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Current Economic Statistics and Review For the
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Theme of the week: Global Financial Crisis-I Many Policy-Induced Financial Market Vulnerabilities Reacting
to the tumultuous global financial
crisis unprecedented since the great
depression of the 1930s, the union
finance minister, P Chidambaram, has
asserted that the Indian financial
system is insulated from the
external turmoil, that “a strong
regulatory architecture fortified
with prudent norms of checks and
balances would prevent India’s
banks from falling into a tailspin
similar to some of their peers in
the United States”. In the same
context, the Planning Commission
deputy chairperson, Montek Singh
Ahluwalia, has opined that “we
have not been as exposed to these
new and innovative instruments,
which have been the source of
financial distress
internationally”.
1.
Satisfaction of Insulation
Indefensible
For
a serious student of Therefore,
if the Indian financial system has
now been insulated from the global
turmoil, it is not because of the
innate strength of the policy
devices pursued by the authorities
but because of intense social
pressures which have prevented the
authorities from inflicting on the
system radical financial sector
reforms. Over a decade ago in 1997,
the authorities had proposed capital
account convertibility but better
sense prevailed after its adverse
consequences got exposed in the
Asian crisis of 1997-99. John
Williamson, the author of the
Washington Consensus, regretted in
an article in this journal (EPW,
April 12, 2003), that the IMF and
other institutions urged “most
damagingly a pace of capital account
liberalisation that most people
agree in retrospect to have been
precipitate” (p.1477). High-level
of short-term debt was the kingpin
in the Asian crisis. In
matters relating to the domestic
operations of banks, it has been a
constant tug- of-war between the
authorities’ reform enthusiasm and
their responses to social pressures.
The government has of late been
pursuing a distorted set of
priorities – bank consolidation,
higher foreign capital, larger
voting rights in private sectors,
etc., while the needs of the period
are strengthening of the
institutional spread with an
expanded and well-designed
professional staff structure. The
tug-of-war between reforms and
social pressures is better seen in
all aspects of credit delivery
arrangements purported to be
attempted by banks for informal
sectors; the arrangements themselves
are consciously done in a
half-hearted manner as a matter of
rhetoric and publicity. This is true
of 40% priority sector target, the
policy of doubling of credit flow in
favour of agriculture and
small-scale and micro enterprises,
placing the role of larger rural
credit structure on the shoulders of
microfinance (MFI) movement, and now
the introduction of the policy of
financial inclusion with compulsory
‘no-frills’ deposit accounts and
optional overdraft accounts – all
in the face of reductions in the
number of rural branches by about
3,500 in the past 12 years and
similar curtailment of bank staff to
the extent of over 60,000 in rural
and semi-urban branches, thus
rendering serving the informal
sectors spread over nooks and corner
of the country that much more
difficult. Reverting
to the claim that the Indian
financial system is not exposed to
the new and innovative instruments
which have been a source of such
financial distress in the Also, in the area of foreign exchange dealings where there is intense competition between foreign and private banks on the one hand, and public sector banks, on the other, there has occurred a serious sign of stress created out of the unmitigated hedging facilities permitted. Prior to April 2007, hedging of forex instruments including forwards, swaps, and options were permitted mainly against crystallised foreign currency exposures, but after that period, ‘dynamic hedging by the residents’ was facilitated on the basis of declaration of an exposure actually in sight or based on past performance and the contracts could be cancelled and rebooked. But, the most damaging aspect of the newly introduced expansion of hedging facilities, as revealed by the recent corporate turmoil, relates to the small and medium enterprises. The April 2007 policy statement said that, “In order to enable small and medium enterprises (SMEs) to hedge their foreign exchange exposures, it is proposed to permit them to book forward contracts without underlying exposures or past records of exports and imports. Such contracts may be booked through authorised dealers with whom the SMEs have credit facilities. The SMEs are also permitted to freely cancel and rebook the contracts” (p.56) In such a free-for-all policy environment, banks and the corporates, obviously hand-in-glove, have indulged in huge amounts of hedging. The banks appear to have sold contracts to corporates, particularly the SMEs, hardly based on any underlying exposures. While full details of the mark-to-market (MTM) losses are not available, a reputed forex dealer, Mr. Jamal Mecklai of Mecklai Financial Services, has placed the MTM losses of banks and the corporate sector in the range of $3 billion to $5 billion (Rs 12,000 crore–Rs 20,000 crore). We have a large list of IT companies, banks and corporates facing huge forex losses. These kinds of liberalisation measures without proper checks and balances have an inherent tendency to create stress in the financial markets. The
speculative activities prompted by
official blessings are more serious
in the case of stock and commodity
markets. In the Indian share market,
well-meaning experts have brought
out how there are two key
destablishing elements in its
derivative segments. First, all
major exchanges of the world (in the
USA and Europe in particular) desist
from introducing individual stock
futures as they are considered as
highly unsafe and do not serve any
justifiable purpose. Despite such a
weighty opinion, individual stock
futures and options together now
constitute over 60% of derivative
transactions on the National Stock
Exchange of India (NSE). Secondly,
in equity derivatives in the Indian
bources, trades are allowed to be
cash settled and not delivery
settled, which is totally contrary
to the international best practices
that we profess to adopt with pride.
In the absence of physical delivery,
there is no logical conclusion to
the futures trade; on the last day,
just the cash is exchanged. Because
of such a structurally weak system,
not only that the size of
derivatives market has grown
phenomenally bigger than the cash
market, it has also converted the
Indian equity market into being the
most volatile market in the world.
What is more, such speculative
activities do not help the system to
achieve the primary goals of better
liquidity and stability; nor do they
facilitate the development of a
healthy, stable and dependable
primary issue market for the
corporates in the manufacturing and
infrastructure areas so as to
mobilise some parts of project
finance. As
for the commodity markets, the
authorities have permitted futures
trading in over 80 agricultural
commodities (including a few which
are temporarily banned) with hardly
any distinction in margining for
hedging and speculation – a simple
process of preventing gambling type
of dealings. Because of the
consequential dominance of
speculator–financial interests in
futures, the market has expanded
over 50-fold in the past five years,
but has failed to perform its basic
function of facilitating hedging,
price discovery and price stability,
and hence it has also failed to
attract farmer participation, though
futures trading in being propagated
in the name of the farmer. These few examples are strong enough to suggest that the Indian financial system does face a situation of vulnerability because of the insufficiency of strong regulatory architecture. This is certainly true of the capital market segment of the financial system. As for the banking system, the sub-prime crisis and the consequential crisis in the mortgage loans market, which has brought down four topmost US financial firms and which has involved the unthinkable size of government salvage operations (almost equivalent to a trillion dollar) and nationalisation of large firms in that citadel of capitalism; the origin of this crisis should be traced to the sub-prime credit crisis of US banks worth over $1.3 trillion which has thus exposed above all the suitability of the so called international best practices under Basel II norms. The critics of these norms have been proved right, that these norms cannot come to the banks’ rescue when it comes to the crunch. The fetishness with which the Indian authorities have applied these norms will call for a rethink. For normal banking operations, they have proved to be highly expensive and cumbersome and besides, they have grossly diverted the attention of the banking system from its social orientation; the formal financial institutions have been as a result hard put to address the credit needs of the poor. It was in this context of the working of the financial markets that are characterised as markedly different from other markets, that Joseph Stiglitz came out clearly to assert that globalisation could have devastating effects on developing countries and especially the poor within those countries [Stiglitz, Joseph E (2002): Globalization and its Discontents, W.W. NORTON & Company]. The
use of global standards of
regulatory architecture but with a
narrow banking spread without the
relationship banking strategy is
sure to prevent the spread of
financial intermediation regionally,
functionally and across different
size classes of assets. The
smug reaction to the most explosive
development in the global financial
system with sharp lessons for
developing countries in particular
– the authorities suggesting that
everything is fine with our system -
is truly indefensible. The
globalisation of the financial
markets has created manifold
distortions the world over,
including the remuneration packages
for company executives far out of
line with their social relevance
vis-à-vis say, engineers and
scientists. That apart, within
financial operations, the current
upheaval is providing telling
lessons for developing countries
like First,
the safety and security of banking
business in Finally,
in the whole policy discourse now on
the expected role of the financial
system in India, what is neglected
is the imperative of
institution-building which is the
fountainhead of the supply-leading
approach to credit delivery for
agriculture, micro and small
enterprises and for other informal
sectors adopted following bank
nationalisation. In fact, it is not
realised that a good part of the
risk management issues – credit
risk and operational risk – also
can be taken care of, if we have a
fairly decentralised institutional
structure with the spread of branch
network in the length and breadth of
the country, professionally
well-manned, such that ‘lenders
have sufficient knowledge about
borrowers’ and information
asymmetry giving rise to the
theoretical issues of moral hazard
and adverse selection is avoided. In
our perception, the presence of
information asymmetry and the issues
of moral hazard and adverse
selection are exaggerated insofar as
the functioning of commercial and
cooperative banks in developing
economies like that of India are
concerned. Unlike in advanced market
economies where banks operate as
wholesale financial intermediaries,
banks in developing countries adopt
branch banking combined with
relationship banking under which
bank managers, if they function
professionally, have reasonably good
knowledge of the regions and
clientele they serve. The banking
system can be strong, healthy, and
dynamic only if such a model is
persevered with. Highlights of Current Economic Scene AGRICULTURE It
has been reported that six
government agencies and millers
procured over 126,79,115 tonnes of
paddy so far, of which PUNGRAIN
procured 35,04,236 tonnes (29.8%),
whereas MARKFED procured 27,05,168
tonnes (23.0%). PUNSUP procured
26,45,897 tonnes (22.5%), while
Punjab State Warehousing Corporation
purchased 14,59,969 tonnes (12.4%)
besides 12,34,895 tonnes is procured
by Punjab Agro (10.5%) for the
ongoing kharif season. The Central
Government Agency FCI procured only
2,03,104 tonnes (1.7%) and millers
procured 9,25,846 tonnes (7.7%). Six
government agencies have paid over
Rs 9521.27 crore for paddy procured
by agencies during the current
Kharif Marketing Season (Oct-Sept
2008-09). THE
state government of Karnataka is
likely to reduce the annual levy
rice procurement target to 1.5 lakh
tonnes from 2.5 lakh tonnes this
season following statewide protests
by rice millers. The state
government enforced rice levy order
from November 3, 2008 to procure
around 33% of rice produced in the
state to transfer it to national
food grains procurement pool managed
by Food Corporation of According
to Central Organisation for Oil
Industry and Trade (COOIT) oilseeds
production during the Kharif 2008-09
season is estimated to be at 16.41
million tonnes, marginally down from
last year’s 16.49 million tonnes.
Major reason for the estimated fall
in oilseeds output is damage to
groundnut and soybean crops in some
of the growing regions. Groundnut
production is likely to decline to
4.52 million tonnes from 4.87
million tonnes in the period under
review. Soyabean output, however, is
expected to be up from 9.46 million
tonnes to 9.89 million tonnes this
year. It has further pegged that
sunflower production at 450,000
tonnes; castor seed at 1.07 million
tonnes, toria (rapeseed grown in
Kharif) at 150,000 tonnes, sesame at
300,000 tonnes and Imports
of edible oil from the country in
2007-08 jumped by 19% on account of
lower global price. Edible oil
imports rise to 56 lakh tonnes
during oil year Nov 2007- Oct 2008
as against 47 lakh tonnes last year.
This rise in imports is attributed
to increase in imports of palm oil
and its products to 48 lakh tonnes
from earlier 31.7 lakh tonnes
following a duty reduction and fall
in international prices. Total
imports of vegetable oil in the
month of October recorded to 8.3
lakh tonnes, of which edible oil
accounted for 7.9 lakh tonnes while
non-edible oil was 0.4 lakh tonnes.
Solvent Extractor Association of
India (SEA) reiterated that of the
total edible oil imports, imports of
crude palm oil and other palm
products increased to over 51% at
48.1 lakh tonnes, while that of soft
oil imports reduced to 7.9 lakh
tonnes. The
Pulses Importers Association (PIA)
has reiterated the central
government agencies such as MMTC,
STC, PEC and Nafed to reduce the
minimum bid quantity for sale of
imported pulses in the domestic
market, so that even small traders
could participate and the commodity
can reach to the remote villages.
The minimum bid size varies from 500
tonnes to 3000 tonnes for different
pulses. As
per the report of National
Horticultural Research and
Development Foundation, onion
production in the country is likely
to decline by 18% in this Kharif
season due to inadequate and delayed
rains at the time of planting and
excess rains before harvest. Total
area under onion during this Kharif
is also expected to dip by about
20%. Currently, stored onions are
available mostly in Maharashtra and Exporters
are bearish on maize exports during
the short term period owing to fall
in commodity prices due to credit
squeeze and fall of rupee against
dollar. It is expected that exports
of maize would pick up momentum from
December 2008, as crops would be
available in plenty with a record
crop being projected during the
current kharif market season. The
central government has beefed up
cotton procurement in Sugar
output form Crushing
operations of sugarcane in According
to International Sugar Organisation,
global sugar production would drop
for the first time since 2004-05 due
to low production in Union
Commerce Ministry is in the process
to provide a debt-relief package for
small and marginal farmers in the
coffee industry because labour
shortage has become a major issue in
the coffee industry. Further it has
been reiterated that According to preliminary results available with the state-run Marine Products Export Development Authority (MPEDA), seafood exports during the first half of 2008-09 have fallen by 1% in volume, 4% in rupee value and 5% in dollar terms due to global recession. The volume and value of seafood exports have dropped significantly in the second quarter of 2008-09 after recording an increase in the first quarter. During the first quarter, exports registered an increase of 6% in volume and value, while the dollar revenue registered an increase of 8.6%. In the period between April-September 2008-09, country exported 218,708 tonnes of seafood products valued at Rs 3,539.05 crore ($848.86 million) as against 216,191 tonnes valued at Rs 3,686.83 crore ($ 900.67 million) in the first half of 2007-08. Shrimp exports account for more than 50% of the total seafood exports in both volume and value. Export of shrimp dropped by 6% in volume and 15.5% in value during the first half of 2008-09. Unit realisation of the species has fallen to US $6.8 per kg as against US $6.9 per kg registered during the first half of 2007-08. Industry The
Quick Estimates of Index of
Industrial Production (IIP) with
base 1993-94 for the month of
September 2008 have been released by
the Central Statistical Organisation
of the Ministry of Statistics and
Programme Implementation. The
General Index stands at 273.0, which
is 4.8% higher as compared to the
level in the month of September
2007. The cumulative growth for the
period April-September 2008-09
stands at 4.9% over the
corresponding period of the pervious
year. The Indices of Industrial
Production for the Mining,
Manufacturing and Electricity
sectors for the month of September
2008 stand at 162.8, 294.4, and
219.3 respectively, with the
corresponding growth rates of 5.7%,
4.8% and 4.4% as compared to
September 2007. The cumulative
growth during April-September,
2008-09 over the corresponding
period of 2007-08 in the three
sectors have been 3.8%, 5.2% and
2.5% respectively, which moved the
overall growth in the General Index
to 4.9%. In
terms of industries, as many as nine
(9) out of the seventeen (17)
industry groups (as per 2-digit
NIC-1987) have shown positive growth
during the month of September 2008
as compared to the corresponding
month of the previous year. The
industry group ‘Transport
Equipment and Parts’ have shown
the highest growth of 16.8%,
followed by 16.1% in ‘Machinery
and Equipment other than Transport
Equipment’ and 12.8% in ‘Metal
Products and Parts, except Machinery
and Equipment’. On the other hand,
the industry group ‘Wood and Wood
Products: Furniture and Fixtures’
have shown a negative growth of 9.7%
followed by 9.3% in ‘Cotton
Textiles’ and 8.6% in ‘Leather
and Leather & Fur Products‘. As per Use-based classification, the Sectoral growth rates in September 2008 over September 2007 are 4.6% in Basic goods, 18.8% in Capital goods and (-)3.3% in Intermediate goods. The Consumer durables and Consumer non-durables have recorded growth of 13.1% and 2.8% respectively, with the overall growth in Consumer goods being 5.6%. Infrastructure The
Index of Six core-infrastructure
industries having a combined weight
of 26.7% in the Index of Industrial
Production (IIP) with base 1993-94
stood at 237.9 in September 2008 and
registered a growth of 5.1% compared
to a growth of 5.8% in September
2007. During April-September
2008-09, six core-infrastructure
industries registered a growth of
3.9% as against 6.9% during the
corresponding period of the previous
year. Crude
Oil Crude Oil production (weight of 4.17% in the IIP) registered a negative growth of 0.4% in September 2008 compared to a growth rate of (-) 0.7% in September 2007. The Crude Oil production registered a growth of (-) 0.8% during April-September 2008-09 compared to 0.7% during the same period of 2007-08. Petroleum
Refinery Products Petroleum
refinery production (weight of 2.00%
in the IIP) registered a growth of
2.8% in September 2008 compared to
growth of 6.9% in September 2007.
The Petroleum refinery production
registered a growth of 4.5% during
April-September 2008-09 compared to
9.8% during the same period of
2007-08. Coal Coal
production (weight of 3.2% in the
IIP) registered a growth of 10.7% in
September 2008 compared to growth
rate of 6.3% in September 2007. Coal
production grew by 7.9% during
April-September 2008-09 compared to
an increase of 2.8% during the same
period of 2007-08. Electricity
Electricity
generation (weight of 10.17% in the
IIP) registered a growth of 4.4% in
September 2008 compared to a growth
rate of 4.3% in September 2007.
Electricity generation grew by 2.6%
during April-September 2008-09
compared to 7.6% during the same
period of 2007-08. Cement
Cement
production (weight of 1.99% in the
IIP) registered a growth of 7.9% in
September 2008 compared to 5.4% in
September 2007. Cement Production
grew by 6.0% during April-September
2008-09 compared to an increase of
8.7% during the same period of
2007-08. Finished
(Carbon) Steel Finished
(carbon) Steel production (weight of
5.13% in the IIP) registered a
growth of 5.8% in September 2008
compared to 9.5% (estimated) in
September 2007. Finished (carbon)
Steel production grew by 5.3% during
April-September 2008-09 compared to
an increase of 7.7% during the same
period of 2007-08. Inflation The
annual rate of inflation, calculated
on point to point basis, stood at
8.98% for the week ended 01/11/2008
(over 03/11/2007 ) as compared to
10.72% for the previous week (ended
25/10/2008) and 3.35% during the
corresponding week (ended03/11/2007)
of the previous year. The rate of
inflation, based on average monthly
WPI, which was 12.04% for the month
of September, 2008, has eased by
1.07% age points to 10.97% in
October 2008. The
index for primary articles declined
by 0.4% to 249.0 from 249.9 over the
week. Due to the higher prices of
barley (4%), gram, jowar, eggs and
mutton (2% each) and bajra (1%) the
index for 'Food Articles' group rose
by 0.1% to 244.1 from 243.9 for the
previous week. However, the prices
of tea and ragi (2% each) and urad
and condiments & spices (1%
each) declined. Price index for
'Non-Food Articles' group declined
by 0.2% to 233.1 from 233.6 for the
previous week due to lower prices of
raw rubber and castor seed (2% each)
and groundnut seed and gingelly seed
(1% each). Because of the lower
prices of iron ore (8% the index for
'Minerals' group declined by 6.4% to
606.0 from 647.6 for the previous
week. The
annual rate of inflation, calculated
on point- to-point basis, for
‘Primary Articles’ stood at
11.01% for the week ended 01/11/2008
as compared to 11.41% in the
previous week and 4.57% a year ago.
It is for ‘Food Articles’ stood
at 9.07% for the week ended
01/11/2008 as compared to 8.84% in
the previous week. It was 2.47% as
on 03/11/2007. The
price index for the major group
fuel, power, light and lubricants,
declined by 3.4% to 356.6 from 369.3
for the previous week due to lower
prices of naphtha (33%), aviation
turbine fuel (18%), furnace oil
(13%) and light diesel oil (6%).
However, the prices of bitumen (2%)
moved up. The
index for ‘Manufactures
Products’ has declined by 0.7% to
203.8 from 205.3 for the previous
week. The index for 'Food Products'
group declined by 0.7% to 202.7 from
204.1 for the previous week due to
lower prices of imported edible oil
(8%), rice bran oil (6%), oil cakes,
cotton seed oil and gingelly oil (3%
each) and unrefined oil (1%).
However, the prices of gur (6%) and
cattle feed (1%) moved up. Due
to higher prices of kraft paper
(2%), the index for 'Paper &
Paper Products' group rose by 0.2%
to 203.7 from 203.2 for the previous
week. The index for 'Rubber &
Plastic Products' group declined by
0.1% to 169.1 from 169.2 for the
previous week due to marginal fall
in the prices of pvc pipes &
tubings. It is for 'Chemicals &
Chemical Products' group rose by
0.1% to 224.6 () from 224.4 () for
the previous week due to higher
prices of blasting powder (15%) and
tooth paste (3%), and for 'Basic
Metals Alloys & Metal Products'
group declined by 3.3% to 286.8 ()
from 296.7 () for the previous week
due to lower prices of billets &
slabs (16%), blooms (15%), basic pig
iron and foundary pig iron (12%
each), angles, channels &
sections (6%), zinc ingots and ms
bars & rounds (4% each), skelps,
CR coils and zinc (3% each), lead
ingots, other iron steel and steel
sheets, plates & strips (2%
each) and CR sheets and bars &
rods (1% each). However, the prices
of heavy rails (23 kg. upwards)
(10%), wire (all kinds) (4%) and
heavy light structurals (1%) moved
up. Due to the higher prices of ball
bearings (3%) the index for
'Machinery & Machine Tools'
group rose by 0.1% to 176.5 () from
176.4 () for the previous week For
the week ended 06/09/2008, the final
wholesale price index for ‘All
Commodities’ (Base:1993-94=100)
stood at 241.7 as compared to 241.1
and annual rate of inflation based
on final index, calculated on point
to point basis, stood at 12.42% as
compared to 12.14%. Financial
Markets Capital
Markets Primary Market The
meltdown in the stock market has
shrunk the country’s primary
market over 10 times during
April-August 2008 over the
corresponding period in 2007.
According to the Reserve Bank of Secondary
Market Domestic
stocks fell the most in All
the sectoral indices of BSE under
performed during the week. Among the
losers, Reality (14.14 per cent),
Capital goods (8.96 per cent), Auto
(8.34 per cent) and Consumer
Durables (7.37 per cent) top the
list. Reality stocks tumbled on
concerns over dwindling property
prices. Fears of loans turning bad
led to fall in banking stocks. The
stock market meltdown has eroded
returns on most private investment
in public equity (PIPE) deals done
last year. Out of the 63 deals, the
mark-to-market return is positive
for only three deals, with the rest
in negative. The current
mark-to-market value of the
$5.29-billion PIPE investments is
just $2.55 billion, or 51.65 per
cent less. Data compiled by Nexgen
Capitals, the investment-banking arm
of In a significant step towards market reforms, the Securities and Exchange Board of India (SEBI) is considering sweeping changes in the norms governing the participation of FIIs in the securities market. The entire framework is undergoing a comprehensive review and the regulator is expected to shortly put out a policy paper and ask for public comments. The most important move under discussion relates to doing away with registration of FIIs. The move, if implemented, will mean that any foreign investor can enter the market directly and work through custodians and brokers to do business. Similarly, the SEBI is in the process of firming up a policy to increase retail participation in mutual funds to neutralise or lower the impact of large outflows by corporate or institutional investors. The regulator is now weighing the option of segregating corporate and retail investments so that retail investors are not impacted even if corporate investors exit schemes early. The
SEBI is expected to clarify a
notification relaxing the creeping
acquisition norms that allowed
promoters to raise their stake by 5
per cent per annum without having to
seek regulatory approval. The
notification also allowed them to
raise their holding to 75 per cent
instead of 55 per cent earlier. On
October 28, SEBI had stated that
promoters would not require
permission if their holdings in the
firm were to increase 5 per cent per
annum in the event of a buyback of
shares. The SEBI intention is to
allow promoters to increase or
consolidate through buyback up to 5
per cent per annum. The
SEBI has decided to conduct a survey
to find out why investors are
staying away from the securities
market. This is the first time that
the market regulator is planning
such a survey of investors. The
survey, which is expected to be
initiated in this financial year,
will also find out the number of
investors in the country and their
preference for investment
instruments such as equities, bonds,
mutual funds, etc. Markets
regulator SEBI has decided to put on
hold clearances of new fund offers (NFO)
by closed-end debt funds, known as
fixed-maturity plans (FMPs). The
market regulator is working with the
mutual fund industry to come up with
new guidelines for FMPs. The new
regulations would include a lock-in
period to correct any
asset-liability mismatch. SEBI is
also expected to direct funds to use
the secondary market to raise
resources for these funds by
floating them on stock exchanges. The
SEBI is in the process of firming up
a policy to increase retail
participation in mutual funds to
neutralise or lower the impact of
large outflows by corporate or
institutional investors. The
regulator is now weighing the option
of segregating corporate and retail
investments so that retail investors
are not impacted even if corporate
investors exit schemes early. The
large redemptions by corporate
investors had put some of the fund
houses under severe pressure,
prompting the Indian central bank to
open a special facility to banks to
onlend to asset management companies
in need of funds to meet redemption
needs. This has raised concerns
within the policy establishment in With
the markets taking a beating, the
price to earnings (P/E) ratio has
fallen drastically. When compared to
the previous year, the PE ratio of
2,630 companies has fallen by 1/3.
From 33.31 times in November 11,
2007, the PE ratio now stands at
11.90 times. Even for the BSE Sensex,
the ratio is now at 12.33 times its
trailing earnings, from 24.27 times
as seen on the same day of the
previous year. Among the 35 major
industries, construction, trading,
electric equipment, engineering,
electronics, sugar, media and
retailing showed significant
decrease in their P/E on November
11,2008, compared to November 12,
2007. The top five industries,
according to their P/E ratio on
November 11,2008, are retail,
trading, entertainment, textiles and
telecom. In contrast, on November
12, 2007, the top five industries
were trading, sugar, retailing,
construction and media. At
a time when FIIs are continuing
their pull out from An
internal analysis of the finance
ministry shows that overseas lending
activity of FIIs did not have any
impact on tumbling of stock prices
in During
October, the mutual fund industry
witnessed a massive loss in its
average assets under management (AAUM)
of over Rs 97,000 crore. However, a
small segment of debt schemes
managed to buck the trend — gilt
funds. Short-term gilt funds
collected the maximum, over Rs 1,500
crore, and the medium- and long-term
category netted another Rs 70 crore.
In fact, the short-term category’s
AAUM is up from a paltry Rs 501
crore to Rs 2,018 crore. While the
medium-and-long-term (over one year)
category average returns is at 9 per
cent, some of the bigger funds have
been able to give really good
returns — ICICI Prudential Gilt
Investment (17.15 per cent), many
others have given returns between 14
and 16 per cent. Even the short-term
gilt category (less than a year) has
given returns of 6.44 per cent.
Compared with returns from other
categories, gilt funds
(medium-and-long-term) are just
below FMPs (9.31 per cent) and Gold
ETFs (11.39 per cent) in the last
one-year, according to data from
Value Research, a mutual fund
research firm. Financial
crisis, slowdown fears and stock
market crash have drastically
brought down the number of new
investors entering mutual fund
industry in October. According to
SEBI, new investor additions during
the month was a mere 188,716,
compared with 415,472 in September -
a near 55 per cent decline. However,
only liquid and tax planner funds
witnessed outflows. This was
contrary to the industry trend as
during October usually liquid plans
experience inflows. Investors
continued to invest in the stock
market through fund houses’ equity
schemes, especially systematic
investment plans, which had the
largest investor base in October.
Liquid plans that coped up with
heavy redemption amid liquidity
crisis during October saw 4,320
investors withdrawing their
investments. During early October,
severe liquidity crunch had sent
call rates soaring to above 20 per
cent levels. This prompted companies
that had just re-invested after
making advance tax payments in
September to pull out in order to
fund their own operations. Mutual
funds were buying certificates of
deposit (CDs) and non-convertible
debentures (NCDs) as they received
inflows from banks into their liquid
schemes and fixed maturity plans (FMPs).
Mutual funds’ liquidity has
improved this month compared with
that of October after measures taken
by the Reserve Bank of India (RBI).
In October, mutual funds were facing
a cash crunch due to redemption from
banks and companies. In a bid to
boost liquidity in the system, RBI
had last month cut banks’ Cash
Reserve Ratio (CRR) by 350 basis
points to 5.50 per cent. It also
introduced a 14-day special repo
window for banks to borrow funds
exclusively to lend to mutual funds. As per data on the Association of Mutual Funds in India’s (Amfi), mutual fund investors pulled out as much as Rs 47,000 crore in October — the highest redemption from mutual fund schemes in a month so far this financial year — triggered by the meltdown in equity markets. The redemptions in mutual fund schemes have been on an increase in the current financial years, and in September, they had witnessed withdrawals to the tune of Rs 45,655 crore. At the end of October, investors redeemed funds worth Rs 46,793 crore, with maximum of withdrawals coming in fixed income plans. In the month of October, equity funds comprising diversified, tax-saving, and exchange-traded categories of funds had net outflows of Rs 814 crore compared with Rs 815 crore of net inflows in September. Equity-linked savings schemes was the only section to attract net inflows during October. Three new equity schemes — Bharti AXA Equity Fund, Escorts Power & Energy Fund and IDFC Strategic Sector (50-50) Equity Fund — that completed allotment in October collectively raised a mere Rs 39 crore, showing dismal response to new equity fund offers. Diversified equity funds recorded net outflows of Rs 706 crore in October compared with Rs 604 crore net inflows in the previous month. Indian equities have been reeling under weak global cues. The mutual fund industry has witnessed a value erosion of Rs 75,966 crore in equity-related schemes in the first seven months of the current financial year. This is primarily because of the slide in the equity market because of the global financial turmoil. According to Amfi data, a major part of the value erosion, Rs 40,608 crore, has taken place in the month of October 2008 as the BSE Sensex and BSE-500 index recorded the biggest ever single-month decline of a 23.9 per cent and 27.1 per cent respectively in that month. However, when markets were zooming in October last year, the market value of these funds had risen by a whopping Rs 80,984 crore. The Amfi data also show that the mutual funds’ assets under management (AUM) in equity-related schemes has declined from Rs 189,025 crore as on March 31, 2008 to Rs 157,913 crore as on October 31, 2008. The fall is despite net inflows of Rs 4,246 crore in new as well as existing schemes. Mutual
funds have begun to revise downward
the indicative yields of FMPs after
the RBI announced a series of
measures to ease liquidity in the
system. In September this year,
returns were on the upswing, thanks
to tighter liquidity conditions.
FMPs launched in September were
offering indicative returns (mutual
funds can only indicate and not
guarantee returns) of around 11 per
cent for both short- and the
long-term FMPs. This has now come
down to the range of 9.95-11.10 per
cent. However, this is still higher
than the returns indicated by funds
over a year ago. In September 2007,
three-month FMPs’ indicative rates
were around 8-8.30 per cent, and for
over 12 months, they were hovering
around 9-9.50 per cent. While the
longer duration FMPs are still
indicating returns of around 10.5
per cent, the shorter duration ones
have begun downward revisions in the
indicative yields. Derivatives
Three
successive losing sessions have
triggered a downside breakout from a
trading range. The NSE Nifty closed
at 2,810.35 points for a loss of
5.47 per cent. The FIIs continued to
hold around 39 per cent of the
entire F&O outstandings but they
were net buyers in the cash markets
during the week. Trading remained
thin, volatility stayed high, and
fear remained the dominant emotion.
Ample time for the bearish trend
that started this week to strengthen
before short covering puts a floor
on prices, as there is still two
weeks to go for the settlement.
Though the Nifty November future
opened the week on a positive note,
lack of buying support pegged it
down during the week. It tumbled 5.4
per cent over the week and closed at
a marginal discount over Nifty spot,
which ended the week at 2810.35. The
cumulative FII positions as
percentage of total gross market
position on the derivative segment
as on November12 decreased to 37.58
per cent. FIIs have been net sellers
during most part of the week. The
VIX is very high, historic
volatility is very high; the Nifty
November futures are trading at a
small discount to spot. Trading
volumes are low, both in spot and in
futures markets. The hedge ratio is
high. There has been erosion in
volume and open interest (OI) in
both the BankNifty and CNXIT as
well. The carryover has been
reasonable so far in Nifty
instruments withOI growing quickly
in both December futures and mid and
far term options. About 40 per cent
of Nifty option volume is in
December and beyond. The overall
Nifty put-call ratio (PCR) in terms
of OI is reasonably neutral at 1.05,
but the November PCR is bearish at
0.9. However, the PCR is far better
than it was at the beginning of the
November settlement. The
Bank for International Settlements (BIS)
has said the notional amounts
outstanding of over-the-counter
(OTC) derivatives continued to
expand in the first half of 2008 and
stood at $683.7 trillion at the end
of June. The central bankers’
central bank said multilateral
terminations of outstanding
contracts resulted in the first-ever
decline of one per cent in the
volume of outstanding credit default
swaps (CDS) since the first
publication of CDS statistics in
December 2004. This small decline
needs to be seen against the average
growth rate for outstanding CDS
contracts over the last three years,
which has been 45 per cent. CDS
allow an investor to buy insurance
against a company defaulting on its
debt payments. BIS also said that,
the market for OTC commodity
derivatives showed ‘robust
activity’ with notional amounts
increasing by a hefty 56 per cent in
the first half of 2008, to reach $13
trillion at the end of June 2008. Exactly
a year after SEBI approved seven
derivative products for the
securities market, only three have
been launched. But two of the
launches — mini contracts and
currency futures — have met with a
fair degree of success. The SEBI
board at its meeting on November 14,
2007, had cleared the introduction
of seven products — mini-contracts
in equity indices, long-tenure
options contracts, F&O contracts
on the Volatility index, options on
futures, F&O contracts on bond
index, exchange-traded currency
futures and exchange-traded products
involving different strategies.
These products were considered for
introduction on the recommendations
of the Derivatives Market Review
Committee (DMRC) headed by Professor
M. Rammohan Rao. Government
Securities Market Primary
Market On
November 12, 2008, RBI auctioned 91
day T- Bills and 182 day T-Bills for
the notified amounts of Rs 5,000
crore and Rs 2,000 crore,
respectively. The cut off yield for
both the securities has been set at
7.35 per cent and 7.21 per cent,
respectively. Under
Market Stabilisation Scheme (MSS),
the RBI repurchased dated securities
on November 12, 2008, through
price-based auction using multiple
price method. The RBI auctioned 6.65
per cent 2009 and 5.87 per cent 2010
for the notified amounts of Rs 5,000
crore each. The cut off yield for
1-year and 2-year paper has been set
at 6.78 per cent and 6.88 per cent,
respectively. Eight
state governments auctioned 10- year
paper maturing in 2018 for the
notified amount of Rs 3,320 crores.
The cut off yields were ranging from
8.21– 8.54 per cent, being highest
for Jammu & Kashmir and lowest
for Himachal Pradesh. The
Government of India has announced
the issue of 8.20 per cent Oil
Marketing Companies Special Bonds,
maturing in 2023 for Rs. 22,000
crore. The Special Bonds are being
issued to three oil-marketing
companies as compensation towards
estimated under-recoveries on
account of sale of sensitive
petroleum products during the
current financial year. The Special
Bonds are being issued at par to
three oil-marketing companies on
November 10, 2008. Secondary
Market The
overnight call money rates fell on
the weekend as demand for funds was
lower after the government infused
Rs 10,000 into the system by
repurchase of MSS bonds on
November12. They ended the day at
7.25 per cent, trading during the
day between 7 per cent and 8 per
cent. Bond
yields dipped powered by deposit
inflows into the banking system,
sagging oil prices and retreating
inflation. Traders said that the
yield dip also stemmed from RBI’s
interventions. Bonds rallied pushing
yields of benchmark 10-year bonds to
a nine-month low, after a government
report showed the inflation rate
fall the most in at least 18 years
to just under 9 per cent in the week
ended November 1. This was their
biggest gain in almost three weeks
on speculation that the accelerated
slowdown in price gains will add
pressure on the central bank to cut
borrowing costs. The yield on the
8.24 per cent note due on April 2018
fell 13 basis points to 7.48 per
cent. At the weekend, the trade
volume in G-secs has been Rs 12,600
crore. In the NSE, the turnover for
the same day was Rs 10,800 crore.
The comfortable liquidity conditions
saw more banks taking recourse to
the reverse repurchase window at the
Liquidity Adjustment Facility (LAF)
auctions. The recourse to the
reverse repo window amounted to Rs
9,800 crore and was parked in the
RBI’s reverse repurchase window.
In addition, FIIs invested about
$155 million during the week,
further increasing the liquidity. On
November 14, 2008, RBI released
draft guidelines on uniform
accounting for repo and reverse repo
transactions. As per the statement,
the liabilities on account of repo
borrowing would be included in the
net demand and time liabilities (NDTL)
calculation for maintenance of cash
reserve ratio (CRR). However,
inter-bank repo transactions would
continue to be netted, as hitherto.
The amendment in the accounting
norms would bring such transactions
on to the balance sheet of the repo
participants in its true economic
sense, thus enhancing transparency.
Bond
Market During
the week under review, three central
undertaking corporations tapped the
market through issuance of bonds.
Foreign
Exchange Market The
rupee closed at Rs.49.46/USD on
November 14, 2008 as compared with
Rs.47.76/USD as on November 07,
2008. The Rupee moved between
Rs.47.32 and Rs.49.46, with a
standard deviation of 101 paise
during the week. The rupee posted
its biggest single-day fall in more
than 12 years on November 12, hit by
rising outflows from the stock
markets and heavy dollar demand from
public sector banks to meet
commercial operations. The rupee
ended 2.4 per cent lower at 49.30/32
per dollar, in line with other Asian
currencies. Although the rupee
partly recovered part of huge losses
it had registered on Wednesday, this
still was the biggest weekly drop in
a month on concerns that foreign
funds would continue to exit their
investments in the stock market. The
currency has slid 20 percent this
year, heading for its steepest
annual loss since 1991. This was the
rupee’s biggest single-day
percentage fall since February 5,
1996, when it dived 2.7 per cent. On
October 27, it fell to a record low
of Rs 50.29. The six-month forward
premia closed at 2.22 per cent
(annualized) on November 14, 2008
vis-à-vis 3.35 per cent on November
07, 2008. Forward
premia for one, three and six months
eased to 6.16 per cent (7.07 per
cent), 3.82 per cent (4.44 per cent)
and 2.61 per cent (2.81 per cent).
However, one-year forward firmed
slightly, as importers, particularly
capital goods importers and
corporates with external
liabilities, took long forward
cover. One-year forward premium, as
a result, firmed slightly to 2.03
per cent (1.95 per cent). Cash to
spot forward premium also firmed to
7.28 per cent (5.03 per cent) as
foreign banks resorted to sell-buy
swaps to take advantage of the
interest rate differential. The
fall in foreign exchange reserves
continued for yet another week as
the RBI sold dollars to meet
buyers’ demand. The forex kitty
saw an outflow of $1.5 billion
during the week ended November 7.
According to RBI, total foreign
exchange reserves, including gold
and SDR, dipped $1,519 million
during the week ended November 7 to
$251.4 billion. The London inter bank offered rate (Libor), that banks charge each other for three-month loans in dollars dropped to the lowest level since October 2004. The rate slid 6 basis points to 2.18 per cent on Tuesday, the lowest level since October 29, 2004, according to British Bankers’ Association data. The Libor-OIS spread, a gauge of cash scarcity among banks, narrowed 6 basis points on Tuesday to 168 basis points. Commodities
Futures Derivatives At
a time when companies are reeling
under severe liquidity strain and
high volatility in commodity prices,
the RBI has relaxed the norms for
remittances related to commodity
derivative contracts. Banks can now
issue guarantees or standby letters
of credit in lieu of making direct
remittances towards payment
obligations arising out of commodity
derivative transactions entered into
by customers with overseas counter
parties. The relaxation will give
greater flexibility to resident
entities that have such payment
obligations related to commodity
derivative contracts. The guarantees
or standby letters of guarantee can
be issued only where the remittances
are covered under the delegated
authority or under the specific
approval granted for overseas
commodity hedging by the Reserve
Bank. Crude
oil futures prices in the domestic
market slipped below the Rs
3,000-mark on the national platform
during the week, following weak
overseas markets amid global
economic weakness. Crude oil prices
fell for a second week in a row
amidst falling global oil demand.
Prices touched a 22-month low of $56
on November 12, 2008. The MCX Crude
oil December contracts were down by
4.63 per cent to trade at Rs 2,943
per barrel over the previous week.
Weak macroeconomic data from the Banking State-owned
banks like Bank of Maharashtra and
Indian Bank have reduced their
benchmark prime lending rate (B-PLR)
by 75 basis points with effect from
November 10, 2008. The new B-PLR is
13.25%. The
Reserve Bank of India (RBI) has
cancelled the licence of The
Achalpur Urban Co-operative Bank
Ltd, In
a major relief to the banking
sector, the RBI has announced that
the banks need not make any
provisions for the loss in present
value (PV) terms for money
receivable only from the Government
of India (GOI), for the accounts
covered under the debt waiver scheme
and the debt relief scheme. Further,
it noted that the Centre will pay
interest to banks at 364 days
treasury bill rate on the unpaid
amount towards the farm debt waiver
scheme, amounting to Rs 60,000 crore.
The Centre has since decided to pay
interest on the second, third and
fourth installments, payable by July
2009, July 2010, and July 2011
respectively, at the prevailing
yield to maturity rate on 364-day
GOI treasury bills. The interest
will be paid on these installments
from the date of the first
installment, which is November 2008,
till the date of the actual
reimbursement of each installment. A
study on the emerging trends in the
financial sector by credit rating
agency ICRA has revealed that the
banking sector’s net profitability
is likely to dip by 10-15 basis
points in the current fiscal year.
The report suggests tough times
ahead for the Indian banking sector
over the short term driven by
pressures on key parameters like
asset quality, capital mobilisation
and the net profitability. At
a time when the global banks hit by
financial turmoil are planning for
massive reduction in their manpower,
for Indian banks, it is time now to
expand their human resources for
undertaking their expansion plans.
Union Bank of Corporate BSA
Motors, a strategic business unit of
Tube Investments of India (TII),
part of the Rs 9,500 crore Murugappa
group and the market leader in
bicycles, has forayed into the
two-wheeler segment. The company is
launching its e-scooters (electric
scooters) in Chennai. The company is
targeting a sale of 10,000 units by
March 31, 2009 and plans to sell a
total of 60,000 units in fiscal
2009. TII is planning to make 150
e-scooters a day at its
manufacturing plant near Chennai;
which will be scaled up to 300 units
a day. US-based
electronics auto components major
Delphi Corporation has announced the
start of construction of a new
electronics manufacturing facility
in Chennai. The company will be
investing close to Rs 250 crore in
the new project, which is planned to
be built in three phases and is
expected to be operational by
2009-end. Although
various segments of the industry,
including IT, aviation, textile and
financial services, are witnessing a
trimming of their workforce to rein
in costs, the Indian steel sector,
which employs thousands of people,
is still in a wait and watch mode.
Although there are no job cuts so
far in the sector, steel
manufacturers like JSW Steel and
Ispat Industries have frozen new
recruitments for the time being. The
so far unaffected luxury cars
segment in The
global financial crisis coupled with
liquidity squeeze in the Indian
market, have taken a toll on the
retail sector. As a result, many
companies are looking at various
means of cost cutting, like reducing
its overheads. For instance,
Reliance Industries is contemplating
merger of its different formats to
make its retail arm more efficient. Despite
slowdown in the economy durable
majors like LG and Samsung is
optimist towards sales and
recruitment. Samsung To
overcome the slowdown in the car
market companies like Maruti Suzuki,
Mahindra & Mahindra and Hyundai External Sector Exports during September, 2008 were valued at US $ 13748 million which was 10.4% higher than the level of US $ 12455 million during September, 2007. In rupee terms, exports touched Rs. 62641 crore, which was 24.7% higher than the value of exports during September, 2007. Cumulative value of exports for the period April- September, 2008 was US$ 94973 million (Rs.405118 crore) as against US$ 72556 million (Rs. 296423 crore) registering a growth of 30.9% in Dollar terms and 36.7% in Rupee terms over the same period last year. Imports during September, 2008 were valued at US $ 24380 million representing an increase of 43.3% over the level of imports valued at US $ 17009 million in September, 2007. In Rupee terms, imports increased by 61.9%. Cumulative value of imports for the period April- September, 2008 was US$ 154744million (Rs. 661208 crore) as against US$ 111654 million (Rs. 456407 crore) registering a growth of 38.6% in Dollar terms and 44.9% in Rupee terms over the same period last year. Oil imports during September, 2008 were valued at US $ 9096 million which was 57.1% higher than oil imports valued at US $ 5792 million in the corresponding period last year. Oil imports during April- September, 2008 were valued at US$ 55063 million which was 59.2% higher than the oil imports of US$ 34590 million in the corresponding period last year. Non-oil
imports during September, 2008 were
estimated at US $ 15284 million
which was 36.2% higher than non-oil
imports of US$ 11218 million in
September, 2007. Non-oil imports
during April- September, 2008 were
valued at US$ 99681 million which
was 29.3% higher than the level of
such imports valued at US$ 77064
million in April- September, 2007. The
trade deficit for April- September,
2008 was estimated at US $ 59771
million which was higher than the
deficit at US $ 39098 million during
April- September, 2007. Information Technology Satyam
Computer Services has acquired
Motorola’s Software Development
Centre in Management
consultancy and technology solutions
provider Orkash Services has
launched Cyber Forensics Laboratory
in Gurgaon. The lab would help the
company identify and resolve threats
pertaining to internal controls and
cyber crime. A
host of leading business process
outsourcing (BPO) firms,
apprehensive of an erosion in
revenues owing to a slowdown in the
US and Europe, are heading back to
the country to tap opportunities in
the domestic market. Infosys,
Genpact, FirstSource and HTMT are
targeting the domestic market so
far, these companies were focusing
only on overseas pastures, ignoring
domestic opportunities. According to
industry estimates, currently the
domestic market contributes less
than 10% of the total revenues of
organised players. Telecom The
country’s GSM players recorded the
largest ever subscriber addition of
around 8 million in October this
year taking the total GSM subscriber
base to 242 million. With this
record addition the GSM operators
would alone add a total subscriber
base of 250 million by the year-end.
Tokyo-based
NTT DoCoMo,
*These statistics and the accompanying review are a product arising from the work undertaken under the joint ICICI research centre.org-EPWRF Data Base Project. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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