91 to reach about 72.0 per cent in 2006-07. This
has resulted in the share of net non-factor services steadily increasing
during the current decades from about 17 per cent in 2000-01 to about 60 per
cent in 2006-07. Contrarily, net transfers, which was the main component
with a large share in the 1990’s and more or less used to take care the
large negative balances in transfer income, have experienced a steady
decline during the period and have been only 53 per cent in 2006-07.
Interestingly, the negative balance in the transfer income has also
experienced a steady decline during the period and it was only –12.3 per
cent in 2006-07. Table 4 presents the data in Rs. crore of the three components of invisible and its growth and ratio to GDP. Recent
Trends A huge increase of US$ 9 billion in private transfers is a major contributor for large growth in invisibles (US $ 28.8 billion in April-February 2007-08 against US $ 20.2 billion in April-February 2006-07). In this, the inward remittances for family maintenance have risen from US $ 9.9 billion to US $ 13.8 billion, marking a growth of 39.1 per cent. The Invisible payments at US $ 49.7 billion in April-December 2007-08 as against US $ 43.1 billion have registered smaller growth of 15.3 per cent. A sharp increase in the pace of outbound traffic have pushed up travel payments from 4.4 per cent in April-December 2006 to 31.1 per cent during the current year. Rising volume of imports coupled with elevated freight cost due to high level of crude oil prices have resulted in high transportation payments during April-December 2007. Transportation payments during April-December 2007 at US $ 8.1 billion have been higher by US $ 2 billion than that of US $ 6.1 billion spent under this head in April-December 2006.
This
note has been prepared by R Krishnaswamy References: 1.
RBI (2002), Statistics of International Trade in Services, Report of
Technical Group, March. 2.
RBI (1999), Invisibles in India’s Balance of Payments, RBI
Bulletin, April 3.
RBI (2001), Invisibles in India’s Balance of Payments, RBI
Bulletin, February 4.
RBI (2007), Invisibles in India’s Balance of Payments, RBI
Bulletin, February 5.
RBI (2008), Invisibles in India’s Balance of Payments, RBI
Bulletin, February 6.
United Nations (2004), Manual on Statistics of International Trade in
Services
Highlights of Current Economic Scene AGRICULTURE The
central government has withdrawn duty entitlement passbook (DEPB) benefits
on the exports of basmati rice. This move is intended to discourage
exports and improve its domestic market availability. At present, the DEPB
rate on basmati rice is 1 per cent. Apart of its anti-inflationary
measures, the government as on March 31, 2008 has raised the minimum
export price (MEP) of basmati rice to US $ 1,200 per tonne. It has also
banned export of non-basmati rice to conserve domestic supplies and for
reduction of prices. A
recent report on food inflation by Food and Agricultural Organisation (FAO)
along with the European Bank for Reconstruction and Development has
indicated that global agricultural commodity prices, which are rising at a
faster rate for the last two years, are expected to remain high in the
near future. The FAO’s world food price index rose by 23 per cent in
2007, against 9-per cent increase in 2006. Notably, the FAO food price
index for December 2007 was nearly 40 per cent above the December 2006
level, while the increase in December 2006 was only 13 per cent. The rise
was large especially for dairy products, and more recently has affected
cereals and oilseeds. The report has listed three reasons for the global
surge in demand for agri commodities and the consequent price rise,
As
per the price bulletin of US Grains Council India reports for the week
ending on March 28, 2008, coarse grains have recorded a sharp increase in
their prices this year with the hike ranging between 15 to 28 per cent.
Sorghum (jowar) has touched a In
the backdrop of stagnating production and productivity of oilseeds I the
country for the last several years and considering the rapid pace of
increase in the global prices of edible oil, the central government has
slashed duty on import of crude edible oil to zero and has decided to
retain a moderate duty at 7.5 per cent on all refined edible oil imported
into the country.
According
to International Cotton Advisory Committee
(ICAC), cotton harvested area in the US is projected to decline by
15 per cent in 2008-09, in the wake of continuing competition for acreage
with major field crops such as wheat, corn and soyabean. The reduction in
cotton plantings in US could be offset by increases in The
Commission for Agricultural Costs and Prices (CACP) has recommended a
substantial upward revision of statutory minimum price (SMP) for sugarcane
growers at Rs 125 per quintal of cane, apart from a bonus of Rs 30 per
quintal to be paid by the Centre, for a base recovery of 9 per cent in the
2008-09 season, as sugar mills
are not in a position to pay high support prices. It is predicted that
this revised rate would not have a large impact on consumers. According
to National Federation of Cooperative Sugar Factories,
According
to the Coffee Board, coffee exports (permit
issued) in 2007-08 have dropped by 12.09 per cent to 224,966 tonnes as
compared with 255,908 tonnes in the previous year. The export realisation
in rupee terms has gone up by 5.09 per cent at Rs 2,102.31 crore in
2007-08 as against Rs 2,000.47 crore in 2006-07. While, in dollar terms,
it is at US $ 505.10 million, 13.42 per cent more than US $ 445.33 million
during the corresponding period a year ago. In terms of unit value
realisation, Indian coffee fetched Rs 93,450 per tonne against Rs 78,171
per tonne last year. Lower production of coffee and fall in exports during
this financial year, was due to pest attacks and untimely rain in the
growing regions. In the first-three months (January-March) of 2008,
exports have stood at 72,673 tonnes. The
state government of West Bengal has urged the central government to allow
exports of potatoes to According
to statistics made available by Maharashtra State Agricultural Marketing
Board (MSAMB), 160 tonnes of Alphonso mangoes had been exported to the US
last year and this year the target is about 1,500-2,000 tonnes. While 50
tonnes had been exported to The
National Co-operative Development Corporation (NCDC) has disbursed Rs 320
crore for various development programmes in Kerala in 2007-08.The funds
provided are mainly for agro-processing and value addition of farm
produces (Rs 53.71 crore); towards the working capital of State
Co-operative Agriculture and Rural and Development Bank and district
cooperative banks (Rs 220 crore); for the development of agriculture
marketing business by primary level agricultural marketing societies (Rs
2.06 crore); and for setting up of farmers service centres (Rs 16.19 crore). Industry A
substantial fall was registered in the growth rate of index of industrial
production during January 2008 as compared to January 2007. The growth in
the index of industrial production during January 2008 at 5.3 is less than
half that recorded in January 2007 (11.6 per cent). All the three major
groups contributed for this slow down. As a result during the fiscal so
far registered IIP index rose by 8.7 per cent as compared to 11.2 per cent
last year. Mining sector and electricity sector grew by 1.8 per cent and
3.3 per cent during the month. The growth of manufacturing sector is at
5.9 per cent during January is much below to that of 12.3 per cent
recorded last January. Out of the 17 industries, two industries declined
and five industries registered double digit growth.. As per use-based
classification, the sectoral growth rates in January 2008 over January
2007 are 3.5 per cent in basic goods industries, 2.1 per cent in capital
goods and 7.0 per cent in intermediate goods. Consumer goods recorded an
increase of 7.0 per cent. Infrastructure Riding
on the back of good performance of coal, electricity and cement the index
of six core infrastructure industries having a combined weight of 26.7 per
cent in the index of industrial production with base 1993-94 registered an
impressive growth of 8.7 per cent during February 2008 as compared to 7.6
per cent in February 2007. This impressive performance exhibited by
the core industries in
February 2008 resulting the core index registering a growth of 5.6 per
cent during the fiscal so far as against 8.7 last year. All the six-core
industries witnessed better performance during February 2008 compared to
January 2008.. Thus refinery products, electricity, cement, steel and coal
all contributed for the higher rate of growth. Inflation The
annual rate of inflation calculated on a point-to-point basis, rose by
7.00 per cent for the week ended March 22,2008 as compared 6.54 per cent
as on March 24,2007. Index
of Primary Articles group rose by 1.8 per cent to 234.6 from 230.5 for the
previous week. Food articles group rose by 0.1 per cent. Index of non-food
articles rose by 0.4 per cent mainly due to higher prices many oil seeds. The
index for the major group Fuel, Power, Light and Lubricants gone up by 0.1
per cent due to higher prices of furnace oil. Increase
in the prices of many iron and steel items and food products pushed up the
the index of manufactured products which registered an increase of 0.2 per
cent The
final WPI for all commodities had been revised upward from 217.6 to 219.0
for the week ended January 22,2008. As a result the rate of inflation
calculated on a point-to-point basis stood at 4.78 per cent as compared to
4.11 per cent provisional. Banking A
report by the National Bank for Agriculture and Rural Development (NABARD)
has estimated that more than 57 lakh farmers in Chennai-based
Indian Overseas Bank (IOB) plans to acquire Pune-based co-operative bank,
Shree Suvarna Sahakari Bank (SSSB). The board of directors of IOB has
given principle approval for the takeover. The acquisition would help the
bank establish its presence in the western parts of the country. SSSB has
12 branches in Mumbai and Pune. Public
Finance Central
government’s revenue receipts at Rs 4,36,389 crore during April-
February was about 83.1 per cent of the full fiscal year estimates of
2007-08 as compared to 83.1 per cent last fiscal for the period. At this
level revenue receipts was Rs 92,339 crore more than that collected in
2006-07 (April-Feb). Increased tax
revenue at Rs. 3,52,356 crore as against 2,76,932 crore
was the main reason for this substantial increase in revenue
collection. Plan expenditure increase from Rs.1,35,911 crore ( 26 per
cent) in 2006-07 to Rs. 1,71,283 crore and non-plan expenditure witnessed
a growth of 23.3 per cent over the year. During the period fiscal deficit
was comparatively less at Rs. 1,05,402 crore as compared Rs. 1,21,817
crore during Apr-Feb 2006-07. Financial
Market Capital
Markets Primary
Market RITES
has filed a draft red herring prospectus (DRHP) with the Securities and
Exchange Board of India (SEBI) to enter the capital market soon with an
initial public offering (IPO) of 1.4-crore equity shares of Rs 10 each for
cash at a price to be decided through a 100 per cent book-building
process. The company is a multi-disciplinary public enterprise under the
Ministry of Railways, involved in the transport, infrastructure and
related technologies. The issue will constitute 28 per cent of the fully
diluted post-issue capital of the company. National
Hydroelectric Power Corp Ltd (NHPC) plans to launch an IPO in the second
quarter of the current financial year.
NHPC, which has a paid-up capital of Rs 11,500 crore, is likely to
come out with a public offer of 167 crore shares, which would add 10 per
cent as fresh equity besides five per cent disinvestment. The shares would
be face value of Rs 10 each. The issue, which was earlier slated to hit
the market during the previous fiscal, got delayed since the company did
not have the requisite number of independent directors on its board, as
stipulated under the Clause 49 of SEBI’s listing norms. Secondary
Market The
potential losses of corporate India on forex derivatives after the
guidelines announced by Institute of Chartered Accountants of India (ICAI),
strike by some arbitrageurs and jobbers protesting change in tax treatment
of the Securities Transaction Tax (STT) and inflation crossing 7 per cent
led to a decline in the markets. The
Sensex fell over 1,000 points to touch 15,343.12 while the Nifty shed 295
points to 4,647. Overall the market saw net losses after violent
fluctuations. The Nifty ranged between a high of 4947 (Monday) and a low
of 4628 (Tuesday) before closing at 4647 for a net loss of 5.97 per cent.
The Sensex was down 6.28 per cent, closing at 15343 points. All
the sectoral Indices of BSE melt down due to three-year high inflation of
7 per cent. Among the losers, Capital goods were the highest with 12.69
per cent followed by Power at 10.23 per cent. SEBI
has allowed brokers to offer their institutional clients direct access to
the exchange trading system through the brokers’ infrastructure. Named
as the direct market access (DMA) facility, this allows clients anywhere
in the world to access the broker’s trading platform without any manual
intervention. The DMA facility offers advantages such as direct control of
clients over orders, faster execution of client orders, reduced risk of
errors associated with manual order entries, greater transparency,
increased liquidity, lower impact costs for large orders, better audit
trails and better use of hedging and arbitrage opportunities through the
use of decision support tools/algorithms for trading.
SEBI has directed the exchanges to prepare a model agreement.
Based on risk assessment, credit quality and available margins of
the client, the broker will ensure that trading limits/exposure
limits/position limits are set for all DMA clients. The
committee on financial sector reforms headed by Raghuram Rajan has
recommended that provident funds and insurance companies should be allowed
to invest abroad, a move that will require legislative changes. The
panel’s draft report has also called for the introduction of “true
auctions” in securities, reduction in the auction and trading period,
unified disclosure norms for multiple securities, use of call options for
opening and closing price on exchanges and removal of regulatory
restrictions against algorithmic trading.
The committee also suggested the creation of investment avenues,
especially in foreign government securities, to relieve the pressure on
inflows. The committee has said that the SEBI needs to establish a
speedier and new product approval process and introduce new methods of
price discovery, clearing and settlement while the central bank should
refrain from intervening in the foreign exchange market to modulate the
exchange rates. There was no
point in restricting capital flows; the government should instead
liberalise the financial markets and make them more open to foreign
players. The 10-member committee pointed out that domestic hedge funds
with large minimum investment should be recognised and registered. According
to a study by Venture Intelligence, a research service focused on private
equity (PE) and venture capital, PE firms invested about $3.3 billion in
the first three months of this year, $0.6 billion more than in the same
period last year. Venture Intelligence founder & CEO Arun Natarajan
said that last year, PEs competed with the public markets for investments.
If the competition for public markets slows down, then more deals will get
done among companies that see PE as an alternative to raising money from
the markets. The choppy market conditions would not be conducive for
Pre-IPO and PIPE (private investment in public equity) deals in the medium
term. In
a far-reaching suggestion that will elicit support from the political
class, an expert committee has called for the Parliament, through the
finance ministry, to set a specific remit for financial sector regulators
every five years. According to Raghuram Rajan, professor, graduate school
of business, On
April 03, 2008, RBI raised the overall limit for overseas investment by
domestic mutual funds from $5 billion to $7 billion, with a view to
providing greater opportunity for investment overseas. The
assets under management (AUM) of the mutual fund industry witnessed a
sharp decline of 8.93 per cent in March at Rs 5,14,617 crore at the end of
month, according to data from the Association of Mutual Funds in India (AMFI).
Reliance Mutual Fund continued to lead the pack with assets worth Rs
90,937 crore under management. Though the funds assets slipped 2.77 per
cent as compared with February (Rs 93,531.67 crore), it is steadily moving
towards the milestone of Rs 1 lakh crore.
ICICI Prudential Asset Management was the second largest fund house
with AUM, worth Rs 54,321 crore. The fund house saw erosion of 8.36 per
cent in asset value as against Rs 59,277.65 crore in February. According
to Sharekhan Research Analyst Mallika Baheti, mutual funds are sitting on
a huge cash pile of Rs 22,908 crore, which is well placed to maintain
buying interest and propel the sagging market forward. The total cash with
MFs, including cash mobilised through the recently launched new fund
offers (NFOs) to the tune of Rs 6,266 crore, stands at a healthy Rs 22,908
crore. Flush with cash, MFs are well placed to maintain buying interest
and propel the market forward. M-Cril
a credit rating agency is launching a company called Capital Connect in
May that will be a platform for micro finance institutions (MFIs) and
enterprises to register themselves to access financiers who buy shares in
them. An index would update
investors on equity prices on a daily basis. The added advantage of the
exchange is that it offers investors an exit route. The moment the
investor wants to withdraw from the enterprise, the stocks can be sold
once buyers are found through the portal. Derivatives The
Bombay Stock Exchange (BSE) will launch the trading of Sensex-based
futures on the Chicago-based US Futures Exchange (USFE) on April 04,2008.
The contract will have a notional value of $40,000 and a tick value of
$10. The clearing and settlement will take place through The Clearing
Corporation, Chicago, which has a 75-year history of risk management.
Trading on USFE is expected to provide impetus to local Sensex futures
also. The Sensex will be the underlying for the futures contract trading
on USFE and will reflect the exchange rate impact on the Sensex as well. Most
index futures ended the week very close to the closing values of the spot
market. The Nifty was highly
traded and open interest (OI) expanded to healthy levels in April and May
and to acceptable levels in June. The spot closed at 4,647 while the
April, May and June contracts were settled at 4,652, 4,645 and 4,643
respectively. The MiniNifty was settled at 4,653, 4,649 and 4,649 with
decent OI in all three months. Other
indices had no OI except in May and volumes and OI were generally low. The
Junior closed at 7,774 and the futures was settled at 7,750. The Midcaps
closed at 2,341 and it was settled at 2,350. The BankNifty was settled at
6,550 while spot closed at 6,545.15. The CNXIT closed at 3,801.6 while it
was settled at 3,807.35. Government
Securities Market Primary
Market On
April 02, 2008, RBI auctioned 91-day and 182-day T-bills for the notified
amounts of Rs.500 crore each. The cut-off yields for 91-day and 182-day
T-bills were 6.94 per cent and 7.19 per cent respectively.
Under
market stabilization scheme( MSS) RBI will re-issue 6.57 per cent 2011 for
the notified amount of Rs.5,000 crore (nominal) through a price based
auction using multiple price method. The auction will be conducted on
April 10, 2008. RBI
has permitted transfer of /trading in the Power Bonds maturing on October
1, 2012 and April 1, 2013, issued by various States to Central Public
Sector Undertakings (CPSUs) in terms of Tripartite Agreement among 27
State Governments, Ministry of Power, Government of India and the Reserve
Bank of India under One Time Settlement Scheme for dues of State
Electricity Boards with effect from April 1, 2008. It may be recalled
that, as provided in the Tripartite Agreement, these bonds were envisaged
to be released for trading in a phased manner. Eight bonds maturing on
October 1, 2008, April 1, 2009, October 1, 2009, April 1, 2010, October 1,
2010, April 1, 2011, October 1, 2011 and April 1, 2012 have already been
made tradable. Secondary
Market Inter
bank call rates ended at 4.25 - 4.50 per cent, significantly below the
previous close of 8.75 per cent-8.50 per cent. At the LAF window, bids for
reverse repos increased to Rs 37,950 crore from Rs 0.6 crore. The
cumulative CBLO volumes for the week fell to Rs 1,66,555 crore from Rs
1,98,19 crore. The overnight weighted average yield was lower at 4.29 per
cent against 6.95 per cent. Average daily trade volumes were Rs 4,500
crore. Volumes
and open interest are down roughly 50 per cent from last year’s average
levels. The FII contribution dropped last week because operators got into
the act and there was some retail action as well.
FII contribution is still at a historically high level at about 42
per cent of open interest but it has fallen from 46-47. Bond
Market During
the week under review, Uco bank tapped the market by issuing lower tier II
bonds by offering 9.50 per cent for 121 months to mobilize Rs 100 crore.
The issue opened and closed on march 31,2008 and has been rated AA by
Fitch and Care. The
exchangeable bonds (FCEBs) proposed by the government as an additional
instrument for fund-raising by companies overseas may again be put on the
backburner. While the government has already issued the required
notification to make the scheme operational, the Reserve Bank of India
(RBI) is still not in favour of the instrument. In response to the Budget
announcement on exchangeable bonds in 2007-08, RBI has sent a cautionary
note to the government stating that the rules for exchangeable bonds will
have to be aligned with the norms for external commercial borrowings (ECBs).
It had specifically raised issues on transparency on the end use of such
funds, which will be raised by one entity and used by another. The
guidelines issued by the government are silent on the monitoring of the
end use of funds. There were also issues on monitoring of the foreign
direct investment (FDI) cap on companies when bonds raised by one company
got converted into another. While
monitoring of the FDI cap is done by RBI, in case of exchangeable bonds,
RBI had suggested a framework through which the cap could be monitored
automatically if an investor converted the shares.
Foreign
Exchange Market The
rupee hovered around 40 per dollar through the week, aided by the stock
market but was unable to extend gains due to the absence of consistent
support, and also suspected demand from state-run banks that stopped the
rupee from testing the previous week’s peak of 39.80 per dollar. The
rupee rose to nearly 39 before the RBI intervened to push it back down to
40. One-month forward premium rose to 2.70 per cent (2.24 per cent).
Three, six and 12 months premia firmed to 2.60 (2.59 per cent), 2.45 per
cent (2.14 per cent) and 1.73 per cent (1.52 per cent) respectively. According
to Professor Raghuram G Rajan, chairman of a high level committee on
financial sector reforms which set to advice the government, reported
that, restricting inflows of foreign funds is not an effective solution in
the long run to prevent the local currency from strengthening that is
reducing export competitiveness. The committee is of the view that foreign
investment should be utilised in areas where the country needs it most.
This would encourage domestic investors to take interest in those areas,
creating a virtuous cycle. It also feels the central bank should focus
primarily on inflation control and should be willing to revise interest
rates whenever needed. The
committee said that exchange-traded currency derivatives in all currencies
with rupee settlement to be traded on NSE and BSE Exchange-traded interest
rate derivatives using both cash settlement and physical settlement with
trading on NSE and BSE. Commodities
Futures derivatives The
National Commodity and Derivatives Exchange (NCDEX), The
Planning Commission appointed High Level Group on Services has made a case
for allowing banks to participate in the commodity derivatives market.This
is essential to bring depth and liquidity to the commodity derivatives
market. Currently, banks are not permitted to participate in both
commodity derivatives and equity derivatives market. The Panel has also
suggested that the Government may consider allowing banks to participate
in equity derivatives market as it would help them better manage risks in
their equity portfolios and would also enhance market liquidity. The
steep price rise in non-agri commodities internationally may see
correction in the coming months as funds are expected to book profits.
According to Scott Slutsky, managing director of Chicago-based commodity
trading firm Alaron agri
commodities will continue to be driven by strong demand and any
correction, lead by profit booking from funds internationally, may be
short-lived but crude oil, bullion and other metals will see an average
correction of 15-20 per cent by year-end or the first quarter of 2009.
Gold prices have plunged from $1,032 per ounce to below $900 at present.
According to him, profit booking has already started in non-agri
commodities and it will increase in the next couple of months when stocks
are expected to bottom out and value buying emerges.
By January 2009, gold may come down to $750 an ounce while oil
could drop to $75 per barrel. On
the prospects of the Indian commodity market, he said the heavy tax on
lenders would badly affect growth while the Commodity Transaction Tax (CTT),
which was proposed in the budget will not make any major impact.
At
a time when the Left parties are calling for a ban on futures trading in
edible oils, Abhijit Sen, chairman of a committee on futures trading of
essential commodities, says such a ban would not help in bringing down
domestic prices of edible oils. As per him half of our countries edible
oil is imported. In any case, there is hardly any trading in edible oils
in Indian commodity exchanges, which are not imported. Only there is
substantial trading of soyabean oil in the country. Of the annual
consumption of around 11 million metric tonnes (mmt) of edible oil, On
March 31, 2008 the government allowed import of crude edible oil at zero
import duty and refined edible oil at a duty of 7.5 per cent.
The government had suspended futures trading in tur and urad from
January 24, 2007, and in wheat and rice from February 28 last year. Insurance Around
25-30 per cent of corporate insurance policies that come up for renewal on
April 1, 2008 have secured discounts in excess of 60 per cent. The move
follows the Insurance Regulatory and Development Authority (IRDA) allowing
non-life insurance companies full pricing freedom from January 2008. In
addition, local underwriters have managed to offer better rates as global
reinsurers are going through a lean phase and the Indian business is
looking attractive. According to the data released from IRDA, during
April-December 2007, buyers of property insurance covers – corporate and
retail – have witnessed a gross 25 per cent drop in premiums.
Corporate
Sector Bhushan
Steel plans to set up a value-added steel plant with a production capacity
of 0.5 million tonne per annum (mtpa), with a total investment of
approximately Rs 500 crore in Chennai. The company is also investing Rs
26,000 crore to expand its capacity to 12 mtpa by setting up plants in External
Sector Provisional
trade data released by the Directorate General of Commercial Intelligence
& Statistics (DGCI&S) estimated that the country’s export during
February 2008 at $ 14.2 billion against S 10.5 billion in the
corresponding month of 2007, a stupendous growth of 35.2 per cent.
Cumulative value of exports during April-February 2007-08 amounted to
138.4 billion against $112.6 billion , an increase of about 22.9 per cent.
Interestingly in rupee terms the growth was in single digit (9 per cent).
This can be more due to the persistent rise in the rupee value vis-à-vis
US dollars, against which most of the country’s export receipts are
denominated. Another view was the uninterrupted up trend to commodity
price in international market boosted the country’s export price of
petroleum products, gem and jewellery and engineering products. Imports
during February 2008 at $ 18.4 billion were 30.53 per cent higher than the
level of imports valued at $14.1 billion in February 2007. Cumulative
import during the current fiscal so far at $ 210.9 billion was 30.2 per
cent higher than $ 161.9 billion last year. Oil imports in February 2008
at $ 6.2 billion forming about 33.7 per cent of the import bill was 39.5
per cent higher than that of $ 4.5 billion in February 2007. Cumulative
oil imports at $66 billion during the period was 26.8 per cent higher that
of $52 billion in last fiscal. Non-oil
imports at $ 12.1 billion as against $9.6 billion pushed up the first
11-month non-oil import to $ 144.8 billion an increase of 31.8 per cent
higher than the level of such imports at $109.9 billion Such
high level of import and exports resulted in a trade deficit of $ 72.5
billion against 49.3 billion during the first 11 months of the fiscal
years.
Telecom The
government has allocated start-up spectrum to CDMA operator Shyam Sistema
(SS) in three circles, making it the first company to be allocated the
radio frequency for rolling out the services. The company, a joint venture
between In
a major setback to the three big telecom companies – Bharti Airtel,
Vodafone Essar and Idea Cellular – anti monopoly watchdog Monopolies and
Restrictive Trade Practices Commission (MRTPC) issued “notice of
enquiry” against them for allegedly forming a cartel to distort
competition. Admitting a report of MRTPCs investigation unit Director
General of Investigations and Registrations (DGIR) a Bench of the
quasi-judicial body, issued “notice of enquiry” and started judicial
inquiry against these operators for cartelising and increasing prices of
telecom services simultaneously. The MRTPC Bench also directed the three
companies to file their reply before it within four weeks. In the
investigation report, DGIR has said that the three GSM operators, by
colluding, have simultaneously increased the price. The report stated that
despite having different cost factors, structures and profits, they all
fixed the tariff of their local call at Rs 1.20 a minute. The report
further said that though the rental and tariff charges of calls and SMS
fall under the forbearance category under the telecommunications tariff
(23rd amendment) and GSM operators are free to fix any tariff
for their services, “it can not be mere coincidence” that the tariff
revision by them is of the identical scale. Private
infrastructure companies are expected to invest Rs 4,500 – 5,000 crore
for setting up over 11,000 base transceiver stations (BTS), under the
second phase of the Universal Service Obligation Fund (USOF). The
investments will help in improving the tele-density in rural areas, which
at present stands at only 4 per cent, compared with an all BSNL
has signed a partnership agreement with global telecom infrastructure
major Nokia Siemens Networks to expand its broadband coverage to 25,000
villages in the country. Information
Technology The
Cabinet Committee on Economic Affairs approved the proposal to create
Information Technology Investment Regions (ITIRs), which have been
conceptualised to boost the growth of information technology (IT),
IT-enabled services (ITeS) and electronic hardware manufacturing (EHM)
units. These regions could include new integrated townships, special
economic zones and industrial parks. The regions would also have
residential area, social infrastructure and administrative services. These
units will be built through public-private partnership route. State
governments will select the developers through a transparent bidding
process. The government expects such regions to be major magnets for
investment, creating employment opportunities and economic growth in the
area. Simultaneously, it will enable growth of new townships and dispersal
of industry, thus reducing pressure on existing urban centres. TCS
has signed a five-year, multi-million-dollar contract with ArvinMeritor, a
global supplier of integrated systems, modules and components of the motor
vehicle industry. Moser
Baer Photo Voltic (MBPV), a subsidiary of leading optical disc
manufacturer Moser Baer, has entered into a multi-million-dollar agreement
with China-based LDK Solar for sale and delivery of high-quality,
multi-crystalline silicon wafers to MBPV. The partnership comes in the
wake of a rising global shortage for silicon wafers, - a key raw material
for PV cells.
*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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