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Current Economic Statistics and Review For the
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Theme
of the week:
The Indian Foreign Exchange Market: A Synopsis *
In
recent years, the depth and breadth of the domestic foreign exchange market
have improved markedly. It is noteworthy that the increase in foreign
exchange market turnover in The
Indian volumes have thus grown rapidly and the diversity of market
participants widened. The development of the foreign exchange market has
been spurred earlier than the initiation of the financial sector reforms.
Following the balance of payments crisis in 1991, the foreign exchange
market received a shot in the arm, which in turn supported the growth of the
foreign exchange market. The nature of trading shows that it has been
concentrated in the onshore markets and there is a thriving non-delivered
forward market. Also, the ratio of turnover to trade flows remains much
higher than the other emerging market economies implying that the capital
flows play a dominant role in increasing the turnover. Brief
Background The
foreign exchange market in A
further impetus to the development was provided with the setting up of an
Expert Group on Foreign Exchange Markets in The
momentous developments over the past few years have been reflected in the
enhanced risk-bearing capacity of banks along with rising foreign exchange
trading volumes and finer margins. The foreign exchange market has acquired
depth (Reddy, 2005). Factors
Contributing to the Forex Market Growth
Apart
from the liberalized regulatory regime, the growth in the foreign exchange
turnover has been attributed to increased trade in financial assets globally
[ Further,
the portfolio inflows from abroad into the domestic equity markets have also
made a large contribution to the foreign exchange turnover as there has been
a region-wide rally in equity markets and substantial purchases were made by
the non-residents in 2007. In
addition, arising out of the stop and go policy of the RBI on the exchange
rate of the rupee there has been a sharp rise in volatility in the exchange
rate movements, which has increased the arbitrage opportunity as well as
hedging demands. Also, the measures undertaken by the RBI to ensure more
conducive environment for the foreign exchange market transactions for small
and medium enterprises had resulted in sharp increases in the derivatives
positions undertaken by these enterprises. The estimated total exposure of
the banks to the exotic derivatives was of a mind-boggling nature of $ 3.16
trillion as on December 31, 2007. A number of companies have reported losses
for a few quarters in their balance sheets and they have also been engaged
in dispute with banks which have opened up a Pandora’s box. In this
respect, it is worth noting the observations presented in the Report on
Currency and Finance 2004-05 (pp 178): “greater
liberalization enjoins upon banks to act more responsibly so as to instill
confidence in corporate entities undertaking derivatives transactions.
Following the instances of some international banks encountering
compensation claims owing to slackness on their part, there is need for all
banks in Foreign
Exchange Market Turnover The
turnover in the foreign exchange market has increased rapidly from at $
13,06,037 million in 1997-98 to $ 123,70,933 million 2007-08, a jump to a 10
fold over the period of 12 years.
Also,
the turnover as a multiple of overall balance of payments (BOP) has
increased from 3.7 to 9.0during the 12-year period. With the deepening of
the foreign exchange market and increased turnover, income of commercial
banks through treasury operations has increased considerably. Profit from
foreign exchange transactions has accounted for more than 20 per cent of
total profits of the scheduled commercial banks during 2004-05 and 2005-06. As
per the RBI’s Report on Currency and Finance (2005-06), the bank
group-wise distribution of the turnover (as a proportion of the total
turnover for the respective year) reveals that foreign banks account for the
largest share in total turnover, though their share declined from 59 per
cent in 1996-97 to 42 per cent during 2005-06.
The shares of public and private sector banks have increased
correspondingly. The turnovers of some of the new private sector banks, in
particular, have increased sharply during this period.
Ratio
of Forex Turnover to Flows As
shown in the data set presented in Table 1, the capital account transactions
have always lagged behind current account transactions, but the gaps have
steadily fallen and finally in 2007-08, the capital account transactions
have overtaken the current account transactions. The ratio of forex turnover
to capital and current flows shows that the significance of capital flows
has increased more than the current account flows. The ratio of turnover to
current account flows has increased from 5.58 in 1996-97 to 19.80 in 2007-08
while during the same period for capital flows, it has increased from 10.70
to 16.51, as in 2007-08 capital flows have exceeded the current account
flows.
As
per a study of BIS, the ratio of foreign exchange turnover to trade flows
has been plotted for several countries. Table 3 has been constructed using
the figures in a Graph contained in the relevant BIS article (Working Paper
No. 252). It shows that the ratio is the highest for
The
Share of Interbank Turnover The
share of interbank turnover has declined, while that of merchant
transactions has increased over the years. Nevertheless, interbank
operations continue to dominate the market. The merchant segment of the spot
market is generally dominated by the government of India and select large
public sector units, such as Indian Oil Corporation (IOC) and the foreign
institutional investors (FIIs) The increases in the transactions of the
latter segments in recent years are reflected in a rising share of the
merchant transactions vis-à-vis that of interbank transactions (Table 4).
Diversification
of the Turnover The
turnover in domestic market has diversified considerably over the years. The
turnover now includes ‘new’ as well as ‘traditional’ foreign
exchange instruments. The traditional instruments include the spot, outright
forwards and foreign exchange swaps. The new over the counter (OTC)
instruments include currency swaps and options, which have also, began
gaining significance in recent years (Table 5).
Non-Delivered
Forward Market
The
non-delivered forward (NDF) market in Indian rupee has been in existence for
over the last 10 years reflecting onshore exchange controls and regulations.
NDFs are synthetic foreign currency forward contracts traded over the
counter outside the direct jurisdiction of the respective national
authorities of restricted currencies. The demand for NDFs arise principally
out of regulatory and liquidity constraints which face the underlying
currencies. These derivatives allow multinational corporations, portfolio
investors, hedge funds and proprietary foreign exchange accounts of
commercial and investment banks to hedge or take speculative positions in
local currencies. The pricing is influenced by a combination of factors such
as interest rate differential between the two currencies, supply and demand,
future spot expectations, foreign exchange regime and central bank policies.
The settlement is not by delivering the underlying pair of currencies but by
making a net payment in a convertible currency, generally the US dollar.
The
liquidity in the rupee NDF market has improved since the late 1990’s as
foreign residents who had genuine exposure to the Indian rupee but were
unable to adequately hedge their exposure in the domestic market due to
prevailing controls participated in the NDF market. However, with the
gradual relaxation of exchange controls, reasonable hedging facilities are
available to offshore non-residents who have exposure to the Indian rupee,
especially when compared with the hedging facilities provided by some other
competing Asian countries. Besides, the NDF market also derives its
liquidity from (i) non-residents wishing to speculate on the Indian rupee
without any exposure to the country; and (ii) arbitrageurs who try to
exploit the differentials in the prices in the two markets. With
regard to the regulatory aspects on the NDF market, there are no controls on
the offshore participation in the Indian rupee NDF markets. Domestic banking
entities have specified open position and gap limits for their foreign
exchange exposures and through these limits, domestic entities could play in
the NDF markets to take advantage of any arbitrage opportunities.
As
shown in Table 6, the rupee NDF market was the second largest at $ 8,685
million in April 2007; next only to the South Korean won which has the
highest daily average turnover of $ 25,374 million in April 2007 (Table 6).
As per the latest report of the Tokyo Foreign Exchange Market Committee for
April 2008, the turnover in Chinese yuan has exceeded that of South Korean
won followed by Taiwanese dollar and Malaysian ringgit. The turnover in the
Indian rupee has slipped to the fifth position.
RBI
Interventions in the Foreign Exchange Market In
response to the developments in the foreign exchange market, the RBI has
intervened both in the spot and forward market with the purpose of
modulating the currency movements and curbing volatility. The RBI’s
intervention in the foreign exchange market has increased from $ 45.6
billion in 2002-03 to $ 78.2 billion in 2007-08. However, the share of
RBI’s operations as a percentage of total forex turnover has increased
from 2.9 per cent in 2002-03 to 3.8 per cent following the redemption of
Resurgent India Bonds, but thereafter it has slipped to 0.4 per cent in
2006-07, which again rose to 0.6 per cent in 2007-08 given the sharp
volatility in the exchange rate (Table 7).
References: BIS (2008): ‘The evolution of trading activity in Asian Foreign Exchange Markets’, May (Working paper no.252). Mohan R (2007): ‘ RBI (2007): Report on Currency & Finance (2005-06). (2006): Report on Currency & Finance (2004-05).
* This note has been prepared by Piyusha D. Hukeri and accompanying tables have been made by Anita B. Shetty.
Highlights of Current Economic Scene AGRICULTURE Cabinet
has decided to raise the MSP of various kharif crops such as maize, jowar,
bajra, and pulses. However, there has been no official announcement to this
effect yet. The government has decided to raise the MSP of arhar, moong and
urad, by Rs 800 per quintal. Experts opine that this would be one of the
necessary move, as prices are ruling firm globally and rising domestically.
Hike in MSP of pulses would increase production on the assurance of better
prices, this, in turn, would assure availability of pulses in the domestic
market. It is expected that farmers would be encouraged to grow more pulses
and the diversion to soybean and cotton would be checked, at least to some
extent. Acreage under urad has been hit badly for the current kharif season
due to inadequate rains in May (the sowing period). Sowings of pulses upto
August 20, 2008 has registered a decline, of which urad, moong and tur has
seen a dip of 22.62 per cent, 22.07 per cent and 13.63 per cent,
respectively, as compared to last year. The cabinet has decided to raise minimum support price (MSP) of maize by 35 per cent to Rs 840 per quintal for 2008-09 from Rs 620 last year. Poultry industry has reiterated that with the MSP revision, the open market price of maize would rise to at least Rs 1,000 per quintal, owing to which production cost of the poultry feed would go up by 20 per cent, as maize is the main intergradient for poultry feed. This would affect the prices of eggs and chicken.
The
central government has allocated two lakh tonnes of foodgrains (rice and
wheat) to four states such as Kerala, Goa, The
rice procurement as on August 26, 2008 has been reported to be 269.09 lakh
tonnes as against the overall procurement of 251.07 lakh tonnes in the
kharif marketing season of 2006-07, representing an increase of 7.18 per
cent year-on-year. In the month of August, 6.06 lakh tonnes of rice have
been procured compared to 1.09 lakh tonnes during the same month last year.
It is estimated that the stock of wheat as on April 1, 2009, would be higher
at 78.60 lakh tonnes compared to the buffer norms of 40 lakh tonnes.
Similarly, the rice stock would be around 62.43 lakh tonnes as on October 1,
2008, against the buffer norm of 52.00 lakh tonnes. The government has made
an ad-hoc allocation of about 96,500 tonnes of wheat under APL category for
the month of July - September 2008 to various States, with a view to keep
prices of foodgrains under control in the open market during ensuing
festivals. According
to an official of government’s agri-trade promotion body APEDA, exports of
agricultural and processed food products from the country have jumped by 38
per cent to Rs 28,906 crore in financial year 2007-08 as against Rs 20,986
crore in 2006-07, mainly due to a significant jump in shipments of coarse
cereals. While exports of cereals, excluding rice and wheat, have been
five-times higher to Rs 2,979 crore during the same period as compared to Rs
599 crore in the financial year 2006-07. The
total crop size under soyabean is estimated to hit a record high of 11
million tonnes during this season due to the revival of monsoon and the
timely pest control. The area covered under soybean has risen by 8.38 per
cent to 9.4 million hectares this year against 8.68 million hectares around
the same period last year. State
agriculture department of According
to the survey carried out by the Domestic and Export Market Intelligence
Cell (DEMIC) of Tamilnadu Agricultural University (TNAU), onion prices are
expected to rise by Rs 2 - 4 per kg in the coming months owing to poor
supply, delayed monsoons and decreased minimum export price (MEP). They have
even advised farmers to store small onion and sell them during
October-November as its prices are expected to rise in the coming months. It
is projected that if there would be rainfall in Palladam, Tirupur,
Perambalur and Erode areas of Tamil Nadu during the harvest season, the
farmers' prices would increase beyond Rs 15 per kg. As per the estimates of
National Horticulture Research and Development Foundation (NHRDF) India
produced around 7.45 million tonnes of onion from 528,000 hectares in
2007-08, which was 11 per cent higher than that of the previous year. As
per cotton traders and industrial officials, Gujarat is the top cotton
producing state in India, which is likely to register a production of
10.5-11 million bales (one bale = 170 kg) in 2008-09 (October-September),
down marginally from the estimated output of 11.5 million bales in 2007-08,
on account of good rainfall at regular intervals. Acreage under cotton in
the state has gone down to 2.45 million hectares this kharif season from
2.52 million hectares a year ago. Of the total acreage around 1.9 million
hectares is under Bt cotton, while the rest is under Kalyan 797.
It is expected that low coverage won’t impact the output at a
larger scale, but if there would be rainfall during the month of September
in the state, then there might be some revision in these estimates. Excess
rainfall in September is expected to damage the cotton crop. Cotton prices
are expected to open at higher rate during this season, as there is no
carry-forward stock of cotton. At present, there would be around
100,000-125,000 bales of Sankar-6 cotton in the state, which would be sold
by the time new arrivals start. President
of Coffee Exporters' Association reiterated that India's coffee exports are
likely to decline by 8-10 per cent in 2008-09 on account of the rising
domestic consumption coupled with concern about a fall in production due to
inconsistent rainfall. Coffee exports have stood at 210,000 tonnes in
2007-08. It is expected that exports would witness a calm period from
September to December, subdued by increasing domestic offtake. However,
shipments may accelerate after January. According to the data released by
the Coffee Board, the total provisional exports of coffee, including
re-exports, in the first seven months of the calendar year have risen by
about 6 per cent to 150,000 tonnes, compared with the year-ago period. The
central government has planned to halve tobacco production by 2015. The
tobacco industry employs nearly 10 million people, of which government has
targeted to move away at least 7 million tobacco growers from the crop.
According to health ministry estimates, 1 million people die every year in
the country due to tobacco-related diseases. The government has set up a
fund of Rs 5,000-crore to finance tobacco farmers for diversifying tobacco
cultivation into other crops such as oilseeds, soyabean and chillies. As per
this fund each farmer would receive Rs 5 lakh to gradually phase out tobacco
cultivation. Labourers employed under tobacco cultivation would be given
rehabilitation package in two villages they are Kovur in Andhra Pradesh and
Shimoga in Karnataka. Falling
global prices of essential food items has become a big relief for countries
battling with high inflation. Wheat, rice and edible oil prices have begun
moving downwards, as farmers continue to expand area under these crops in
response to high prices. While The
Punjab State Co-operative Supply and Marketing Federation (Markfed) on
August 29, 2008 has signed a Memorandum of Understanding (MoU) with Swiss
agribusiness company Syngenta to open three farmers training centres by the
name of 'Krishi Shakti' at Gidderbaha, Rajpura and Jalandhar, which would
provide quality fertilisers and agro chemicals and training to farmers.
Besides, both of them would also work upon enhancing the production of rice
and wheat in fives districts including Nawanshehar, Hoshiarpur, Ropars,
Jalandhar and Fathegarh Sahib districts. Infrastructure The
Index of Six core-infrastructure industries having a combined weight of 26.7
per cent in the Index of Industrial Production (IIP) with base 1993-94 stood
at 232.5 in June 2008. This industry registered a growth of 3.4 per cent in
June 2008 compared to a growth of 5.2 per cent in June 2007.
During April-June 2008-09, six core-infrastructure industries
registered a growth of 3.5 per cent as against 6.4 per cent during the
corresponding period of the previous year. The
Crude Oil production having a weight of 4.17 per cent in the IIP, registered
a negative growth of 4.7 per
cent in June 2008 compared to a negative growth rate of 1.8 per cent in June
2007. The Crude Oil production registered a growth of (-) 0.2 per cent
during April-June 2008-09 compared to (–)0.7 per cent during the same
period of 2007-08. In
June 2008, Petroleum refinery production
(weight of 2.00 per cent in the IIP) registered a growth of 5.6 per
cent compared to growth of 9.9 per cent in June 2007. During April-June
2008-09, registered a growth of 3.3 per cent compared to 13.3 per cent
during the same period of 2007-08. Coal
production, weight of 3.2 per cent in the IIP, registered a growth of 6.2
per cent in June 2008 compared to growth rate 0.9 per cent in June 2007.
During April-June 2008-09, Coal production grew by 8.4 per cent compared to
an increase of 0.6 per cent during the same period of 2007-08.
In
June 2008, Electricity generation, weight of 10.17 per cent in the IIP,
registered a growth of 2.6 per cent compared to a growth rate 6.8 per cent
in June 2007. Electricity generation grew by 2.0 per cent during April-June
2008-09 compared to 8.3 per cent during the same period of 2007-08.
In
June 2008, a growth of 3.8 per cent in Cement production compared to 6.0 per
cent in June 2007 and grew by 5.8 per cent during April-June 2008-09
compared to an increase of 7.2 per cent during the same period of 2007-08.
Finished
(carbon) Steel production, weight of 5.13 per cent in the IIP, registered a
growth of 4.4 per cent in June 2008 compared to 5.1 per cent (estimated) in
June 2007. During April-May 2008-09, Finished (carbon) Steel production grew
by 4.5 per cent compared to an increase of 5.4 per cent during the same
period of 2007-08. Inflation The
official Wholesale Price Index (WPI) for 'All Commodities' (Base: 1993-94 =
100) for the week ended 23rd August 2008 rose marginally to 240.3
from 240.2 for the previous week.
The
annual rate of inflation, calculated on point to point basis, stood at 12.34
per cent for the week ended 23/08/2008 over previous year as compared to
12.40 per cent for the previous week. The annual rate of inflation stood at
3.94 per cent as on 25/08/2007 i.e. a year ago. The
index for the major group ‘Primary Articles’ declined by 0.4 per cent to
248.5 from 249.6 for the previous week. The annual rate of inflation,
calculated on point to point basis, for ‘Primary Articles’ stood at
10.79 per cent for the week ended 23/08/2008. It was 8.46
per cent as on 25/08/2007 i.e. a year ago.
The
index for 'Food Articles' group declined by 0.8
per cent to 236.9 from 238.8 for the previous week due to lower
prices of fish-marine (13 per cent), fruits & vegetables (2 per cent)
and jowar, arhar and urad (1 per cent each). However, the prices of tea (3
per cent) and eggs and condiments and spices (1 per cent each) moved up. The
annual rate of inflation for ‘Food Articles’ stood at 6.04
per cent for the week ended 23/08/2008. It was 7.77
per cent as on 25/08/2007. The
index for 'Non-Food Articles' group rose by 0.4
per cent to 246.3 from 245.2 for the previous week due to higher
prices of raw silk (14 per cent), raw cotton (3 per cent) and copra (1 per
cent). However, the prices of castor seed and raw rubber (1 per cent each)
declined. The
index for the major group Fuel, Power, Light and Lubricants, weight of 14.23
per cent, remained unchanged at its previous week's level of 376.2.
The
index for Manufactured Products group rose by 0.2
per cent to 207.1 from 206.6 for the previous week. The
index for 'Food Products' group rose by 0.2
per cent to 213.0 from 212.5 for the previous week due to higher
prices of imported edible oil (2 per cent) and oilcakes (1 per cent).
However, the prices of rice bran oil (2 per cent) and cottonseed oil and
rape & mustard oil (1 per cent each) declined.
The
index for 'Paper & Paper Products' group rose by 0.2
per cent to 201.0 from
200.6 for the previous week due
to higher prices of newsprint (1 per cent).
The
index for 'Chemicals & Chemical Products' group rose by 0.5
per cent to 223.2 from
222.0 for the previous week due
to higher prices of acid (all kinds) (10 per cent) and phenol (1 per cent).
Due
to higher prices of cast iron spun pipes (15 per cent), pipes & tubes (6
per cent), lead ingots (3 per cent) and zinc ingots (2 per cent), the index
for 'Basic Metals, Alloys & Metal Products' group rose by 0.4
per cent to 300.4 from 299.1 for the previous week. However, the
prices of zinc (2 per cent) declined. The
index for 'Transport, Equipment & Parts' group rose by 0.2
per cent to 174.4 from
174.0 for the previous week due
to higher prices of bicycles (3 per cent).
For the week ended 28/06/2008, the final wholesale price index for 'All Commodities’ (Base: 1993-94=100) stood at 238.4 as compared to 238.1 and annual rate of inflation based on final index, calculated on point to point basis, stood at 12.03 per cent as compared to 11.89 per cent for the previous week.
Banking The
RBI has held Orissa State Co-operative Bank (OSCB) guilty in the Rs 153
crore bonds/securities scam. The RBI has imposed a penalty of Rs 5 lakh on
OSCB under Section 46 read with Section 47A of Banking Regulation Act, 1949
(ACCS), in view of irregularities in the securities transactions. ARMS,
a pioneering initiative of Asset Reconstruction Company of India (ARCIL),
has recently acquired over Rs 1,200 crore worth of distressed consumer loans
including housing and auto portfolio. This recovery mainly includes housing
loans of Rs 1,000 crore given by National Housing Board (NHB) and ICICI
Bank. Financial
Market 1.
Capital Markets Primary
Market Securties
and Exchange Board of India (SEBI) has notified several amendments to the
process of public or rights issues wherein companies have to obtain final
letters of sanction of loans for the projects or plans for which they are
raising funds (from whom), as per the SEBI’s clarification on its
Disclosure and Investor Protection (DIP) Guidelines. SEBI has also notified
the amendments reducing the time lines in a rights issue and other changes
in DIP guidelines. The regulator has facilitated eligible listed companies
to raise funds from qualified institutional buyers (QIBs) without having to
go through elaborate documentation. For this, it has extended the modified
pricing guidelines for Qualified Institutional Placements (QIP) to
preferential allotments to QIBs, provided the number of QIB allottees does
not exceed five.
The
government is likely to bar foreign venture capital funds (VCF) from
investing in compulsory convertible debentures (CCD) and other quasi-equity
instruments. Officials rewriting the norms governing foreign venture capital
investor (FVCI) plan to restrict investments to pure equity. The
domestic equity markets have outperformed the world markets as a direct
consequence of a swift rise in the bellwether US Dollar Index (USDX) since
July 15 this year (against whom and why). Both equity benchmarks BSE Sensex
and the NSE Nifty have gained 14 per cent and 12 per cent, respectively, as
the USDX rose by a quick 7.83 per cent in over a month. It touched a high of
77.50 on August 26.Compared to this, the benchmarks in Brazil and Russia,
which are predominantly commodity exporters, have declined in the range of
10-21 per cent during the same period. Only the equity benchmark of the FTSE
100 has gained by 4 per cent, while the benchmarks in Hong Kong and The
market started the week with marginal gains on falling crude oil prices and
reports of near-normal monsoon. The market slumped later on expectations of
higher weekly inflation figures. However, the market ended the week on a
buoyant note as inflation fell for the first time in 28 weeks. The BSE
Sensex closed higher by 163 points or 1.1 per cent at 14,565, while the NSE
Nifty rose 32 points or 0.8 per cent at 4,360 in the week. Sensex gained in
three out of five trading sessions. While there was little to cheer about Among
the sectoral indices of BSE, most of the indices performed a slightly better
than the previous week. Interest rate sensitive sectors like banking and
reality have bounced back as inflation eased marginally. IT stocks surged
with rupee depreciating to 17 year low. While volatility in crude oil prices
has put pressure on oil and gas stocks. An
investor-friendly measure adopted by Association of Mutual Funds of India (AMFI)
has put distributors in a spot. AMFI had amended the clause regarding the
no-objection certificate in a bid to empower investors over unscrupulous
distributors. Freedom for investors to choose their distributor will, over
the long run, promote healthy competition as distributors are forced to
raise their service standards to retain customers. Domestic
diversified equity schemes investing in the domestic stock market have
outperformed global funds in one-month returns from July 22 to August 22 as
local indices showed uptrend compared with its global peers. During July 22
to August 22, both Bombay Stock Exchange’s 30-share Sensex (BSE Sensex)
and National Stock Exchange’s 50-share Nifty (NSE Nifty) rose 2 per cent
as crude oil prices eased. In comparison, On
August 26, Standard & Poor’s launched an equity index of 60-listed
Indian companies, including the likes of Infosys, Bharti Airtel and Reliance
Industries, to provide international investors with information on tradable
exposure to the largest and most liquid scrips in the country. R Ravimohan,
Managing Director and Head of South and Radhakrishnan
Nair, executive director of SEBI, has urged the mutual fund industry to
adopt a standardised disclosure format, which should include the amount of
commission they pay to distributors, value of assets and where they were
invested. AMFI
Chairman A P Kurian said mutual funds should be allowed to sell insurance
cover by tying up with insurance companies. According to the proposal, the
insurance premium under these schemes would be collected separately. Foreign
pension funds are making a beeline for Derivatives During
the August settlement week, FIIs eased back derivatives commitments to
around 35 per cent. Last week, they hardly traded cash segment at all in the
first four sessions but they increased derivatives exposure to around 42 per
cent of all open interest (OI). It is worth noting that FII exposure to
index options has also increased in terms of overall exposure. The Nifty was
range-bound during the early part of the week with a negative bias. On
Wednesday and Thursday, the fall was fairly steep. The dramatic surge on
Friday wiped off the initial losses, and helped the index close roughly 1
per cent higher on a weekly basis. The
firm trend in global markets, and a marginal dip in inflation set the tone
for the rally. The expiry of the August series of derivatives contracts went
off smoothly. The volume in Nifty futures and other segments improved
compared to the previous week. The September futures were trading at a
marginal premium of 4 points to the spot. The RSI (relative strength
indicator) is in a fresh buy mode while the faster line of MACD (moving
average convergence divergence) is slightly below the zero mark. The
Nifty September future finished marginally higher at 4370.55 against its
previous week’s close of 4320.15. This, however, came on the back of high
volatility, with Nifty futures touching a low of 4209 points intra-week. The
Nifty September future closed at 4364, marking a premium of four points over
the spot Nifty’s close. But despite all the intra-week volatility, both
Nifty and the overall market enjoyed a better rollover of open interest
positions as compared with last month. The VIX eased down from 36 to 31. 2.
Government Securities Market Primary
Market Three
State Governments auctioned the 10-year paper maturing in 2018 through an
yield based auction using multiple price auction method on August 26, 2008
for an aggregate amount of Rs. 2,059.60 crore. The cut-off yields for the
securities of Mizoram, On
August 27, 2008, Reserve Bank of India (RBI) auctioned 91-day and 364-day
T-bills for the notified amounts of Rs.2,000 crore (out of which Rs.1,500
crore under MSS) and Rs.2,000 crore (out of which Rs.1,000 crore under MSS),
respectively. The cut-off yields for 91-day and 364-day T-bills were 9.06
per cent and 9.18 per cent, respectively. Secondary
Market During
the week, call rates moved in a range of 6.08-9.46 per cent. The government
bonds gave up some of the intraday gains towards the end of trade as fears
of a cut in banks’ statutory liquidity ratio (SLR) prompted investors to
trim their portfolios. The observations in the RBI’s Annual Report for
2007-08 (July-June), which said the regulatory norm on SLRs was distorting
the development of the government securities (G-sec) market, sparked fears
among bond traders. Banks have to invest 25 per cent of their net time and
demand liabilities in government securities and a cut in SLR will mean a
lower demand for gilts. Bonds rallied with the liquidity influx into the
financial markets after redemptions of G-secs. At the liquidity adjustment
facility auctions in recourse to the repurchase window has been at Rs 8,700
crore. However, the recourse to the reverse repurchase window was Rs 1,100
crore as some of the banks parked their surpluses with the RBI. 3.
Bond Market Repurchase
agreements (repos) in corporate bonds may have to wait for some more time as
the RBI wants to examine the legality of allowing clearing houses and
depositories to use the real time gross settlement (RTGS) system. The
central bank is of the view that a committee should first study the matter.
Recently, the finance ministry asked the SEBI and the RBI to expedite steps
towards developing
After
a gap of six years, IOC is tapping the bond market to raise term money at a
fixed rate of 11 per cent for ten years and 11.15 per cent for three years.
Sources said IOC had last raised money from the bond market in 2002. The
issue size is Rs 300 crore, but the company can accept higher subscription
under the greenshoe option. Rating agency Icra has issued AA+ rating for the
programme, while Fitch has assigned AAA for the long-term debt of the
company for a sum of Rs 1,500 crore. This indicates that IOC can raise at
least up to Rs 1500 crore through the current issue. The issue will be open
for subscription on August 28 and close on September 5. During
the week under review, a bank, two central undertakings and a corporate has
tapped the market by issuing bonds. 4.
Foreign Exchange Market The
rupee ended weak against the dollar on August 29 as banks persistently
bought the greenback to meet the month-end demand from oil companies and
other importers. The local currency ended at Rs 43.93 to a dollar compared
with 43.78 on the previous day after moving in a range of 43.70-43.96. A
strong demand for dollars from importers, including the three public sector
oil marketing companies, pushed the rupee below the 44-mark on August 27
after a gap of 17 months. Forward premium for 30 days, on the back of
refinery covers and firmed to 6.58 per cent (5.26 per cent). Premia for 90,
180 and 360 days remained stable at 4.48 per cent (4.66 per cent), 3.93 per
cent (3.73 per cent) and 2.67 per cent (3.11 per cent) respectively. Currency
Futures The
much-hyped currency futures debuted with a turnover of nearly Rs 291 crore,
on the debut day on NSE. Clicking the first trade on the NSE on August 29,
finance minister P Chidambaram said the market regulators should consider
allowing more than one currency for futures and permit FIIs and non-resident
investors to hedge in this market also. At present only US dollar-rupee
futures are allowed and FIIs are barred from this market. He also said After
the BSE, the MCX Stock Exchange (MCX SE) is endeavoring to attract more
members for the currency futures trading on its platform. Promoted by the
country’s top commodity exchange, MCX SE has made it almost free for the
trading and clearing participants, who choose to register with it before
September 6, 2008. The NSE first launched trading in rupee futures on August
29. Both BSE and MCX SE, which were also granted an in-principle approval
from SEBI for the same, are likely to start trading by early September.
While BSE, in its bid to upstage NSE, has asked for 90 per cent less deposit
from trading and clearing members who register with it before September 15,
MCX SE has gone a step forward, seeking ‘no deposits’ from either
clearing or trading participants under its special offer. According to the
scheme, the deposit of Rs 10 lakh for trading and up to Rs 20 lakh for
clearing members would be waived for already-registered members of MCX, BSE,
Foreign Exchange Dealers’ Association of India (FEDAI), National Commodity
and Derivatives Exchange (NCDEX) and NSE, who choose to enroll before
September 6. 5.
Commodities Futures Derivatives Commodity
market regulator Forward Markets Commission (FMC) has scrapped futures
trading in mustard seed, oil and oil cake on Bikaner Commodity Exchange on
account of inadequate infrastructure and back-end support. The regulator has
not renewed futures trading in mustard seed, mustard seed oil and mustard
seed oil cake on Reflecting
the global trend, especially in On
August 27 the pepper futures market dropped sharply on bearish sentiments.
There was not much demand from the international and domestic market. As per
traders, weakening of rupee against dollar and fall in the futures market
has pushed down the domestic parity to become competitive. September
contract fell by Rs 286 to close at Rs 13,950 a quintal below the spot
prices for MG 1 while October and November fell by Rs 291 and Rs 293 to
close at Rs 14,238 and Rs 14,460 a quintal.
After witnessing an
unabated rally within a short period of a month, spot prices of sugar have
now started moving downwards. Sugar prices had surged by Rs. 400 per quintal
during 5 July to 15 August on the back of lower quota and higher future
prices. However, the prices in local markets of FMC
has rejected the demand of traders and exporters to hike the delivery
default penalty, saying that it is working on alternatives to tighten the
system. The Agricultural Produce Marketing Committee (APMC) of Unjha, Insurance The
Life Insurance Corporation, the public sector giant is going for change in
strategy this year. LIC is repositioning some of its plan like Jeevan Anand,
Jeevan Tarang and Jeevan Saral. While SBI Life Insurance is planning a
massive expansion in tier four towns and is lining up a slew of health
insurance plans and micro insurance products. Kotak Life Insurance is aiming
for a 100 per cent growth and has decided to focus on its group business and
capital guarantee products. At the same time Prudential ICICI is planning to
scale up business, while not compromising on service. Corporate
Sector The
largest real estate company by market share DLF Ltd is planning to raise Rs
10,000 crore over the next one year. In the month of July, the company has
announced that it will buy back up to 2.2 crore shares at a maximum price of
Rs 600 per equity share. It has allocated Rs 1,100 crore for the purpose,
and would be financing the same through internal resources. Tata
Refractories Ltd (TRL), a Tata Steel associate, is going to sign a
memorandum of understanding (MoU) for a magnesite mining lease in All
India Origin Chemists and Distributors Ltd (AIOCDL), which has five lakh
chemists as members, entered into alliances with generic major Sandoz and
Mumbai-based Lupin Ltd to distribute their respective drugs. Mahindra’s
Farm Equipment Sector has launched its international range of tractors in MRF
Ltd has become the first domestic company to introduce tyres for helicopters
and aircraft targeted particularly at the defence sector. The defence
ministry has been importing these tyres so far. Leading
paper manufacturer, Ballarpur Industries Ltd (BILT) has reported a 5.1 per
cent rise in its net profit at Rs 73 crore for the fourth quarter ended June
30, 2008 as compared to Rs 69 crore during the same period last year. The
government has approved a total overhaul of the omnibus Companies Act, 1956,
making it far easier for boards of Indian companies to change their
corporate structures without having to seek government approval. The Cabinet
has approved the Companies Bill, 2008, which proposes to limit the
government’s role in India Inc. The Bill will now be introduced in the
upcoming session of Parliament in October. Information
Technology Telecom State-owned
Bharat Sanchar Nigam Ltd (BSNL), Bharti Airtel, Tata Communications
(formerly VSNL) and Saudi Telecom are investing around $400 million in an
undersea cable link – The Europe India Gateway (EIG) cable. Though the
other telecom firms have stakes in other submarine cables, this would be the
first undersea cable owned by BSNL in which the company is investing $50
million. Once the cable is up, it would help BSNL offer more competitive
rates for its broadband and international long distance tariffs. The company
has 25 lakh broadband customers. The EIG cable link, which is an Atlantic
cable link, will be completed by December 2009. International submarine
cables are divided into Reliance
Communication’s FLAG Telecom is also building a $1.5 billion undersea
cable, which will cover 50,000 km across 60 countries. Besides, Tata
Communication is partnering in TGN Intra Asia and TGN Eurasia undersea cable
consortiums, which would be laying 6,500 km undersea cable connecting
South-East Asia and linking Mumbai to major European capitals via
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