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Theme of the week: Global Financial Crisis-III Monetary Measures Lack Developmental Focus The
global financial distress and its
repercussions on the Indian
financial markets – current and
prospective – have attracted from
the authorities mindboggling sets of
measures. Never has there been in
the history of the Reserve Bank of
India (RBI) such concerted attempt
to augment liquidity in the
financial system on such a large
scale and in such quick succession.
The release of about Rs
140,000 crore liquidity through 350
basis points slashing of cash
reserve ratio (CRR) within the space
of three to four
weeks, as shown in Table 1,
the injection within such a short
span has nullified the effect of the
CRR hikes effected between 2006 and
2008. The simultaneous release of
additional liquidity support to the
extent of 1.50 per cent of demand
and time liabilities (DTL),
equivalent to Rs 60,000 crore, to be
used exclusively by the banks for
funding the requirements of mutual
funds (MFs) and non-banking finance
companies (NBFCs), and the
reductions in repo rate from 9 per
cent to 7.50 per cent, are all
historic measures befitting the
havoc wrought by the financial
crisis. In
response to the depleting foreign
exchange reserves, interest rates
offered on foreign currency deposits
have been raised and the rules
regarding external commercial
borrowings have been liberalised.
With the need for sterilization of
foreign exchange inflows
disappearing, the government have
decided to buyback the securities
issued under the market
stabilisation scheme (MSS) as a
measure of further injection of
liquidity and that too on a
long-term basis.
Besides, as a
counter-cyclical prudential measure,
the dynamic provisioning
requirements have been
activated and all types of standard
assets would now attract a uniform
0.40 per cent provisioning,
substantially reduced from 1.0 to
2.0 per cent; the low rate of 0.25
per cent for agriculture and SME
sectors will continue..
1. The Situation Calls for Some Soul-Searching by RBI In
the conventional monetary policy
framework, the authorities’
response to the crisis and the
series of measures taken thereunder
cannot be faulted.
But, the greatest drawback
lies in believing that the
conventional measures will do the
trick in the current unprecedented
crisis.
In turn, this belief arises
from the lack of realisation that
the entire economic edifice built on
monetarist policy framework combined
with a policy of fiscal compression
can only be weak and can be
unsettled with the slightest of
external stocks.
Critically viewed in this
light, there can be strong
misgivings regarding the objectives
set before the measures, their
nature and sequencing.
The objective seems to be to
inject vast amounts of short-term
money market liquidity, without
ensuring its end-use. This attitude
is in no way different from
President George Bush’s assertion
at the recently concluded G-20
summit that there is nothing wrong
with free market capitalism and
minimal regulations. And even the
RBI measures have come about not as
a studied response on its own
volition but based on promptings by
the governmental authorities.
Instead, the present crisis should
give the central banking authority
an opportunity – and need – to
do some soul-searching.
There are many elements
involved in such inward-looking
exercise necessary for the RBI. First,
it is necessary to realise that
deep-down the current economic
malaise, the crisis of the Indian
financial sector is peripheral; the
deeper crisis is rather to be found
in the rapid deterioration in the
real sector growth.
The projected 7 to 8 per cent
growth in overall GDP during 2008-09
with support from the services
sector, hides the problems of crisis
proportions faced by the real
sectors.
More specifically, the
deterioration in recent industrial
growth is to be traced to the
RBI’s knee-jerk and sledge-hammer
methods of fighting inflation based
as they were on the
generally-discredited monetarist
policies.
In this respect, it is worth
recalling that the rate of
industrial growth had begun to
falter right from the beginning of
the current financial year, much
before the exacerbation of the
global financial crisis manifested
in the bankruptcy, sell-out and
restructuring of some of the
world’s largest financial
institutions that occurred in
mid-September 2008.
The adverse consequences of
such a dear money policy are to be
seen concretely in the doubling of
interest cost to corporates in the
second quarter of 2008-09 and in the
largest amount of shelving of
planned investment projects
estimated at worth Rs 85,500 crore
during the first half of the year,
almost one and a half times more
than such normal shelving a year
ago. Secondly, it is time the RBI realises that its model of relying only on money market instruments to convey its policy signals has created three noticeable distortions in the working of the credit and monetary system of the country: layers of money market transactions unrelated to the underlying real sector needs, grossly unequal distribution of bank credit and huge and sudden increases in interest cost for projects. To begin with, layers of money market transactions indulged in by low-deposit-based foreign and new private sector banks have determined the interest rate structure in the country in the country and thus distorted the rate structure relevant for the real economy, in a manner of the tail wagging the dog. This distortion in turn has been prompted by the RBI’s policy of non-interference in the much-touted prime-lending rate (PLR) system. After the system was allowed to have a free-play without any lower and upper bounds on interest rates, the scheduled commercial banks have favoured the corporates with large sub-PLR lendings for short-term purposes and kept the rates for the rest at sticky levels. Even for corporates, the rates of interest on long-term project finance are found to be higher than those for short-term working capital. As shown in Table 2, the interest rate on non-export demand and term loans above Rs. 2 lakh excluding lending rates at the extreme five per cent, shows that the BPLR has shifted significantly upwards from a range of 10.25 – 11.25% in March 2005 to 13.25 – 14.75 % in September 2008 – an increase of more than 300 basis points in more than three years for public sector banks. Similarly, increases have taken place for private sector banks and foreign sector banks.
The sector-wise incremental share in bank credit between March 2002 to March 2007 shows that the share of agriculture has increased from 9.8 per cent to 11.8 per cent. Similarly, the share of personal loans has jumped which includes consumer durables and housing loans and balance personal loans (Table 3)
What is more, as shown in Table 4, the scheduled commercial banks show no compunction in charging the same weighted average of interest rates for artisans and village industries, small-scale industries and agriculture as those for the total bank loans; in many years, the artisans and village industries have attracted higher rates than the average rate for the system as a whole. However there has been a decline for Industry, Artisans and Village and Tiny Industries and other small scale industries. A final distortion has come about in banks’ neglect of agriculture small-scale industries and other small borrowers in credit delivery. As the Report on Trend and Progress of India for 2006-07 writes: “Out of 28 public sector banks (PSBs), only eight banks --- could achieve the agricultural lending target of 18 per cent. In the case of lending to weaker sections, only seven PSBs --- have achieved the sub-target of 10 per cent as on the last reporting Friday of March 2007” (p.72)
The
priority sector guidelines have
themselves allowed the fulfilment of
the priority sector targets without
satisfying the sub-targets for
agriculture or for weaker sections.
Such a system, which overtly
excludes a large section of the
poor, is patently inequitable and
replete with serious social and
economic implications.
While demand-side issues are
no doubt crucial for increasing the
credit absorptive capacity of the
poor, the supply-side exclusion is,
as it is, indeed massive and
therefore there exists vast scope
for the credit agencies to reach the
vulnerable groups with the help of
policy guidelines. The
neglect of the informal sectors
embracing more than 80 per cent of
the population with vast social
returns in credit supply smacks of
insensitivity in the operations of
the nation’s credit policy regime
which in turn gives rise to
socio-political revulsions.
This precisely what happened
when the government of India, faced
with severe and repetitive
incidences of farmer suicides,
adopted the policy of doubling of
bank credit for agriculture and
allied activities within a period of
three years (2004-05 to 2007-08).
This has been done despite
there being no proper spread of
additional branch network in rural
areas for proper appraisal of credit
needs and delivery.
In fact, the number of rural
branches has experienced a steady
decline and so has the number of
staff posted over there.
Such narrowing of the
institutional set up is also the
direct result
of the RBI giving up branch
licensing policy – a policy which
had given an impetus to the spread
of branch banking in rural and
semi-urban areas in the country.
In a situation of such weak
institutional structure, there are
serious dangers of varied
distortions: the bulk of the
agricultural credit going to rich
farmers and borrowers located in
urban and metropolitan areas, and
above all, such politicised loans
giving rise to a growing incidence
of non-performing assets – a
phenomenon which is already getting
revealed. In such a policy environment, the propagation of ‘financial inclusion’ appears hollow. The very concept of ‘financial inclusion’ looks to be an escapist device to avoid a genuinely egalitarian credit distribution arrangement. To cite an example, in the years 2005-06 and 2006-07 when the RBI went to town with the declaration that “as banking services are in the nature of public good, it is essential that availability of banking and payment services to the entire population without discrimination is the prime objective of the public policy (Leeladhar, V “Taking Banking Services to the Common Man – Financial Inclusion.” RBI Bulletin, January 2006)”, the banks hardly observed any of the credit guidelines for the real and neglected sectors including those for opening general credit lines for the weaker sections or the need for expanding branch network in rural areas but instead extended unprecedented levels of bank credit for real estate, capital market and commodity market operators (Table 5). It may appear queer but true that the outstandings of loans of public sector banks against real estate (including housing loans) at the end of March 2007 (at Rs 217,979 crore) have far exceeded their loans against agriculture, both direct and indirect together (Rs 205,091 crore). The sum total of the contention in this section is that a calibrated set of central bank guidelines with rigorous enforcement are necessary regarding social goals in credit policy prescriptions including the strengthening of banking institutions and a rational interest rate structure. When public pressures are brought to bear on the government to desist from diluting the independence of the central bank. The most egregious example of interference by the Ministry of Finance has been surely the constitution in mid-October of the Liquidity Adjustment and Injection Committee headed by the secretary in the Ministry of Finance. What was the main province of the central bank became the terrain of the ministry. The case against such governmental interference becomes stronger if the central bank ensures the necessary developmental role for institutional credit and above all, exhibits a reasonable degree of social concern for an egalitarian pattern of credit distribution and economic development.
Highlights of Current Economic Scene AGRICULTURE Food
and Agriculture ministry has stated
that the government would continue
with the ban on exports of
non-basmati rice and might consider
imposing import duty on crude palm
oil if oilseeds prices fall below
minimum support price (MSP). The
closing stock of sugar in
According
to Cotton Association of India,
exports of cotton have plunged by 95
per cent to 75,000 bales during
October 01 November 5, 2008 as
against 20 lakh tonnes bales
exported in the same period last
year. Cotton prices are falling in
the international markets; however,
the high minimum support price fixed
by the central government has
protected farmers even as demand
from textile companies remains
subdued. International Cotton
Advisory Committee has projected
that global cotton output would
decline by 6 per cent to 24.7
million tonnes in 2008-09, which is
expected to put pressure on the
prices of the commodity. Cotton
Corporation of India has reiterated
that arrivals of cotton so far in
the year ending September 2009 has
fallen by 22.6 per cent due to sharp
drop in arrivals of Gujarat. All According
to the estimates of the
International Pepper Community (IPC),
global pepper production during 2009
is likely to increase by 5 per cent
over the previous year to touch
305,070 tonnes. Black pepper
production would be around 246,600
tonnes, while white pepper would
contribute to 58,470 tonnes.
Consumption of producing nations is
projected to be around 111,210
tonnes for 2009, as against 113,100
tonnes of 2008. Exportable surplus
of the producing nations is
projected to be around 280,793
tonnes as against 280,498 tonnes in
2008. Actual export is projected to
be around 221,960 tonnes for 2009 as
against 218,820 tonnes in 2008.
Carry forward stock in 2008 is
reported to be at 61,678 tonnes and
in 2009 it is expected to come down
to 58,833 tonnes. The
coffee cultivation in
non-traditional areas has expanded
by 8 per cent to cross 50,000
hectares in 2008-09 as compared to
previous year’s levels.
Non-traditional coffee growing areas
are located in Vishakapatnam, in
east Coir
exporters are hit badly by global
slowdown, as demands have declined
and payment for executed contracts
have been delayed or have got
defaulted. The 2,000 crore
traditional coir industry, which
employs more than five lakh workers
is set for a crisis. For two
consecutive months (September and
October), exports have dropped by
more than 10 per cent in volume.
According to estimates of the
state-run Coir As
per the new global report by
International Grain Council (IGC) on
grain outlook, global wheat sowings
are estimated to slow down by 1.6
per cent to 221.7 million hectares
during 2008-09. This decline would
be attributed to falling
international wheat prices and
higher input costs. However, global
wheat production in 2008 is
estimated to be around 683 million
tonnes, displaying a rise of 73
million tonnes from last year. Total
global wheat consumption is
projected to be fall by 1 million
tonnes during 2008-09 at 650 million
tonnes. In 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 %. Insurance State
Bank of Financial
Markets Capital Markets Primary
Market As
per the study conducted by India's
fourth largest share brokerage firm,
the Delhi-based SMC Group, initial
public offers (IPOs) made in the
last four years are showing negative
returns on an aggregate basis, and
only those made in 2004 and those
made by state-owned units are still
showing positive returns. The study
calculated the returns of IPOs made
in 2004-2008, on the basis of
mark-to-market (MTM) prices. As of
November 25, 2008, 19 IPOs made in
2004, with a total investment of
$6.20 billion (Rs 248 billion), have
a MTM of $8.49 billion (Rs 340
billion), representing a return on
investment of 36.92 per cent and
IPOs made in the rest of the years -
2005 to 2008 - are showing negative
returns on an aggregate basis. The
government plans to go ahead with
its plan to offload 10 per cent
stake in upstream firm Oil India Ltd
(OIL), though it decided against
divesting its stake in RITES Ltd in
view of the market turmoil. However,
the IPO of rail infrastructure
company RITES has been deferred on
account of market conditions and in
view of the change in requirement of
funds of the company. The Cabinet
Committee on Economic Affairs (CCEA)
had, approved the IPO of RITES
through fresh issue of one crore-equity
shares and a simultaneous divestment
of government's 10 per cent
shareholding on January 10, 2008. The
global economic downturn
notwithstanding, venture capital
(VC) investments have continued to
flow into Secondary
Market Hopes
that other central banks will follow
suit after a surprise steep rate cut
announced by China's central bank
(108 basis points), US measures to
prop up Citigroup, the beleaguered
US bank, better than expected gross
domestic product data during the
September quarter (7.6 per cent) and
lower inflation data numbers (8.84
per cent) lifted the market during
the week. The market ended the week
with modest gains, on the back of
buying by institutions, despite the
deadly terror attacks in the
nation’s financial hub, which
forced regulators to shut financial
markets on Thursday, November 27,
2008. The hospitality and airlines
stocks were hit hard on fears of
slowdown in tourist arrivals. The
BSE Sensex ended the volatile week,
177 points or 2 per cent higher at
9,092. NSE Nifty rose 61 points or
2.3 per cent to end at 2,755. Among
the sectoral indices of BSE, Reality
and Capital goods are the major
under performers over the week with
(-) 5.13 per cent and (-) 2.58 per
cent. Among the gainers, IT stocks
recorded 4.13 per cent growth as the
rupee continued to depreciate and
TECk earned 3.84 per cent during the
week. The
guidelines and procedures for
setting up of smaller exchanges to
cater the financial requirement of
small and medium enterprises (SME)
are being given final touches by the
SEBI and are likely to be announced
towards middle of December 2008 to
actively provide alternate finance
window. Addressing the Assocham
Conference on “Financing the
Future Giants” on Wednesday in
Chandigarh, T C Nair, whole time
member, SEBI said in the initial
phase, three-four licenses will be
provided to the companies who have
the net worth income of Rs100 crore. The
board of Securities and Exchange
Board of India (SEBI) will meet on
Saturday to give its final approval
for the setting up of a dedicated
stock exchange for small and medium
enterprises, a finance ministry
official said on Wednesday. The
market regulator had earlier this
month detailed guidelines for
setting up dedicated stock exchange
for small and medium enterprises.
According to the guidelines,
existing stock exchanges can also
set up a dedicated platform for
trading in shares of small and
medium enterprises. Struggling small and medium enterprises (SME) and exporters may get some relief with the Indian Banks’ Association (IBA) indicating on November 26, that lenders may consider waiving the penalty on delayed loan repayment and lowering margin requirements to enhance credit limits for small units and exporters. These two were among several key demands raised at a meeting between IBA and representatives from SMEs and export organizations. As
per SEBI data as many as 120 new
foreign institutional investors (FIIs)
have registered in India since the
global financial crisis broke out in
September though the country’s
stock and money markets still nurse
fears of large-scale FII pullout
from India. The months of
September-November have seen
registration of 358 new
sub-accounts—the highest in any
block of three months in 2008. Most
mutual funds restricted their buying
only to non-convertible debentures (NCDs)
having daily put-call options (PCR)
and avoided certificates of deposit
(CDs) and commercial papers (CPs)
because they witnessed inflows only
in liquid schemes. Fund managers
have remained cautious over the
liquidity situation because of big
outflows witnessed a couple of
months ago from companies and banks.
At best, mutual funds are buying
small amounts of three-month papers. The
SEBI is expected to issue stricter
norms for the mutual fund industry
after its board meets on November
25. The mutual fund industry is
understood to have agreed to
implement the proposal not to invest
liquid scheme corpus in papers with
maturity beyond 91 days from April
2009. Initially, some members were
of the view that this should be
implemented with immediate effect.
According to sources, the guidelines
for investment by foreign
institutional investors (FIIs) are
likely to be liberalized. The
country’s regulators have been
discussing these issues at various
forums in view of the large-scale
withdrawal of money by FIIs and
redemption pressures that mutual
funds have faced over the last two
months. SEBI is in a view that there
is a need to open more windows for
foreign investment in the equity
markets and cushion pressure points
for mutual funds. Mutual funds have
already submitted detailed proposals
to SEBI on new norms for liquid
schemes and fixed maturity plans (FMPs).
SEBI is expected to bar premature
withdrawals from FMPs and ask fund
houses to list such schemes on the
exchanges to provide investors an
exit route. The move is aimed at
reducing the redemption pressures on
mutual funds when corporate and high
net worth investors need liquidity
and go in for huge withdrawals. The
government and the SEBI would soon
put up a framework for delisting of
securities. According to official
sources, a more simplified procedure
for delisting of small companies
would also be put in place,. Enacted
in 2005, the Securities Laws
(Amendment) Act allowed delisting of
securities, necessitating the
creation of a delisting framework. Private
equity (PE) deals saw a record 403
private equity deals with an
announced value of $19.03 billion in
2007. However, the market meltdown
has crimped this channel of
investment. Until October 2008,
there were only 274 deals amounting
to $9.67 billion. The
Union Government’s recent approval
to the insurance Bill, which
proposes, among other things, to
raise the cap on foreign direct
investment (FDI) to 49 per cent from
26 per cent for private sector
insurance companies, is expected to
bring around Rs 7,000 crore into the
industry, according to industry
representatives. However, the Bill
is yet to be introduced in
Parliament. Currently, the insurance
industry has a total FDI of around
Rs 2,500 crore. The expected inflow
is likely to create 3 lakh jobs in
the sector as more companies are
planning to use the additional funds
mainly to execute their expansion
plans. According to industry
representatives, a hike in FDI limit
is necessary to allow foreign
partners to infuse more capital into
their Indian joint ventures to
sustain growth. It will also give
confidence to foreign investors to
do business on a scale that is not
restrictive. Given that life
insurance is a capital-intensive
industry, this move will help
insurers access larger international
capital over a period of time. Derivatives
The
NSE may revise the lot size of
future contracts as the market slump
has pulled the value of the contract
size below the prescribed level of
Rs 2 lakh. About 93 per cent of 265
contracts have slipped below the
minimum contract value mandated by
the SEBI. Only 19 stock futures are
trading above Rs 2 lakh. The
increase in the contract size may be
required to stop speculators from a
possible shorting of the futures
market at a lower cost. For example,
a trader can buy 850 (lot size)
shares of Kingfisher Airlines, say,
at Rs 25 per share from the cash
market and sell it in the future and
options (F&O) market the same
day. The trader will gain from any
fall in the value of the underlying
without losing his holding.
Derivatives players have, however,
not yet taken any aggressive
position in low-value stock futures
as the current open interest (OI) in
these stocks has been almost 60 per
cent of the May 2008 levels when the
Nifty was hovering around the 5,000
mark. The index has fallen to 2,654
since then. Data shows that out of
the 265 stock futures, the contract
value of more than 163 is less than
Rs 1 lakh. Forty-four of the 163
stock futures have a contract value
of less than Rs 50,000 and four out
of the 44 have a value of Rs 25,000.
Out of the 50 Nifty stocks, only 10
are having a contract value of more
than Rs 2 lakh, while three stocks
have a contract value of less than
Rs 50,000. In index futures, the
contract value of Nifty has declined
to Rs 1.35 lakh from its Deeply
out of money strikes indicate a
“long shot” approach by savvy
long players who are risking small
premium outgo for bigger pay offs.
The week saw subdued fluctuation due
to the dual impact of the shorter
week and unique law and order
situation, which influenced
participation levels. The turnover
in the derivative segment on NSE
during the week, decreased to Rs
184,672 crore as against Rs 211,683
crore in the previous week. The
market-wide applicable annualised
implied volatility (IV) stood at
102.85 per cent, which is higher
than the six-monthly average. That
indicates that the market needs to
“settle down” where daily
fluctuations are concerned. That the
IV is at unsustainable levels is
sort of good news for the retail
players, is missed out by many a
participant as the confidence levels
are poor. Volatility was high
throughout the week ahead of the
expiry of November F&O contracts
which was postponed to Friday, 28
November 2008 due to closure of
stock markets on Thursday. The
market wide OI stood at Rs 39,902
crore which is a mere third from the
all-time high. The expiry of the
November series was muted but
optimistic as the players focused on
the market dynamics rather than the
law and order situation. Technology
stocks advanced as the rupee went
into a tailspin on relentless
short-term selling pressure. That in
turn is likely to cause a short-term
withdrawal by overseas players who
assign significant importance to
treasury factors. In terms of
futures OI, index futures recorded
Rs 8,771 crore as on Friday. The
Nifty options OI makes an
interesting read – Nifty Dec 3200
CE (Rs 778 crore), Nifty Dec 5000 CE
(Rs 712), Nifty 3000 CE (Rs 444
crore), Nifty Dec 4500 CE (Rs 374
crore) and Nifty 2700 CE (Rs 366
crore). Note the deeply out of money
(OTM) strikes which indicate a
“long shot” approach by savvy
long players who are risking small
premium outlay in the hope of bigger
pay offs. The writers of these
strikes are focusing on income
generation by writing relatively
“safer” strikes. The puts make
equally interest analysis – Nifty
Dec PE 2500 (Rs 702 crore), Nifty
Dec 4500 PE (Rs 582 crore), Nifty
Dec 5000 PE (Rs 554 crore), Nifty
Dec 4000 PE (Rs 460 crore) and Nifty
Dec 2900 PE (Rs 392 crore). PCR has
firmed up marginally and the Nifty
PCR has firmed up noticeably. The
market wide PCR has gained steadily
too. Government
Securities Market Primary
Market Reserve
Bank of India (RBI) auctioned 91-day
Treasury Bills (T-Bills) and 182-day
T-Bills for the notified amounts of
Rs 5,000 crore and Rs 2,000 crore,
respectively on November 26, 2008.
The cut off yield has been set at
7.14 per cent for 91-day T-Bills and
7.06 per cent for 182-day T-Bills. Secondary
Market Inter
bank rates initially stayed in the
comfortable range of 6.00 -6.50 per
cent as banks appeared to have
surplus funds. However, some demand
persisted in the first half of the
bi-weekly reporting cycle.
Inter-bank rates edged up lightly on
Friday on bunched-up demand for
funds after an unexpected break in
trade forced banks to borrow at
higher rates to meet reserve
requirements. Bonds
gained on growing speculation that
RBI would ease monetary policy to
stimulate the slowing economic
activity, but later pared gains as
the timing of the much-expected rate
cut remained uncertain. Bond yields
moved further south as inflation
continued to retreat and global oil
prices maintained their unimpeded
slide. As terror attacks snatched
attention of the population in
general, market-moving factors like
interest rate speculation were
pushed into the background late in
the week. The 10-year benchmark
yield dipped to near 3-year lows at
7.04 per cent, 17 basis points below
the previous close of 7.21 per cent.
The yield, however, touched a high
of 7.24 per cent during the week.
Banks have been seeing deposit
inflows of at least about Rs 4,000
crore per day. The deposit inflows
were largely from investors fleeing
from the equity markets. The deposit
inflows, in turn, triggered a demand
for government securities from banks
to maintain the mandated Statutory
Liquidity Ratio (SLR) of 24 per
cent. The incremental government
securities to deposits ratio is
currently close to the SLR.
Liquidity, however, tightened
slightly during the week, largely on
account of the outflows by FIIs and
high credit demand. At the weekly
liquidity adjustment facility (LAF)
auction, RBI mopped up an average of
Rs 7,725 crore through the reverse-repo
window while lending Rs 6,087.50
through the repo window. But, some
liquidity surplus public sector
banks also parked Rs 7,000 crore in
the reverse repo window. The
trade volumes were high during the
week and trade volumes per day
averaged Rs 14,400 crore. The demand
has been driven by deposit inflows
was evident from the equity trade
volumes at the NSE. The average
turnover per day during the week in
the NSE was Rs 8,900 crore. Besides,
credit demand remained high. This
was evident from the high
incremental credit deposit ratio.
The ratio has been in excess of 90
per cent. Housing
finance companies are the latest to
get access to the special liquidity
facility extended by the RBI to
mutual funds and non-banking finance
companies (NBFCs) in October. The
central bank has also extended the
liquidity adjustment facility (LAF)
from its current deadline of March
31, 2009 to June 30. When the
liquidity squeeze worsened last
month and threatened the operations
of NBFCs and mutual funds, the RBI
had allowed banks to help them by
availing liquidity support under the
LAF by relaxing their Statutory
Liquidity Ratio (SLR) up to 1.5 per
cent of their net demand and time
liabilities. After a meeting between
RBI governor D Subbarao, and select
private and public sector bankers in
Mumbai on Friday, it was decided to
extend this facility to enable banks
to accommodate the funding needs of
housing finance companies (HFCs). Bond
Market The
government relaxed the pricing norms
for issue of convertible bonds and
equity shares under depository
receipts to overseas investors on
November 27, 2008. The move will
enable Indian companies to price
their shares more closely to
prevailing market prices. The
finance ministry has changed the
definition of the relevant date and
the way base pricing is calculated
for issue of foreign currency
convertible bonds (FCCBs) and equity
shares under global depository
receipts (GDRs) and American
depository receipts (ADRs). Now, the
relevant date for computing the
issue price is the day on which the
company’s board of directors
decides to issue shares to foreign
investors. Previously, it was thirty
days prior to the date on which the
shareholders’ meeting was held,
which takes a long time after the
board’s decision is taken. The
second change relates to the issue
price. Now, companies can price
their issues based on the average of
the weekly high and low of the two
weeks prior to the relevant date.
Previously, it was either the weekly
average of the last six months
before the relevant date or the
weekly average of the two weeks
immediately preceding the relevant
date. After non-banking finance companies (NBFCs) that do not depend on deposits, finance companies that accept deposits have approached regulators for relaxation in the external commercial borrowing (ECB) norms. The move comes in the wake of the cap on the interest rate, which is affecting their fund-raising plans through this route. LIC Housing Finance has already received interest from certain institutions that are ready to extend loans worth Rs 1,000 crore through the ECB route, but at a market-determined interest rates. Existing RBI guidelines allow deposit-taking NBFCs to raise resources up to 50 per cent of their net-owned funds for up to three years. However, the regulator has capped the interest rates on such loans at 200 basis points above the six-month Libor. Similarly, based on the proposals, a deposit-taking asset finance company has approached the regulator for a reprieve on the interest rate ceiling.
During the week under review, three FIs/Banks tapped the market through issuance of bonds to mobilize Rs 1,650 crore. Foreign
Exchange Market The
rupee firmed to Rs 49.84 per dollar,
up from last weekend’s level of Rs
50.03. Rupee came off a low of Rs
50.25 per dollar intra-week. Large
dollar inflow from a corporate aided
the rupee to gain to Rs 49.25 per
dollar in initial trades of the
week. Steady equity markets also
supported gains in the unit. The
rupee slipped despite showing calm
in the face of the unrest in the
financial capital as trading resumed
from a day’s gap. Dollar demand
from importers added to the selling
pressure and the unit erased all
gains earned. The unit succumbed to
month-end dollar demand and posted
losses. The exchange rate at this
level resulted in a hardening of
forward premia across all
maturities. Forward premia for one,
three, six and twelve months firmed
to 7.46 per cent (6.60 per cent in
the previous week), 4.64 per cent
(3.98 per cent), 2.98 per cent (2.43
per cent) and 3.75 per cent (1.68
per cent). The firming of the rupee
was partly triggered by exporters’
repatriation and large inflows of
foreign currency non-resident
deposits. Currency Derivatives The
race between the NSE and MCX Stock
Exchange (MCX SX) to achieve
leadership position in currency
futures has turned hot in the last
few weeks, with the rupee turning
volatile as the bellwether Sensex.
According to the SEBI data, 1,030
entities have registered either as
trading or clearing members. Of
this, NSE had managed to attract 470
entities, MCX 403 members and BSE
has 157 members. MCX-SX for the
first time overtook NSE turnover on
November 11 and it has been a
neck-to-neck race ever since between
the two exchanges. On November 21,
MCX-SX registered a turnover of Rs
1,254 crore while it was Rs 1,135
crore on the NSE. On the next day,
NSE bounced back to record a
turnover of Rs 1,014 crore and
MCX-SX’s was Rs 927 crore. Commodities
Futures Derivatives Around
six-month-old suspension of futures
trading in four agriculture
commodities lapsed on November 30
without any formal notification by
the government for extension of the
suspension. However, as per sources,
lapse of the notification does not
necessarily mean that futures
trading in refined soyoil, rubber,
potato and chana (chickpeas) could
resume immediately as the commodity
markets regulator Forward Markets
Commission (FMC) has to formally
issue an order to the exchanges
signaling the resumption of futures
in these four farm commodities.
According to a senior government
official, until the government gives
a clear nod to the FMC to issue
orders for resumption of futures, no
trading can start in the four
commodities. However, technically
the earlier order has lapsed as no
order for extending it has come from
the government till now. Agri-commodity
traders will have to wait for one
more month to resume hedging in
potato, rubber, chana and soy oil,
as the FMC, is yet to grant
permission to exchanges to trade in
these suspended commodities.
However, many traders and commodity
exchange officials are doubtful if
the suspension will be lifted as
despite repeated assurances, FMC had
extended it till November 30. National
Commodity & Derivative Exchange
Limited (NCDEX) has registered a
record monthly trading volume of
44.93 lakh barrels in sweet light
crude oil in the month of October
2008 over 33 lakh barrels registered
in September 2008. Crude oil in
October 2008 has been 36 per cent
more than that traded in the
previous month. The futures trading
volume increased at the time when Ahmedabad-based
National Multi Commodity Exchange (NMCE)
is planning to enter the warehousing
space by setting up over 10 modern
warehouses across the country at an
investment of Rs 50 crore. The
exchange’s entry into warehousing
is significant as it is currently in
a tie-up with the public sector
Central Warehousing Corporation (CWC)
for similar service, which also
holds 26 per cent equity in it. NMCE
entered warehousing in June this
year, when it handled 4,800 tonnes
of castorseed, which was later
delivered for contracts that expired
in August and September. Banking In
a bid to extend its footprint into
the Indian market, German bank,
Norddeutsche Landesbank plans to set
up wholesale banking operations in Private
sector lender Indusind Bank and TVS
Motor Company have entered into an
agreement where the bank will
provide structured inventory funding
to TVS Motors’ dealers. In
a bid to woo more customers to use
alternative banking channels and
lower the bank’s transactions
costs, HDFC Bank has planned to
upgrade its automated teller
machines (ATM) network across the
country. This new initiative is
powered by NCR Corporation’s
‘Aptra eMarketing’ software and
is aimed at reducing the cash
withdrawal time by 40 per cent at
ATM locations. RBI
has asked banks and financial
institutions to ensure that all
information relating to charges or
fees for processing are invariably
disclosed in the loan application
forms. Further, the banks must
inform ‘all-in-cost’ to the
customer to enable him to compare
the rates charged with other sources
of finance. State
Bank of Bangalore-based Vijaya Bank is seeking a capital infusion of Rs 1,800 crore from the government to maintain its capital adequacy ratio (CAR) at the mandatory 12 per cent. Its CAR is currently at 10.4 per cent. Corporate The
government and the Reserve Bank of
India (RBI) are contemplating to
open a special Rs 20,000 crore
refinance window to boost growth of
small and medium enterprises (SMEs),
which are facing credit crunch. The
special refinance window will
encourage banks to lend funds to
SMEs as the facility would be made
available at a concessional rate.
The details of the scheme including
the interest rate are being worked
out and are likely to be announced
by the central bank in the next
10-15 days. The facility would help
meet the twin objectives of giving
much required liquidity boost to the
sector and at the same time help
banks in meeting the mandatory 40
per cent priority sector lending
target. In addition to lack of
credit, the SME sector is also
suffering from low demand of their
goods in the domestic market as well
as for exports which have fallen by
15 per cent in October. Tata
Motors has decided to shut its The
world’s largest oil company, Saudi
Aramco, is likely to step in as the
new joint venture partner in one of
the Sun
Pharmaceuticals Industries Inc, the
fully owned The
KP Singh-promoted property fund DLF
Assets Ltd (DAL) is planning to
raise Rs 2,200 crore through private
equity by the end of this quarter.
This exercise is being undertaken
primarily to pay back part of the
money it owes to the promoter
group’s another firm DLF Ltd. Tamil
Nandu Electricity Board (TNEB) has
entered into a joint venture
agreement with Bharat Heavy
Electricals Ltd (BHEL) to set up a
two thermal power plant at Udangudi
in Tuticorin district of Tamil Nadu
with an estimated investment of Rs
8,700 crore. With
the market size of LCD televisions
in The
600 MW Phase-I of Reliance Rosa
Power project in Shahjahanpur
district of Uttar Pradesh will start
generating power by September next
year, six months ahead of schedule. Netherland-based
global paints and coating company
Akzo Nobel will be investing Rs 90
crore, in setting up a new facility.
The new plant, with an area of 5,000
sq. ft. will have an annual
production capacity of 85 lakh
litres of coil coatings and
speciality plastic coatings once
fully operational by 2010. Information Technology Wipro
Technologies, BPO firm ExlService Holdings is looking at acquisitions of companies that can either strengthen expertise in key verticals or expand it presence in new outsourcing destinations. Telecom Mobile telecom tariffs may see a further decline as the government has asked the regulator TRAI to review the five-year old termination charge of 30 paise a minute per call for fixed and mobile telephony. Termination charge is the money given by an operator on whose network a call originates to the operator on whose network a call originates to the operator on whose network the call terminates.
*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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