Current Economic Statistics and Review For the Week 
Ended October 24, 2008 (43^rd Weekly Report of 2008)

 Theme of the week:

   Extraordinary situations call for equally unusual and unconventional measures so that the disturbed environment is stabilized or at least efforts are made in that direction. This characterizes the stance of the central bankers most affected by the unprecedented US financial crisis which began as problems with the sub-prime mortgages in mid-2007 and which has now engulfed the entire financial system; its contagion effects have not only spread across the global financial markets but have also begun impinging the real economies. The US Fed has been announcing a number of unconventional measures right from July 2007 such as extending credit lines to various market participants, expanding the collateral base to include even junk securities, got involved in bankruptcy/sell-out/restructuring of major financial institutions, and has also worked on a bail-out plan. Even the other countries such as the Europe and UK too have introduced unusual measures (For details see appendix table).   

            The sub-prime mortgage crisis began wherein loans were offered to those borrowers who did not qualify owing to various risk factors such as, income level, size of the down payment made, credit history, and employment status, began to default following the rise in interest rates; housing prices started to drop moderately in 2006–2007 and the spate of default increased substantially in mid-July 2007. Foreclosures (i.e., the process by which a mortgager, failing to repay, losses the mortgaged property) multiplied in the US in late 2006 and triggered a global financial crisis through 2007 and 2008. During 2007, nearly 1.3 million U.S. housing properties were subject to foreclosure activity, up 79 per cent from 2006. Major banks and other financial institutions around the world have reported losses of approximately $ 435 billion as of 17 July 2008. The magnitude of this crisis has been compounded due to multi-layered securitisation (exotic derivatives with underlying as sub-prime mortgages) which until recently enjoyed the highest ratings. Investments in these securities have been spread across the global markets and as these sub-prime borrowers defaulted, the entire edifice built on these precarious securities has collapsed.  

 Until now, ongoing financial crisis has been characterized by contracted liquidity in global credit markets and banking systems triggered by the failure of mortgage companies, investment firms and government- sponsored enterprises which had invested heavily in sub-prime mortgages; the crisis which has passed through various stages has exposed pervasive weaknesses in the global financial system and the regulatory framework.

             The impact on the Indian domestic financial markets, though not as cataclysmic as in the US and other western markets, has been quiet distinct and unsettling. Though not overbearing, there are a number of contact points at which, at the margin, the Indian economy has become sensitive to the developments in the international markets. These are reflected in a number of developments domestically.   

First, notwithstanding the crisis in the US financial markets, the US dollar has continued to strengthen putting pressure on the rupee to depreciate; this has happened despite the easing of international crude oil prices. The rupee has depreciated from Rs 39.98 as on April 2008 to Rs 50.09 as on October 27, 2008, a 20 per cent fall in just six and a half months. Second, with the weaknesses in the domestic financial markets, the foreign institutional investors (FIIs) have turned risk averse, and since the beginning of the 2008, they have been net sellers of $ 12 billion.        

Third, as a result of the above developments, the RBI has been in a tight position as it had to inject dollars as the supply of dollars has dried up. The foreign currency reserves have depleted between end-March and October 17, 2008 to the extent of $ 34 billion. Injection of dollars by the RBI has put enormous pressure on the rupee liquidity, which pushed the call rates higher to touch a multi-year peak of 20 per cent, thus forcing the RBI to ease the situation by injecting huge amounts of over Rs 90,000 crore per day through repo window under liquidity adjustment facility (LAF).

The intense distress and strains in the domestic financial markets have invited a slew of measures particularly to ease the pressure on liquidity, which had resulted in bankers being wary of extending credit to the commercial sector.  

RBI Measures

In order to alleviate the transient pressures on the domestic financial markets, the RBI announced a host of measures on September 16, 2008. First, the RBI said that it would continue to sell foreign exchange (US dollar) through agent banks or directly to augment supply in the domestic foreign exchange market or intervene directly to meet any demand-supply gaps and thus arrest the steady depreciation of the rupee. Second, the interest rate ceiling on various foreign currency deposits by non-resident Indians (NRIs) was increased. Third, scheduled banks were temporarily allowed to avail of additional liquidity support under the LAF to the extent of up to one per cent of their net demand and time liabilities (NDTL) and seek waiver of penal interest, that is, the statutory liquidity ratio (SLR) was allowed to fall below the stipulated 25 per cent. Fourth, the Second LAF was re-introduced to provide additional liquidity. Fifth, the RBI imposed restrictions on Lehman Brothers Capital Pvt. Ltd’s activities in India . Further, Lehman Brothers Fixed Income Securities Pvt. Ltd. was prohibited from declaring any interim dividend or remitting any amount to its holding company or any other group company without prior approval of the RBI. Furthermore, this fixed-income wing of Lehman Brothers was advised not to undertake transactions in government securities as a primary dealer in the primary market.

Sixth, on September 22, 2008, the limit for borrowers in the infrastructure sector for availing external commercial borrowing (ECB) was increased to US$ 500 million per financial year from the earlier limit of US$ 100 million per financial year for rupee expenditure for permissible end-uses under the approval route. The all-in-cost ceiling for ECBs over average maturity of seven years was increased by 50 basis points to 450 basis points over 6-month LIBOR. On October 8, 2008, ECB policy was further liberalised by including development of the mining, exploration and refinery sectors in the definition of infrastructure sector.

Seventh, particularly in the context of the deterioration in the global financial environment, the RBI has issued a slew of blanket as well as sector-specific measures, which were aimed at injecting liquidity. The blanket measures included the reduction of  cash reserve ratio (CRR) by 0.50 percentage point to 8.50 per cent and then topping it with another 1.0 percentage point, thereby injecting a whopping Rs 60,000 crore with effect from October 11, 2008. Further, for the first time, the RBI has in retrospective effect reduced CRR by yet another percentage point (finally to 6.5 per cent) thereby injecting an additional Rs 40,000 crore.

The sector-specific measures consisted of focusing on the liquidity requirements of mutual funds: On October 14, for the first time since the introduction of the LAF, the RBI has conducted a special 14-day repo at 9 per cent for a notified amount of Rs 20,000 crore with a view to enabling banks to meet the liquidity requirements of mutual funds. Banks have utilized Rs 8,800 crore of this facility as of October 24, 2008. Further, this special fixed rate term repo will be conducted every day until further notice up to a cumulative amount of Rs 20,000 crore for the same purpose is exhausted. In addition, in terms of further measures for improving domestic and foreign currency liquidity, banks can avail of additional liquidity support exclusively for the purpose of meeting the liquidity requirements of mutual funds to the extent of up to 0.5 per cent of their NDTL. This repo has been conducted in addition to the existing usual arrangements of repo and reverse repo under LAF. Further, the RBI has allowed banks and FIs to grant loans only to mutual funds against certificate of deposits (CDs) as well as buy them back for a period of 15 days. Again, on October 27, 2008, the RBI shall conduct a yet another fixed rate term repo at 8 per cent against eligible securities worth Rs 11,200 crore due to be reversed on November 10, 2008, with a view to enabling banks to meet the liquidity requirements of mutual funds. 

Eighth, the RBI, at the request of the central government, agreed to provide Rs.25,000 crore to the lending institutions immediately under the Agricultural Debt Waiver and Debt Relief Scheme, as the first installment.

Ninth, banks were allowed to borrow funds from their overseas branches and correspondent banks up to a limit of 50 per cent of their unimpaired Tier I capital as at the close of the previous quarter or US$ 10 million, whichever is higher, as against the earlier limit of 25 per cent.

Finally, in order to alleviate the pressures of the indirect impact of the global liquidity constraint on domestic financial markets reflected by some signs of strain in its credit markets in recent weeks, the RBI has reduced the repo rate under the LAF by 100 basis points to 8.0 per cent on October 20, 2008. In the mid-term review of credit policy announced on October 24, the RBI has, however, held the rates steady much to the disappointment of the market, probably being more sensitive to the over 11 per cent inflation scenario.

The issues

            While the liquidity augmenting measures (both domestic and foreign inflows) were eagerly awaited, the sector-specific measures have raised a number of issues, which have been reviewed below:  

1.The BSE Sensex has collapsed from its all-time high in intra-day trades touched on January 10, 2008 at 21,207 points to 14,499 on September 1, 2008. Following the unfolding of the US financial crisis, the index slipped to 13,531 on September 15, which dipped further to 10,528 points on October 10 as the fears of contagion effects of US financial crisis coincided with concerns about the domestic growth prospects as well as severe liquidity crunch pushed the index sharply lower (Chart 1).  This was followed by a further precipitate fall to 8509 on October 27, 2008. This huge collapse in such a short span has resulted in colossal losses for all classes of investors. FIIs have continuously remained net sellers since the beginning of the current financial year, which has contributed to further worsening of the situation and has adversely affected the sentiments. They have together sold about $ 12 billion worth of equities on the Indian Bourses during the past months or so.  

2.There are two general perceptions regarding mutual funds, which have to be accepted with circumspection. First, mutual funds are essentially for individual investors who are risk averse and equity savvy. Second, mutual funds are less volatile than the equity price indices and hence investments in mutual fund units are more dependable than equities. The following facts place these perceptions in proper perspective

      a)    As per SEBI records as on March 31, 2008, there are 43.30 million investor accounts with mutual funds (it is likely that there may be more than one folio of an investor which might have been counted more than once and actual number of investors would be less) holding units worth Rs. 507,670 crore. Out of this total number of investors accounts, 42.0 million are individual investor accounts, accounting for 96.9 per cent of the total number of investor accounts and contribute Rs. 1,87,464 crore which is 36.9 per cent of the total net assets. Corporates and institutions, who form only 1.16 per cent of the total number of investor accounts in the mutual funds industry, contribute a sizeable amount of Rs. 2,87,108 crore which is 56.55 per cent of the total net assets in the mutual funds industry. The asset under management (AUM) of all the mutual funds has declined from Rs 573,411 crore as of April 30, 2008 to Rs 529,103 crore as of September 30, 2008 – a loss of 7.7 per cent in five months.

b)      Mutual funds, as investors’ outlet, are neither the biggest investor outlets compared with direct investors in equities nor are they managing huge amounts of funds invested in equities; their spread is also not very wide across investor classes and geographic reach. The assets under management (AUM) have increased only recently, that is, after 2006 wherein the ongoing bullish run in the secondary markets led to aggressive marketing by the mutual funds and the AUMs have more than doubled. But, with the emerging weaknesses in the markets, the AUMs have begun to decline as the redemptions have exceeded the inflows in the recent period.  

c)      Further, the mutual funds industry has seen a remarkable shift from being a public sector dominated one to the one where private sector has begun to play a leading role. The private sector includes those with majority and minority foreign ownership and it accounts for over 80 per cent of the total AUMs.

d)      The Securities and Exchange Board of India (SEBI) has made systematic efforts to ensure that the mutual funds do not mislead the investors by showing prospects of continuous huge returns to lure them. For instance, SEBI has made it mandatory that all advertisements should inform investors to the effect that investments in mutual funds are subject to market risks – a statement which has to be disseminated more legibly and clearly than in the past. Hence, the investors are, at least technically, well informed about the possible fluctuations of their returns, which rise during a bullish phase and fall during the bearish period.  

3.The RBI has been injecting huge amounts of funds through the LAF repo window without there being any requirement of end-use; such funds will again willy-nilly circulate in the same money and government securities market. As per the data published by the Clearing Corporation of India (CCIL), foreign banks and private sector banks have been the major borrowers in the NDS-Call money market while nationalized banks have been the major lenders and they contribute to over 70 per cent of lendings and they don’t seem to face so much liquidity problem. And to the extent there is liquidity shortage arising out of huge foreign currency withdrawals to the extent of Rs 95,000 crore will have adverse repercussions on the nationalized banks lendings to the real sectors.

4. The current situation is an extraordinary situation, which will have significant impact on the growth process. In fact, the current slowdown in growth, particularly the growth in the manufacturing sector, began much earlier with the series of monitory measures taken by the RBI including raising interest rates with a view to fighting inflation. With a drastic decline in crude oil prices and dramatic turnaround in other commodity prices in international markets, there is a strong case for the RBI to revisit the tight interest rate regime. It is found that as a result of the earlier dear money policy, the banks have gone into a knot: higher deposit rates followed by firmer lending rates. Unless the RBI takes firm steps like providing signals for unwinding from the above position, banks on their own will not do it and the growth process will remain jeopardized.

5. Second, there appear to be two major flaws in the existing policy of liquidity injection. To begin with the ongoing need of the hour is one of expanding the credit base for productive sectors and not liquidity supply into the money market. Experience has shown that banks do not necessarily use the additional liquidity for expanding their productive credit base, particularly in favour of credit-starved sectors like agriculture, small and medium enterprises and other small borrowers. For it to take place, the RBI has to relate the liquidity injection to its final outcome in the form of credit expansion for the chosen productive sectors.

6. The other flaw in the existing policy concerns the focus on mutual funds and through them, on the capital market. In reality, the capital market should reflect the fundamental growth scenario and not the other way about. If the growth process is expanded and also made more broad- based by expanding the credit base, the overall growth would be accelerated and the capital market would automatically receive an added impetus. The government seems to persist with its capital market centric policies, which are not conducive for retrieving the economy from the current financial crisis.

Conclusion

 It is necessary that the regulators do not resonate the measures adopted in the developed countries such as the US Fed extending credit lines to investment bankers and allowing bailout, buy out and such other measures, which are not in sync with the Indian domestic realities. Further, there is a need to recognize that strengthening of the economy would boost the stock indices and not vice-versa. It is required that the RBI should focus on improving the credit delivery mechanism, easing the liquidity constrains and focusing on widening geographic and functional spread of credit availability. The stock markets only reflect the underlying events; they are not the only indicators of the health of the economy. The regulators should shed their capital market centric view of the markets and should ensure that the credit lines are functioning smoothly for all purposes. It remains to be seen if the RBI would extend the same enthusiasm shown in helping the mutual funds to increasing the spread of geographic and sectoral reach of credit delivery and financial inclusion on a wider scale.

* This note has been prepared by Piyusha Hukeri 

Appendix  

Recent Global Response to Finance Market Turmoil: Country Key Measures  

United States Monetary Policy Easing  

● Federal funds rate target was reduced by 50 basis points (bps) to 1.50 per cent on October 8, 2008.

Liquidity Provisions

● Term funds were auctioned through new channels (TAF, TSLF and PDSLF).

● Eligible collaterals and the eligible counterparties (including investment banks) were expanded.

● The duration of liquidity support and provision of cross-border liquidity through swap arrangements was extended.

● Foreign exchange swaps were established with major central banks for infusing dollar liquidity (made unlimited on October 13, 2008).

● Commercial paper (CP) funding facility was created to provide liquidity backstop to CP issuers.

Financial Restructuring

● Write downs were made by financial institutions.

● Top investment banks – Bear Stearns, Merrill Lynch and Lehman Brothers ceased to exist; Goldman Sachs and Morgan Stanley were converted into bank holding companies.

● 15 banks declared bankruptcy – Washington Mutual Inc. filed for biggest ever bankruptcy after sale of assets of its banking unit to JP Morgan.

● Wachovia, the 6th largest US bank was taken over by Wells Fargo & Co. Recapitalisation of the Financial System

● Fannie Mae and Freddie Mac and AIG were taken over by the US Government in September 2008.

● Emergency Economic Stabilisation Act was passed on Oct 3, 2008.

● Troubled Assets Relief Program, authorising the US Government to purchase of troubled assets of US$ 700 billion was introduced.

● Federal Reserve paid interest on depository institutions’ required and excess reserve balances.

● Limit on deposit insurance was raised at banks and credit unions from US$ 100,000 to US$ 250,000 per account.

● On October 14, 2008, the US Treasury Department of the Treasury announced voluntary Capital Purchase Program. Under the program, the US Treasury would purchase up to US$ 250 billion of senior preferred shares on standardised terms as described in the program’s term sheet.  

United Kingdom Monetary Policy Easing  

● Official bank rate was reduced by 50 bps to 4.50 per cent on October 8, 2008.

Recapitalisation of the Financial System

● After Northern Rock, Bradford and Bingley became the second mortgage lender to get nationalised.

● Government rescue plan of UK £400 billion for financial institutions was introduced.

● The UK government invested as much as UK £50 billion in the banking industry and offered guarantees over as much of UK £250 billion of new bank debt. It further added UK £100 billion to the existing Bank of England short-term loan scheme.

● The UK Government took control of Royal Bank of Scotland and Halifax Bank of Scotland .

Other Measures

● Short-selling was temporary banned in specific stocks.

Other Countries Monetary Policy Easing

● Central banks in the Euro area, Canada , Sweden and Switzerland reduced their policy rates by 50 bps on October 8, 2008.

● Australia reduced twice its central bank policy rate by 125 bps in September-October 2008.

● China reduced its policy rate by 54 bps in September-October 2008. China also reduced CRR by 200 bps in September-October 2008.

● South Korea reduced its policy rate by 25 bps to 5.00 per cent on October 8, 2008.  

Recapitalisation of the Financial System

● Germany bailed out IKB Deutsche Industriebank AG after losses on the US sub-prime investments in June 2008.

● Danish central bank rescued Roskilde Bank and Ebh bank in July and September 2008, respectively.

● German Government rescued Hypo Real Estate Holding AG.

● France and Belgium Governments announced measures to support Dexia SA, the world’s largest lender to local governments.

● Governments of Belgium, the Netherlands and Luxembourg rescued Fortis, a Belgo Dutch banking and insurance group.

Other Measures

● Short-selling in specific stocks in France , Australia , Ireland , Portugal and Korea was banned/restricted.

● Irish government guaranteed deposits from the six major banks.

● Germany guaranteed bank deposits of private savers.

● Australia guaranteed all bank deposits for three years.

● New Zealand guaranteed all deposits for two years.

Source: Websites of respective central banks.

  Highlights of  Current Economic Scene

Agriculture  

Uttar Pradesh (UP) government has increased the state administered price (SAP) of sugar by Rs 15 for all varieties for the 2008-09 sugar crushing season that began on October 1, 2008. SAP for the normal variety has been fixed at Rs 140 per quintal, up from Rs 125 per quintal fixed last year for the early variety, while for other varieties it is at Rs 145 per 100 kg, up from last year’s Rs 130 per 100 kg. The centre has fixed a statutory minimum price (SMP) of Rs 81.18 per quintal for the 2008-09 crushing season.  

National Agricultural Cooperative Marketing Federation of India (Nafed) is likely to purchase about 5 lakh tonnes of bajra (millets) from Rajasthan where the prices of the cereals have plummeted to Rs 640 per quintal as against the government’s minimum support price (MSP) of Rs 840 per quintal. Nafed purchased 9.4 lakh tonnes of foodgrains such as, bajra, guar, jowar, maize, paddy, rice, wheat and barley during 2007-08, valued at Rs 885.85 crore in its outright account besides procuring 24,930 million tonnes of rice valued at Rs 33.38 crore on a tie-up basis.  

The state government of Madhya Pradesh reiterated that scanty rainfall; dry reservoirs and projected low irrigation area have spoiled the plans to bring larger area under wheat during the upcoming rabi season. Malwa region, the main wheat-growing belt of Madhya Pradesh is expected to loose 25 per cent of the wheat acreage in the rabi season due to poor rainfall. Main reservoirs like Tawa, Barna, Bergi, Sanjay Gandhi among others are reported to be dry and the irrigation potential is expected to fall by 300,000 hectares from 700,000 hectares. The state government has revised its rabi target upward by 900,000 hectares from 7.68 million hectares. Among which wheat acreage would remain stagnant at 3.7 million hectares and coverage under gram is expected to go up to 2.8 million hectares from 2.4 million hectares last year.

Output of total oilseeds in the kharif season is likely to be 17.9 million tonnes, higher by 5 per cent as compared to 16.89 million tonnes produced last year. This increase is attributed to the extended rainfall in the month of August that negated the impact of missing rain in the early part of the sowing season in the states of Maharashtra and Andhra Pradesh, the two major oilseeds producing states. Higher global prices of edible oil has influenced farmers to cover maximum area to oilseeds which has resulted into rise in acreage of oilseeds by 4 per cent to 183 lakh hectares, higher than Central Organisation for Oil Industry & Trade (COOIT’s) estimates of 180.86 lakh hectares towards the end of September. Demand of Edible oil slumped by 8 per cent in the first quarter (April-June) to 46.16 lakh tonnes as compared to 50.13 lakh tonnes in the comparable period last year because of high prices at domestic and global level. It is estimated that India ’s edible oil demand is likely to maintain its growth rate at 4 per cent during this quarter.   

Exports of Castor oil is expected to touch a new high of 3 lakh tonnes in the calendar year 2008 spurred by the depreciating value of the rupee against the US dollar and higher crude oil prices worldwide, as castor oil serves as a substitute for most of the petroleum products. Availability of castor oil in India is expected to increase due to bumper crop in the states like Gujarat , Rajasthan and Andhra Pradesh. Exports of castor oil upto September 2008 have raised to 2.37 lakh tonnes over 1.26 lakh tonnes during the same period 2007, while in the month of October exports of castor oil are expected to be at 40,000 tonnes.  

Soymeal exports from the country are expected to shoot up by 14 per cent to 5.5 million tonnes this year though realisation may go down due to recession in international markets. Exports of soyameal in 2007-08 have reported to be at 4.89 million tonnes. Prices of soyameal last year touched to US $492 per tonne, while at present they are ruling at US $300 per tonne.

As per the estimates by cotton advisory board, cotton output during this Kharif season is expected to be marginally higher at 32 million bales (1 bale=170 kg) as against 31.5 million bales last year’s. Inadequate rainfall in the initial sowing period, especially in the central part of the country, led to 5 per cent decline in acreage from 9.55 million hectares to 9 million hectares. Experts are of the view that average yield of cotton would rise by 6-7 per cent to 590-600 kg per hectare as most of the acreage is under Bt-cotton. Cotton consumption by the textile industry is expected to reduce due to severe power cuts in various states and falling demand of cotton textile products in the international markets. Overall cotton exports in 2008-09 are expected to be around 7 million bales as compared to 10 million bales last year.

Tamil Nadu Government has announced a sugarcane State Advised Price (SAP) of Rs 1,050 per tonne linked to a sugar recovery of 9 per cent for 2008-09, this price is more than the Statutory Minimum Price (SMP) of Rs 811.8 per tonne fixed by the Centre, which have remained same for the financial year 2008 season. Last year, the State Government had fixed the cane price at Rs 1,034 per tonne. In addition to it, farmers get an incentive of Rs 9 per tonne for every 0.1 per cent point increase over 9 per cent in sugar recovery.

  Exports of spices during the first half of the financial year have registered a 14 per cent increase to Rs 2,660.75 crore as compared to the same period of the previous year. Quantity of exports during the same period increased by 8 per cent to 2,53,550 tonnes as against 233,825 tonnes a year ago. While, in dollar terms, exports of spices increased by 9 per cent to US $624.15 million during April-September 2008 as against US $570.52 million last year. Spice oils and oleoresins including mint products contributed 40 per cent of the total export earnings. While chilli contributed 22 per cent, followed by cumin (9 per cent), pepper (8 per cent) and turmeric (5 per cent) of the total exports. However, export of pepper and mint products has declined both in terms of quality and value as compared to the previous year.  It is projected that if the current trend remains then exports of spices would meet the annual target of 425,000 tonnes valued at Rs 4,350 crore.

As per the analysis by United Planters’ Association of Southern India (Upasi) reiterated that exports of coffee in the first quarter of the current fiscal (2008-09) displayed an increase in quantity, value and unit value realisation as compared to the same period a year ago. Coffee exports during the first quarter stood at 62,000 tonnes valued at Rs 242.49 crore and its unit value realisation is reported to be around Rs 23.58 per kg. Indian coffee exports witnessed a resurgence in terms of value realisation during last fiscal (2007-08) by Rs 30.96 crore in spite of declining exports, which stood at 2,18,000 tonnes as against 2,49,000 tonnes in 2006-07. Unit value realisation per kg of coffee exported during last fiscal was higher by Rs 12.73 pr kg as against the previous year.  

Industrial Production  

The General Index stands at 273.0, which is 1.3% higher as compared to the level in the month of Aug 2007. The cumulative growth for the period April-Aug 2008-09 stands at 4.9% over the corresponding period of the pervious year. 

Mining, Manufacturing and Electricity sectors for the month of Aug 2008 stand at 162.2, 282.4, and 221.6 respectively, with the corresponding growth rates of 4.0%, 1.1% and 0.8 % as compared to Aug 2007. The cumulative growth during April-Aug, 2008-09 over the corresponding period of 2007-08 in the three sectors have been 4.1%, 5.2% and 2.3% respectively, which moved the overall growth in the General Index to 4.9%.  

Seven out of the seventeen industry groups (as per 2-digit NIC-1987) have shown positive growth during the month of Aug 2008 as compared to the corresponding month of the previous year. The industry group ‘Transport and Equipments and Parts’ have shown the highest growth of 11.2%, followed by 8.9% in ‘food products’ and 8.0% in ‘Basic Metals and Alloys’.  On the other hand, the industry group ‘Wool, Silk and Man-made Fibre Textiles’ have shown a negative growth of 14.9% followed by12.3% in ‘Metal Products and Parts’. 

Sect oral growth rates in Aug 2008 over Aug 2007 are 3.9% in Basic goods, 2.3% in Capital goods and (-)6.2% in Intermediate goods. The Consumer durables and Consumer non-durables have recorded growth of 5.1% and 5.0% respectively, with the overall growth in Consumer goods being 5.1%. 

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 240.1 in July 2008 and registered a growth of 4.3 per cent compared to a growth of 7.2 per cent in July 2007. During April-July 2008-09, six core-infrastructure industries registered a growth of 3.7 per cent as against 6.6 per cent during the corresponding period of the previous year.  

Crude Oil production (weight of 4.17 per cent in the IIP) registered a negative growth of 3.0 per cent in July 2008 compared to a growth rate of 0.9 per cent in July 2007. The Crude Oil production registered a growth of (-) 0.9 per cent during April-July 2008-09 compared to (–) 0.3 per cent during the same period of 2007-08.  

Petroleum refinery production (weight of 2.00 per cent in the IIP) registered a growth of 11.8 per cent in July 2008 compared to growth of 4.7 per cent in July 2007. The Petroleum refinery production registered a growth of 5.4 per cent during April-July 2008-09 compared to 11.0 per cent during the same period of 2007-08.  

Coal production (weight of 3.2 per cent in the IIP) registered a growth of 5.5 per cent in July 2008 compared to growth rate of 1.1 per cent in July 2007. Coal production grew by 7.7 per cent during April-July 2008-09 compared to an increase of 0.8 per cent during the same period of 2007-08.  

Electricity generation (weight of 10.17 per cent in the IIP) registered a growth of 4.5 per cent in July 2008 compared to a growth rate of 7.5 per cent in July 2007. Electricity generation grew by 2.6 per cent during April-July 2008-09 compared to 8.1 per cent during the same period of 2007-08.  

Cement production (weight of 1.99 per cent in the IIP) registered a growth of 8.8 per cent in July 2008 compared to 9.4 per cent in July 2007. Cement Production grew by 6.5 per cent during April-July 2008-09 compared to an increase of 7.7 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 1.9 per cent in July 2008 compared to 10.8 per cent (estimated) in July 2007. Finished (carbon) Steel production grew by 3.8 per cent during April-July 2008-09 compared to an increase of 6.8 per cent during the same period of 2007-08.

Inflation  

The official Wholesale Price Index for 'All Commodities' (Base: 1993-94 = 100) for the week ended 11^th October 2008 declined by 0.3 per cent to 238.8 from 239.6 (Provisional) for the previous week.  

The annual rate of inflation, on point to point basis, stood at 11.1 percent for the week ended Oct 11, 2008 as compared to 3.1 percent during the corresponding period a year ago.    

Index of Primary Articles, major group, declined by 0.8 percent due to decline in the prices of fruits and vegetables, urad, eggs, and bajra.

The annual rate of inflation, calculated on point-to-point basis, for ‘Primary Articles’ stood at 11.5 percent as compared to 4.6 percent a year ago.   

The index for fuel power, light and lubricants declined marginally due to lower prices of furnace oil. 

The index for manufactured products dipped by 0.2 percent due to of fall in food products prices by 1.3 per cent. 

 For the week ended 16/08/2008, the final wholesale price index for 'All Commodities’ (Base: 1993-94=100) stood at 241.1 as compared to 240.2 (Provisional) and annual rate of inflation based on final index, calculated on point to point basis, stood at 12.82 percent as compared to 12.40 percent.  

Financial Markets

Capital Market

Primary Market  

According to Power Secretary Anil Razdan, NTPC's follow-on public offer (FPO) and NHPC's initial public offer (IPO) will come when the market conditions are conducive. NHPC had earlier scheduled the launch of the offer between October 13 and 17 to raise nearly Rs 1,670 crore worth fresh equity, besides premium. On October 23, the government said that the public offer for sale of shares in state-run power firms NTPC and NHPC will come as and when market conditions are appropriate.  

The IPO grading introduced by the rating agencies some time ago appears to have a little or no influence on the share price of the newly listed shares (whose IPOs were rated) on the bourses. According to rating agencies Crisil, CARE and ICRA, IPO gradings have nothing to do with the share pricing. According to Crisil, these gradings are meant to provide investors an independent, reliable and consistent assessment of the fundamentals of new public issues.  

Secondary Market           

It has been yet another traumatic week for the stock markets, which were rattled by weak global cues and relentless selling by foreign institutional investors (FIIs). The bears dashed all hopes of a pre-Diwali rally, by holding sway for most part of the week. The BSE Sensex lost 1,274 points or 12.77 per cent during the week to close at 8,701, while the NSE Nifty fell 490 points or 15.94 per cent to end the week at 2,584 points. Relaxation in ECB norms, a 100 basis points reduction in the repo rate and SEBI's indirect threat to ban short selling by FIIs failed to provide support to the markets.  

On October 20, SEBI said that it was not in favour of lending and borrowing of securities by FIIs overseas through participatory notes (PNs). In a statement on its website, SEBI also said that it was monitoring the lending and borrowing activities of FIIs and that it would take stronger measures to halt short selling in equities through PNs. On October 22, SEBI met 12 FIIs, who issue PNs and facilitate short selling, to discuss overseas stock lending and borrowing. However, the regulator dealt with the FIIs on expected lines and the meeting was over without SEBI spelling out any action against ‘dubious’ short sellers. Earlier on October 17, SEBI had written to all the PN-issuing FIIs to submit the data for stocks lent overseas in 2008 so far by October 23. Stocks of over Rs 1,000 crore have been short sold in domestic markets between October 10 and 17 through overseas borrowing, causing over 12 per cent fall in benchmark indices.  

Finance minister P Chidambaram on October 23 said that, SEBI has found one instance of possible inappropriate use of the overseas lending/borrowing window and FIIs have been asked to stop this activity henceforth. However, Chidambaram did not mention any specific deadline for FIIs to unwind their positions, though he termed these overseas deals inappropriate. So far this year, FIIs have sold a record over $12 billion in local markets out of their nearly $34 billion investment made in the past three years. Borrowed overseas, stocks worth Rs 1,000 crore have been short sold in the domestic market between October 10 and 17, causing over 12 per cent fall in benchmark indices.  

On October 23, SEBI amended its earlier circular to allow FIIs to buy shares of stock exchanges and other security market infrastructure companies even before they are listed. In its earlier circular, the market regulator had said that FIIs were allowed to pick up shares of stock exchanges and security market infrastructure companies only from the secondary market. However, no exchange has been listed. As per SEBI circular, “In respect of the exchanges that are not listed, FIIs purchase of shares of such exchanges can be through transactions outside the exchange, provided it is not an initial allotment. SEBI has put a limit on foreign direct investments in such companies at 26 per cent and FIIs can invest a further 23 per cent.  

Capital market regulator SEBI, has modified the valuation methodology of debt securities, conceding additional discretionary room to mutual funds with immediate effect. Earlier, mutual funds could value rated debt instruments with duration up to two years at 100 basis points (bps) over and above, or 50 bps below the valuation provided by the Crisil matrix. Rating agency Crisil values bonds held by mutual funds at the end of the day as per a valuation matrix.  

FIIs continue to lend stocks to overseas investors despite a warning issued by the Securities and Exchange Board of India (SEBI) and finance minister P Chidambaram against such transactions. As per data released by SEBI on October 24, when the BSE Sensex, fell over 1,000 points, FIIs lent over 300,000 shares of Reliance Petroleum and over 69,000 shares of Educomp Solutions. According to SEBI, FIIs sold of equities worth Rs 2,544.56 crore during the week. However, domestic institutional investors purchased stocks valued at Rs 514.26 crore on the bourses. Among other categories, brokers invested in equities worth Rs 330.77 crore on behalf of clients and retail investors and purchased shares valued at Rs 1.64 crore in the day's trade. While, proprietors sold off equities worth Rs 80.19 crore on the bourses.  

Mutual funds heaved a sigh of relief on October 20 after the Reserve Bank of India (RBI) announced a repo rate cut of 100 basis points. Acording to Ashish Nigam, head-fixed income at Religare-Aegon mutual fund, the RBI move will stabilise the banking sector and reduce the borrowing/lending mismatch, which caused volatility. An immediate impact of the repo rate cut may make the mark-to-market valuations of government securities and corporate debt attractive. But, mutual funds might find it difficult to sell paper issued by non-banking finance companies, as investors fear defaults in the sector.  

The government has raised by 60 per cent the annual limit on external commercial borrowings (ECBs) by domestic companies to $35 billion, from the current $22 billion. Companies that already have permission to raise overseas loans will benefit immediately from this move. Economic affairs secretary Ashok Chawla confirmed to reporters on October 23, a day after RBI announced a significant relaxation in ECB policy that allowed companies to repatriate up to $500 million through the automatic route. Finance minister P Chidambaram said the relaxation in rules should encourage companies to repatriate external funds as early as possible. This is the third time in two months that external commercial norms have been revised to improve the access of local companies to overseas funds. In another crucial change, borrowers, who were hitherto required to park the funds overseas until actual deployment in India , have now been granted the flexibility to remit the funds to India for credit to their rupee accounts with banks in the country, pending utilisation.  

Derivatives 

A spectacular global crash led to double-digit losses in the stock markets. The NSE Nifty has been down 15.9 percent closing at 2,584 points and the Defty 17.8 per cent. Despite a positive opening for the markets, markets swooned under selling pressure to touch its three-year lows. Predictably, even the Nifty future breached its all-important technical support levels during the week. Both the Nifty October and November futures closed with a huge discount to the spot, which suggests that despite the steep fall, a chunk of the short positions may have been rolled over to November month. So far, about 40 per cent of Nifty positions have been rolled over to November series.  

The cumulative FII positions as a percentage of total gross market position on the derivative segment as on October 23 increased to 38.72 from October 18 level of 37.83 per cent. This indicates that retail and domestic players have reduced their activity in the market. FIIs have hiked their positions in index futures, but have considerably reduced their exposure to stock futures. According to lNSE data, they now hold index futures worth Rs 11,847.25 crore (Rs 11,725.08 crore) and stock futures worth Rs 11,909.55 crore (Rs 14,095.31 crore). Their holding on index options declined marginally to Rs 17,018.53 crore (Rs 17,988.85 crore).  

Government Securities Market  

Primary Market  

On October 22, 2008, RBI auctioned 91-day T-bills and 364-day T-bills for the notified amounts of Rs 5000 crore and Rs 2000 crore, respectively. The cut off yield for 91-day and 364-day T-Bills were at 7.19 per cent and 7.40 per cent, respectively.  

Five state governments auctioned 10-year paper maturing in 2018, for the notified amounts of Rs 4,300 crores. The cut off yield for the securities range from 7.97-8.11 per cent, being highest for Andhra Pradesh and lowest for Himachal Pradesh.  

Secondary Market

Call rates ended in their comfortable range of 6-6.10 per cent, as liquidity finally improved considerably for the range of monetary tools used by the RBI. Banks had appeared to have covered fortnightly positions well in advance, aided by the hefty 100 basis points LAF repo rate cut by RBI that alleviated the prevailing cash crunch in the banking system. Bonds remained stable after traders took signals from the RBI’s peak season policy to expand credit. Bond yields rose from week’s lows due to the disappointment over the absence of any further easing in monetary policy from RBI. Anticipation that more easing could be in the offing had built up since RBI cut LAF repo rate by 100 bps earlier. Bond yields could edge up while sporadic movement in both direction would continue. The market awaits clarity over the short- and medium-term; especially on the extra government borrowing that could have an impact on monetary policy. That the RBI’s measures were beginning to impact was evident from the liquidity adjustment facility (LAF) auctions. At the two weekend LAF auctions, net recourse to the reverse repo window was Rs 19,605 crore.  

Government bond prices ended off highs on Wednesday as fears of oversupply and a cut in banks’ statutory liquidity ratio emerged. The 10-year benchmark 8.24 per cent, 2018 paper settled at Rs 104.25, up from Rs 103.47 on October17, but sharply down from an intraday high of Rs 105 rupees. The 7.94 per cent, 2021 paper ended the day at Rs 100.92, down from October 20’s close of Rs 101.90.  

Close on the heels of the RBI’s 100-basis point cut in the repo rate; the government also cancelled its Rs 10,000-crore bond auction slated for on October 27. This is the second time in three weeks that the government has put off the auction for the new six-year paper (Rs 6,000 crore) and reissue of bonds maturing in 2032 (Rs 4,000 crore). Earlier, the government had put off the auction scheduled for October 10 for same bonds due to tight liquidity conditions. It decided to cancel the auction on Monday after receiving bids from market participants. The price of the government bond maturing in 2021, rose by more than a rupee after RBI made the announcement to cancel the bond auction.  

Bond Market  

During the week under review, Rural Electrification Corp (REC) Ltd tapped the market by issuance of bonds to mobilise Rs 500 crores by offering 11.75 per cent for 3 years. Crisil, Icra and Fitch have rated the bond AAA.  

The RBI is considering options to make cheaper finance available to the non-banking finance companies (NBFCs) including a separate line of credit for bank finance backed by government securities or AAA-rated commercial paper (CP). According to sources close to the development, the central bank is also reviewing the various restrictions on placing bank funds with NBFCs and may relax prudential ceilings. NBFC representatives met central bank officials over the last few days to seek easier bank finance since commercial paper worth Rs 20,000 crore to Rs 25,000 crore is coming up for maturity.  

State-owned IDBI Bank plans to raise up to Rs 2,000 crore through upper tier-II bonds to shore up its capital base and support its business. Rating agency Crisil has assigned a rating of AA/Negative to the upper tier-II bonds. The rating on the bonds is driven by the bank’s weak financial risk profile, marked by a modest tier-I Capital Adequacy Ratio (CAR). The tier-I CAR is expected to reduce further because of the bank’s growth plans and limited flexibility to enhance capitalisation. The bank’s capitalisation is also under pressure with currently adequate, but declining tier-I CAR. Further, the bank has limited flexibility to raise additional capital, as the government’s stake in it is 52.68 per cent, just above the floor level of 51 per cent. The bank is in discussions with the government to convert a part of its tier-I government bonds into equity, but the prospects of the same are currently uncertain.  

Foreign Exchange Market

The rupee dropped to its lowest-ever levels against the dollar, going below the Rs 50 mark, and it took forward this year’s loss to 27 per cent. The rupee breached the crucial 50-mark against the dollar on Friday, as it crashed to an all-time low of 50.15 during early trade, given the high level of risk aversion. The simultaneous entry of oil companies and FIIs for purchase of dollars, pulled down exchange rates to Rs 49.95 per dollar or about 25 per cent down from the beginning of this financial year. The exchange rates would have slipped below Rs 50, but for the RBI’s intervention in the foreign exchange markets, mostly through sell-buy swaps. State-owned banks offered periodic support to try and help the rupee from outflows and arbitrage between onshore and offshore quotes. In fact, throughout the week, the rupee remained highly volatile on the back of hedge fund and FII unwinding. The rupee showed no reaction to the easing of ECB rules announced mid-week. Forward premia shot up, especially following the RBI policy, which did not include fresh monetary policy easing. Forward premia for one, three, six and 12 months were 2.4 per cent (1.48 per cent), 2.24 per cent (0.66 per cent), 2.32 per cent (0.49 per cent) and 2.32 per cent (0.45) respectively.  

With the financial world in the grip of turmoil, the net foreign capital flows to India were lower until early October 2008 compared to the same period last year. The foreign exchange reserves had also depleted substantially as the US dollar turned strong against international currencies and the RBI used part of its kitty to moderate the sharp decline in the rupee’s value. The capital flows have remained volatile in this financial year so far, and are lower than those in the corresponding period of 2007-08. Foreign exchange reserves during the period declined by $35.7 billion by the end of March 2008, while in 2007-08, they had seen an increase of $57.5 billion till October 12, 2007 over the end of March 2007.  

Currency Derivatives  

With the successful launch of currency futures, regulators are now looking at taking a series of measures to further deepen the currency derivatives market. Apart from introducing trading in 4-5 more currencies, the regulators SEBI and the RBI are considering raising the exposure limit for players. More players, including FIIs and non-resident Indians (NRIs), may also be allowed to operate in the market.  

Commodities Futures derivatives  

Commodities including precious metals, base metals and crude oil took a heavy pounding to touch multi-year lows in the global markets. The slide has been due to the dollar strengthening against other currencies coupled with investors selling heavily to meet margin calls in the plummeting stock markets. Base metals, precious metals and energy products prices on the national commodity bourses continued to rule lower on the week ended on Friday in the threat of a global recession and the dollar strengthened.  The domestic commodity market has not witnessed massive pull-outs of the kind which their international counterparts have seen as volumes in the market itself are not so deep, analysts perceived. Copper tumbled to the lowest price since December 2005 on speculation that the world economy is headed for a recession that will reduce demand for metals. China , the biggest contributor to global growth, expanded at the slowest pace in five years in the third quarter. U.S. lawmakers and officials moved toward forging a second fiscal-stimulus package to stem the economic decline. Copper had fallen 30 percent this year on signs of declining demand. Yet, since the beginning of the week, crude oil and gold have eroded nearly 10 per cent, silver nearly 5 per cent, copper and zinc a whopping 20 per cent, 15 per cent each in the domestic market, tracking similar nose-dives internationally. Base metals continued their steep decline on October 23 with all domestic futures on Multi Commodity Exchange (MCX) opening lower by an average of 3 per cent.  International benchmark London Metals Exchange (LME) prices slid by 8 to 14 per cent during the last two sessions alone. While most of the metals are trading well below their cost of production, the bleak global economic outlook continued to trigger more selling. Prices have breached all strong supports and expectations of a rebound have thinned now.  

Spot gold hit a one-year low of $699 an ounce on October 23, sharply below its record high of $1,030.80 an ounce on March 17. The collapse of now-defunct Lehman Brothers in early September coincided with the strongest inflows to SPDR Gold Trust, the world's largest gold ETF, since its launch in November 2004. Physical demand coupled with rising investment demand from ETF boosted gold prices. Copper fell over 15 per cent to a three-year low, following equity markets lower as the market priced in the threat of a global recession and the dollar strengthened supported by the weak demand outlook. The MCX Copper November contracts were lower by 15 per cent to settle at Rs 197.30 per kg from Rs 232.85 per kg in the previous week. The MCX Gold December contracts were lower by 10 per cent to settle at Rs 11,442 per 10 gram over the previous week. The average gold price fell in the third quarter to $870.88 an ounce from $896.11 in the second quarter, World Gold Council said. During the quarter, investors bought a total of 145 tonne of gold bullion via gold-backed exchange-traded funds (ETFs), totaling $2.8 billion when converted at the average monthly gold price. The MCX Silver December contracts were lower by 6 per cent to settle at Rs 16,346 per 10 gram over the previous week.  

Crude oil futures on October 22, hit the lower circuit by losing 4.71 per cent on the MCX on speculative selling by traders, taking cues from weak global markets amid a surge in the dollar value. All the three running contracts on MCX were in the negative zone registering fall of up to 5.30 per cent. Crude oil for far-month January contract, fell by Rs 198, or 5.30 per cent at Rs 3,538 per barrel at MCX counter, while November contract lost Rs 160, or 4.35 per cent at Rs 3,434 per barrel. Similarly, December delivery contract lost Rs 137, or 3.92 per cent at Rs 3,482 per barrel. The crude oil for October delivery fell by 4.04 dollar at 68.14 dollar a barrel on the New York Mercantile Exchange. Possibilities of the Organisation of Petroleum Exporting Countries (OPEC), which supplies over 40 per cent of the world's oil, announcing a cut in output in the wake of falling prices later this week have failed boost prices, they added.  

Sugar futures on October 23; fell marginally on the National Commodity and Derivatives Exchange (NCDEX) on selling by speculators, triggered by high supplies in the physical markets in view of ongoing festive season. Sugar for November delivery contract fell by Rs 6, or 0.3 per cent to Rs 1,760 per quintal on NCDEX counter with business volume of 4,560 lotes, while the far-month December contract lost Rs 5, or 0.3 per cent to RS 1,792 per quintal in a turnover of 5,870 lots. January month contract fell by Rs 8, or 0.5 per cent at Rs 1,852 per quintal. The fall in sugar prices at futures market was attributed to increased arrivals in the spot market to meet marriage and festival season demand.  

According to media sources, Forward Markets Commission (FMC) plans to recommend the resumption of futures trade in wheat, rice and two varieties of lentils next month. India had suspended trade in the futures in early 2007 to tame soaring prices. BC Khatua, chairman of FMC, told media that physical market prices of the commodities that have been banned did not justify the curb. A ban on futures trade in rubber, soyoil, potato and chickpea would automatically lapse next month. The government initially banned the futures in rubber, soyoil, potato and chickpea in May for four months, under pressure from its allies to check prices, and later extended the ban until end-November.  

With the stock market in turmoil, small investors have been increasingly shifting their attention towards gold. The MCX, which launched its first-ever gold guinea futures contract on the festive occassion of Akshaya Tritiya in May 2008, is witnessing hectic activities these days. Small investors have been buying 8-gm gold guinea which is being not only being delivered at home, but is also selling at around 15 per cent less than the market price of gold coins sold by financial institutions and banks.

LIST OF WEEKLY THEMES

We will be grateful if you could kindly send us your feed back at epwrf@vsnl.com