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Current Economic Statistics and Review For the Week 
Ended
May 23, 2009 (21st Weekly Report of 2009)

 

Trade-off between Food and Fuel: the case of Maize in the US and India

Rising oil prices, energy security, and global warming concerns have all contributed to the current hype over bio-fuels. Prices and demand for oil slowly and gradually continued to increase, till recently in most of the developing and developed countries, and given the constraints of supply elasticity, led them to search and exploit alternative energy sources. As a solution, most of the countries attempted to develop home grown energy at a larger scale so that it would reduce dependency on oil imports as well as pressure on the central exchequer. Several countries have actively supported the production of liquid bio-fuels based on sugarcane, maize, sweet sorghum and various oil seeds, as one of the cheap environment-friendly options. They were also considered to be potential alternate sources of renewable energy and as an avenue to help develop farmer community as well as rural economy. As a result, most of the governments provided substantial support to bio-fuels.

Table1: US Ethanol Production

Year

Ethanol (billion gallons)

Grain Used

1997

1.3

481mb

1998

1.4

526 mb

1999

1.47

566 mb

2000

1.63

628 mb

2001

1.77

706 mb

2002

2.13

996 mb

2003

2.8

1.1 bb

 2004

 3.4

1.3 bb

 2005

 3.9

 1.4 bb

 2006

 4.9

 1.8 bb

 2007

 6.5

 2.3 bb

mb: million bushels, bb: billion bushels

Source: Kansas Ethanol, www.ksgrains.com

 

Reduction in the oil supply by OPEC countries during late 1970s and the consequent shooting up of oil prices, forced both the US and Brazil to launch ethanol programs during this period. Until 2006, Brazil was the global leader in ethanol production, but with the developments in world oil markets (suggesting continuous upward swings in the oil prices) along with the US domestic policy to remove the oxygen requirements leaving oil companies free to meet the clean air rules in any way they saw fit, the US overtook Brazil in ethanol production by 2006. Ethanol production in 2004 was about 3.4 billion gallons and it increased to 4.9 billion gallons in 2006 and 6.5 billion gallons in 2007.

The ethanol boom has, in turn, led to what is termed as ‘yellow revolution’ in the US, as corn or maize has been the primary raw material used for producing this bio-fuel in the US. The “Live green, go yellow,” one of the industry slogans, was vocal enough in portraying corn-based ethanol as a clean, environmentally responsible energy source. It can be observed from table 2 that utilisation of maize for producing ethanol took off since 2003 onwards reducing its availability for other purposes like manufacturing corn-based products like starch, Glucose and dextrose, beverage, alcohol, etc., feed and residual use and even for exports over a period of time. For example, ethanol formed almost 30% of the total domestic use of corn in 2007, which was just 9% in 2001.

Table 2--Corn: Food, Seed, and Industrial Use

 

Industrial Use*

Fuel alcohol

Feed and residual use

Total domestic use

Exports

Total disappearance

Million bushels

2001

1340.42

705.95

5,864.27

7,910.63

1,904.77

9,815.40

2002

1344.72

995.5

5,562.88

7,903.10

1,587.89

9,490.99

2003

1369.57

1,167.55

5,793.02

8,330.13

1,899.82

10,229.95

2004

1363.79

1,323.21

6,155.47

8,842.47

1,818.06

10,660.53

2005

1378.4

1,603.32

6,152.28

9,133.99

2,133.81

11,267.80

2006

1370.75

2,119.49

5,591.00

9,081.25

2,125.37

11,206.62

2007

1337.3

3,026.13

5,938.13

10,301.55

2,435.83

12,737.39

2008

1290

3,750.00

5,350.00

10,390.00

1,750.00

12,140.00

2009*

1310

4,100.00

5,250.00

10,660.00

1,900.00

12,560.00

*: Forecast reported as on19 May 2009

Source:  USDA Economic Research Service http://www.ers.usda.gov/data/feedgrains/FeedYearbook.aspx

 

The increasing demand for corn resulted in rapid escalations in corn prices that encouraged farmers to prefer corn over other crops; thus, area cultivated under corn rose from 75.7 million hectares in 2001 to 93.5 million hectares in 2007, while corn production witnessed an upward trend since marketing year 2001 (9502.6 million bushels), excluding the year 2002, to marketing year 2007 when it peaked to 13,037.9 million bushels (Table 3).

 

Table 3: Supply of Corn in the US and

Area Cultivated Under Corn and Prices Trend

 

Beginning stocks

Production

Imports

Total supply

Ending stocks

Area

Price, farm, avg. price received

 

Million bushels

(million acres)

($ per bushel)

2001

1,899.11

9,502.58

10.14

11,411.83

1,596.43

75.7

1.97

2002

1,596.43

8,966.79

14.45

10,577.66

1,086.67

78.89

2.32

2003

1,086.67

10,087.29

14.08

11,188.04

958.09

78.6

2.42

2004

958.09

11,805.58

10.83

12,774.50

2,113.97

80.93

2.06

2005

2,113.97

11,112.19

8.81

13,234.97

1,967.16

81.78

2

2006

1,967.16

10,531.12

11.98

12,510.27

1,303.65

78.33

3.04

2007

1,303.65

13,037.88

20.01

14,361.54

1,624.15

93.53

4.2

2008

1,624.15

12,101.24

15

13,740.39

1,600.39

85.98

4.2

2009*

1,600.39

12,090.00

15

13,705.39

1,145.39

84.99

4.1

* Forecast as reported on 19 May 2009 Sources: USDA, National Agricultural Statistics Service, USDA, World Agricultural Outlook Board, World Supply and Demand Estimates; and U.S. Department of Commerce, Bureau of the Census.

  

Diversion of land for corn cultivation from other competing crops (soybeans, in particular) fuelled the prices of such other commodities. For instance, a glance at Table 4 reveals that the average price received by the farmers for soyabean went on strengthening during the same period from $ 4.54 in 2001 per bushel to $10.1 per bushel in 2007, whereas sown acreages under soyabean stagnated during 2001-2007 in the range of 72 million hectares to 76 million hectares and the same has been the case for production that hovered around 2-3 million bushels during the same period.  

Table 4: Soyabean Trends

 

Area

Production

Price, farm, avg. price received

 

(million acres)

(million bushels)

( $ per bushel)

2000

74.266

2,758

4.54

2001

74.075

2,891

4.38

2002

73.963

2,756

5.53

2003

73.404

2,454

7.34

2004

75.208

3,124

5.74

2005

72.032

3,068

5.66

2006

75.522

3,197

6.43

2007

64.741

2,677

10.1

2008*

75.718

2959.174

8.85-9.85

*: Forecast reported as on 19 May 2009

Source: USDA Economic Research Service http://www.ers.usda.gov/data/feedgrains/FeedYearbook.aspx

In fact, not particular to USA but in general also, rising agricultural crop prices especially (corn) driven by demand for bio-fuels has created a trade-off between food and fuel across the world. The grain required to fill the tank of a sports utility vehicle with ethanol (240 kilograms of maize for 100 litres of ethanol) could feed one person for a year; thus, rising prices of staple crops can cause significant welfare losses for the poor; as most of them are net buyers of staple crops.

Apart from the threat inflicted on the cultivation of other staple crops, their production and prices, some allied farming activities such as poultry also started feeling the heat, as corn constituted about two-thirds of the poultry feed. For instance, in the US, as a consequence of increased corn prices, the total cost of producing poultry meat and eggs also went up by about 15% over this period.

However, slowly and gradually, it was learnt that corn ethanol, that was considered as a silver bullet solution to the US's energy and environmental problems is not a viable energy option with environmental and research organisations raising serious questions regarding its economic and ecological efficiency.

  • The report ‘The Rush to Ethanol’ released by Food & Water Watch, the Network for New Energy Choices and the Vermont Law School Environmental Law Centre had revealed that Corn, which is the source of 95% of ethanol in the U.S., is among the least efficient, least sustainable bio-fuels. It has also mentioned that corn ethanol has little promise of reducing the U.S. fossil fuel emissions. Even if the entire U.S. corn crop was dedicated to ethanol, it would displace less than 15 percent of national gasoline use. But, a modest increase in auto-fuel efficiency standards, such as those passed by the Senate , would cut petroleum consumption by more than all alternative fuels and replacement fuels combined. Since corn production uses more than twice the amount of pesticides than any other major U.S. crop, uncontrolled ethanol industry growth could exponentially increase environmental toxins.

  • In a similar vein, the Congressional Research Service (CRS) concludes that, ‘barring a drastic realignment of U.S. field crop production patterns, corn-based ethanol’s potential as a petroleum import substitute appears to be limited by a crop area constraint. Therefore, the potential of ethanol to displace fossil fuels, and thus to reduce imports of foreign oil, is limited.

  • World Resources Institute has concluded that the development of a corn-based ethanol market would negatively impact environmental problems. Already it has started degrading soil and water quality in the United States. The study estimates that expected incentives for corn production resulting from its increased market value, would increase soil erosion, contribute to the eutrophication (algae blooms resulting from excessive nitrogen) of rivers and lakes, reduce fish habitat, and expand hypoxic (low-oxygen “dead zones” where life cannot flourish) zones.

Considering these aspects, it seems that the ethanol boom would recede in the near future. To quote from the paper ‘The Biofuels Boom: Implications for World Food Markets’ presented at the Food Economy Conference Sponsored by the Dutch Ministry of Agriculture, ‘without substantial further increases in the world price of petroleum, the US bio-fuel boom based on corn will gradually come to a halt,... Excess production capacity, relative to the absorptive capacity of transport infrastructure and the ability of the liquid fuel market to absorb the additional ethanol being produced for energy substitution, is having an adverse near term effect on this market.’ The paper has also foreseen substantial impact on the long run patterns of global food and agricultural production.

 

Indian Experience:

India has not gone through the phases experienced by the US, as maize is not used mainly for ethanol production; ethanol is basically produced from Jatropha and Molases of sugarcane. In India, maize is grown exclusively as a feedgrains for livestock rearing and is utilised for manufacturing various corn-based products. The demand for maize as a feed resource has been increasingly realised because of the structural changes in the consumption pattern, as a consequence of rising per capita income, which have boosted the demand for livestock and poultry products. Maize is the third important crop produced in the country after Rice and wheat.

A glance at the trend in the area, production and yield of maize over the last few decades as shown in Chart A reveals that area cultivated under maize has seen an improvement over the decades. While production and yield of maize had increased at a faster pace till late sixties, they showed some fluctuations during seventies and eighties. Since early nineties, production and yield have shown a significantly increasing trend. Table 2 displays decadal CAGRs indicating trends observed in the sown acreages, production and yield of maize in the country.

Table 5: CAGR of Maize

 

Area

Production

Yield

1950-60

3.17

7.30

4.03

1960-70

3.38

4.14

0.73

1970-80

-0.13

-0.63

-0.01

1980-90

0.00

1.91

2.10

1990-00

0.94

3.29

2.26

2000-08

3.49

5.83

2.26

Source: Prepared by EPWRF

Maize cultivating states in India, are broadly classified under two categories, viz., traditional that include Bihar, Madhya Pradesh, Rajasthan, and Uttar Pradesh (BIMARU), and non-traditional maize areas, such as Karnataka and Andhra Pradesh (KAP). In traditional areas, the crop is often grown in marginal eco-regions, primarily as a subsistence crop to meet food needs. In contrast, maize in the non-traditional areas is grown for commercial purposes–i.e., mainly to meet the feed requirements of the booming poultry sector. As a result of adoption of hybrids, particularly in non-traditional maize growing states like Karnataka and Andhra Pradesh, and to some extent in some of the traditional maize growing states like Bihar and Maharashtra, maize yield and production saw noticeable increases during 1990-2000. Rigorous efforts made by the central government towards boosting the production of maize by providing various incentives like significant hikes in minimum support price (MSP) i.e. from Rs 505 per quintal in 2003-04 to Rs 840 per quintal in 2008-09, provision of assured procurement and distribution channels, marketing infrastructure etc also helped to sustain increasing trends in production.

As per a ASSOCHAM-Agri Watch Study on `Maize Report 2008’, the current level of maize yield in the country (2.17 MT/Ha) is far behind the global average of 5 MT/Ha, and there is thus, significant scope for improvement in yield by improving the adoption of hybrids, particularly in traditional maize growing regions.

Keeping in mind, the burgeoning demand from poultry and starch industry, India needs to exploit this potential. It can also become a major hub for maize exports, as it enjoys both price and freight advantages in this market.

 

  • This note has been prepared by Anita Naik with inputs from  Pallavi Oak

References:

  • Birur, Dileep K, et al (2007): ‘The Biofuels Boom: Implications for World Food Markets’. Centre for Global Trade Analysis Department of Agricultural Economics, Purdue University, October 18-19

  • Economic Research Service, United States Department of Agriculture,

  • Alexander Corinne and Chris Hurt, ‘Biofuels and Their Impact on Food Prices’, Department of Agricultural Economics, Purdue University

  • Joshi, P.K., et al (2005): ‘Maize in India: Production Systems, Constraints, and Research Priorities’. Mexico, D.F.: CIMMYT.

  • Directorate of Economics and Statistics, Ministry of Agriculture, Government of India

  • Agriculture at a Glance 2008, Ministry of Agriculture, Government of India

 

 

Highlights of  Current Economic Scene

Agriculture

Agriculture Ministry has estimated that output of sugarcane from the country is likely to be around 289.23 million tonnes in 2008-09 season, which is 17% lower than that produced a year ago.

The central government would be lifting up the ban on exports of non-basmati rice and further it is likely to remove the quantitative restrictions on wheat shipments. It would review the stock inventories, purchases form farmers and supplies in the country before implementing the decision in the month of June.

As per the projection by the states, overall availability of cottonseed in the country is reported to be around 235,000 quintals as against demand of 187,000 quintals for the kharif season. No shortage of cottonseed has been reported in any state of the country. Though some reports claimed that there is shortage of cottonseed in Maharashtra, the reality is that the availability is more than 85,000 quintals on requirement of 71,000 quintals. 

Data collected by the Cotton Corporation of India (CCI) as of 16 May 2009 reveals that arrivals of cotton in the local markets during the current crop year started from October 1 dropped by 9.3% to 275.2 lakh bales. The daily supplies are reported to be around 20,000 bales. Cotton arrivals from Gujarat declined by 27.3% to 8 million bales, while in Maharashtra it rose by 5.8% to 6.35 million bales. In northern states cotton arrivals showed a downfall of 15.25% to 3.90 million bales, while in south arrivals increased by 15% to 6.16 million bales.

Procurement of Rice as on May13, 2009

 (lakh tonnes)

Punjab

84.9

Andhara Pradesh

60.7

Uttar Pradesh

36

Chhattisgarh

25.5

Orisa

20.1

Harayana

14.1

Tamil Nadu

10.8

Source: Media

Procurement of rice as on 13 May 2009 has registered an increase of 19% touching to 284 lakh tonnes, as against 237.9 lakh tonnes attained during the same period a year ago. This quantum jump in procurement of rice is attributed to remarkable increase of purchase undertaken from the states like Punjab, Andhara Pradesh, Uttar Pradesh, Chhattisgarh, Orissa, Haryana and Tamil Nadu. Punjab has continued to remain the largest contributor to the central rice pool having a share of 84.9 lakh tonnes followed by Andhra Pradesh with 60.7 lakh tonnes, respectively.

According to the Food Ministry, the quantity of wheat procured from local farmers has risen to 22.85 lakh tonnes, 14% more than 20.07 million tonnes purchased during the same period a year earlier. Total procurement last year amounted to 22.69 million tonnes.

The central government in February had allowed sugar mills to import duty-free raw sugar under advance license scheme (ALS). Sugarmills have contracted 20 lakh tonnes of raw sugar since February, while STC, MMTC and PEC have entered into a contract for 56,000 tonnes. It has been reported that nearly 13 lakh tonnes of sugar would be received by June-end.

The central government has not allowed Nafed to import white sugar, as it was not able to import 10 lakh tonnes of white sugar at zero duty, restricting the work of shipping to be done only by the three public sector trading firms PEC, STC and MMTC.

The central government is planning to increase the statutory minimum price (SMP) of sugarcane to Rs 107.76 per quintal for next season beginning from October 2009 as against 81.18 per quintal paid since last two years. Sugar production from the country has declined for the second successive year, which has forced the country to become a net importer for the first time since 2006, and has led raw-sugar prices to rise by 31%. The Indian Sugar Mills Association has requested the government to announce the SMP as early as possible, so that farmers would be encouraged to plant more acreage under sugarcane. The Commission for Agricultural Costs and Prices, which recommends support price for agricultural crops, has suggested SMP to be raised to Rs 125 per quintal. It has been reported that due to shortage of sugarcane during this season, some mills in Uttar Pradesh have paid Rs 155-160 per quintal, much more than the state advisory price (SAP) of Rs 140 per quintal.

Industry

The General Index (IIP) stands at 297.9, which is 2.3% lower as compared to the level in the month of March 2008. The cumulative growth for the period April-March 2008-09 stands at 2.4% over the corresponding period of the previous year.

The annual growth of thee Indices of Industrial Production for the Mining, Manufacturing and Electricity sectors for the month of March 2009 at  0.4%, (-)3.3% and 6.3% as compared to March 2008. The cumulative growth during 2008-09 over the corresponding period of 2007-08 in the three sectors have been 2.3%, 2.3% and 2.8% respectively, which moved the overall growth in the General Index to 2.4%.

In terms of industries, as many as five (5) out of the seventeen (17) industry groups (as per 2-digit NIC-1987) have shown positive growth during the month 2009 as compared to the corresponding month of the previous year. The industry group ‘Beverage etc’ have shown the highest growth of 15.1%, followed by 8.3% in ‘basic chemicals ’ and 6.6% in ‘Rubber and plastic products’.  On the other hand, the industry group ‘Food Products’ have shown a negative growth of 35.8% followed by 25.1% in ‘Wood and Wood Products; Furniture and Fixtures‘ and 18.1% in ‘Leather and Leather Products’.

As per Use-based classification, the Sectoral growth rates in March 2009 over  2008 are  1.4% in Basic goods, (-)8.2% in Capital goods and (-) 4.4% in Intermediate goods. The Consumer durables and Consumer non-durables have recorded growth of 8.3%  and (-) 3.4% respectively, with the overall growth in Consumer goods being negative at 0.8%..

Infrastructure

The Index of Six core industries having a combined weight of 26.7 per cent in the Index of Industrial Production (IIP) with base 1993-94 stood at 270.3(provisional) in March 2009 and registered a growth of 2.9% (provisional) compared to a growth of 2.9% in March 2008.  During April-March 2008-09, six core industries registered a growth of 2.7% (provisional) as against 5.9% during the corresponding period of the previous year.

Crude Oil production registered a decline of (–)2.3% in March 2009 compared to a lower fall of (-)0.3% in March 2008. The Crude Oil production registered a growth of (-) 1.8 during April-March 2008-09 compared to 0.4% during the same period of 2007-08.

Petroleum refinery production registered a growth of 3.3% (provisional) in March 2009 compared to growth of 0.1% in March 2008. The Petroleum refinery production registered a growth of 3.0%during April-March 2008-09 compared to 6.5% during the same period of 2007-08.

Coal production registered a growth of 5.2% in March 2009 compared to growth rate of 9.3% in March 2008. Coal production grew by 8.1%  during April-March 2008-09 compared to an increase of 6.0% during the same period of 2007-08. 

Electricity generation registered a growth of 5.9% (provisional) in March 2009 compared to a growth rate of 3.6% in March 2008. Electricity generation grew by 2.7% during April-March 2008-09 compared to 6.3% during the same period of 2007-08.

Cement production registered a growth of 10.1% in March 2009 compared to 9.3% in March 2008. Cement Production grew by 7.5% during April-March 2008-09 compared to an increase of 8.1% during the same period of 2007-08.

Finished (carbon) Steel production (weight of 5.13% in the IIP) registered a growth of (-)2.6%in March 2009 compared to (-)0.9%  in March 2008. Finished (carbon) Steel production grew by 0.4% during April-March 2008-09 compared to an increase of 6.2% during the same period of 2007-08.

Inflation

The official Wholesale Price Index for 'All Commodities' (Base: 1993-94 = 100) for the week ended 9 May, 2009 rose by 0.2 percent. The annual rate of inflation, calculated on point to point basis, stood at 0.61%  for the week ended 09/05/2009  as compared to 0.48%  for the previous week and 8.57% during the corresponding week  of the previous year.

The index for  major group Primary articles rose by 0.5% due to higher prices of many food items and food product items.

The index for fuel, power ,light and lubricants remained unchanged at previous week’s level of 323.7.

The index for manufactured products gone-up  by 0.1 percent to 203.3 from 203.0 for the previous week. The index for 'Food Products' group rose by 0.4%. due to higher prices of imported edible oil, rice bran oil etc.

 The index for 'Basic Metals Alloys & Metal Products' group looked up by 0.1% due to increase in the price of iron and steel, lead and zinc ingots..

 The final wholesale price index for ‘All Commodities’ (Base: 1993-94=100) revised upwards from 228.0 to 227.0 for the week 14 March 2009, and hence the annual rate of inflation based on final index, calculated on point to point basis, stood at0.71 % as compared to 0.27%.

Financial Market Developments

Capital Markets 

Primary Market

As informed by the company to BSE, the shareholders of Indiabulls Real Estate Ltd (IBREL) has approved to raise up to Rs 3,000 crore ($600 million) through shares sale to qualified institutional buyers (QIPs), to fund its projects and acquire new businesses.. With the issue opening on 25 May, the allotment of the shares is expected to be made around 22 May. Morgan Stanley is the lead book manager to the issue. According to investment banking sources, the company was expected to use the QIPs proceeds to fund its power projects, mainly a 1,320-mw project planned in Amaravati in Maharashtra.

Secondary Market

With the return of Congress-led UPA in the Lok Sabha elections, this time without the Left parties, the stock markets saw an unprecedented surge. It was the shortest trading session in the history of Indian stock markets, lasting a little over a minute and generating wealth of Rs 5,66,881 crore for investors. On May 18, for the first time in history, the key indices hit the upper circuit limit twice in the first few seconds of trading as they jumped by about 17% for the session, forcing the BSE and the NSE to suspend trading for the day a little before noon. The gains were attributed mainly to short covering by traders, who expected a bull run till the next Budget in June.

The BSE Sensex spurted 1,714 points or 14% in the week ended 22 May. Though markets ended with gains, profit booking was also seen. Compared to broader indices, the rally in the BSE Small-Cap and BSE Mid-Cap was larger with gains of 29% and 25%, respectively. FIIs are playing a crucial role in the current rally with purchases of about Rs 15,000 crore in May and their extent of participation could influence the market movement.

Among the sectoral indices of BSE most sectors ended green except IT index which posted negative returns due to appreciation of rupee. Expectations of easing liquidity helped the capital goods and reality indices to record massive gains over the week.

With markets hitting an upper circuit limit within seconds of opening for the first time in history, a section of players feel the cap needs reviewing. Since the norms were codified in 2001, the stock market has witnessed a sea change. As a result, they feel there is a strong case for revising those limits.

After a “forced holiday” on 18 may due to two circuit breakers, traders rushed back to the market on 19 May. As a result the markets reported their highest turnover of 157,891 crore. In the cash segment, the NSE and the BSE recorded turnovers of Rs 40, 122 crore and Rs 11,781 crore, respectively.

According to the London-based metal consultancy firm, GFMS Ltd, investment into gold exchange traded funds (ETFs) touched a record level and increased by 540% to 465 tonne at a value of $13.6 billion in the first quarter of 2009. Total demand for gold in first quarter of 2009 rose 38% year-on-year to 1,016 tonne, representing a 36% rise in value terms to $29.7 billion. Identifiable investment demand for gold, which includes exchange traded funds (ETFs), bars and coins, was the major source of growth in the quarter, reaching 596 tonne, up 248% over first quarter of 2008.

Foreign institutional investors (FII) have dumped the debt market to make the most out of the rising equity market, which is showing signs of revival. Between January and 15 May 2009, FIIs have pulled out Rs 3,962 crore, or $1.96 billion, from the debt segment. Of this, they pulled out Rs 3,687 crore (or $1.03 billion) between 8 March and15 May. FIIs have pulled out more than 90% of the investments after the equity markets started rising. On 18 May, when the trading was halted at both the stock exchanges after it hit the upper circuit barrier, FIIs invested around Rs 32 crore, or $6.7 million, in the debt market.

The Securities and Exchange Board of India (SEBI) is worried about the mass exodus by independent directors since the Satyam Computers scam in January. The market regulator has sought the primary market advisory committee’s (PMAC) suggestions to rectify this situation. According to industry experts, 364 independent directors had put in their papers.

Derivatives

An extraordinary week saw volumes zoom over Rs 100,000 crore as traders scrambled to adjust to a decisive election verdict. In the futures and options (F&O) segment, the NSE recorded the highest-ever turnover of Rs 105,986 crore on 18 May. The previous highest turnover was Rs 149,505 crore on 17 October 2007 which was reached immediately after the then SEBI Chairman M Damodaran issued guidelines for phasing out participatory notes (P-notes). Ahead of the May expiry, volatility will be high in the derivatives market as the stage is now set for a high-voltage settlement week. The Nifty May future closed the week at 4248 against the spot close of 4238.5. The Nifty June future closed at 4256.2, but saw a rollover of just 20%, which is low when compared with previous occasions.

The option chain had little open interest (OI) above Nifty 3,800 and no OI to speak of above 4,000. At its peak on 18 May, the market was at 4,509 – that is, up over 22% from 3,671 where it had closed on 15 May. The sudden surge in the benchmark indices left most traders in the F&O segment high and dry as they could not participate or take positions. Share prices went up between 25 and 30% for many stocks and even before traders could react, circuit filter arrested the trading. Options with higher strike price, particularly for individual stocks, were not available and even the existing one could not witness trading due to the break. The day’s turnover was just Rs 2,599 crore, the lowest ever; with stock options saw a volume of Rs 16.24 crore.

While the domestic equity bourses posted one of its best weekly gains in recent times, doubling of the India Vix or volatility index created by the NSE indicates a high level of nervousness in the market. For the first time, the NSE Volatility index in 2009 crossed the 80 mark to hit a high of 87.53 on the weekend and closed 83.71 against the previous week’s close of 49.64. The last time it crossed the 80-point mark was in November, after the Nifty hit fresh lows in October. This suggests that traders are expecting a drastic fall in Nifty future after a sharp run up in recent times.

Apart from Indian traders and FIs, the FIIs increased their collective exposure considerably. They pumped in over Rs 5,000 crore on 19 May alone (around Rs 15,000 crore so far in May). The cumulative FII positions as a percentage of gross market positions on the derivative segment as on 22 May declined to 35.67%. They have been net sellers in recent times, particularly on stock and index futures. They, however, increased their holding in index options. They now hold index futures worth Rs 13,160.01 crore (Rs 11,570.93 crore) and stock futures worth Rs 21,994.33 crore (Rs 16,843.27 crore). On index options, FII holdings jumped strongly to Rs 38,040.58 crore (Rs 31,490.74 crore).

Government Securities Market

Primary Market

On 20 May 2009 RBI auctioned 91-day TBs and 364-day TBs for the notified amount of Rs 5,000 crore and Rs 1,000 crore, respectively. The cut-off yield for the 91-day TB was set at 3.28% and for 364-day TB it was set at 3.68%.

RBI purchased government securities through open market operations (OMO) on 21 May 2009 for the notified amount of Rs 6,000 crore. The cut-off yield for the 8.24% 2018, 8.35% 2022, 8.28% 2032 and 8.33% 2036 was set at 6.69%, 7.26%, 7.47% and 7.50%, respectively.

Secondary Market 

The inter-bank call rates moved in the range of 3.12-3.21% during the week. Bond yields stayed firm as banks reduced trading and booked profits ahead of large credit demand from the public sector oil refining sector. Traders said that although capital inflows were high during the week, the decline in bond prices or firm yields were more due to low interest from the banking sector in Government securities. Besides, with a new government in place, a fresh fiscal stimulus was expected to be announced. As a result, traders said that they preferred to wait for fresh government borrowings that were likely to be at higher yields instead of chasing government securities driving down the yields.

Trade volumes shrank further during the week reflecting the caution ahead. Average daily trade volume was Rs 11,200 crore, down Rs 1,200 crore over the previous week. The caution was also evident from the high spreads of 285 basis points. The drop in trade volumes also revealed a distinct fatigue and fading interest for government securities.

Equipping the Indian banks in managing their asset liability better, the BSE, MCX-SX and NSE were planning to launch interest rate futures (IRFs), soon thereby acting as a central counterparties.

Bond Market

During the week under review, one bank, one NBFC, five corporates and one state PSU tapped the bond market through issuance of bonds to mobilise an amount of Rs 8,970 crore.

 

Profile of Major Commercial Bond Issues for the Week Ending 22 May 2009

Sr No.

Issuing Company / Rating

Nature of Instrument

Coupon in % per annum and tenor

Amount in Rs. crore

 

FIs / Banks

 

 

 

1

Dena Bank
A by Care, Crisil.

Perpetual Bond

9% with a step up of 50 bps if call is not exercised at the end of 10 year.

125

 

NBFCs

 

 

 

1

Bajaj Auto Finance Ltd
AA+ by Icra, Crisil.

NCD

8.75% for 2 years.

200

 

Corporates

 

 

 

1

Tata Steel Ltd
AA by Fitch.

NCD

11% for 10 years.

1500

2

Tata Motors Ltd
A+&A by Icra, Crisil.

NCD

6.75%-7.25%, 8%-8.25% & 8.25%-8.75% for 2 years, 4 years & 5 years, respectively.

4200

3

Tata Motors Ltd
A+&A by Icra, Crisil.

NCD

10% for 7 years.

1250

4

Rural Electrification Corp Ltd
AAA by Crisil, Icra.

Bonds

7% and 7.7% for 3 years and 5 years, respectively.

1500

5

Reliance Capital Ltd
AAA by Care.

NCD

9.35% for 2 years.

125

 

State Undertakings

 

 

 

1

Tamil Nadu Electricity Board
A+ (SO) by Icra, Care.

Bonds

8.31% for 10 years with put/call at the end of 10th year.

70

 

Total

8970

 

Source: Various Media Sources

 

SKS Microfinance has raised Rs 75 crore through non-convertible debentures (NCD). This is country's first listed NCD issue by a microfinance institution. The one-year NCDs, issued at a coupon of 10%, are listed on the BSE. 

Bank of India (BoI) is planning to buy back part of $240-million upper Tier-II bonds to save on servicing debt capital. These bonds carry a coupon (interest rate) of 6.62% and are due for redemption in 2021. The Mumbai-based public sector bank had raised capital (Tier-II bonds) overseas in 2006 under Medium Term Note (MTN) programme.

Foreign Exchange Market

The rupee rose past 47 per dollar to a five-month high on Friday before trimming gains on suspected central bank intervention and dollar buying by refiners, but still notched its biggest weekly gain in 13 years. The surge in capital inflows about $1.231 billion pushed the rupee up by 5% in a single week to 47.19, up from the previous week’s level of 49.55.

The partially convertible rupee rose 4.9 percent over the week, its biggest weekly gain in 13 years, after the Congress-led coalition's resounding election win raised expectations for economic reforms and greater foreign investment.

Forward premia for one, three, six and 12 months though widened to 3.78% (3.51%), 3.56% (3.36%), 2.99% (2.80%) and 2.41% (2.31%), as corporates and importers hedged at current levels. Short-term forward premia diverged from this trend and widened as foreign banks took advantage of the RBI’s reverse repo window. The cash to spot premium was 2.21%, up from the previous week’s 1.82%. The rupee appreciation reflected in the non-deliverable forward (NDF) market also to Rs 47.54.

The dollar dropped to its lowest level this year on 22 May and was on track for its biggest weekly fall in two months on concerns about the AAA-rating status of the United States. A rise in US stocks and more upbeat views of the recession-hit global economy also encouraged risk-taking by investors, helping the euro break above $1.40, while sterling hit a 6 1/2-month peak versus the dollar.

Currency Derivatives 

The NSE currency derivatives segment witnessed another milestone on 18 May by registering trading volumes of more than one million contracts in USD-INR futures, valued at over $1 billion. Remittances made easy (over Rs 5,000 crore), as the currency turned bullish against dollar due to strong rally in the equity market. The OI also witnessed a growth close to 334 million dollar. For the first time after last August’s launch, currency derivatives’ volumes have scored over volumes in equity derivatives. Not only that, currency futures’ volumes were at a record high, with over a million contracts traded on NSE and over eight lakh contracts traded on MCX-SX, too. The volume on all three exchanges crossed Rs. 9,020 crore on 18 May.

Commodities Futures derivatives

Trading in wheat futures finally restarted on NCDEX and MCX on 23 May after a hiatus of over two years, with brokers terming the interest generated in the commodity variously as “decent” to “good”. They, however, expect any price rally to be a short-term phenomenon due to bumper crop in the current season and prices at some locations actually quoting below the government’s floor price of Rs 1,080 a quintal (100 kg). Both the exchanges have launched contracts from June to October. Wheat futures contracts got an overwhelming response from commodity markets’ participants on both MCX and NCDEX, the first day of the re-launch of the contracts in the commodity. The total trading volume was 52,410 tonnes. On the MCX, the first trade was put through at Rs 1,202 per quintal (pqtl). The price gradually slipped to Rs 1,140 pqtl before closing at Rs 1,144. The total turnover and OI recorded were Rs 33.2 crore and 6,280 tonnes, respectively. The exchange recorded a trading volume of 28,840 tonnes. On NCDEX, the June contract opened at Rs 1,135 pqtl. After reaching a high of Rs 1,150 pqtl, wheat futures slipped to close at Rs 1,136. The exchange generated a total revenue of Rs 27 crore from wheat contracts with total traded volume of 23,570 tonnes. It witnessed an OI for 8,990 tonnes.

On 18 May prices of almost all commodities having global references slumped on the country’s two largest futures exchanges, MCX and NCDEX, due to a sudden appreciation of the rupee, despite steady trends in these commodities in overseas markets. Prices of most global commodities declined heavily with base metals, precious metals and energy being the biggest losers. Near-month contract of aluminium declined 4% while copper, lead nickel and zinc slumped 3.35%, 4.11%, 5.68% and 3.29% respectively. Crude palm oil was down 3.87% while gold and silver lost 2.46 and 2.33% respectively.

The government has extended time up to 30 September for commodity exchanges to reduce their foreign investment up to 49% and fall in line with the FDI guidelines. When the Department of Industrial Policy and Promotion (DIPP) fixed a composite ceiling of 49% foreign investment in commodity exchanges in March 2008, they were given time up to 30 June 2009 to bring down the overseas equity equivalent to the cap.

Insurance

Reliance Capital has decided to offload 26% stake in its life insurance subsidiary Reliance Life for which the company is evaluating three options including roping in a foreign insurer as a partner who will be given 26% stake, getting a foreign financial partner or going for an initial public offering (IPO). Reliance Capital is keen to complete this offloading activity in next six months.

Banking

Bank of India has completed the implementation of core banking solutions (CBS) in all its 3,023 branches. This is the first project of its kind where a bank has opted for an outsourced model for the CBS implementation. This project has been outsourced to Hewlett Packard India Sales for a 10-year period.

As per a new housing finance scheme, Union Bank will charge both fixed and floating rate of interest on the loan given by the bank. In first year it will charge 8% fixed rate of interest and floating rate of interest in remaining tenure of the loan.

Tata Capital Housing Finance Ltd is likely to disburse home loans worth Rs 200-400 crore in current financial year. The company will be targeting home loan buyers in Tier-II and Tier-III cities of the country. Housing loans would be given up to 85% of the property value with interest rate band of 8-12% for tenure of 12-240 months.

Corporate

MRF Ltd has declared a lockout at its Arakonam in Tamil Nadu from May 17, 2009 on account of labour unrest. This comes after the company had temporarily shut down its plant in Tiruvottiyur and Puducherry in the recent past. Around 2,000 workers are employed in the Arakonam plant which manufacturers 12,000 radial tyres a day.

Lupin Pharmaceuticals, the US subsidiary of Indian pharma Lupin, has been sued by US firm Genzyme. Early this month, Lupin had been sued by Pfizer alleging that Lupin’s proposed generic equivalent to Pfizer pain management drug, Lyrica in the US, will infringe the original patent. Once a generic firm files paragraph IV ANDA with the US FDA, the company has to prove in the court that its generic version will not infringe the patented drug.  

Apollo Tyres has completed the acquisition of the Netherlands-based Vredestein Banden BV, for an undisclosed amount from Russia’s bankrupt largest tyre manufacturer Amtel-Vredestein after it got all regulatory approvals and consent from the Judge of the Dutch Courts.

GE Hitachi Nuclear Energy, the global nuclear alliance created by GE and Hitachi signed an agreement with engineering and construction major L&T to develop an advanced nuclear power plant in India based on advanced boiling water reactor (ABWR). While GE Hitachi Nuclear Energy will serve as the technology provider of certain ABWR nuclear island equipment and components, L&T’s role will be to engineer, manufacture and construct these power equipments.

State owned Bhel has offered to take up the controversial Barh project of NTPC if the Russian firm Technopromexport (TPE) that had bagged the order for it and the power major end their arbitration case. TPE had bagged the project to supply boilers for the first stage of the Barh projet from NTPC about three years ago but the companies went into litigation as the equipment supplier demanded higher prices in view of increase in input prices.

Dr Reddy’s Laboratories is closing Atlanta research facility in the US, one of the first research facilities of the company outside India. In addition, the company’s drug discovery operations in Hyderabad will be taken over by Aurigene, a wholly-owned independent subsidiary of the company.

Pantaloon Retail have raised about Rs 368 crore through preferential issue of equity shares and warrants for funding its expansion plans.

External Sector

Exports during March  2009  at US$ 11516 million which was one-third  lower than that in March 208, as a result during the fiscal year 2008-09 total exports at US$ 168704 million registered a growth of 3.4% over that of US $ 163132 million reported in the comparable period last year.

Imports during March were valued at US $ 15561 million, a decrease of 34.0 per cent over that of US$ 23574 million in March 2008 and the cumulative import at US$ 287759 million was 14.3% more than that of US $ 251654 during  2007-08.

Trade balance during March worked out to be $ 4045 as compared to $6320 in 2007-8. The cumulative trade balance for 2008-09 estimated at US $ 119055 million was 1.3 times to that of US $ 88522 million during  2007-08.

While oil imports during the current fiscal year gone up from US $ 93176 million  to US $ 79715 million, that of non-oil imports accelerated by 13.2% to US $ 171940 million.

 
Information Technology

RPG group’s Zensar Technologies is targeting Rs 100 crore revenues from the domestic market in the current fiscal year 2008-09.  The company is looking at projects with electricity, water and power companies in the domains of asset management and GIS. In the education space, it is looking at working with large private universities.

Last month, Tech Mahindra had acquired 51% stake in the Hyderabad-based company for Rs 2,990 crore through a transparent auction. Tech Mahindra in its due diligence process of Satyam had estimated over 15,000 employees in its 40,000-strong headcount. The company’s CEO, Vineet Nayyar said that, “we are looking at least painful ways to take care of this issue". On other hand, Satyam Board Chairman Kiran Karnik said, "we are not looking at layoffs. But we are looking at the ways on how to mange the cost, handle people and meet the challenges to the bottom line."

National Aviation Company of India (NACIL) which runs national carrier Air India has chalked out a cost-cutting drive which could translate into savings of Rs 1,000 crore. Nacil’s proposal seeking Rs 1,300 crore additional equity and soft-loans worth Rs 3,000 crore is pending with the government since last year.

Le Mѐridien, the French hotel brand, is planning to open five new hotels in India in the next 3-5 years.

 

Telecom 

Bharti Airtel that has been focusing on the rural market to add volumes in the subscriber base, will now extend value-added services (VAS) to them. Currently, around 55% of Airtel’s 100 million customer base is from the rural area and the company expects this share to reach 65%.

Airtel will be the first Indian company to offer in-flight cell-phone connection facility to its customers. Recently the company has tied up with UK based in-flight solutions company AeroMobile. This facility will provide the customers to make or take a call on the selective international airlines. Currently AeroMobile is in agreements with several global carriers such as Emirates, Qantas, Malaysia Airlines and Turkish Airlines.

The Delhi High Court has dismissed a petition filed by mobile equipment vendor Nokia Siemens Network seeking stay over parts of the Rs 30,000 crore mega tender floated by state-run BSNL. A division bench dismissed the petition after observing that it has no territorial jurisdiction over May 15 tender of BSNL. 

 

Macroeconomic Indicators

Table 1 : Index Numbers of Industrial Production (1993-94 =100)

Table 2 : Production in Infrastructure Industries (Physical Output Series)

Table 3: Procurment, Offtake and Stock of foodgrains

Table 4: Index Numbers of  Wholesale Prices (1993-94 = 100)

Table 5 : Cost of Living Indices

Table 6 : Budgetary Position of Government of India

Table 7 : Government Borrowing Programmes and Performance

Table 8 : Scheduled Commercial Banks - Business in India  

Table 9 : Money Stock : components and Sources

Table 10 : Reserve Money : Components and Sources

Table 11 : Average Daily Turnover in Call Money Market

Table 12 : Assistance Sanctioned and Disbursed by All-India Financial Institutions

Table 13 : Capital Market

Table 14 : Foreign Trade

Table 15 : India's Overall Balance of Payments

Table 16 : Foreign Investment Inflows  
Table 17 : Foreign Collaboration Approvals (Route-Wise)
Table 18 : Year-Wise (Route-Wise) Actual Inflows of Foreign Direct Investment (FDI/NRI)

Table 19 : NRI Deposits - Outstandings

Table 20 : Foreign Exchange Reserves

Table 21 : Indices REER and NEER of the Indian Rupee

Table 22 : Turnover in Foreign Exchange Market  
Table 23 : India's Template on International Reserves and Foreign Currency Liquidity [As reported under the IMFs special data dissemination standards (SDDS)
Table 24 : Settlement Volume and Netting Factor for Government Securities Transactions Settled at CCIL - Monthly, Quarterly and Annual Basis.
Table 25 : Inter-Catasegory Distribution of All Types of Trade in Government Securities Settled at CCIL (With Market Share in Respective Trade Types) 
Table 26 : Settlement Volume and Netting Factor for Total Forex Transactions Settled at CCIL - Monthly, Quarterly and Annual Basis.
Table 27 : Inter-Category Distribution of Total Foreign Exchange Transactions Settled at CCIL (With Market Share in Respective Trade Types) 

 

Memorandum Items

CSO's Quarterly Estimates of GDP  

GDP at Factor Cost by Economic Activity

India's Overall Balance of Payments: Quarterly

India's Overall Balance of Payments: Annual  

*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.

LIST OF WEEKLY THEMES


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