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Current Economic Statistics and Review For the
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Stimulus Packages- A Mechanical Effort* I The Background The simmering global financial turmoil, which began as a problem in sub prime mortgage crisis in the US, has escalated into such unprecendented dimensions that what was expected to be a financial sector crisis that would result in a shallow recession in advanced countries has been belied. The contagion has traversed from the financial to the real sector; and it has been accepted that the recession will be deeper and the recovery longer than earlier anticipated. It has been for the first time ever that simultaneously the recessionary situation exists in the US, UK and Japan. With expectations that the present recession would be worse than the great depressions of the 1930’s, there has been an unparalleled spree of stimulus packages in many of the countries as sustaining growth has become a major concern. The US has been in the forefront with its much-debated $ 700 billion package under the Troubled Assets Relief Programme, followed by the Chinese of $ 568 billion and many others. According to current estimates, the magnitude of the bail-out/rescue packages at the global level has already crossed the grant figure of $ 12 trillion, with as much as $8.5 trillion attributed to the US alone. International Monitory Fund (IMF)’s outlook IMF’s World Economic Outlook Update in early November 2008 has stated that the present crisis has made the economic outlook “exceptionally uncertain” and predicted a decline in world growth to just over 2% in 2009. The Fund recommended further fiscal stimulus and monetary easing by countries and noted “fiscal stimulus can be effective if it is well targeted, supported by accommodative monetary policy, and implementation in countries that have fiscal space”. Shift in favour of fiscal policy With the US Fed reducing its benchmark rate to below 1% and also major other advanced countries paring their benchmark rates to unfrequented lows, this has triggered a debate about the effectiveness of the monetary policy in arresting the recession. The debate in particular recalls Milton Friedman’s contention that the Fed could have stopped the depression in the 1930’s by providing banks with more liquidity, which would have prevented a sharp fall in the money supply. Ben Bernanke, the Federal Reserve chairman, famously apologized to Friedman on his institution’s behalf: “You’re right. We did it. We’re very sorry. But thanks to you, we won’t do it again.” Recently, the US Fed has been supplying enormous liquidity, and the money supply has been rising rapidly. Yet credit remains scarce, and the economy is still in free fall. Friedman’s claim that monetary policy could have prevented the Great Depression was an attempt to refute the analysis of John Maynard Keynes, who argued that monetary policy is ineffective under depression conditions and that fiscal policy — large-scale deficit spending by the government — is needed to fight mass unemployment. The failure of monetary policy in the current crisis shows that Keynes was right. Effect on emerging economies and India, in particular The crisis of this magnitude has engulfed the countries not directly operating in he epi-centre of the crisis and even those countries that were hitherto considered to be relatively strong and stable thereby debunking the decoupling theory, which implies that these markets were impervious to the happenings in the advanced countries, but in reality they too have been affected by a number of problems weakening their macroeconomic fundamentals. Most emerging market countries have slowed down significantly and India has also been affected. Gross domestic product (GDP) growth in real terms in the first half of the fiscal year 2008-09 has been at 7.8%, which is fairly robust. However, it is likely to be significantly slower in the second half as the impact of slower export growth and weaker domestic demand, including a possible dampening of private investment, would begin to be felt. It is against this background that this note reviews the various policy measures that have been introduced by the Reserve Bank of India (RBI) and the government with the intention to regain confidence and return to normal functioning. Here it is necessary to realize that deep down, the current economic malaise, the crisis in the Indian financial sector- is peripheral; the deeper crisis is to be found in the rapid deterioration in the growth of the real sector. The projected 7 to 8% 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. Even so, India is experiencing the knock-on effects of the global crisis, through the monetary, financial and real channels – all of which are coming on top of the already expected cyclical moderation in growth. The financial markets – equity market, money market, forex market and credit market – have all come under pressure mainly because of what has begun to be called 'the substitution effect' of: (i) drying up of overseas financing for Indian banks and Indian corporates; (ii) constraints in raising funds in a bearish domestic capital market; and (iii) decline in the internal accruals of the corporates. All these factors added to the pressure on the domestic credit market. It is indeed commendable that the RBI and the government have responded swiftly and promptly to the emerging contingencies thereby assuring their sustained support amidst heightened uncertainty and instability. The RBI’s measures have sought to bring in stability as against the volatility witnessed in near past, thus returning to a state of normalcy back in the financial markets. II RBI’s Liquidity-Augmenting and Stimulus Packages The overall response of the RBI to this crisis has been initially one of injection of liquidity in view of the pressure on the rupee and dollar liquidity; increasing interest rates on foreign deposits so as to encourage inflows; special liquidity-augmenting measures and increasing forex inflows. As the situation has deteriorated further, the RBI has emphasized the need for the credit to select sectors and easing the constraints for free flow of credit. Measures So Far The RBI has taken several measures aimed at infusing rupee as well as foreign exchange liquidity and to maintain credit flow to productive sectors of the economy. Measures aimed at expanding the rupee liquidity included all conventional measures taken in an unconventional way; they have been introduced sharply in quick succession: reductions in the cash reserve ratio (CRR) to the lowest level of 5.0% (as of 17 January 2009), reduction of the statutory liquidity ratio (SLR) to 24% again below the earlier statutory floor of 25%, opening a special repo window under the liquidity adjustment facility (LAF) for banks for on-lending to the non-banking financial companies (NBFCs), housing finance companies (HFCs) and mutual funds, and extending a special refinance facility, which banks can access without any collateral. The RBI has also began unwinding the Market Stabilisation Scheme (MSS) securities, roughly synchronised with the government borrowing programme, in order to manage liquidity. Measures aimed at managing forex liquidity include upward adjustment of the interest rate ceilings on the foreign currency non-resident (banks) [FCNR(B)] and non-resident (external) rupee account [NR(E)RA] deposits, substantially relaxing the external commercial borrowings (ECB) regime, allowing the NBFCs and HFCs access to foreign borrowing and allowing corporates to buy back foreign currency convertible bonds (FCCBs) to take advantage of the discount in the prevailing depressed global markets. The Reserve Bank has also instituted a rupee-dollar swap facility for banks with overseas branches to give them comfort in managing their short-term funding requirements. Measures to encourage flow of credit to sectors which are coming under pressure include extending the period of pre-shipment and post-shipment credit for exports, expanding the refinance facility for exports, counter-cyclical adjustment of provisioning norms for all types of standard assets (except in case of direct advances to agriculture and small and medium enterprises which continue to be at 0.25%) and risk weights on banks' exposure to certain sectors which had been increased earlier counter-cyclically, and expanding the lendable resources available to the Small Industries Development Bank of India (SIDBI), the National Housing Bank (NHB) and the Export-Import Bank of India (EXIM Bank). To improve the flow of credit to productive sectors at viable costs so as to sustain the growth momentum, the Reserve Bank signaled a lowering of the interest rate structure by reducing its key policy rate, viz., the repo rate by as much as 350 basis points from 9.0 % as on 19 October to 5.5 % by 2 January 2009. There has been a sustained demand from various quarters for exercising regulatory forbearance in regard to extant prudential regulations applicable to the banking sector. As a part of counter-cyclical package, several changes have been made to the current prudential norms. These include: (a) reduction in the risk weights for claims on unrated corporates and commercial real estate to 100%; (b) reduction in the provisioning requirement for all standard assets to 0.40%; (c) permitting housing loans to be restructured even if the revised payment period exceeds ten years; (d) making the restructured commercial real estate exposures eligible for special treatment if restructured before 30 June 2009.
Immediate Effect of these Monetary Measures Monetary policy actions transmitted to the rest of the economy, called the monetary transmission mechanism, is a complex process. Changes in monetary policy instruments (such as monetary aggregates or short-term policy interest rates) affect the rest of the economy and, in particular, output and inflation, differently in different situations. Thus, monetary policy impulses get transmitted through various channels, affecting different variables and different markets, and at various speeds and intensities (Loayza and Schmidt-Hebbel, 2002). Thus, lags assume a significant role in understanding the speed at which the policy changes percolate through the system and help achieve the policy goals. However, in the recent period, it appears that despite the shifts in instruments and operating procedures of the monetary policy after the financial sector reforms, there is no evidence of any smooth transmission of the impulses.
Repo Rate and Prime Lending Rates (PLRs) As shown in Table 1, the CRR had been increased from 5% in 31 October 2006 to a peak of 9% on 30 August 2008, an increase of 4 percentage points in a span of two years, which has been reversed back to 5% (by 17 January 2009) in a short span of three months injecting close to Rs 160,000 crore of primary liquidity. Similarly, the reverse repo rate was raised from 4.50% in March 2004 to a peak of 6% from July 2006 to November 2008 but brought back to 4% as on 2 January 2009. Likewise, the repo rate jumped from 6% to 9% and then slipped to 5.50%. This has resulted in short-term money market rates easing substantially from the peaks touched in October of 18.53% to below 6% in December or to 4.23% now on 7 January 2009. Also, the yields on 10-year paper has fallen from 9.46% in October to 5.24% in December, a decline of 422 basis points in just three months.
Reluctant Adjustment of Rates by Banks
Despite such sharp cuts in the benchmark rates, the deposit rates have remained sticky and have declined by around 0.25-0.75%, while PLRs have fallen by around 1-1.5 percentage points. The RBI governor has said in his speech that there are two aspects to lending viz., availability and cost of credit. While the availability of credit should not be an issue, the cost of credit seems to be an issue at the current juncture. There seem to be two reasons inhibiting the banks from extending credit: first, a high weighted-average cost of funds because of high interest rates on deposits; and second, concerns about credit quality, which makes the banks risk averse, particularly in lending to certain segments. During the last one month, there has been a sharp reversal in trend and credit demand seems to be slackening. The reduced funding demand on the banks should enable them to reduce the interest rates on deposit and thereby reduce the overall cost of funds.
Investment in G-Sec Though the SLR has been cut by 1%, the investment ratio has risen from 28.68% as on 26 September 2008 to 30.60% as on 19 December 2008 implying that the surplus liquidity has been invested in the government securities leading to some quarters of media referring to it as ‘lazy banking’- a name popularized by an RBI deputy governor some years ago. The secondary market turnover has increased from a weekly average of Rs 25,000 crore in October to about Rs 60,000 crore in December in response to the surplus liquidity and expectations of further rate cuts. Subscriptions to Repo and Reverse Repo Window There has been a sharp shift in the liquidity support availed from the RBI from deficit to surplus. The injection through repo touched a peak of Rs 8,78,005 crore in October due to huge pressure on liquidity while reverse repo absorptions have been much less. In December, the liquidity support has dwindled rather sharply while absorption has jumped up implying that the banks are preferring to park their surplus liquidity with the RBI and earn 5% interest rather than extending credit.
Issues The speed at which the RBI has issued the monetary measures is commendable, but its thinking has remained within (monetarist) framework. In other words, while augmentation of liquidity for the banking system was useful, by itself, its not obviously sufficient. The experience during the last decade and half has shown that the banks have taken a narrow view of the role of bank credit in the process of development. Such a narrow view has resulted in a number of drawbacks in the performance of scheduled commercial banks in particular that is (i) They have reduced their regional spread of bank branches. (ii) They have failed to fulfill the priority sector targets set for the informal sectors, particularly, for agriculture and for the weaker sections (iii) Apart from agriculture their neglect of small and micro enterprises has been blatant (iv) They have adopted a grossly unequal system of charging interest rates, with bigger corporates getting away by the lower interest burden and the informal sector increasingly having to pay higher rates of interest. There are instance of small farmer paying 12% rate of interest when a highly rated corporate entity could get finance from banks at 6%. The RBI itself has pointed out the inequity in this system of charging interest rates by banks. Around 82 per cent of the lending by banks is taking place at sub-BPLR rates, which raises several concerns. While better creditworthy corporates are getting credit at sub- BPLR rates, the agriculture and SSIs sectors and other borrowers, in general, are charged BPLR or in some cases even higher rates. The All India Debt and Investment Survey 2002 found that about 82 per cent of the rural debt as of June 30, 2002 was in the interest range of 12 to 20 per cent, while prime lending rates (PLRs) of banks were in the range of 11 to 12 per cent. To compensate for sub-BPLR lending, other segments are charged higher rate of interest, thus, leading to cross subsidisation of the economically well-off borrowers by the economically poor borrowers. (v) Finally, attitudinally, the banks have been using their notions of risk perceptions against the interest of small borrowers including the SME. For instance, although there is a threshold up to which bankers should not insist on collateral, they seldom assume the risk involved in non-collateralised lending. The surveys conducted by the Reserve Bank revealed that many bank branches insisted on collaterals even for loans up to Rs.5 lakh. These laps and inadequacies in the SCBs have been impinging on the operations of the informal sectors, during normal situation in the past 10 to 15 years. But now, in the current situation of crisis, the adverse consequences of their behaviour on these informal sectors would be massive in terms of size, which requires two broad policy instruments: (i) An expansionary monetary and credit policy with a decisive distributional bias in favour of the masses of informal sectors and, (ii) An expansionary fiscal policy, in fact, these policies have got be hand-in-glove because larger credit absorption is possible when public expenditure programmes improve the overall economic performance through improved public investment for better infrastructure and push to growth in agriculture and industry (public expenditure is reviewed in the next section ). For the present, purely as an example of the distorted pattern of credit deployment, we may cite the RBI’s latest data on sectoral bank credit expansion (Table 4)
As brought out in these RBI data, while banks have very joyfully expanded credit for credit cards (86.3%), all services sectors (35.3%), constructions (48.3%) or for real estate (46.3%). Similar expansion in agriculture and allied activities during the past year ending August 2008 has been 18.5% and for small scale industries at 9.7%. A simple question that RBI has to observe how its concentration on money market measures and aggressive expansion of liquidity will correct the above malaise. Banks will not do it on their own. Therefore, any liquidity expansion measure that they take have to be willy-nilly linked to the end use of credit; in particular, more credit has to follow in favour of the informal sector, which account for the purchasing power of large part of the population. Otherwise, the counter-cyclical measures that they take will not serve the end purpose in view which is to provide a genuine stimulus to effective demand all along the line. III Fiscal Stimulus Well-before the concerns of the economic slowdown gathered momentum, the fiscal policy had faced some strain due to the acceptance of sixth-pay commission recommendations, the loan waiver scheme and oil and fertilizer bonds. Though these had some expansionary impulses, their purpose was quiet different; it was due to socio-political pressures. On the other hand, the two stimulus packages announced on 7 December and 2 January have been essentially as contra-cyclical measures to arrest the slipping growth. The main areas of focus in the first package have been boost to exports, home loan borrowers, small and micro-enterprises and special measures for the textiles and infrastructure for which the government seeks to increasing spending by Rs 20,000 crore and a 4 percentage point reduction in the central value added tax (CENVAT) rate. The second package emphasized on easing constrains on foreign borrowings and increased the limit of foreign institutional investor (FII) in rupee denominated corporate bonds from $6 billion to $15 billion, increased inflows for the NBCFs. The borrowings by state governments increased by 0.5% amounting to Rs 30,000 crore for capital expenditure. IIFCL enabled to access in tranches an additional Rs 30,000 crore through tax-free bonds to fund additional projects of about Rs 75,000 crore at competitive rates over the next 18 months. Issues Broadly, the focus has been to support the export sector, manufacturing and infrastructure, which have been welcomed as it is expected to support the growth process. However, there have been few areas of concerns. The export sector needs to be supported as they have been bearing the brunt of uncertain and unsettled external environment, which has adversely affected their profitability. While it is well accepted that they need to be supported, given the weakening external demand the effect of these measures do not appear to have the strength to propel growth; though, it may support the sagging exports. Neglect of Agriculture While expenditure facilitating infrastructure would support the growth in years to come, but for the immediate propping up of growth it would have been laudable if policies were directed towards increasing agricultural incomes, as their elasticity to consume is more than urban consumption. Further, the agriculture has been suffering for want of adequate investment and this would be an opportune time to usher in second-generation reforms. Need for Higher Spending The CENVAT excise duty cuts will be for those products with a duty of more than 4%, this means that the boost to consumer demand will come mainly for durable and luxury goods (which now have duty rates of 12-16%). While reduction in tax rates eases pressure on prices, thereby boost consumption, but in a recessionary situation the issue is not so much of prices or inflation but with incomes and confidence which government spending can achieve. However, on the plan side alone, the government has envisaged the provision of an addition of Rs. 20,000 crore, over and above the budget estimate of Rs 243,386 crore for the year 2008-09, to be spent in the next four months. Besides the absence of any clues as to the Plan heads or sectors for which the extra amount is earmarked, the stimulus package is also misleading in that it does not take account of the fact that the actual expenditure during the first seven months till the end of October has only been Rs 119,738 crore or 49.2%. With the balance of Rs 123,648 crore out of the original provision itself still waiting to be utilised, loading the Plan with another Rs 20,000 crore and hoping to spend a total of Rs 1,43,648 crore in the remaining period of the current year can only be on the presumption of some superhuman effort, the like of which has not been seen before. Issues The same thrust of expanding the domestic size of market can be / should be simultaneously achieved by fiscal policy. Its role would be to supplement the role of bank credit for development. It is to expand the public sector expenditure in infrastructure areas like power, roads, ports, airways and telecommunications.
An aggressive investment programme in infrastructure results in higher public sector investments which in turn generates demand for many manufacturing goods- cement, steel, other metals and many engineering products, starting from bolt and nut to electrical plants and to aircrafts. Likewise, larger public expenditure for social activities: education, health and rural infrastructure have also substantial forward linkages and capacity to generate better incomes and purchasing power amongst the unorganized sector of the society. While the government seems to pay lip service to above ideas of larger stimulus for growth, what has been done is too meagre in size and to narrow in its spirit. In order to see that the fiscal stimulus makes a powerful impact, it is necessary in the first place to revere the persistent decline or general stagnation in central government development expenditure as a percentage of GDP (Table 5).
In this respect state have shown a slightly better performance during the last few years (Table 6). Total disbursement as a percentage of GDP which was at 28.9% in 2003-04 fell to 26.8% in 2006-07 which rose again to 28% in 2008-09, but still lower than the level achieved in 2003-04.
IV The Deeper Crisis The crisis is now of confidence and incomes among different players. For instance, the retail consumption has declined due to heightened job insecurity, which has affected the demand for manufacturing goods and services. Thus, impinging on their cash flows of these companies leading to built-up of surplus inventory and shelving of projects worsening the job prospects further. Hence, there is a need for stepping up the spending rather than relying on tax incentives. The efforts of both the fiscal stimulus appear to be one of patchwork, that is, plugging the up coming holes as displayed in the Table 7 rather than systematically devising strategy to make significant structural changes in the economy. Narrowness of the government thinking is reflected in the assessment that they have made of sectoral growth implications of global financial crisis in an extremely static manner. This assessment could have been extended further to locate sectors and areas where further impetus to growth were possible by improving public expenditure programmes.
References: Bhandare S (2008): India: Stimulus Package and Economic Outlook, MEDC, December. GOI (2008): Mid Year Review Krugman P (2009): Fighting off depression, The New York Times Rao S D (2008): The Global Financial Turmoil and Challenges for the Indian Economy, RBI Bulletin, December. Raghavan (2008): Patchwork of a fiscal stimulus, Business line, December 8
*This note is prepared by Piyusha D Hukeri and Anita B Shetty has prepared the accompanied tables.
Highlights of Current Economic Scene
Agriculture As per the government report, stocks of wheat in the central inventories are expected to be around 91.7 lakh tonnes by April 1 as against a statutory requirement of 40 lakh tonnes. Thus, additional 30-lakh tonnes of wheat as strategic reserves over and above buffer stocks are available in the central pool. Rice stocks are expected to reach 73.7 lakh tonnes by October 1, as against a requirement of 52 lakh tonnes.
Data available with the Union Agriculture Ministry have revealed that acreage under mustard seed during 2008-09 is estimated to be higher by around 25% across the country, which is expected to push up mustard output. Most of the farmers are opting for the mustard crop this year, as it is receiving higher prices in the domestic market. Industrial players have estimated that mustard production is likely to be around 7 million tonnes in 2008-09, which was nearly 5.80 million tonnes in 2007-08.
National Agricultural Cooperative Marketing Federation of India (Nafed) has raised the minimum export price (MEP) of onion by US $ 50 per tonne to an average of US $380-385 for January 2009 to check domestic prices and boost supply of the commodity. At present, supply of fresh crops is continuing mainly in Maharashtra.
National Agricultural Cooperative Marketing Federation of India (Nafed) has invited bids for sale of 2,000 tonnes of imported edible oils. This offer would be closed by December 31, 2008 and is valid for minimum 200 tonnes of RBD palmolein oil. This tender would be lifted from Kandla, Mangalore, and Paradeep Ports. Meanwhile the state-run agency PEC has also floated a tender for sale of 2,000 tonnes of crude degummed soyabean oil on December 30, 2008.
The central government has released 50 lakh tonnes of sugar as the free sale quota (FSQ) for mills during the January-March 2008 quarter. This is inclusive of four lakh tonnes of the now-dismantled second ‘buffer stock’ of 30 lakh tonnes that created on the government account. Of the 46 lakh tonnes ‘normal’ FSQ, mills are required to dispose of 15 lakh tonnes each in January and 16 lakh tonnes in February, while the expected availability from the dismantled second buffer stock would be 2 lakh tonnes in January and 1 lakh tonnes each in February and March. Any unsold/un-despatched stocks out of the normal FSQ during any month or the four-lakh tonnes dismantled buffer to be disposed before March would automatically be converted into levy sugar for the public distribution system. Besides, penal action would be taken against the defaulting sugar factories under the Essential Commodities Act.
The government sources reiterated that the sugar output of the country this year would be lower at around 18 million tonnes-21 million tonnes, than that of average domestic consumption of sugar at 22-23 million tonnes.
Sugar Industry form Uttar Pradesh has sought permission from Uttar Pradesh Electricity Regulatory Commission to sell cogenerated power to private traders and users in the open market. The price of sugarcane has almost doubled since the mills began signing power purchase agreement, while price of power has also increased marginally. Even sugar mills from the states like Karnataka and Tamil Nadu are allowed to sell surplus power to private consumers.
Soyabean Processor Association of India reiterated that exports of soyabean meal in the marketing year ending 2009 would cross 50 lakh tonnes. Export of soyabean meal is targeted to be around 55 lakh tonnes in 2008-09. Shipments have picked up as prices have risen to more than US$ 300-310 per tonne from US$ 265-290 per tonne two months ago. Vietnam, Japan and South Korea are the main destinations for Soyameal exports.
According to the latest report released by International Cotton Advisory Committee (ICAC), world cotton production is estimated to be around 24.6 million tonnes during 2008-09, displaying a drop of 6% from last year’s 26.2 million tonnes, due to lower coverage under cotton caused by stiff competition from grains and oilseeds and unfavorable fluctuations in exchange rates of many cotton-producing countries during 2007-08. Cotton production is expected to decline in USA to 2.95 million tonnes in 2008-09 from 4.18 million tonnes in 2007-08, while significant falls are expected in Turkey and Brazil. Contrary to it cotton production is expected to increase in countries like India, Pakistan and Australia. It is projected that usage of cotton by mills in India would fall slightly from 4.01 million tonnes in 2007-08 to 3.93 million tonnes in 2008-09. Cotton exports from India is also projected to fall this year at 1.24 million tonnes from 1.5 million tonnes in 2007-08. It is expected that this year cotton consumption would drop by 6% to 24.9 million tonnes as against 26.4 million tonnes in 2007-08.
Spices Board reiterated that exports of spices have shown an increase of 15% in terms of rupees, 6% in dollars and 6% in terms of volume during April-November period of the current fiscal (2008-09) as compared to the corresponding period of the last fiscal. India exported 3,10,830 tonnes of spices valued at Rs 3450.50 crore ($786.25 million) during April-November 2008 as against 2,94,335 tonnes valued at Rs 3010.25 crore ($742.95 million) a year earlier. Exports of pepper and mint products have declined both in terms of volume and value as compared to last year. While chilli exports have declined in volume only as against a year ago.
Tea exports are expected to register a marginal increase in 2009 to 200 million kg (Mkg) over last year’s export of 189 million kg. Egypt, the traditional market for Indian exports, has shifted its consumption to Kenyan tea.
As per the statistics revealed by Coffee Board, coffee exports from India dropped by 16.97% at 37,774 tonnes during the first-quarter of the coffee year (October-September) 2008-09 as against 45,498 tonnes recorded during the same quarter last year. Despite this, value realisation was marginally higher by 5.44% for the quarter at Rs 444.40 crore over the previous year. Unit value realisation stood at Rs 1,17,647 per tonne. Sudden slowing of exports in the last three months, financial crisis, fears of recession affecting consumption, credit squeeze for buyers have all caused delays in concluding contracts during the recent months resulting into shortfall in exports of coffee.
Inflation The annual rate of inflation, on point-to-point basis, stood at 6.38 percent (Provisional) for the week ended 20/12/2008 as compared to 6.61 percent (Provisional) for the previous week (ended 13/12/2008) and 3.74 percent during the corresponding week (ended 22/12/2007) of the previous year.
The index for primary articles major group declined by 0.2 percent mainly due to lower prices of tea, gram, fruits, vegetables, barley, arhar, condiments and spices, cotton seed, castor seed etc.
Index of fuel, power, light and Lubricants declined by 0.5 per cent due to lower prices of aviation turbine fuel, bitumen, light diesel oil and furnace oil.
The index for this major group manufactured products declined by 0.1 percent due to fall in prices salt, imported edible oil, rice bran oil, cotton seed oil synthetic yarn, acid, cement etc.
For the week ended 25/10/2008, the final wholesale price index for ‘All Commodities’ (Base: 1993-94=100) stood at 238.56 and inflation rate on a point-to-point basis works out to be 10.72 per cent.
Financial Market Developments Capital Markets Primary Market After a dismal 2008, over three-dozen firms are holding back their IPO plans to raise an estimated Rs 75,000 crore (over $15 billion) for the market conditions to be suitable, which experts believe is unlikely before the year-end. The overall size of the IPO backlog from 2008 is more than four times of the total amount raised during the year through this route and is almost equivalent to the cumulative capital raised over the past three years. The slackening in the primary market was primarily due to the poor response to the post-IPO listings in the secondary market and the slump in investor sentiments due to the overall sluggish market conditions.
Secondary Market The Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) have announced the index-based, market-wide circuit breaker for the quarter January-March. The circuit breaker system is applicable at three stages of the index movement either way at 10%, 15% and 20%. Accordingly, the percentages are calculated on the closing index value of the quarter. As the NSE Nifty closed at 2959.15 on December 31, the last trading day of the previous quarter, the market-wide circuit breaker for any day in the quarter between January 1 and March 31 would be triggered only if the index moves by 300 points (10%), 440 points (15%) and 590 points (20%). Similarly, the BSE would suspend trading only if the Sensex moves by 970 points (10%), 1450 points (15%) and 1925 points (20%). The BSE Sensex had closed at 9647.31 on December 31.
Stock markets started the New Year on a positive note, on the back of positive global cues and expectations of second stimulus package by the government along with further rate cuts by the RBI. Crude oil prices jumped nearly 20% to $45 per barrel, amid concerns that Israeli attacks on Hamas could disrupt West Asia crude oil supplies. The market gained in four out of the five trading sessions of the week ended 2 January 2009. The BSE Sensex added 629 points (6.7%) during the week to close at 9,958, while the NSE Nifty rose 189 points (6.6%) to end the week at 3,046. The BSE Mid-Cap index gained 284.50 points or 9.16% to 3,391.18 and the BSE Small-Cap index jumped 321.91 points or 9.07% to 3,870.45 in the week. Both these indices outperformed the market. The BSE IT index (up 6.27% to 2,284) and the BSE Auto index (up 6.65% to 2,521) under performed the Sensex in the week.
The Securities and Exchange Board of India (SEBI) has decided to review its know your client (KYC) norms for foreign institutional investors (FIIs) after Goldman Sachs got a clean chit last week in the 17 May 2004 stock market crash case. The other accused in the case, UBS Securities, was let off earlier. On 17 May 2004 — widely known as Black — there was a steep fall of 824 points in the Bombay Stock Exchange (BSE) benchmark index, BSE Sensex, due to which trading had to be suspended twice during the day as markets hit the lower circuit.
The BSE has decided to transfer companies in the ‘Z’ group to the ‘B’ group after ensuring compliance with various norms. Currently, the ‘Z’ group has 1,686 companies but only 124 of them are active. BSE had announced criteria for such transfers on 17 December 2008. The intention behind the change is to remove confusion of investors and better price discovery when suspension of a company in the ‘Z’ group is revoked. There is no circuit filter for ‘Z’ group companies when they are relisted or in case of resumption of trading after revocation of suspension.
The SEBI issued guidelines on exit opportunities for regional stock exchanges (RSEs) on 30 December 2008. The SEBI board has approved the broad guidelines, which provide an exit option to such regional stock exchanges whose recognition is withdrawn or renewal of recognition is refused by SEBIi, and those exchanges who may want to surrender their recognition. As per the said guidelines, such RSEs (or their successor entities) may be permitted to retain movable and immovable assets and to deal with such assets as they deem fit, subject to compliance with certain conditions.
According to the monthly data published by the Association of Mutual Funds of India (Amfi), the average assets under management (AAUM) are on the rise. Initial numbers for December indicate that the AAUM has improved marginally. Out of the 24 fund houses (total 37), which declared their numbers, 14 have shown an improvement in the AAUMs. Market experts said that this could be largely due to the fact that investors are getting into gilt funds, which are likely to do better, in a falling interest rate regime. Also, the stock markets performed better, helping shore up the AAUMs. In November, the total assets of these 24 fund houses was Rs 2.8 lakh crore, up 4.6%, or over Rs 13,000 crore, to Rs 2.93 lakh crore.
Derivatives Very low volumes were registered in the derivatives market probably because of lack of FII participation. Surprisingly, a lot of index futures volume was extinguished given that the market shot up. FII exposures in terms of all open interest is down to around 30% at the moment (the average is around 37%) and that’s in a market, which is generating volumes that are about 35% lower than normal. In the options market, there is a mildly bearish tinge to the overall put-call ratios at 0.87. Index Option put call option (PCR) has dropped to 0.9 while stock PCR has dropped to 0.4. In terms of open interest (OI), the Nifty option PCR is 1.1, which is at the lower range of healthy. The PCR for February and beyond is at 0.85. This is unusual and bearish–normally mid/far series PCRs are well above 1.
Government Securities Market Primary Market Reserve Bank of India (RBI), repurchased MSS dated securities of 7.55% and 5.87% maturing in 1-year for the notified amounts of Rs 5,000 crore each, on 1 January 2009. The cut-off yield for 7.55% security has been set at 4.60% while for the 5.87% stock is not available.
On 2 January 2009, Reserve Bank of India (RBI) re-issued 7.46%2017 and 7.40% 2035 for the notified amounts of Rs 6,000 crore and Rs 4,000 crore, respectively. The cut-off yield for the 8-year paper has been set at 5.73% and for the 26 year paper has been set at 6.53%.
The RBI auctioned 91 Day T-Bills and 364 day T- Bills for the notified amounts of Rs 500 croe and 1,000 crore, respectively. The cut-off yield for the 91 day T-Bills has been set at 4.71% and for 364 day T- Bills haas been set at 4.78%.
Secondary Market Bonds shoot up propelled by increased liquidity in the financial markets and weakening inflation. The weakening inflation prompted the Reserve Bank of India (RBI) to cut some of its key monetary policy rates — the Cash Reserve Ratio (CRR) and the repurchase/ reverse repurchase rates. The reductions were largely effected partly to improve liquidity. The CRR reduction would improve liquidity by another Rs 20,000 crore.
The positive undertone manifested in high trade volumes. Average daily trade volume last week was about Rs 12,400 crore or about Rs 3,000 crore more than equity turnover in the National Stock Exchange.
Bond Market The RBI bought oil bonds worth 30 crore from Indian Oil Corporation under its special market operations, on 1 January 2009. RBI had bought oil bonds worth Rs 370 crore from Hindustan Petroleum (HPCL) and Bharat Petroleum (BPCL) on 31 December 2008.
Foreign Exchange Market The dollar demand resulted in the rupee dropping to Rs 48.89 against the dollar. Forward premia for one three, six and 12 months though softened to 4.51% (6.26%), 3.29% (5.01%), 2.41% (3.42%) and 1.83% (2.39%) respectively as exporters took cover ahead of inward remittances by non-resident Indians. Non-resident Indians were repatriating funds to rupee deposits (non- resident ordinary deposits) after losing confidence on international banks. Inflows were also expected to resume through the External Commercial Borrowings (ECB) route, as the RBI removed the cost ceilings temporarily till June 30 this month.
Foreign direct investment (FDI) in companies engaged in primary dealership of commercial papers, security receipts, asset and mortgage-backed securities may soon be allowed through the automatic route. Foreign investors may also get automatic approval for undertaking dealerships of brokerage and underwriting services in government securities and corporate bonds, an official in the industry ministry said. Currently, foreign companies have to take prior approval of the Foreign Investment Promotion Board (FIPB) for investing in these business activities. Under the automatic route, a foreign investor only informs the Reserve Bank of India before making an investment. The change will be effected by including primary dealership activities under the head of non-banking finance company (NBFC) permitted under the automatic route,
Currency Derivatives The SEBI is studying a proposal submitted by exchanges to extend trading hours of the currency futures segment in line with commodities as both are linked closely with each other. If SEBI approves the demand, trading hours of currency futures will be extended to 11.30 pm from the existing 9 am to 5.30 pm. Internationally trading in futures continues for nearly 23 hours a day.
Commodities Futures derivatives Within five years of the launch of futures trading in commodities, the comexes’ annual turnover surpassed $1 trillion benchmark as predicted by intellectuals a year ago. The three national commodity bourses including the Multi Commodity Exchange (MCX), the National Commodity & Derivatives Exchange (NCDEX) and the National Multi Commodity Exchange (NMCE) recorded a sharp 40% jump in their turnover in 2008. During the calendar year, the three exchanges, representing over 98% of the commodities’ futures trade in India, witnessed a total turnover of Rs 49.58 lakh crore ($1.02 trillion) as compared to Rs 35.46 lakh crore in the previous year. Comexes turnover constitutes about 42.55% of the National Stock Exchange’s derivatives segment turnover, which is Rs 116.54 lakh crore. This is significant as experts believe commodities futures’ potential is larger than that of equities.
The Forward Markets Commission (FMC), the commodity markets regulator, has asked the NCDEX to withdraw the circular on reduction of transaction charge immediately after finding the exchange guilty of violating regulatory norms. The exchange had earlier asked appealed to the regulator that “transaction charges are a prerogative of the exchange. Therefore, the exchange has not violated any regulatory norm.” FMC has rejected NCDEX’s appeal and asked it to place the matter before their board immediately. The regulator may also issue a warning to the exchange not to indulge in unfair trade practices in future. Following a steep erosion of over 50% in its turnover since July this year, the NCDEX tried to lure traders by reducing the transaction charges to a minimal amount, especially in the latter part of the day.
On 2 January 2009, Geojit Financial Services Ltd has informed BSE that it will exit from its commodity business and has discontinued trading in all commodity exchanges in the country, after receiving the regulatory approvals. While BNP Paribas had acquired 27% stake in Geojit last year, the continued presence of the broking firm in commodity business had proved a regulatory block to a subsequent open offer by the French banking major.
Crude oil futures, largely traded on the country’s leading commodity exchange Multi Commodity Exchange witnessed a record volume of over 23 million barrels on Friday last week, mainly due to speculative buying at lower levels. The exchange clocked a maximum volume of 23.49 million barrels in crude oil futures on January 2,beating the earlier record of 19.08 million barrels achieved on December 15,2008, MCX said in a statement.
Five days into the market, two new contracts in gold and silver at leading agri commodity bourse NCDEX have evoked good response from investors, with Gold International January contract registering a business volume of 122 kg in a day. Concerned over dip in its turnover, NCDEX has started focusing on metal and bullion contracts and offering international contracts in gold and silver, which commenced trading from 29 December.
Spot Exchange The proposed start of exchange-based spot trading in wheat before the beginning of the coming rabi marketing season will, when it happens, mark major reform of the food-grain marketing system.
Banking PNB is planning to raise Rs 500 crore from tier II bonds to meets its capital requirement. The bond will be raised from Upper Tier II Bonds Series VI through private placement.
The RBI is considering requests for mergers of 14 more urban co-operative banks (UCBs). RBI has been encouraging consolidation in the urban co-operative banking sector and has so far allowed merger and acquisitions (M&As) in case of 68 banks. Since issuance of guidelines on mergers of urban co-operative banks in February 2005, it had received 107 proposals for mergers in respect of 92 banks and has issued NOCs in 68 cases as of November 2008. According to RBI, M&As pave way for non-disruptive exit of weak or unviable banks, provide an inorganic route for expansion and facilitates consolidation in the process. Almost invariably banks voluntarily approach it to obtain NOC for their merger proposal. The RBI examines the proposal, gets an expert group to go through it before giving approval. There are 1,770 urban co-operative banks in the country with total deposits of Rs 1,38,000 crore and advances of Rs 89,000 crore. A large majority of these banks are located in states like Maharashtra, Gujarat, Karnataka, Tamil Nadu and Andhra Pradesh.
The government stake in UCO Bank would fall to 63.59% from 74.98% on account of capital restructuring scheme. Under the capital recast, Rs 250 crore of the total equity capital of Rs 799 crore would be converted into perpetual non-cumulative preference shares.
National Housing Bank (NHB) the state-run agency that promotes housing finance institutions and provides financial and other support to such institutions, plans to raise Rs 3,000 crore by June next year. The bank is also offering refinance to other housing finance companies at 8% for the housing loans of up to Rs 20 lakh. It has also reduced the prime-lending rate to 10.75% from 11.25%. The current normal refinance rate of NHB is between 9 and 9.5%. Of the total housing loan portfolio of HFCs, 63% consists of loans up to Rs 5 lakh.
Insurance Settlement of agriculture insurance claims in 13 states and union territories has been delayed due to failure of respective governments in releasing Rs 150.85 crore in the National Agriculture Insurance Scheme (NAIS). Meanwhile, Agriculture Insurance Company of India Ltd has settled claims worth Rs 846.78 crore from farmers in Bihar, Gujarat, Jharkhand, Tamil Nadu and Uttar Pradesh, under NAIS.
Corporate In its largest buyout abroad, ONGC is all set to acquire the London Stock Exchange-listed Imperial Energy, a British Oil & Gas Company, for ₤1.3 billion ($1.9 billion) after 97% shareholders in the Leeds-based company gave their consent to takeover bid. The entire process of takeover and delisting may be completed in three weeks.
The World Bank arm, International Finance Corporation (IFC) has proposed to provide long term loan of $100 million to the Maharashtra State Electricity Transmission Company’s (Maha Transco) for capital expenditure.
Information Technology TCS has announced the completion of its acquisition of Citigroup’s India-based captive BPO unit Citigroup Global Services Ltd, for all cash consideration of $512 million. This acquisition will broaden TCS’ portfolio of end-to-end IT and BPO services in the global banking and financial services sector.
As the Satyam Computer Services drama unfolds till the January 10 board meeting, analysts and institutional investors have started building in the possible combinations. The most likely option, reckon analysts, would be to rope in a strategic partner with a less than 15% stake. At the same time private equity (PE) players are also on the prowl and expected to take a hit at acquiring Satyam. Roping in a strategic partner with less than 15% stake is seen as the easiest option for the management and also for the strategic investor. Considering the guidelines mentioned by SEBI, the open offer price could be double the current market price and therefore be a disincentive for the investor.
State-owned Bharat Sanchar Nigam Ltd (BSNL) has launched Interactive Personalised Television and Video (IPTV) services for its customers in the Haryana circle, in a bid to tide over its falling landline subscribers. BSNL launched the services in Gurgaon, Faridabad and Ambala. BSNL is expecting to have one-lakh subscribers in the country by March 2009.
Telecom The Department of Telecommunications (DoT) has put off the 3G auctions by a fortnight, thanks to the poor response of foreign operators and uncertainty over the 2 per cent administrative charge on bidders, on which the Cabinet Committee of Economic Affairs (CCEA) has to take a decision. The auction, earlier scheduled for January 16, 2009 may now take place on January 30, 2009.
Anil Ambani-owned Reliance Communications (RComm) has launched the much-waited national-wide global system for mobile communications (GSM) wireless services. RComm will be covering 11,000 towns and 3,40,000 villages and has plans to invest in Rs 10,000 crore for the GSM roll out.
With the TRAI beginning to review the interconnect usage charge (IUC), the mobile tariffs are expected to decline later this year.
*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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