Current Economic Statistics and Review For the
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Theme
of the week:
Invisible In India’s Balance of Payments – VI
1.Introduction Strong
growth in invisibles balance plays an important role in providing a modicum
of stability to the current account balance, as the invisible balance as
ratio to GDP have witnessed a steady rise but country’s development and
maintenance needs give rise to growing merchandise deficits. As widely
known, for which the current account would have faced unsustainable levels
of deficit. (Annexure1).
Invisibles
comprise: (i) traditional services like travel, transportation, insurance
and new service like software, engineering, financial services, all these
together are broadly known as non-factor services; (ii) transfer payments
mainly covering workers unrequited income remittances; and (iii) factor
income consisting of compensation of employees and investment income from
financial assets. Among
these, non-factor services since the last decades or so have always
exhibited surpluses and smoothened the current account balance to a great
extent which has helped to bridge the ever-increasing merchandise deficit.
Transfer payments mainly consisting of workers remittances are receipts;
their growth has been steady. They are in the nature of one sided
transactions, i.e., transactions which do not have any quid pro quo, such as
grants, gifts, workers remittances etc., and they have shown large
surpluses. Both
the factor incomes, namely, compensation of employees and investment incomes
generally face net outgo. Amongst them investment income or income from
financial assets is the one invisible account, which is always showing large
deficits (Annexure
2); though,
net deficit income as ratio of GDP declined from one per cent in 1989-90 to
0.7 per cent in 2002-03. The nature of persisting deficit under this account
acquires special attention, as it appears important conceptually and
financially. ‘Investment
income’ represents the servicing of capital transactions – (both debt
and non-debt). These transactions are in the form of interest, dividend, and
profit for servicing capital transactions. Interest payments represent
servicing of debt liabilities, while dividend and profit payments reflect
the servicing of non-debt (foreign direct investment and portfolio
investment) liabilities. Investment income payments generally move in tandem
with 2.Income
According to IMF’s Balance of Payment Manual (BOPM-5) Income
covers two types of transactions between resident and non-resident. (i)
those involving compensation of employees, which is paid to non-resident
workers (eg. border, seasonal and other short-term workers), and (ii) those
involving investment income receipts and payments on external financial
assets and liabilities. ‘Compensation
of employees’ comprises wages, salaries and other benefits in cash or in
kind earned by individuals – in economies other than those in which they
are residents – for work performed for (and paid for by) residents of
those economies. Contributions paid by employers on behalf of employees to
social security schemes or to private insurance or pension fund (whether
funded or unfounded) are also included. Here, employees include seasonal or
other short-term workers (less than one year) and border workers, who have
centers of economic interest in their own economies. Investment
income includes receipts and payments on direct investment, portfolio
investment, other investments and receipts on reserve assets. Income derived
from the use of tangible assets is excluded from income. Direct
investment income includes income accruing to a direct investor resident in
one economy from ownership of direct investment capital in an enterprise in
another economy. It can take the form of income from equity or income from
debt. Income
on equity is subdivided into: a)
Distributed income – dividends and distributed branch profits and it may
be in the form of dividends on common or preferential shares owned by direct
investors in associated enterprises abroad or vice versa; and b)
Reinvested earnings comprise direct investors shares’ – in proportion to
equity held – (i) earnings that foreign subsidiaries and associated
enterprises do not distribute as dividends and (ii) earnings that branches
and other unincorporated enterprises do not remit to direct investors.
Reinvested earnings may be calculated as the entrepreneurial income (net
operating surplus )of the direct investment enterprise plus any income or
current transfers receivable minus any income or current transfers payables
Current transfers payable also include any current taxes payable on income,
wealth , etc. Income
on debt consists of interest payable – on inter company debt – to/from
direct investors from/to associated enterprises abroad. Income on
non-participating preference shares are treated as interest income, rather
than dividend income and are included in income on debt. Portfolio
investment income comprises an income transaction between residents and
non-resident and is derived from holding of shares, bonds, notes and money
market instruments and associated with financial derivatives. It is
subdivided into income from equity i.e., dividends and income on debt i.e.,
interest. Other investment income mainly covers interest receipts and payments on all other resident claims (assets) on and liabilities to non-residents respectively. This category also includes, in principle, imputed income to households from net equity in life insurance reserves and in pension funds. 3.Indian
scene (Balance of Payments Compilation Manual, RBI 1987)
Investment income credits cover earnings received by Indian resident
from the ownership of foreign financial assets and debits investment income
cover income paid to non-residents accruing from their ownership of
financial assets in Direct
investment income credits includes current profits remitted by branches of
Indian companies functioning abroad and constitute profits earned during the
year or in the year immediately preceeding. However, receipts of accumulated
profits, identified to have been retained abroad, for a period longer than a
year are recorded in private long-term capital (credit). Dividends remitted
by Indian subsidiaries abroad are included in dividends received on foreign
shares held by residents. Direct
investment income debits represent profits remitted by Indian branches of
foreign companies and dividends paid to direct investors abroad by foreign
controlled Indian Joint-Stock Companies. Remittances of profits by these
branches cover current profits earned during the current year or in the year
immediately preceding it. Retained
earnings of an enterprise are owned by its equity holders: Equity holdings
of an enterprise are held by non-residents. Such retained earnings
reinvested earnings are conceived of as a payment income to foreign
investors and simultaneous reinvestment of that income by foreign investors
in the same resident direct investment enterprise. Retained earnings
accruing to direct investors abroad in the foreign controlled Indian
Joint-Stock Companies are recorded in the revision stage. The debit entry
for such earnings in investment income account is matched by corresponding
entry under credits in the private long-term capital account. Remaining
investment income credit represents receipts in the form of
interest/dividends accruing from ownership of other types of foreign
financial assets such as deposits, loan/overdrafts extended and securities.
A predominant share of investment income receipts is accounted for interest
and dividend earned of foreign currency assets held by RBI. Other
interest receipts comprise: (i) interest earned in loans/overdrafts extended
by Indian individual and non-bank institution to non-resident, (ii) interest
received on loans/overdrafts extended by bank in India to non-resident
banks, and interest received by Indian banks on their deposits with
non-resident banks, and (iii) interest received on holding of SDRs with IMF
and remuneration received on foreign shares held by residents and receipt by
way of taxes and tax refunds on profits, dividends and interest and income
realized by residents on their investment in real estate abroad.. However,
the current scene in investment income had undergone some changes and an
overall summery is given below. Investment
income transactions are in the form of interest, dividend, profit and others
for servicing of capital transactions. Investment income receipts received
on loans to non-residents, dividends/profits received by Indians on foreign
remittances, reinvested earnings of Indian FDI companies abroad, interest
received on debentures, floating rate note (FRNs), commercial papers (CPs),
fixed deposits (FDs) and fund held abroad by authorized dealers (ADs) out of
foreign currency loans/export proceeds, payment of taxes by
non-residents/refund of taxes by foreign governments and interest/discount
earnings on RBI holding of foreign assets. Investment income payments comprise payment of interest on non-received deposits, payments of interest on loans from non-residents, payment of dividend/profit to non-resident share holders, reinvested earnings of the FDI companies, payment of interest on debentures, FRNs, CPs, FDs, government securities, charges on SDRs and others. 4.
Trend in Factor income
‘Factor Income’ under invisibles represents receivables and
payments on account of compensation to employees (wage and salaries) and
investment income receipts and payments. ‘Compensation
to employee’ records wages and salaries received by Indian workers abroad
and that received by foreign workers in ‘Investment
income’ receipts are mainly determined by two-components. First, interest
and discount earnings on RBI investment and second, reinvested earnings of
the Indian direct investment enterprises abroad. ‘Investment income’
receipts rose significantly since the late 1990’s due to building up in
foreign exchange reserves. Foreign currency assets (foreign currency assets
including gold) (FCA) outstanding has been US $ 29 billion as on 31st
March 1998 rose sharply to a sum of US $ 199 billion by 31st
March 2007- a 7-fold increase (Annexure
4) . As against this, investment income receipts
has registered a 6-fold increase from US $ 1.6 billion in 1997-98 to US $
9.3 billion (including compensation to workers) during the decade ending
2006-07. Though there are 9 heads of investment income receipts account, the
major ones are: (i) the income
earnings from RBI investment; and (ii) income from the investment of
reinvested earnings income (which is
included
under investment income from 2000-01). Income
from RBI investment grew from US $ 1,105 million in 1997-98 to US $ 6.640
million in the decade ending 2006-07. Share of RBI investment income, which
was about 71 per cent in 1997-98 rose to 76 per cent in 2000-01, came down
in the next
three
years to about 54-56 per cent mainly due to inclusion of reinvested earnings
under this head from 2000-01 and then rose to 73 per cent in 2004-05; in
2006-07 it was 75 per cent. In
rupee terms as per RBI annual report it rose from Rs. 5,687 crore in 1997-98
to Rs. 35,153 crore in 2006-07. The average foreign currency asset of RBI
bulged from Rs. 96,659 crore in 1997-98 to Rs. 770,814 crore as on 30th
June 2007 (Table 2). Contrary
wise, the income from reinvested earning which was 13 per cent in 2000-01,
rose to 32.4 per cent in 2002-03 and thereafter started declining and was
only 12 per cent in 2006-07. Investment
income payments move in tandem with
Interest
income payments mainly reflect payment of interest on external commercial
borrowings, interest payments on non-resident deposits and reinvested
earnings of the FDI enterprises operating in India and thus interest
payments depend on the level of debt and the interest rate environments;
payment due to reinvestment earnings are influenced by the profitability and
reinvestment decisions of FDI enterprises operating in India. Investment
income payments since 2000-01, to some extent reflects the inclusion of
reinvested earnings of FDI enterprises as per the revised procedure of
recording foreign direct investment in
However,
the interest payment in both cases had been on the decline which is probably
due to the prevalence of low interest regimes in the *
This note has been prepared by R.Krishnaswamy References 1)
RBI
(2008), Invisible in 2)
IMF
(2007), Balance of Payments Statistics Year Book 3)
IMF(2005),
World Economic Outlook, April 4)
IMF(1993),
IMF’s Balance of Payments Manual, 5th edition (BPM5). 5)
United
Nations (2002), Manual on Statistics of International Trade in Services Highlights of Current Economic Scene AGRICULTURE In
order to curb inflationary pressure the central government is considering
re-allocating wheat in place of rice under the Targeted Public
Distribution System (TPDS) and other welfare schemes due to increase in
availability of wheat stocks in the central pool as compared to rice. This
move would allow people to switch to wheat from rice Further; it also has
plans to distribute pulses and edible oil at a subsidised rate. In case of
pulses and edible oil, public sector agencies so far have already
contracted 1.37 million tonnes of pulses and 104,000 tonnes of RBD
palmolein and crude soyabean oil, of which 1.19 million tonnes of pulses
have been arrived and deliveries of edible oil are expected to begin by
the end of May 2008 and distribution would be from the first fortnight of
June 2008. State
Bank of India (SBI) has temporarily suspended new loan applications for
financing farm equipments like tractors and other mechanisation equipment,
as there is large scale of repayment defaults in the farm mechanisation
segment. It has also issued a circular to all branches with immediate
effect, stating that financing of new tractor and farm mechanisation
equipment, including power tillers and combine harvesters had been put on
hold due to very high overdue from borrowers. The
Cabinet Committee Economic Affairs (CCEA) has approved the implementation
of revised Macro Management of Agriculture (MMA) scheme during the XIth
five-year plan (2007-12), as this would bring uniformity and avoid
confusion at the field level. The revised MMA has been earmarked a
tentative outlay of Rs 5,500 crore, which is expected to help farmers to
increase farm productivity by reducing yield gaps. The scheme is based on
district agriculture plans prepared by states and this comprises of 11
sub-schemes related to crop production and natural resource management.
The scheme would merge with other major farm initiatives like National
Food Security Mission (NFSM) and Rashtriya Krishi Vikas Yojana (RKVY).
Domestic
textile firms have asked the central government to impose restrictions on
exports of cotton, in order to keep a check on prices. Rising cotton
exports has resulted in higher prices of cotton in the country. It is
expected that if exports are not regulated, then profitability of the
firms would see a drop of 5-10 per cent.
According to Cotton Advisory Board, (CAB) in the cotton year 2007-08
(August-July) the country is expected to export 8.5 million bales (1
bale=170 kg) of cotton which is over 30 per cent more than the originally
estimated 6.5 million bales and displaying a rise of 46.5 per cent as
compared with last year’s production of 5.8 million bales. Of the total
exports, around 60 per cent of cotton is exported to According
to Spices Board, exports of spices form the country have crossed US
$1-billion mark in 2007-08 by registering an increase of 19 per cent in
terms of volume, 24 per cent in terms of rupee and 39 per cent in terms of
dollar. In 2007-08, 4,44,250 tonnes of spices and spice products have been
exported which valued at Rs 4,435.50 crore (US $101.80 million) as
compared to 3,73,750 tonnes valued at Rs 3,575.75 crore (US $792.95
million) in the previous year. The spices exports, in 2007-08, have
exceeded the target of 3.8 lakh tonnes valued at Rs 3,600 crore (US $ 875
million) as fixed for the year; the achievement has been 117 per cent in
volume, 123 per cent in rupee and 126 per cent in dollar. The Board has
fixed an export target of US $1.2 billion for the year 2008-09. In
2007-08, the export of pepper, chilli, seed spices such as coriander,
cumin, fennel, fenugreek and other seeds have shown a substantial growth
both in volume and value terms as compared to last year. The export of
value added products such as curry powder; mint products and spice oils
and oleoresins have also shown impressive growth during the same period.
However, export of some of the items such as cardamom (large), ginger,
turmeric, celery, garlic and nutmeg and mace have fallen short of last
year’s performance. The
union government has sanctioned Rs 122 crore for cardamom replanting and
rejuvenation schemes within next four years. Of the total amount, Rs 50
crore would be spent in Kerala this year, as it is the largest producer of
the spice. The main purpose of the programme is to increase the annual
production of cardamom in the state from 9,500 tonnes to 24,000 tonnes by
2012. Exports during 2007-08 have been 500 tonnes valued at Rs 24.75 crore
against 650 tonnes valued at Rs 22.36 crore last year, registering an
increase of 11 per cent in value terms. However, the export volume has
declined by 23 per cent. The major importers of cardamom from overseas
market are Unseasonal
rains in Kerala and Tamil Nadu have disrupted supply of copra in the
domestic market even as the season has just begun; owing to which
wholesale prices of copra and coconut oil have shot up the by 50 per cent
from around Rs 4,000 to Rs 6,000 per quintal. It is also cited that strike
by gunny bag workers in Kozhikode, one of the largest copra-producing
centres in south Exports
of grape wine from According
to horticulture department, the coverage under mentha farming in Uttar
Pradesh in 2007 was almost 1-lakh hectares and this year it is pegged at
1.2 lakh hectares, as it provides more profit compared to other cash crops
and takes lesser time for cultivation. It is normally sown during
March-April and is gets ready for harvesting in 70-90 days around
June-July and is extensively cultivated in trai regions of the state. The
government provides credit linked back-ended subsidy of 25 per cent of the
total investment or Rs 1.25 lakh and Rs 5 lakh to small and big mentha
units, respectively. The subsidy has a central and state component of 85
and 15 per cent, respectively. Another scheme gives a subsidy of Rs 11,250
per hectare to mentha farmers for cultivation, subject to the cultivation
of maximum of 4 hectares. Meanwhile, the state government has joined hands
with Lucknow-based Central Institute of Medicinal and Aromatic Plants (CIMAP)
to impart training to mentha farmers and entrepreneurs. CIMAP is
accredited with developing four improved varieties of mentha used in the
country, namely Union
ministry of chemicals and fertilisers in its recent notification has
extended subsidy and exclusive marketing rights to only ten-odd fertiliser
units, producing more than 1 lakh metric tonnes of Single Super Phosphate
(SSP) per year. Of which ten units would not only be eligible to avail
subsidies of Rs 3,658 and Rs 5,630, depending on their usage of domestic
or imported rock phosphate, but also have the rights to market the
fertilisers produced by smaller units under their brand name. This has
drawn hassle among small fertiliser units, which produce capacity of less
than 1 lakh metric tonnes. Industry A
fall in the rate of growth in IIP had seen during March 2008. The growth
in the index of industrial production during March 2008 at 3.0 is only
about one-fifth of that in March
2007 (14.8 per cent). All the three major groups contributed for this
performance. As a result during the fiscal year 2007-08 IIP index rose by
8.1 per cent as compared to 11.6 per cent last year. Mining sector and
electricity sector grew by 3.8 per cent and 3.7 per cent during the month.
The growth of manufacturing sector is at 2.96 per cent during March 2008
has been way below to that of 16.0 per cent recorded last March. Out of
the 17 industries, five industries declined and four industries registered
double digit growth.. As per use-based classification, the sect oral
growth rates in March 2008 over March 2007 are 3.1 per cent in basic goods
industries, 8.6 per cent in capital goods and 3.5 per cent in intermediate
goods. Consumer goods recorded a decline of 0.1 per cent. Infrastructure Riding on the back of good performance of coal, steel 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 a growth of 9.6 per cent during March 2008 as compared to 10.5 per cent in March 2007. This impressive performance exhibited by the core industries in MArch 2008 resulting the core index registering a growth of 5.6 per cent during the fiscal so far as against 9.2 last year. Steel and cement witnessed better performance during March 2008 compared to January 2008 and also March 2007. Inflation The
annual rate of inflation calculated on a point-to-point basis, rose by
8.10 per cent for the week ended May 17,2008 as compared 5.37 per cent as
on May 19,2007. Rise
of 0.5 per cent in the index of Primary Articles group during the week can
be attributed to increase in prices of fish marine, fruits and vegetables,
moong and masur, condiments and spices and gram.. Non-food articles rose
by 0.2 per cent. Mineral prices fell marginally due to fall in prices of
barites. The
index for the major group Fuel, Power, Light and Lubricants rose by 0.4
per cent due to higher prices of coke, furnace oil, naptha and light
diesel oil. Marginal
rise in the price index of Manufactured products due to the increase in
the prices of rice bran oil, skimmed milk, baby food, malted food,imported
edible oil and gur. The
final WPI for all commodities had been revised upward from 224.8 to 226.6
for the week ended March 22,2008. As a result the rate of inflation
calculated on a point-to-point basis stood at 7.85 per cent as compared to
7.02 percent provisional. Linked
CPI (UNME) The
Consumer Price Index for Urban Non-Manual Employees [CPI (UNME)] numbers
on base 1984-85=100 in respect of 59 urban centres and all -India up to
March, 2008 were compiled and released by the Central Statistical
Organisation, Ministry of Statistics and Programme Implementation.
Because of outdated base year and also deployment of field
investigators for collection of price data for a broad based CPI (Urban)
number, the National Statistical Commission in its meeting held on
15.2.2008 decided to: (i) discontinue
the CPI (UNME) and (ii)
adopt link index, based on
ratio method after aggregating the sub group level indices of Labour
Bureau’s CPI (Industrial Workers) using CPI (UNME) weights at
group/sub-group level for all (i)
Compile
linked CPI(UNME) numbers till new series of CPI(Urban) is brought out In
pursuance of the National Statistical Commission’s recommendation, price
collection for CPI (UNME) was discontinued with effect from April 2008.
The linked all- India CPI (UNME) numbers based on sub-group level indices
of CPI (Industrial Workers) using CPI (UNME) weights at group/sub-group
level for all Banking Banks’
Association (IBA), have released the “Code of Banks’ Commitment to
Micro and Small Enterprises (MSE)”. The code reflects the positive
commitment of banks to MSE customers to provide easy, speedy and
transparent access to banking services. The
Government has allowed domestic companies to raise upto $50 million worth
of external commercial borrowings (ECBs) in a year up from $20 million. In
particular, the borrowers in the infrastructure and services sector can
avail upto $100 million from markets abroad. The service sector can bring
in funds for import of capital goods under the approval route. Currently,
services sector borrowers are not eligible to avail ECB under the
automatic route. The new ECB norms are likely to help reverse receding
capital inflows. The spread over Libor has also been relaxed, making it
easier for the SMEs to access the overseas debt markets. The
RBI has issued new draft norms on off-balance sheet exposures to review
the current stipulations and prescribed prudential requirements. These
norms propose modifications in conversion factors, risk weights and
provisioning requirements for specific off-balance sheet exposure of
banks. The new RBI draft guidelines suggest that the banks must compute
their credit exposure through the ‘current exposure method’. The norms
have come in the background of losses reported on forex derivatives by
many banks. The modifications will come into effect from the financial
year 2008-09. The
RBI has reviewed the norms governing the treatment of banks’ investment
in their subsidiaries and associates and the investment by the banks’
subsidiaries and associates in their parent banks. The investments of a
bank in the equity as well as non-equity capital instruments issued by a
subsidiary, which are reckoned towards its regulatory capital as per norms
prescribed by the respective regulator, should be deducted at 50 per cent
each, from Tier-I and Tier-II capital of the parent bank, while assessing
the capital adequacy of bank on ‘solo’ basis under the Basel-I
framework. The
RBI has raised the borrowing limit of the public sector oil companies,
which have been issued oil bonds by the government. Banks can now lend
upto 25 per cent of the banks’ investment limits. In exceptional
circumstances, the banks could even consider enhancement of their exposure
to oil companies in public sector up to a further 5 per cent of capital
funds. The SBI has announced increase in its deposit rate by 25-50 basis points in specific long-term deposit categories. Financial
Sector Capital
Markets Primary
Market The resources mobilised in the primary market during the year 2007-08 grew by about 57.5 per cent with companies raising over Rs 2.08 lakh crore through domestic and overseas offerings. Though both the domestic (IPOs, rights offers, private placements) and the overseas (GDR, ECBs, FCCBs) markets were tapped with equal fervor, overseas flotations were favoured, with funds raised abroad trebling to Rs 31,600 crore this year. The statistics from CMIE shows that the bulk of the funds were raised in the months of June and July 2007; in particular, June 2007 was a frenetic month, with Rs 20,000 crore raised through IPOs of realty majors DLF and HDIL and the follow-on offer from ICICI bank, amongst others. By September, aided by the bull run in the stock markets, companies had already raised close to Rs 30,000 through IPOs, thereby exceeding the amounts mopped up for the full financial year of 2006-07 (Rs 29,000 crore). Piramal
Life Sciences Ltd (PLSL), the demerged research entity from Piramal
Healthcare Ltd, made its debut on the BSE and NSE on May 29,2008, making
it the second pharmaceutical research company to get listed, after Sun
Pharma’s research arm got listed last year. PLSL listed at Rs 300,
touched an intra-day high at Rs 519.80 and low of Rs 100 before closing at
Rs 316.10 on the BSE. On the NSE, the research entity listed at Rs 391,
touched an intra-day high of Rs 519 and a low of Rs 101.10 before closing
at Rs 313.20. Secondary
Market The
secondary market succumbed to selling pressure as weak global equities and
soaring crude oil prices turned the investors cautious. The BSE Sensex
slipped 234 points or 1.41 per cent to 16,415 for the week ended May 30 on
the possibility of a hike in retail fuel prices and its impact on the
spiralling inflation. The BSE Sensex rose in two out of five trading
sessions. The BSE Mid-Cap index declined 176.57 points or 2.55 per cent to
6,760.54. The BSE Small-Cap index slumped 384.39 points or 4.51 per cent
to 8,133.04. Even, the Nifty lost 76.45 points or 1.54 per cent to
4,870.10 during the week. Among
the sectoral indices of BSE, IT stocks continued their gains with 6.98 per
cent on slipping rupee against dollar. The rising inflation and higher
interest rates were responsible for the poor performance of reality index
which slipped by 6.68 per cent, followed by bankex, PSU, consumer durables
and auto by 6.29 per cent, 5.91 per cent, 5.75 per cent and 5.72 per cent,
respectively. Foreign
institutional investors (FIIs) were net sellers pulling out $1.2 billion
(over Rs 5,000 crore) during May. This was the fifth-highest monthly
outflow in history that came on the back of a weakening rupee, rising
crude oil prices and a sliding market. The lacklustre performance of the
equity markets coupled with the depreciation of the rupee was a major
dampener on trading sentiment of these investors, who turned extremely
risk averse in 2008. As possibilities of a On May 26,2008, market regulator Securities and Exchange Board of India (SEBI) has proposed a maximum post-issue capital of Rs 25 crore for companies to be eligible to participate in the proposed SME (Small and Medium Enterprises) exchange. It has recommended a minimum investment size of Rs 5 lakh in order to have only well informed and financially sound investors at the time of the IPO.“To facilitate retail participation in SMEs for investors having high-risk appetite, specific allocation through mutual funds may be permitted,” said a SEBI discussion paper on developing a market for SMEs. For the secondary market too, SEBI has prescribed a minimum trading lot worth Rs 5 lakh so that smaller retail investors are not drawn in. The regulator has also proposed only approved merchant bankers for exclusively catering to the needs of the SME companies during the IPO. Merchant bankers/underwriters to the issue may also have to compulsorily act as market makers for the company. The existing Disclosure and Investor Protection (DIP) Guidelines “may be completely relaxed for SMEs” On
May 30, 2008, SEBI simplified norms for registration of foreign
institutional investors (FIIs) and sub-accounts. In addition, it decided
to accord FII status to asset management companies promoted by
non-resident Indians (NRIs) provided they do not invest in
"proprietary funds". Investment managers, advisors or
institutional portfolio managers in the NRI category would also be
eligible to be registered as FIIs under similar conditions, FIIs have also
been permitted to invest in collective investment schemes. A track record
of profits of at least $50 million in the three years preceding the
application has also been mandated. Individuals who have not been Indian
citizens and are seeking sub-account status must have a net worth of over
$50 million. In
a major relaxation of overseas borrowing norms, the government has made it
easier for domestic companies to raise external commercial borrowings (ECBs)
and repatriate larger chunks of these funds to Derivatives Despite
overselling signals, wide bearspreads offer better risk: reward ratio.
The settlement has been accompanied by a volume surge and a rise in
volatility as prices showed a bearish trend. Carryover has been good and
the market is intriguingly poised at the beginning of the June settlement.
Volumes
were high on settlement day and there was a strong carryover trend, prices
were low. prices rose a little, volumes dropped sharply in the F&O
segment. The FII dominance of
F&O open interest (OI) is coupled to a trend of continued selling by
them in the cash segment. Carryover was excellent with nearly Rs 60,000
crore of OI when settlement ended. The Nifty closed at 4870 in cash while
the June and July contracts were settled at 4850 and 4847 respectively.
The Bank Nifty closed 6584 while the June contract was settled at 6538.
The CNXIT closed at 4688 while the June contract was settled at 4634. The
volatility as measured by the VIX spiked beyond 34, an oversold level, as
the Nifty dropped to 4800 and then the VIX eased to a neutral value of 26.
This is partly due to the settlement situation but it also suggests that
volatility expectations are down. The PCR in index options as well as in
the overall market is quite high, In terms
of OI, the June Nifty PCR is 1.96 while the July +August OI is 1.68. While
the far + mid OI is actually on the low side for this early in the
settlement, the June OI is quite high at 32 per cent of all Nifty OI. Government
Securities Market Primary
Market On
May 28, 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 7.48 per cent and 7.53 per cent, respectively.
Five
State Governments auctioned 10-year paper maturing in 2018, through an
yield based auction using multiple price auction method on May 27,2008, at
cut-off yields ranging from 8.39-8.68 with the lowest for Uttarakhand and
the highest for Jammu&Kashmir. RBI has set the underwriting commission
cut-off rate at 11.85 paise per Rs.100 for underwriting commission payable
to primary dealers in respect of the auction of West Bengal State
Development Loan. Secondary
Market Inter-bank
rates quoted well above 7-7.1 per cent over the week. The rates touched a
high of 8.25 per cent on account of liquidity constraints brought about by
the CRR rate hike taking effect and treasury bill/bond auctions. Pressure
on call rates has also been experienced, as banks appeared to be covering
products well in advance even as traders hoped that government spending at
the start of the new month would help shore up cash. At the LAF, the RBI
absorbed an average of Rs 305 crore through its reverse repo window and in
turn, infused an average Rs 9,727 crore through the repo window. The
repurchase window implied liquidity support to banks and primary dealers.
Bond yields continued to upsurge on the back of inflation worries and
tightening liquidity with the exit of FIIs. The yield on the 8.24 per cent
2018 bond moved in a range of 8.03-8.11 per cent over the week
The
market did not witness price movements in the ten-year benchmark security
of 8.24 per cent 2018. While the yield on the ten-year benchmark closed
flat at 8.09 per cent, the 7.59 per cent 2016 and 8.33 per cent 2036
papers witnessed a fall in prices by 25-30 basis point. However, there was
not much movement in short-term bonds and treasury bills.
On
May 31,2008, RBI proposed to increase the provisioning requirements for
banks for off-balance sheet items such as forex and interest-rate
derivatives and gold trading, in a move that may take some sheen off
derivative deals. Higher provisioning will make bankers cautious while
hawking derivatives, which have been the source of growing controversy
between some banks and companies, since they will now be required to set Bond
Market In
order to provide a breather to the cash-strapped oil marketing companies,
the RBI has decided to allow trade in oil bonds via special market
operations, subject to a ceiling limit of Rs1,000 crore per day. The RBI
has also opted to provide much needed foreign exchange to the
oil-marketing trio of Indian Oil (IOC), Bharat Petroleum (BPCL), and
Hindustan Petroleum (HPCL) to help them tide over the present financial
crunch. According to the central banking authority, the move will help
mitigate the adverse impact of cash-strapped oil marketing companies
across financial markets such as money, forex, credit and bond markets.
For public sector oil companies scorched by the rising crude prices, the
special market operations would improve their access to domestic liquidity
and alleviate the lumpy demand in the foreign exchange market in the
current extraordinary situation, said the apex bank. The RBI will conduct
open market operations (outright or repo at the discretion of the RBI) in
the secondary market through designated banks in oil bonds, held by public
sector oil marketing companies in their own accounts. Oil companies will
also be provided equivalent foreign exchange through designated banks at
market exchange rates. In
a bid to facilitate funds availability to cash-strapped refineries and
simultaneously cut bank depreciation losses, the RBI has capped the
spreads on oil bonds. The RBI has now fixed the marked-to-market spread
for valuation of oil bonds at 25 basis points over sovereign borrowings.
This has been against the Fixed Income Money Market and Derivatives
Association (FIMMDA) spread of 50 basis points. After
maintaining a low profile in the last two years, the securitisation
activity in the country gathered pace in 2007-08.
The factors such as need for banks and non-banking finance
companies (NBFCs) to free up resources, capital and also realign credit
portfolio led to robust growth in the securitisation market.
The total volume of securitisation deals grew by 2.95 times to Rs
68,000 crore in 2007-08 compared with Rs 23,000 crore in 2006-07. The
growth was even lower at around Rs 20,000 crore in 2005-06, according to
the Crisil data. The volume of asset-backed securities, one of the
categories of securitisation, more than doubled to Rs 37,000 crore in
2007-08 as against Rs 17,000 crore in 2006-07.
According
to Prasad Koparkar, head (structured finance rating), Crisil, the
Asset-backed securities (ABS) segment accounted for close to about Rs
37,000 crore in 2007-08, making up over 50 per cent of the total
securitisation volume. ICICI Bank, Tata Motors (vehicle finance) and
Cholamandalam Finance were active in securitising auto and personal loans.
As per some experts, the sharp rise in the securitisation activity,
the banking sector had seen about 30 per cent year-on-year growth in
non-food credit between 2004-2007. The changes in regulatory norms for
securitisation have also affected the activity. The market dipped sharply
in 2005-06 after the Reserve Bank of India (RBI) tightened norms for
booking profits and raised the capital charge for the securitised paper.
Banks and NBFCs have now accepted stringent norms and are back with
large-size deals. After the
ABS category, single-loan assets are the next largest segment of
securitisation. The mortgage-backed (home loan) securities (MBS) market
was quite negligible at Rs 1,500-2,000 crore in 2007-08 compared with Rs
1,000 crore in the previous year Foreign
Exchange Market The
rupee dipped drastically from the relaxation of ECB and FII investment
rules by the government and shot up to Rs 42.47 in reaction to the
announcements. Earlier, persistent pressure from crude prices and
month-end demand threatened to push the rupee past 43 per dollar. The
crude oil being the biggest import item for SEBI
and the RBI announced on May 30, 2008 that the Exchange Traded Currency
Futures would be introduced. This will allow currency derivatives,
hitherto traded over the counter (OTC) by banks, to be traded on the
exchanges. According to the report, initially currency futures contracts
on US dollar-Indian rupee would be permitted and the minimum contract size
of the currency futures contract at the time of introduction would be
$1,000. The size of the contract would be periodically aligned to ensure
that the size of the contract remains close to the minimum size. The
report further specifies the trading hours, the tenor of the contract and
settlement mechanism. The currency futures would expire on the last
working day (excluding Saturdays) of the month. The report also states
that a robust risk management system needs to be in place since
derivatives are leveraged instruments. Accordingly, the report has laid
down a system that includes payment of an initial margin, calendar spread
margin and, extreme loss margin (ELM). The initial margin would be based
on a worst-case loss of a portfolio of an individual client across various
scenarios of price changes and shall be deducted from the liquid networth
of the clearing member on a real time basis. ELM of one per cent on the
mark to market value of the gross open positions should be deducted from
the liquid assets of clearing member on a real time basis. The report also
specifies that the clearing member's networth must be at least Rs 50 lakh
at all points in time. Mark to market gains and losses should be settled
in cash before the start of trading on T+1 day. Other salient features of
the risk management system include collection of margin and enforcement by
the exchange. The Clearing Corporation of India (CCIL) should continuously
conduct backtesting of the margins collected vis-a-vis the actual price
changes and submit a copy of the report to SEBI. The report has placed the
onus of surveillance and disclosures on the exchanges who will act as the
first level regulators. Each client is assigned a client code, which is
unique across all members. The report has specified client level, trading
member level and clearing member level limits which would be applicable in
the currency futures market. The exchanges should design surveillance
systems that will meet the requirements specified by the joint committee. The
government has also relaxed the spread over the London Interbank Offered
Rate (or, Libor), making it easier for companies, especially small &
medium enterprises, to access the overseas debt market. The all-in cost
ceilings have been raised to 200 basis points over the six-month Libor
rate, up from 150 bps, for loans of three- to five-year duration, and to
350 bps from the earlier 250 bps for a loan of more than five years.
Commodities
Futures derivatives The
Forward Markets Commission (FMC) has stipulated that it would recognise
new national multi-commodity exchanges only if they have an authorised
paid-up equity capital of at least Rs 100 crore. At present, there are 22
recognised commodity exchanges, including three national multi-commodity
exchanges. The FMC said there was renewed interest in setting up new
national commodity exchanges and the framework for new such exchanges was
under government's consideration for some time. The new guidelines will be
crucial for the commodity exchange that is being set up by IndiaBulls in
collaboration with MMTC. Indian
commodity futures markets regulator has also said it would seek at least
26 per cent equity in paid up capital by a government company in any
proposed national-level exchange. The
National Egg Coordination Committee (NECC) has said that the concept of
forward trading is a western one and it may not work in Indian conditions
where majority of farmers do not possess holding capacity to derive
benefit from forward trading. While urging the Centre to withdraw futures
in maize and soya, the committee, a known opponent to commodity futures
trading, has blamed it for the unbridled rise in the prices of maize and
soya – the two key commodities widely used in poultry feed manufacture.
The NECC, in a communication to the Union Government, has pointed out that
the system of forward trading may work in developed economies such as the Soaring
prices of a range of commodities — food, energy, metals — have
generated a lot of heated debate around the world. Governments are keen to
rein in galloping prices and their inability to do so is causing
disaffection among the people. The desirability of stubbornly pursuing
policies of neo-liberalism is being questioned, especially because the
market economy has failed to ensure growth with equity. In Multi
Commodity Exchange of India (MCX) has decided to establish MCX Africa, a
pan African commodities exchange in Contrary
to perception about benefits of futures market not reaching farming
community, a study has found that mint growers are getting 67 per cent
higher price for their produce mentha oil after the commencement of
futures trade in this commodity. The average price realised by the farmers
prior to introduction of futures trading in mentha oil was Rs 300-350 per
kg. The realised price has now grown to Rs 500-550 per kg, according to a
study by MCX. The cost of producing mentha oil from mint leaves (pudina)
for the farmer works out to be around Rs 150-200 per kg, Trading
activity in agricultural commodities seems to be unruffled by the recent
ban on futures in potatoes, soya oil, chana and rubber effective from May
8,2008 for four months till September 6 as part of government's measures
to tame inflation. Industry analysts attribute this marked increase in
trading volume in agri commodities to traders and punters swiftly moving
to other commodity futures. Data from MCX, the exchange that commands 80
per cent of the market share in commodity futures trading in Corporate
Sector Commercial
vehicle major Eicher Motors Ltd (EML) and the world’s second largest
truck maker Volvo has signed a definitive agreement to formalise the joint
venture (JV) for trucks in Truck
major Ashok Leyland has announced the legal formation of three joint
venture companies with Nissam Motor Company for light commercial vehicle (LCV)
business in Yash
Birla Company (YBG), the Rs 2,300 crore conglomerate with business ranging
from auto to power, is diversifying into solar power business. The company
is set to sign an agreement with a Brazilian energy company to set up a JV
firm in L&T
has posted a 55 per cent rise in net profit at Rs 2,173 crore for the year
ended March 31, 2008, as compared to Rs 1,403 crore recorded during the
previous corresponding period, on the back of huge orders from the Tata
Tea, the world’s second largest tea company, reported a net profit of Rs
313 crore for the year ended March 31, 2008 where as the same was at Rs
306 crore for the year ended March 31, 2007, a marginal increase of 2 per
cent. External
Sector Exports
during April 2008 was US $ 14400 million as against US $ 10953 million
registering a growth of 31.5 per cent. As against this Imports was valued
at US $ 24274 million as against US$ 17769 million recording a growth of
36.6 per cent. In
rupee terms, while export increased by 24.8 per cent , import flared up by
29.7 per cent. As
a result trade deficit was estimated at US $ 9874 in April 2008 million
higher than the deficit at US $ 6817 million during April 2007 Oil
imports were estimated during April 2008 US$ 8029 million
and non-oil imports at US $ 16245 million was 46.2 per cent and
32.3 per cent higher than that in last year Telcom
The
TRAI has initiated a consultation process to create a revenue share
structure between the value added services (VAS) providers and the mobile
access service providers. The TRAI has sought to know approach for the
growth, regulatory guidelines and terms and conditions in respect of
licensing and provisioning of VAS. Information
Technology The
country’s two largest software exporters, Infosys and Wipro technologies
have anticipated that wage pressures might decrease their margins and
prevent them from maintaining their competitive advantage. Infosys, in its
recent annual filing to American market regulator Securities and Exchange
Commission (SEC), has stated that the wages in
*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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