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Current Economic Statistics and Review For the
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Theme of the week: Global Financial Crisis-II Paradigm Shift In Financial Policies: Need of Hour By
now the genesis of the global
financial crisis has been reasonably
well unravelled. The crisis
represents the inevitable
manifestation of a shaky financial
architecture built on the basis of
impersonal mass securitisation
resulting in layers of financial
products using complicated
statistical models and nurturing
varied types of non-bank
institutions outside the realm of
banking laws and discipline but
tempting and attracting banking
institutions into the quagmire
structure riddled with extreme form
of risks. 1
Relationship Banking as the Most
Viable Foundation In
the collapse of the edifice like a
pack of cards reflecting the
contagion across the globe, the
entire philosophy of free-market
financial engineering and the
associated set of institutions and
instruments which have promoted it
– the central banking policies,
Basel norms of capital adequacy and
supervisory architecture, the
complex system of securitisation
including mortgage-based securities
(MBSs) and collateralised debt
obligations (CDOs) and the role of
credit rating agencies – have all
come into disrepute. There cannot be
a second opinion on the need for
concerted rethinking at the levels
of philosophy and public policies
setting out the necessary checks and
balances on the scope and scale of
financial engineering. The often
repeated quintessential quote from
Joseph E. Stiglitz (1993) comes to
mind: “A basic thesis of this
essay is that financial markets are
markedly different from other
markets; that market failures are
likely to be more pervasive in these
markets; and that there exist forms
of government intervention that will
not only make these markets function
better but will also improve the
performance of the economy” (p.20)
(‘The Role of the State in
Financial Markets’ in Proceedings
of the World Bank Annual Conference
on Development Economics 1993).
This should constitute the
fundamental premise on which the
future financial systems have to be
calibrated in individual countries
taking into account their social and
economic structures and current and
prospective development goals,
priorities and needs. In such a
framework, globalisation as a goal
for the financial systems has to be
discarded as unworkable, though
capital flows for productive
purposes can be promoted based on
the needs of individual systems.
Against this background and against
the backdrop of adverse
repercussions that the Indian
financial system has begun to sense,
there ought to be fundamental
changes in this country’s approach
to financial policies and the
banking and financial sector
management. The new thinking has to
be consistently applied both in
regard to the resolution of
immediate repercussions of the
global turmoil and the fashioning of
the long-term banking and financial
superstructure. The
foundation for such a long-term
superstructure is to be found in
commercial banking which is socially
leveraged to access without limit
public deposits and partake the
benefits of multiple credit
creation. For such a banking system
to be able to serve the community at
large in a safe and less risky
environment, the essential condition
is one of promoting and nurturing
relationship banking – an
arrangement in which contacts
between lending bank manager and the
borrower are direct and not
impersonal unlike in the western
banking system in which
securitisation or credit-related
derivatives have dominated. The
latter have neither contributed to
more efficient use of scarce
resources nor reduced financial
risks; in fact, the Nobel-prize
winning theory of asymmetric
information, and the consequential
adverse selection and moral hazard
behaviour on the part of lenders and
borrowers have proved to be, in
retrospect, the bane of the western
banking system; their operations
have intensified financial risks and
pushed them to the brink. In
relationship banking, on the other
hand, to repeat the relatively close
banker-borrower contact obviates
information asymmetry. It has
another major advantage which is
that it does not overtly depend on Of
course, for the relationship banking
to be successful, there are certain
pre-requisites. And when such
pre-requisites are established,
there can be enormous endogenous
benefits derived in banking
operations, apart from deriving
in-built benefits of risk
minimisation. These pre-requisites
are in the form of strengthening
branch network and professionalism
in banking. Such a system
facilitates sound knowledge of the
varied sectors of manufacturing,
infrastructure and agriculture and
allied activities on the part of the
banking personnel. Even in The
weaknesses in the organisational
structures of commercial banks in
the post reform period have also
manifested themselves in the neglect
of agriculture, small and micro
enterprises and other informal
sectors, the growth of the which is
imperative for the national economy
to expand and in which there is vast
business potential for the banking
industry. Apart from widening branch
network in rural and semi-urban
areas with sound professional staff,
big-size scheduled commercial banks
are required to strengthen their
Rural Regional Banks (RRBs) and
adopt cooperative institutions so
that credit delivery arrangements
for small and marginal farmers and
micro enterprises could be
strengthened. Big banks have also
been faltering in adopting the new
innovative ideas such as business
facilitator (BF) and business
correspondent (BC) models along with
the application of information
technology in the form of rural
kiosks. The RBI has expanded the
scope of BCs and BFs by covering
individuals with local knowledge
such as retired teachers or retired
government officials along with
non-government organisations (NGOs)
and microfinance institutions (mFIs).
What has been coming in the way of
banks adopting such institutional
strengthening has been the fear of
increasing operational costs and
risk profiles and thus violating the
This
form of institution and instrument
development calls for a thorough
rethink on the part of the
authorities who have embraced the
free-market theology wholeheartedly
and have been pushing the financial
system to achieve global standards
and adopt international practices.
They have been, for instance,
aggressively cajoling the banks to
introduce credit derivatives, the
very instruments that have
contributed to the collapse of the
western banking system. To quote the
RBI: “while banks have been
provided with the options of
managing their interest rate risk
and foreign currency risks through
the use of derivatives, similar
option was not available for
managing their credit risks.
Therefore, with a view to enabling
banks to control risk in a more
efficient manner, it is considered
appropriate to introduce credit
derivatives in a calibrated manner.
Accordingly, the Reserve Bank has
issued draft guidelines for
introducing, to begin with, single
entity credit default swaps
(CDS)”, (p.248) (RBI (2007): Report
on Trend and Progress of Banking in
India, 2006-07, December). This
has apparently been done at the
instance of the Percy committee on
making Mumbai an international
finance centre and on the promptings
of the finance ministry. The RBI has
been opposed to it, and after the
current crisis, the guidelines on
the CDS has been withheld. The
country’s financial system has
been saved from the global
catastrophe because of the values of
public ownership and social banking
in operation despite the coterie
amongst the powers-that-be pushing
the system in the other direction. The
country has a long history of
trading classes and speculation
dominating the system. In this
context and the context of the
current crisis, another area of the
Indian financial sector that call
for a fundamental rethink on the
part of the authorities concerns the
capital market. The way the capital
market instruments have been put in
place and the way the capital market
centric fiscal and other public
policies have been pursued by the
authorities, have given rise to a
situation of massive speculative
activities without contributing
admittedly to an efficient
functioning of the market including
the failure to help mobilise fresh
equity capital by many manufacturing
and infrastructure, companies for
their investment projects. The
authorities persistent phobia on
depending on port folio capital
despite its destabilising character,
is evident from the SEBI’s
relaxation of the curbs on
participatory notes (PNs) despite
long-standing case made by the RBI
against it. Treating such capital
inflow as an answer to the banks’
immediate liquidity problem, is
improper as it can be an extremely
costly proposition. As it is, the
economy enjoys a fairly high level
of domestic saving, and as shown
below, there are ready ways of
addressing the problem. The share
market centric policy imposes a
heavy constraint on pursuing
independent macroeconomic policies
on the plea that foreign investment
flow may suffer. In fact, this is a
distorted view of the responses of
foreign investors who are attracted
by a stable environment of real
economic growth. Within
the existing capital market
policies, there is substantial scope
for reforms and restraints. First,
in the derivative segments, short
sales should be an exception rather
than the rule. There have been
occasions when groups of investors
like foreign institutional investors
(FIIs) have hammered down share
prices by short sales. Secondly, as
alluded to in the column last month
(EPW, September 27, 2008),
individual stock futures which
dominate and cash-settlements rather
than delivery-settlements, which are
the norm in derivative segments in
the Indian bourses, have reduced the
Indian equity market into being
amongst the most volatile in the
world. In the interest of putting in
place a healthy, stable and
dependable capital market, it is
necessary that some of these much
needed reforms in the capital market
are undertaken. The
same is true of the system of
currency futures on exchanges in
which trading has been allowed for
everyone without there being any
underlying exposure. A ‘dynamic’
forex dealer can put together the
names of 10 bank depositors
satisfying know-your-customer (KYC)
norms and trade in their name for
protecting the value of their rupee
in terms of US dollar, the currency
in which contracts have been
permitted for trading for the
present. This is just not
hypothetical; we have the recent
concrete experience of such trading
in respect of small and medium
enterprises (SMEs) in the form of
exotic derivatives and the banks as
well as SMEs incurring heavy losses. Apart
from these basic reforms in the
management of banking system, the
authorities’ response to the
immediate problem of adverse
consequences on the domestic economy
is required to be calibrated. First,
it should not be treated purely as a
short-term liquidity issue, which is
basically an issue with foreign and
new private sector banks, which have
relatively poor deposit base and
which carry on layers of money
market transactions. Instead, what
is to be ensured is the normal
credit flow essentially by other
banks for productive sectors. For
this purpose, there is the need for
releasing the amount of Rs 122,500
crore of bank liquidity impounded
through CRR increases by 375 basis
points between December 2006 and
July 2008 in a gradual manner (Of
course, about Rs. 60,000 crore have
already been released). Secondly,
while impounded funds are being
released in this manner, it is
improper to let it purely in favour
of the short-term money market
without ensuring some purposeful
end-use of such funds. The RBI
should go back to its old system of
sector-specific refinance
facilities, thus encouraging banks
to lend in favour of agriculture,
small and micro enterprises, self
help groups (SHGs) and weaker
sections, which suffer the maximum
in such a credit-starved
environment. Thirdly, there is a
stronger case for reducing interest
rates on bank loans which have gone
up rather drastically and which have
hurt manufacturing investment and
output activities to a significant
extent during the past year or so.
Finally, a more purposeful policy
stance in the context of
contractions in foreign currency
assets and consequential reductions
in liquidity, should be a
countervailing expansionary fiscal
policy. The liquidity released above
along with some unwinding of funds
under the market stabilization
scheme could be fruitfully
utilised by the government for
giving a push to a number of
infrastructure projects in public
sector or those under public-private
partnerships which are held under
the restrictive FRBM rules. In the
current scenario of sluggish
manufacturing activity, the FRBM
rules regarding fiscal and revenue
deficit targets deserve to be waived
and an expansionary fiscal policy
pursued. The fear of inflation has
been considerably obviated by
significant declines in commodity
prices including crude oil prices.
In any case, the drastic fall in
industrial growth deserves to be
arrested through enabling credit and
fiscal policies. Highlights of Current Economic Scene AGRICULTURE Paddy
(de-husked rice) procurement by
private millers and dealers has
dipped sharply during the new crop
season started in October 2008. This
reduction can be attributed to
timely implementation of the stock
limit, local targets set by
government agencies and a hike in
the minimum support price. This has
not only raised government’s paddy
procurement to around 14.47 million
tonnes till November 14, 2008 from
last year’s 12.09 million tonnes,
but also has revealed that unlike
last year, traders do not have any
incentive to hoard rice or paddy.
According to official sources, paddy
procurement by private agencies in Sowings
of wheat slowed down, after starting
off on a brisk note at around 8.4
million hectares during the week
ending November 20, 2008 as against
8.5 million hectares a year ago. On
the contrary, winter-sown oilseeds
during the same period have been
planted on 7.3 million hectares as
compared to 5.9 million hectares
last year. Sowing of rapeseed,
principal rabi crop has reached to
5.6 million hectares, up from 4.4
million hectares a year ago. Even
acreage under maize has increased to
396,000 hectares, up from 292,000
hectares a year ago. Rice
procurement by the central
government as on November 17, 2008
has reached to 10.17 million tonnes
mark, displaying an increase of over
20 per cent from 8.47 million tonnes
in the year-ago period. The
government aims to procure 27.6
million tonnes of rice in 2008-09
season (October-November) for which
it has provided an additional bonus
of Rs 50 per quintal over and above
the minimum support price (MSP) at
Rs 850 per quintal for common
variety and Rs 880 per quintal for
‘Grade A’ during this season. Basmati
exports from Solvent
Extractor Association (SEA) has
urged the central government to lift
ban on export of edible oil
specially groundnut oil and seize
this opportunity to push the export
of edible oil to support exporters,
industry and farmers. The
central government allows limited
exports of edible oil by raising the
import duty on crude soyoil to 20
per cent from zero and partially
lifting up ban on the overseas
sales. Edible oil firms can export
only through packets of 5 kg and up
to a limit of 10,000 tonnes till
October 31, 2009. Indian
Sugar Mills Association (ISMA) as on
November 21, 2008 has agreed to pay
cane prices at the rate of Rs 125
per quintal to farmers. Corn
exports from the country are set to
crash to 2 lakh tonnes from 3
million tonnes in 2008-09 due to a
three-month export ban and more
attractive shipments from Spice
exports from the country have
registered a 14 per cent rise to Rs
2,660.75 crore in the
April-September period of this
fiscal year as compared to the same
period of the previous year. The
quantity of exports increased by 8
per cent to 2,53,550 tonnes during
the period. In dollar terms, exports
increased by 9 per cent to US $
624.15 million during the first six
months of the current year. Spice
oils and oleoresins including mint
products have contributed 40 per
cent of the total export earnings.
Chilli has contribution of 22 per
cent, followed by cumin 9 per cent,
pepper 8 per cent and turmeric by 5
per cent. Cardamom
exports are likely to increase this
fiscal year due to easing domestic
prices and reports of crop failure
in other producing countries.
Domestic prices declined in the
recent auctions because of increased
arrivals and reduced demand from
north Indian market. In the
April-September 2008, favourable
macro situation has enabled As
per the post monsoon estimates by
coffee board, coffee output is
likely to drop by 5.6 per cent to
276,000 tonnes for the current crop
year 2008-09. The major reason for
reduction in coffee production is
the rainfall during the blossom
period in majority of the coffee
growing areas in Karnataka and heavy
rains in the respective zone that
resulted in berry drop caused by wet
feet conditions. It is predicted
that Arabica production would be
around 90,050 tonnes, while Robusta
is pegged at 186,550 tonnes. Arabica
production is likely to see a
decline of 9,950 tonnes as compared
to Robusta, which is estimated to
decline by 6,450 tonnes, or 3.34 per
cent over the post blossom forecast. Tea
exports from Tamil
Nadu, the fourth largest producer of
raw silk in the country, has
occupied the top position in
productivity of raw silk 64 kg as
compared to the national average of
48 kg. It is also the leading state
in the production of the bivoltine
silk (white silk) for which there is
very high demand in the overseas
markets. While the other silk
producing states like Karnataka,
Andhra Pradesh, West Bengal, Assam
and The
food ministry has considered a
proposal to rationalise allocations
for the Above Poverty Line (APL)
category amidst complaints from
various states regarding cut in
foodgrain allocation, particularly
in rice. Demand of foodgrain under
the APL category has increased in
recent years because of a sharp
difference between the market price
and the central issue price (CIP)
announced by the government. Industrial
Production 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 8.84 % for the week ended 15/11/2008 over same period of the previous year as compared to 8.90 % for the week ended 08/11/2008 and 3.35 % during the corresponding week ended 17/11/2007 of the previous year. The index for Primary Articles rose by 0.1 % to 250.2 from 250.0 for the previous week. Due to the higher prices of moong, rice and bajra (3% each), ragi (2%) and masur, maize and fruits & vegetables (1% each), the index for 'Food Articles' group rose by 0.1 % to 244.6 from 244.3 for the previous week However, the prices of fish-marine (12%) and gram and tea (2% each) declined and for 'Non-Food Articles' group rose marginally to 235.8 from 235.7 for the previous week due to higher prices of soyabean (11%), gingelly seed and castor seed (2% each) and linseed (1%). However, the prices of raw rubber (4%), cotton seed groundnut seed and raw cotton (2% each) and raw silk (1%) declined. The annual rate of inflation, calculated on point-to-point basis, for ‘Primary Articles’ stood at 11.90 % (Provisional for the week ended 08/11/2008 as compared to 11.66 % in the previous week. It was 4.68 % a year ago. For ‘Food Articles’, the annual rate of inflation stood at 9.93 % for the week ended 15/11/2008 as compared to 9.31 % in the previous week. It was 2.63 % as on 17/11/2007. Fuel, Power, Light & Lubricants group index remained unchanged at its previous week's level of 353.3 The index for the Manufactured Products rose by 0.05 % to 203.5 from 203.4 for the previous week. The index for 'Food Products' group declined by 0.1 % to 201.6 from 201.9 for the previous week due to lower prices of cotton seed oil (5%), imported edible oil (4%), rice bran oil (3%) and gur (2%). However, the prices of bran (all kinds) (5%), gingelly oil (4%), sooji (rawa) (2%) and salt and atta (1% each) moved up. Due to higher prices of cotton yarn-cones and hessian & sacking bags (4% each), texturised yarn (2%) and hessian cloth and cotton yarn-'hanks (1% each), the index for 'Textiles' group rose by 1.0 % to 141.8 from 140.4 for the previous week. However, the prices of synthetic yarn (2%) declined. The index for 'Rubber & Plastic Products' group declined by 0.2 % to 168.2 from 168.6 for the previous week due to lower prices of pvc fitting & accessories (12%). For 'Chemicals & Chemical Products' group, the index rose by 0.3 % to 223.9 from 223.2 for the previous week due to higher prices of acetylene (70%) and oxygen (8%). However, the prices of vitamin liquids (4%) declined. The index for 'Basic Metals Alloys & Metal Products' group declined by 0.6 % to 284.1 from 285.7 for the previous week due to lower prices of ferro silicon (24%), steel ingots (plain carbon) (16%), basic pig iron and foundry pig iron (7% each), zinc (3%), steel sheets, plates & strips (2%) and ms bars & rounds (1%). However, the prices of joist & rolls and other iron steel (3% each) moved up. The index for 'Machinery & Machine Tools' group rose by 0.3 % to 177.1 from 176.6 for the previous week due to higher prices of other electrical equipment & systems (9%). The
final wholesale price index for 'All
Commodities’ (Base:1993-94=100)
stood at 241.3 as compared to 241.0
and annual rate of inflation
based on final index, calculated on
point to point basis, stood at 12.13
% as compared to 11.99 %. Financial
Markets Capital
Markets Primary
Market The
current market volatility have
prompted the government to defer
disinvestment in rail infrastructure
company RITES Ltd, but it has
decided to offload its 10 per cent
holding in upstream firm Oil India
Ltd (OIL). The Cabinet Committee on
Economic Affairs (CCEA) had approved
RITES initial public offering (IPO)
through fresh issue of one crore
equity shares and a simultaneous
divestment of government's 10 per
cent shareholding on January 10.
However, as per official sources,
RITES have deferred the IPO
indefinitely because of current
market conditions and a change in
requirement of funds. Similarly,
the OIL was to launch its IPO of
2.64 crore-equity shares on November
10, but the volatile market led the
firm to re-think on the issue. At
present, government holds 98.13 per
cent stake in OIL, which produces
close to four million tons of crude
oil a year. Secondary
Market Fears
of a prolonged global recession,
slowdown in the domestic economy and
selling by foreign funds pulled the
key benchmark indices lower for the
week ended Friday, 21 November 2008.
The market edged lower in four out
of five trading sessions. Stock
markets came close to their October
lows on the back of a relentless
rout in the world equities and
sustained selling by foreign
institutional investors (FIIs).
Global stock indices fell on worries
of a prolonged recession in Among the sectoral indices of BSE, all the indices continued their downward trend during the week. Reality shares were slid 18.2 per cent over the week on the back of price cuts by real estate developers and negative outlook on the sector by credit rating agencies. Metal and Bankex followed the same trend which lost more than 10 per cent each during the same period. According
to Securities and Exchange Board of
India (SEBI), there was no evidence
to blame short selling for the stock
market slide since September. SEBI
chairman Bhave opined that countries
that had banned short selling had
seen their markets dipping. And most
of them have restarted short
selling. According to him, the
prolonged fall in the markets was
instead the results of the collapse
of liquidity in international
financial markets and the subsequent
failure of financial entities and
the consequent global recession that
has set in. October
will go down in the annals of the
mutual fund industry as perhaps the
bloodiest month. The action that was
building up in all the asset markets
found its way to the mutual funds
sector and caused the industry to
shiver. Assets under management fell
from Rs 5.29 lakh crore to Rs 4.31
lakh crore, a fall of around 18.37
per cent, or around Rs 97,201 crore,
in a month. For some of the smaller
funds the erosion was as much as 30
per cent. The mutual fund industry
saw almost Rs 90,000 crore of net
outflows in September and October. Reserve
Bank of India (RBI)’s sustained
injection of liquidity into the
mutual fund industry has started
yielding results. After the huge
redemptions of September and
October, the outlook for November
has improved. As a result, RBI data
shows that Rs 56,755 crore of the
limit allocated to banks for lending
to mutual funds and NBFCs lies
unused. RBI had opened the term repo
facility to banks for lending up to
Rs 60,000 crore to mutual funds. It
had also permitted an exemption of
up to 1.5 per cent of the funds that
banks needed to invest in specific
securities (SLR) to create headroom. Fixed
Maturity Plans (FMPs) may no longer
be permitted to announce indicative
portfolios and indicative yields to
investors if the SEBI accepts the
recommendations of the Association
of Mutual Funds in The
SEBI is considering a proposal to
remove the short-term tax benefits
on dividends paid by mutual funds.
At present, investors get tax
advantages when they are paid
dividends. The move, recommended by
Sebi’s advisory committee on
mutual funds, is aimed at
discouraging investors to exit funds
after dividend payouts. Participants
in the domestic equity market are
still wary of overseas stock lending
and borrowing operations of FIIs
even while some finance ministry
officials have claimed that
short-selling through overseas
lending is negligible. FIIs have
been lending their participatory
notes’ (PNs’) underlying stocks
in the overseas market since the
beginning of this year, which have
been used to short-sell in Standard
& Poor's (S&P), in
collaboration with India Index
Services & Products Ltd (IISL)
and NSE, plans to launch commodity
index and different derivative
products for Derivatives
Despite
a sharp recovery on Friday, the
Nifty November future closed a good
3.6 per cent lower over its previous
week’s close of 2829 points. In
terms of rollover, the performance
so far has only been moderate. The
week saw about 15 per cent rollover
in open interest (OI), which is
marginally better than that of the
previous month. The FIIs have been continuous sellers during the week. The cumulative FII positions as percentage of total gross market position on the derivative segment as on November 20 decreased to 36.54 per cent. FIIs have been net sellers during most part of the week. They now hold index futures worth Rs 7,939.65 crore and stock future worth Rs10,688 crore. Their index options holding stood higher at Rs 13,523.79 crore. The carryover pattern has not been particularly strong so far. About 17 per cent of Nifty futures OI has moved into December and beyond. About 45 per cent of Nifty option OI has moved to December and beyond. The Bank Nifty has also seen a strong trading pattern and a fair amount of carryover into the December series. As
the Indian markets remain in the
grip of intense volatility, many
participants, especially those in
the hedging and proprietary desks,
are voicing the need for a tradable
volatility index (VIX), which could
be used to hedge their portfolios.
They feel that it is the best time
for Indian markets to get exposed to
an asset class that will help
investors counter the all-pervading
volatility in the domestic markets. Government
Securities Market Primary
Market Five
state governments auctioned 10- year
paper maturing in 2018, for the
notified amounts of Rs 4,850 crore
on November 20, 2008. The cut off
yields ranging between 7.77-7.86 per
cent, highest for The
RBI repurchased 7.55 per cent 2010
and 5.87 per cent 2010 under market
stabilisation scheme (MSS), for the
notified amounts of Rs 5,000 crore
and 4,000 crore, respectively, on
November 20, 2008. The cut off yield
for both the 2-year papers have been
set at 6.71 per cent and 6.61 per
cent, respectively.
On
November 21, 2008, RBI re-issued
7.56 per cent 2014 and 7.94 per cent
2021 for the notified amounts of Rs
6,000 crore and 3,000 crore,
respectively. The cut off yield for
both the 13-year papers have been
set at 7.16 per cent and 7.42 per
cent, respectively. Secondary
Market Inter-bank
call rates stayed in the comfortable
range of 6-6.25 per cent throughout
the week, as banks appeared to have
covered their fortnightly positions
in the first half of the reporting
cycle itself, resulting into lower
demand for funds later. Rates did
edge up lightly on Friday during
bond auctions worth Rs 10,000 crore.
At the weekend liquidity adjustment
facility (LAF) auctions, the
recourse to the repurchase window,
the RBI’s purchase of securities,
amounted to Rs 6,800 crore. Recourse
to the reverse repurchase window was
Rs 16,015 crore, mostly from
successful bidders at the MSS
auctions. RBI mopped up an average
of Rs 18,324 crore through the
reverse repo window while the amount
lent through the repo window fell to
an average of Rs 4,020 crore during
the week. Bonds
rallied during the week, propelled
by receding inflation and investor
flight to public sector bank
deposits. But traders said that the
rally was also driven by
expectations of further policy
interventions from the RBI to ensure
a stable liquidity in the financial
market. The interventions last week
came in the form of another round of
repurchase of MSS securities. The
10-year benchmark yield fell sharply
on expectations that RBI could lower
interest rates further to stimulate
the slowing economic growth. The
yield dipped to the lowest in
3-years, falling 30 basis points to
end at 7.21 per cent from 7.51 per
cent. Crude oil prices slipped to a
3-1/2 year lows, below $49/barrel,
easing pressure on prices after a
dip in the WPI inflation rate to a
near 5-1/2- month low had allayed
underlying worries and confirmed
that the significant drop in the
preceding week was not an
aberration. Meanwhile, comments from
finance minister P Chidambaram
reiterating that the monetary policy
bias would be clearly to stimulate
economic growth and that necessary
steps would be taken to boost the
domestic economy underpinned
sentiments. A junior industry
ministry also made comments on
policy expectations, boosting the
bonds market. The 10-year benchmark
yield could linger in the current
range with a slight downward bias,
as speculation over more rate cuts
would drive sentiments and trading
activity. Receding oil prices and
inflation would further boost
sentiment. Bond Market During
the week under review, Reliance
Industries Ltd tapped the market
through issuance of bonds to
mobilise Rs 1,000 crore by offering
11.45 per cent for 5 years. The bond
has been rated AAA by Crisil and
Fitch. Indian
convertible bonds, one of the
preferred instruments of corporates
for raising capital in 2007, have
almost dried up. In 2008 so far,
best and worst performing IPOs
convertible issuance by Indian
corporates stands at $578 million,
down 91 per cent from $6.6 billion
in 2007. The country, which was the
second-largest issuer of foreign
currency convertible bonds (FCCBs)
in 2007, has seen its ranking slip
to the ninth position. Prithvi
Haldea, chairman and managing
director, PRIME Database, the
country's premier database on debt
private placements, the first half
of the current fiscal witnessed a
mobilisation of Rs. 55,510 crore
through debt bonds on private
placement basis by a handful of only
72 institutions and corporates.
According
to PRIME, the sector which witnessed
a significant growth was the private
sector whose mobilisation went up by
37 per cent from Rs.12,689 crore to
Rs.17,371 crore. Moreover,
mobilisation by state level
undertakings went up by 308 per cent
from Rs.150 crore to Rs.613 crore
while public sector undertaking
mobilization went up by 240 per cent
from Rs.471 crore to Rs.1,600 crore.
On the other hand, all-India
financial institutions/banks
recorded an 18 per cent decrease to
Rs. 35,896 crore as compared to Rs.
43,566 crore in the corresponding
period of the previous year. A fall
in mobilisation also came from state
financial institutions, down by 57
per cent to Rs.30 crore as against
Rs.70 crore in the corresponding
period of the previous year. The
highest mobilisation through debt
private placements during the period
has been by Power Finance
Corporation (Rs. 8,409 crore),
followed by REC (Rs 4,474 crore),
HDFC (Rs 3,350 crore), LIC Housing (Rs
2,750 crore), IDFC (Rs 2,486 crore),
IRFC (Rs 2,324 crore), DSP (Rs 2,055
crore), IDBI (Rs 2,052 crore) and
Tata Steel (Rs 2,000 crore). Foreign
Exchange Market The
rupee fell to an all-time low of Rs
50.57 per dollar intra-day, but
losses were then arrested by
suspected dollar sales by state-run
banks. Rupee ended the week at Rs
50.04 per dollar. After a gap of
several days, the rupee took a break
from its falling routine and posted
gains on November 19. However, this
is the second week in a row that the
currency posted weekly losses, as a
slide in global stocks fuelled
concerns foreign investors would
step up equity sales. Measures
announced by RBI, which included
raising rates on deposits by NRIs to
boost foreign exchange inflows,
provided little support to the rupee
as dollar short-covering dominated
price action. Apart from concerns
over capital outflows, dollar demand
from non-deliverable forward (NDF)
market arbitrageurs and importers/
corporates added to the selling
pressure. The NDF market continued
to remain bearish for the rupee
throughout the week, given the
overseas market development.
Annualised forward premia broadly
gained over the week although gains
remained limited in their movement
compared with spot. Six-month
premium ended higher at 2.67 per
cent from 2.22 per cent. The
country's foreign exchange reserves
fell $5.02 billion to $246.3 billion
in the week ended November 14, as
per RBI. According
to media sources, the government
will clamp down on overseas special
purpose vehicles (SPVs) of Indian
companies, which were set up to
carry out businesses in other
countries, but have instead resorted
to raising funds and invested them
in the Indian stock market or in
real estate. The transactions have
been in subversion of external
commercial borrowings (ECB)
guidelines and the Foreign Exchange
Management Act (Fema) and hence are
illegal. Among the actions being
planned by the RBI is defining the
bonafide business activity of SPVs
as a genuine activity in
manufacturing, trading or the
services sector and explicitly
prohibiting companies, by law, to
use the overseas route to acquire
Indian assets or loans. On the anvil
are also stringent regulations on
overseas investments in the
financial sector and fool-proof
regulation to ensure the purpose and
end use of the funds. In a missive
to DIPP, the apex bank has proposed
to make it mandatory for an overseas
SPV to have its major operations in
the country of its operation. Currency
Derivatives The
SEBI is planning to broad-base the
exchange-traded currency futures
market by allowing currency options,
delivery-based settlement and
futures contracts in more
currencies. Currently, these
facilities are available only in the
over the counter (OTC) market, where
client-to-banks and banks-to-banks
currency derivative deals take place
on bilateral basis. Now, a daily
trading of $250-300 million is
taking place on three exchanges —
NSE, BSE and MCX-SX. The
MCX-SX active November contract
registered a record volume increase
of 50.63 per cent over the previous
session. MCX all contracts put
together had a record volume of Rs
1,466 crore on November 20. Commodities
Futures Derivatives Five
years after the start of commodities
futures trading in Jeera
futures on NCDEX (National Commodity
and Derivatives Exchange) lost some
of its gains on November 20. Prices
rallied by nearly 3 per cent on
November 18, on the back of delivery
shortage as the November contract
reached an expiry. While the 397
tonnes of stock available for
delivery corresponding to the
November futures, OI-reflecting
intention of taking physical
delivery of the commodity in last
five days to contract expiry--rose
to 897 tonnes. Prices have declined
considerably since then and active
January contract is currently
trading near Rs 10,125 per quintal,
down 2.5 % from its Tuesday's high. Jobbers
and arbitrageurs, who churn out
large volumes are likely to be
impacted and exposed to greater risk
with Except
gold futures, crude oil and base
metals futures markets continued
their slide in the last week ended
on Friday, mainly on weak economic
activities, amid a firm dollar.
Crude oil prices in the
international markets traded below
$50 a barrel mark, as prices
followed movements in the equity
markets amidst a rising inventory
and a firm dollar. The overall trend
in base metals remained down as the
global economic situation is weak
and the recessionary impact is felt
across the globe. On the other hand,
gold futures befitted from a slump
in equity markets as safe heaven
buying from investors continued to
support yellow metal prices. The MCX
Gold December contracts gained some
further ground and rose 4.9 per cent
to settle at Rs 12,212 per 10 gram
over the previous week. Gold prices
traded above the key support level
of $720 an ounce. However, silver
December contracts ended steady at
Rs 16,090 per 10 gram, down by Rs
260 per kg over previous week. The
MCX crude oil December contracts
prices dipped by 13 per cent to
trade at Rs 2,563 per barrel on
Friday over the previous week. The
MCX Copper November contracts were
lower by Rs 22.80 or 6 per cent to
settle at Rs 187.50 per kg over the
previous week. Maintaining a three-week losing streak, edible oil fell further in New Delhi during the week ending on increased selling by stockists as deepening global recession reduced demand for commodities. Trading sentiment turned weak as palm and soyabean oil prices declined in Malaysian commodity markets on easing crude oil prices. Energy
Exchange The
volume of electricity traded in the
day-ahead market contract rose by
39.82 per cent on November 18 on
India Energy Exchange (IEX), the
country’s first power exchange
promoted by Financial Technologies
Ltd. Total 21,105 megawatt hours (mwh)
were traded against 15,094 mwh on
November 17. Between 1000 hrs and
1200 hrs, buyers offered bids for
36,640 mwh, while sellers for 30,445
mwh. However, the total volume
traded on agreed price was about
21,105 mwh. The minimum price that
was quoted by the traders was Rs
4.91 kilowatt hour (kwh), while the
maximum rate was Rs 9.50 kwh. Banking Many
commercial banks have raised the
interest rate on NRI deposits by 75
basis points (bps) to attract
foreign currency resources to the
country. This follows the RBI’s
decision to raise the interest rate
ceiling on foreign currency
non-resident (FCNR) deposits by 75
bps to London Inter Bank Offered
Rate (LIBOR) plus 100 points.
Similarly, it raised the ceiling by
75 bps on non-resident (external)
rupee accounts (NRE) to Libor plus
175 bps. Since October 2008, the
interest rate ceilings on FCNR (B)
and NRE term deposits were increased
by 100 bps each. State
Bank of With
a view to further liberalising the
policy on overseas investments, it
had been decided, in consultation
with the Government of India, to
allow Registered Trusts and
Societies engaged in
manufacturing/educational sector to
make investment in the same sector(s)
in a joint venture or wholly owned
subsidiary outside India, with the
prior approval of the RBI subject to
compliance with the prescribed
eligibility criteria. The
RBI has allowed up to 49 per cent
foreign investment in credit
information companies (CICs) by a
single entity. This forms part of
the revised notification on foreign
direct investment (FDI) in CICs. Entities
in the services sector, namely,
hotels, hospitals and software
companies have been permitted to
avail ECB up to US$ 100 million, per
financial year, for the purpose of
import of capital goods under the
approval route. All other aspects of
ECB policy shall remain unchanged.
The facility to companies, including
those in the services sector, to
avail trade credit up to US$ 200
million per import transaction, for
a period less than 3 years, for
import of capital goods, shall
continue. The
RBI has constituted a working group
under the Chairmanship of its
Executive Director, Shri V S Das, to
suggest measures, including the
appropriate regulatory and
supervisory framework, to facilitate
emergence of umbrella organisations
for the urban co-operative banking
sector in each state. Further, and
as opined by the Standing Advisory
Committee for UCBs, the working
group may also look into the issues
concerning creation of Revival Fund
for the sector. The Group will
submit its report within three
months of the first meeting, which
was held on July 8, 2008. Corporate Indian
tyre manufacturers like MRF, JK
Tyres are facing high input costs
resulting in higher prices.
China-based tyre manufacturing
companies are providing tyres at low
price than Indian companies. High
input costs are not allowing Indian
producer to cut price of the tyres.
MRF, Dabur
Unitech
Ltd., the country’s second largest
real estate firm, has decided to
sell its 200-room budget hotel
Courtyard by Marriott in Gurgaon
ahead of its inauguration in January
2009. The transaction is valued
between Rs 250 crore and Rs 300
crore. Information
Technology TCS,
along with five other Indian firms,
has been named among the top 100
global entities offering IT
solutions for the financial services
industry worldwide. Infosys Technologies has been selected as an original component member of ‘Global Dow’, an index of corporations around the world chosen by journalists and editor in chief at Dow Jones. 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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