by Sudip Bandyopadhyay
(CEO & Director, Reliance Money)
Financial crisis have, by and large, exhibited a repetitive pattern, demonstrating the inability, or unwillingness, of financial market participants to learn.
Charles Mackay, in his book Extraordinary Popular Delusions and the Madness of the Crowds, says that while episodes of panic and disasters have their own distinctive features, they exhibit a common feature – that they are all preceded by a period of apparent prosperity when it is possible to rapidly acquire fortunes ‘otherwise than by the road of plodding”.
In their study of 18 financial crises in the US, economists Carmen Reinhart and Kenneth Rogoff of Harvard Business School found that there were ‘stunning qualitative and quantitative parallels across a number of standard financial crisis indicators’. Ahead of each big financial shock, house prices rose rapidly, as did equity prices; current account deficits ballooned; and capital inflows accelerated.
Financial crises, either global or domestic, transform ‘something close to universal trust into something akin to universal suspicion’ as Galbraith remarked in his book The Great Depression. Under these conditions, it becomes difficult for regulators and legislators to make the wisest decisions or take the best measures. Regulations originating in a crisis tend to be extreme and such measures often lead to expensive regulation.
The Sarbanes Oxley Act is one such example. The question is: if the financial crisis could not be detected despite the expensive disclosures and risk management requirements of this act and NYSE rules, are such rules serving the purpose? The recent banning of short sales in the US, Europe and Australia is another example. Banning of short sales is an extreme measure which has not worked in any market. It does little to arrest the decline in prices; on the contrary, when the ban is removed, a flood of pent up sales push the market down further. This was tried in India too on a couple of occasions, and with little effect. We ought to refrain from taking any quick-fix regulatory measure – either as a precautionary or prophylactic step or for lifting the market sentiment. Market sentiments cannot be talked up or down and when fear grips the market it would be futile to try and impact the prices by comforting statements for example, the famous Greenspan speak of ‘irrational exuberance’ had affected markets only for half a day.
Markets are known to respond to the casual market-reviving measures only casually, as they did to the recent SEBI Participatory Note-related policy changes. What works are measures that ensure that liquidity never dries up. That is the responsibility of the central banker.
Thursday, January 29, 2009
Monday, January 26, 2009
RBI not very optimistic in Q3 review
The Reserve Bank has released the document “Macroeconomic and Monetary Developments Third Quarter Review 2008-09” to serve as a backdrop to the Third Quarter Review of Monetary Policy 2008-09.
The highlights of macroeconomic and monetary developments during 2008-09 so far are:
Overview
The Indian economy, after exhibiting strong growth during the second quarter of 2008-09, has experienced moderation in the wake of the global economic slowdown. Although agricultural outlook remains satisfactory, industrial growth has decelerated sharply and services sector is slowing. The economic slowdown, during the second quarter vis-à-vis the first quarter of 2008-09, was primarily driven by a moderation of consumption growth and widening of trade deficit, offset partially by an acceleration in investment demand.
The balance of payments (BoP) for the first half of 2008-09 reflected a widening of the current account deficit and moderation in capital flows. Net capital inflows reduced sharply and remained volatile during 2008-09 with foreign direct investment inflows showing an increase, while portfolio investments recording a substantial outflow.
The growth of non-food credit remained high during 2008-09, so far, albeit with some moderation in recent months. Continued high growth in time deposits enabled the banking system to sustain the credit expansion while the non-banking sources of funds to the commercial sector declined.
The total flow of resources from banks and other sources to the commercial sector during 2008-09, so far, has been somewhat lower than the comparable period of 2007-08.
Financial markets in India, which, by and large, remained orderly from April 2008 to mid-September 2008, witnessed heightened volatility subsequently reflecting the knock-on effects of the disruptions in the international financial markets and the uncertainty that followed. This necessitated the Reserve Bank to undertake a series of measures to inject rupee and foreign exchange liquidity from mid-September 2008 onwards. Liquidity conditions turned around and became comfortable from mid-November 2008.
Headline inflation has declined in major economies since July/August 2008. In India, inflation measured as year-on-year variation in the wholesale price index (WPI) has declined sharply since August 2008 and was at 5.6 per cent as of January 10, 2009.
On the macroeconomic front, the downside risks for economic growth emanate from global economic slowdown, deterioration in global financial markets and slowing down in domestic demand. On the positive side, factors include expected increase in consumption demand mainly reflecting rise in basic exemption limits and tax slabs, Sixth Pay Commission awards, debt waiver for farmers and pre-election expenditure. The easing of international oil prices and commodity prices may help in softening the inflationary pressure.
Output
According to estimates released by the Central Statistical Organisation (CSO) in November 2008, the real GDP growth was placed at 7.6 per cent during the second quarter of 2008-09 as compared with 9.3 per cent during the corresponding quarter of 2007-08, reflecting deceleration in growth of industry and services.
The Ministry of Agriculture has set a target for foodgrains production for 2008-09 at 233.0 million tonnes. According to the First Advance Estimates, the kharif foodgrains production during 2008-09 was placed at 115.3 million tonnes (Fourth Advance Estimates) as compared with that of 121.0 million tonnes during the previous year.
The index of industrial production during April-November 2008-09 recorded year-on-year expansion of 3.9 per cent as compared with 9.2 per cent during April-November 2007-08. The manufacturing sector recorded growth of 4.0 per cent during April-November 2008-09 (9.8 per cent during April-November 2007-08) and the electricity sector recorded growth of 2.9 per cent (7.0 per cent during April-November 2007-08).
Available information on the leading indicators of services sector activity during April-October 2008-09 indicate some acceleration in growth in respect of several indicators such as railway revenue earning and freight traffic and export cargo handled by civil aviation as compared with the corresponding period of 2007-08. On the other hand, growth decelerated in respect of cargo handled at major ports and other indicators of civil aviation excluding export cargo, commercial vehicles, cement and steel.
Aggregate Demand
Aggregate demand in the Indian economy is primarily domestically driven, though exports have been gaining progressively higher importance in recent years. The economic slowdown, during the second quarter vis-à-vis the first quarter of 2008-09, was primarily driven by a moderation of consumption growth and widening of trade deficit, offset partially by an acceleration in investment demand. On the other hand, the government consumption expenditure accelerated during the same period.
According to the latest information on Central Government finances for 2008-09 (April-November), the revenue deficit and fiscal deficit were placed higher than those in April-November 2007 both in absolute terms and as per cent of budget estimates (BE) primarily on account of higher revenue expenditure.
Tax revenue as per cent of BE was lower than a year ago on account of lower growth in income tax, corporation tax and customs duties owing to economic slowdown. Aggregate expenditure as per cent of BE, was higher than a year ago on account of higher revenue expenditure, particularly, subsidies, defence, other economic services, social services and plan grants to States/Union Territories.
While expenditure is slated to increase on account of the fiscal stimulus measures undertaken by the Government to address the problem of economic slowdown, growth of tax revenue is likely to decelerate in the coming months of 2008-09 due to moderation in economic activity. The net cash outgo on account of the two supplementary demand for grants is placed at Rs. 1,48,093 crore. This, in turn, will be reflected in the non-attainability of the deficit targets for 2008-09 as envisaged in the Union Budget 2008-09.
During 2008-09 (up to January 13, 2009), special bonds amounting to Rs.44,000 crore and Rs.14,000 crore have been issued to oil marketing companies and fertiliser companies, respectively.
Sales performance of select non-Government non-financial public limited companies in the private corporate sector during the first two quarters of 2008-09 was impressive; however, profits performance was subdued as compared with 2007-08. Higher increase in expenditure in relation to sales growth was primarily on account of rising input costs, interest expenses and large provisioning towards mark to market (MTM) losses on foreign exchange related transactions which exerted pressure on profits.
The External Economy
India’s balance of payments position during the first half of 2008-09 (April-September) reflected a widening of trade deficit resulting in large current account deficit, and moderation in capital flows. Merchandise trade deficit recorded a sharp increase during April-November 2008 on account of higher crude oil prices for most of the period and loss of momentum in exports since September 2008. Net surplus under invisibles remained buoyant, led by increase in software exports and private transfers. Net capital inflows reduced sharply and have remained volatile during 2008-09 so far.
The large increase in merchandise trade deficit during April-September 2008 led to a significant increase in the current account deficit over its level during April-September 2007. The widening of trade deficit during April-September 2008 could be attributed to higher import payments reflecting high international commodity prices, particularly crude oil prices.
The surplus in the capital account moderated during April-September 2008 reflecting increased gross capital outflows on the back of global financial turmoil. While the net inward FDI (net direct investment by foreign investors) remained buoyant reflecting relatively strong fundamentals of the Indian economy and continuing liberalisation measures to attract FDI, net outward FDI (net direct investment by Indian investors abroad) also remained high during April-September 2008. The gross capital inflows were higher on account of higher FDI inflows and NRI deposits during the period.
In terms of residual maturity, the revised short-term debt (below one year) comprising sovereign debt, commercial borrowings, NRI deposits, short-term trade credit and others maturing up to March 2009, was estimated at around US $ 85 billion as at end-March 2008.
According to the provisional data released by DGCI&S, India’s merchandise exports during April-November 2008 increased by 18.7 per cent while imports recorded a higher growth of 32.5 per cent, largely due to the rise in petroleum, oil and lubricants (POL) imports. The rise in oil imports was primarily due to the elevated international crude oil prices, while the volume of oil imports moderated. Merchandise trade deficit during April-November 2008 widened to US $ 84.4 billion from US $ 53.2 billion a year ago.
As of January 16, 2009, foreign exchange reserves at US $ 252.2 billion declined by US $ 57.5 billion over the level at end-March 2008, including changes due to valuation losses.
Monetary Conditions
Monetary and liquidity aggregates that expanded at a strong pace during the first half of 2008-09 showed some moderation during the third quarter reflecting the decline in capital flows and consequent foreign exchange intervention by the Reserve Bank.
Growth in broad money (M3), year-on-year (y-o-y), was 19.6 per cent (Rs. 7,36,777 crore) on January 2, 2009 lower than 22.6 per cent (Rs. 6,91,768 crore) a year ago.
Aggregate deposits of banks, y-o-y, expanded 20.2 per cent (Rs.6,49,152 crore) on January 2, 2009 as compared with 24.0 per cent (Rs. 6,21,944 crore) a year ago.
The growth in bank credit continued to remain high. Non-food credit by scheduled commercial banks (SCBs) was 23.9 per cent (Rs.5,01,645 crore), y-o-y, as on January 2, 2009 from 22.0 per cent (Rs.3,79,655 crore) a year ago.
The intensification of global financial turmoil and its knock-on effect on the domestic financial market, and downturn in headline inflation, necessitated the Reserve Bank to ease its monetary policy since mid-September 2008.
Reserve money growth at 6.6 per cent, y-o-y, as on January 16, 2009 was much lower than that of 30.6 per cent a year ago. Adjusted for the first round effect of the changes in CRR, reserve money growth was 18.0 per cent as compared with 21.6 per cent a year ago.
Financial Markets
The crisis in global financial markets deepened since mid-September 2008, triggered by the collapse of Lehman Brothers followed by the failure of a number of other financial firms across countries. The pressure on financial markets mounted with the credit spreads widening to record levels and equity prices crashing to historic lows leading to widespread volatility across the market spectrum. The turmoil transcended from credit and money markets to the global financial system more broadly. The contagion also spilled over to the emerging markets, which saw broad-based asset price declines amidst depressed levels of risk appetite.
Added to this, there was a significant deterioration in the global economic outlook. As a result, authorities in several countries embarked upon an unprecedented wave of policy initiatives to contain systemic risk, arrest the plunge in asset prices and shore up the confidence in the international banking system. While these initiatives did help in restoring some level of stability, the financial market conditions remained far from normal during the period October-December 2008.
Liquidity conditions tightened significantly in India between mid-September and October 2008 emanating from adverse international developments and some domestic factors.Financial markets in India came under pressure since mid-September 2008, reflecting the knock-on effects of the disruptions in the international financial markets. This necessitated the Reserve Bank to undertake a series of measures to inject rupee and foreign exchange liquidity from mid-September 2008 onwards.
Accordingly, money markets in India came under some pressure mirroring the impact of capital outflows and redemption pressures faced by mutual funds and other investors. The pressure on money markets was reflected in call rates breaching the upper bound of Liquidity Adjustment Facility (LAF) corridor but settling back within the corridor by November 2008. Interest rates in the collateralised segments of the money market moved in tandem with but remained below the call rate during the third quarter of 2008-09.
In the credit market, lending rates of scheduled commercial banks, which had increased initially, started declining in December 2008. Yields in the government securities market also came to soften during the third quarter 2008-09.
In the foreign exchange market, Indian rupee generally depreciated against major currencies. Indian equity markets witnessed downswings quite in line with trends in major international equity markets.
The Reserve Bank swiftly initiated a series of measures, which helped to assuage liquidity conditions, while reassuring the market that the Indian banking system continued to be safe and sound, well capitalised and well regulated.
Price Situation
The accommodative monetary policy, which was pursued by most central banks since September 2008, aimed at mitigating the adverse implications of the recent financial market crisis on economic growth and employment.
Headline inflation moderated in major economies since July/August 2008 on account of the marked decline in international energy and commodity prices as well as slowdown in aggregate demand emerging from the persistence of financial market turmoil following the US sub-prime crisis.
After remaining at elevated levels for an extended period, global commodity prices declined sharply since the second quarter of 2008-09 led by decline in the prices of crude oil, metals and food. The WTI crude oil prices have eased from its historical high of US $ 145.3 a barrel level on July 3, 2008 to around US $ 42.3 a barrel as on January 22, 2009 reflecting falling demand in the Organisation for Economic Co-operation and Development (OECD) countries as well as some developing countries, notably in Asia, following the economic slowdown. Metal prices eased further during the third quarter of 2008-09, reflecting weak construction demand in OECD countries and some improvement in supply, especially in China.
In India inflation, based on the year-on-year changes in wholesale price index (WPI), declined sharply from an intra-year peak of 12.9 per cent on August 2, 2008 to 5.6 per cent as on January 10, 2009. The recent decline in WPI inflation was driven by decline in prices of minerals oil, iron and steel, oilseeds, edible oils, oil cakes, raw cotton.
Amongst major groups, primary articles inflation, year-on-year, increased to 11.6 per cent on January 10, 2009 from 4.5 per cent a year ago and (it was 9.7 per cent at end-March 2008). This mainly reflected increase in the prices of food articles, especially of wheat, fruits, milk, and eggs, fish and meat as well as non-food articles such as oilseeds and raw cotton.
The fuel group inflation turned negative (-1.3 per cent) as on January 10, 2009 as compared to an intra-year peak of 18.0 per cent on August 2, 2008. This reflected the reduction in the price of petrol by Rs. 5 per litre and diesel by Rs. 2 per litre effective December 6, 2008 as well as decline in the prices of freely priced petroleum products in the range of 30-65 per cent since August 2008.
Manufactured products inflation, year-on-year, also moderated to 5.9 per cent on January 10, 2009 as compared with the peak of 11.9 per cent in mid-August 2008 but remained higher than 4.6 per cent a year ago. The year-on-year increase in manufactured products prices was mainly driven by sugar, edible oils/oil cakes, textiles, chemicals, iron and steel and machinery and machine tools.
Inflation, based on year-on-year variation in consumer price indices (CPIs), increased further during November/December 2008 mainly due to increase in the prices of food, fuel and services (represented by the ‘miscellaneous’ group). Various measures of consumer price inflation were placed in the range of 10.4-11.1 per cent during November/December 2008 as compared with 7.3-8.8 per cent in June 2008 and 5.1-6.2 per cent in November 2007.
Macroeconomic Outlook
The various business expectations surveys released recently reflect less than optimistic sentiments prevailing in the economy. The results of Professional Forecasters’ Survey conducted by the Reserve Bank in December 2008 also suggested further moderation in economic activity for 2008-09.
According to the Reserve Bank’s Industrial Outlook Survey of manufacturing companies in the private sector, the business expectations indices based on assessment for October-December 2008 and on expectations for January-March 2009 declined by 2.6 per cent and 5.9 per cent, respectively, over the corresponding previous quarters.
The global economic outlook has deteriorated sharply since September 2008 with several countries, notably the US, the UK, the Euro area and Japan experiencing recession. In India too, there is evidence of a slowing down of economic activity. Unlike in the advanced countries where the contagion of crisis spread from the financial to the real sector, in India the slowdown in the real sector is affecting the financial sector, which in turn, has a second-order impact on the real sector.
On the positive side factors include expected increase in consumption demand mainly reflecting rise in basic exemption limits and tax slabs, Sixth Pay Commission awards, debt waiver for farmers and pre-election expenditure.
WPI inflation has fallen sharply driven by falling international commodity prices especially those of crude oil, steel and selected food items, although, some contribution has also come from the slowing domestic demand. Going forward, the outlook on international commodity prices indicate further softening of domestic prices.
The highlights of macroeconomic and monetary developments during 2008-09 so far are:
Overview
The Indian economy, after exhibiting strong growth during the second quarter of 2008-09, has experienced moderation in the wake of the global economic slowdown. Although agricultural outlook remains satisfactory, industrial growth has decelerated sharply and services sector is slowing. The economic slowdown, during the second quarter vis-à-vis the first quarter of 2008-09, was primarily driven by a moderation of consumption growth and widening of trade deficit, offset partially by an acceleration in investment demand.
The balance of payments (BoP) for the first half of 2008-09 reflected a widening of the current account deficit and moderation in capital flows. Net capital inflows reduced sharply and remained volatile during 2008-09 with foreign direct investment inflows showing an increase, while portfolio investments recording a substantial outflow.
The growth of non-food credit remained high during 2008-09, so far, albeit with some moderation in recent months. Continued high growth in time deposits enabled the banking system to sustain the credit expansion while the non-banking sources of funds to the commercial sector declined.
The total flow of resources from banks and other sources to the commercial sector during 2008-09, so far, has been somewhat lower than the comparable period of 2007-08.
Financial markets in India, which, by and large, remained orderly from April 2008 to mid-September 2008, witnessed heightened volatility subsequently reflecting the knock-on effects of the disruptions in the international financial markets and the uncertainty that followed. This necessitated the Reserve Bank to undertake a series of measures to inject rupee and foreign exchange liquidity from mid-September 2008 onwards. Liquidity conditions turned around and became comfortable from mid-November 2008.
Headline inflation has declined in major economies since July/August 2008. In India, inflation measured as year-on-year variation in the wholesale price index (WPI) has declined sharply since August 2008 and was at 5.6 per cent as of January 10, 2009.
On the macroeconomic front, the downside risks for economic growth emanate from global economic slowdown, deterioration in global financial markets and slowing down in domestic demand. On the positive side, factors include expected increase in consumption demand mainly reflecting rise in basic exemption limits and tax slabs, Sixth Pay Commission awards, debt waiver for farmers and pre-election expenditure. The easing of international oil prices and commodity prices may help in softening the inflationary pressure.
Output
According to estimates released by the Central Statistical Organisation (CSO) in November 2008, the real GDP growth was placed at 7.6 per cent during the second quarter of 2008-09 as compared with 9.3 per cent during the corresponding quarter of 2007-08, reflecting deceleration in growth of industry and services.
The Ministry of Agriculture has set a target for foodgrains production for 2008-09 at 233.0 million tonnes. According to the First Advance Estimates, the kharif foodgrains production during 2008-09 was placed at 115.3 million tonnes (Fourth Advance Estimates) as compared with that of 121.0 million tonnes during the previous year.
The index of industrial production during April-November 2008-09 recorded year-on-year expansion of 3.9 per cent as compared with 9.2 per cent during April-November 2007-08. The manufacturing sector recorded growth of 4.0 per cent during April-November 2008-09 (9.8 per cent during April-November 2007-08) and the electricity sector recorded growth of 2.9 per cent (7.0 per cent during April-November 2007-08).
Available information on the leading indicators of services sector activity during April-October 2008-09 indicate some acceleration in growth in respect of several indicators such as railway revenue earning and freight traffic and export cargo handled by civil aviation as compared with the corresponding period of 2007-08. On the other hand, growth decelerated in respect of cargo handled at major ports and other indicators of civil aviation excluding export cargo, commercial vehicles, cement and steel.
Aggregate Demand
Aggregate demand in the Indian economy is primarily domestically driven, though exports have been gaining progressively higher importance in recent years. The economic slowdown, during the second quarter vis-à-vis the first quarter of 2008-09, was primarily driven by a moderation of consumption growth and widening of trade deficit, offset partially by an acceleration in investment demand. On the other hand, the government consumption expenditure accelerated during the same period.
According to the latest information on Central Government finances for 2008-09 (April-November), the revenue deficit and fiscal deficit were placed higher than those in April-November 2007 both in absolute terms and as per cent of budget estimates (BE) primarily on account of higher revenue expenditure.
Tax revenue as per cent of BE was lower than a year ago on account of lower growth in income tax, corporation tax and customs duties owing to economic slowdown. Aggregate expenditure as per cent of BE, was higher than a year ago on account of higher revenue expenditure, particularly, subsidies, defence, other economic services, social services and plan grants to States/Union Territories.
While expenditure is slated to increase on account of the fiscal stimulus measures undertaken by the Government to address the problem of economic slowdown, growth of tax revenue is likely to decelerate in the coming months of 2008-09 due to moderation in economic activity. The net cash outgo on account of the two supplementary demand for grants is placed at Rs. 1,48,093 crore. This, in turn, will be reflected in the non-attainability of the deficit targets for 2008-09 as envisaged in the Union Budget 2008-09.
During 2008-09 (up to January 13, 2009), special bonds amounting to Rs.44,000 crore and Rs.14,000 crore have been issued to oil marketing companies and fertiliser companies, respectively.
Sales performance of select non-Government non-financial public limited companies in the private corporate sector during the first two quarters of 2008-09 was impressive; however, profits performance was subdued as compared with 2007-08. Higher increase in expenditure in relation to sales growth was primarily on account of rising input costs, interest expenses and large provisioning towards mark to market (MTM) losses on foreign exchange related transactions which exerted pressure on profits.
The External Economy
India’s balance of payments position during the first half of 2008-09 (April-September) reflected a widening of trade deficit resulting in large current account deficit, and moderation in capital flows. Merchandise trade deficit recorded a sharp increase during April-November 2008 on account of higher crude oil prices for most of the period and loss of momentum in exports since September 2008. Net surplus under invisibles remained buoyant, led by increase in software exports and private transfers. Net capital inflows reduced sharply and have remained volatile during 2008-09 so far.
The large increase in merchandise trade deficit during April-September 2008 led to a significant increase in the current account deficit over its level during April-September 2007. The widening of trade deficit during April-September 2008 could be attributed to higher import payments reflecting high international commodity prices, particularly crude oil prices.
The surplus in the capital account moderated during April-September 2008 reflecting increased gross capital outflows on the back of global financial turmoil. While the net inward FDI (net direct investment by foreign investors) remained buoyant reflecting relatively strong fundamentals of the Indian economy and continuing liberalisation measures to attract FDI, net outward FDI (net direct investment by Indian investors abroad) also remained high during April-September 2008. The gross capital inflows were higher on account of higher FDI inflows and NRI deposits during the period.
In terms of residual maturity, the revised short-term debt (below one year) comprising sovereign debt, commercial borrowings, NRI deposits, short-term trade credit and others maturing up to March 2009, was estimated at around US $ 85 billion as at end-March 2008.
According to the provisional data released by DGCI&S, India’s merchandise exports during April-November 2008 increased by 18.7 per cent while imports recorded a higher growth of 32.5 per cent, largely due to the rise in petroleum, oil and lubricants (POL) imports. The rise in oil imports was primarily due to the elevated international crude oil prices, while the volume of oil imports moderated. Merchandise trade deficit during April-November 2008 widened to US $ 84.4 billion from US $ 53.2 billion a year ago.
As of January 16, 2009, foreign exchange reserves at US $ 252.2 billion declined by US $ 57.5 billion over the level at end-March 2008, including changes due to valuation losses.
Monetary Conditions
Monetary and liquidity aggregates that expanded at a strong pace during the first half of 2008-09 showed some moderation during the third quarter reflecting the decline in capital flows and consequent foreign exchange intervention by the Reserve Bank.
Growth in broad money (M3), year-on-year (y-o-y), was 19.6 per cent (Rs. 7,36,777 crore) on January 2, 2009 lower than 22.6 per cent (Rs. 6,91,768 crore) a year ago.
Aggregate deposits of banks, y-o-y, expanded 20.2 per cent (Rs.6,49,152 crore) on January 2, 2009 as compared with 24.0 per cent (Rs. 6,21,944 crore) a year ago.
The growth in bank credit continued to remain high. Non-food credit by scheduled commercial banks (SCBs) was 23.9 per cent (Rs.5,01,645 crore), y-o-y, as on January 2, 2009 from 22.0 per cent (Rs.3,79,655 crore) a year ago.
The intensification of global financial turmoil and its knock-on effect on the domestic financial market, and downturn in headline inflation, necessitated the Reserve Bank to ease its monetary policy since mid-September 2008.
Reserve money growth at 6.6 per cent, y-o-y, as on January 16, 2009 was much lower than that of 30.6 per cent a year ago. Adjusted for the first round effect of the changes in CRR, reserve money growth was 18.0 per cent as compared with 21.6 per cent a year ago.
Financial Markets
The crisis in global financial markets deepened since mid-September 2008, triggered by the collapse of Lehman Brothers followed by the failure of a number of other financial firms across countries. The pressure on financial markets mounted with the credit spreads widening to record levels and equity prices crashing to historic lows leading to widespread volatility across the market spectrum. The turmoil transcended from credit and money markets to the global financial system more broadly. The contagion also spilled over to the emerging markets, which saw broad-based asset price declines amidst depressed levels of risk appetite.
Added to this, there was a significant deterioration in the global economic outlook. As a result, authorities in several countries embarked upon an unprecedented wave of policy initiatives to contain systemic risk, arrest the plunge in asset prices and shore up the confidence in the international banking system. While these initiatives did help in restoring some level of stability, the financial market conditions remained far from normal during the period October-December 2008.
Liquidity conditions tightened significantly in India between mid-September and October 2008 emanating from adverse international developments and some domestic factors.Financial markets in India came under pressure since mid-September 2008, reflecting the knock-on effects of the disruptions in the international financial markets. This necessitated the Reserve Bank to undertake a series of measures to inject rupee and foreign exchange liquidity from mid-September 2008 onwards.
Accordingly, money markets in India came under some pressure mirroring the impact of capital outflows and redemption pressures faced by mutual funds and other investors. The pressure on money markets was reflected in call rates breaching the upper bound of Liquidity Adjustment Facility (LAF) corridor but settling back within the corridor by November 2008. Interest rates in the collateralised segments of the money market moved in tandem with but remained below the call rate during the third quarter of 2008-09.
In the credit market, lending rates of scheduled commercial banks, which had increased initially, started declining in December 2008. Yields in the government securities market also came to soften during the third quarter 2008-09.
In the foreign exchange market, Indian rupee generally depreciated against major currencies. Indian equity markets witnessed downswings quite in line with trends in major international equity markets.
The Reserve Bank swiftly initiated a series of measures, which helped to assuage liquidity conditions, while reassuring the market that the Indian banking system continued to be safe and sound, well capitalised and well regulated.
Price Situation
The accommodative monetary policy, which was pursued by most central banks since September 2008, aimed at mitigating the adverse implications of the recent financial market crisis on economic growth and employment.
Headline inflation moderated in major economies since July/August 2008 on account of the marked decline in international energy and commodity prices as well as slowdown in aggregate demand emerging from the persistence of financial market turmoil following the US sub-prime crisis.
After remaining at elevated levels for an extended period, global commodity prices declined sharply since the second quarter of 2008-09 led by decline in the prices of crude oil, metals and food. The WTI crude oil prices have eased from its historical high of US $ 145.3 a barrel level on July 3, 2008 to around US $ 42.3 a barrel as on January 22, 2009 reflecting falling demand in the Organisation for Economic Co-operation and Development (OECD) countries as well as some developing countries, notably in Asia, following the economic slowdown. Metal prices eased further during the third quarter of 2008-09, reflecting weak construction demand in OECD countries and some improvement in supply, especially in China.
In India inflation, based on the year-on-year changes in wholesale price index (WPI), declined sharply from an intra-year peak of 12.9 per cent on August 2, 2008 to 5.6 per cent as on January 10, 2009. The recent decline in WPI inflation was driven by decline in prices of minerals oil, iron and steel, oilseeds, edible oils, oil cakes, raw cotton.
Amongst major groups, primary articles inflation, year-on-year, increased to 11.6 per cent on January 10, 2009 from 4.5 per cent a year ago and (it was 9.7 per cent at end-March 2008). This mainly reflected increase in the prices of food articles, especially of wheat, fruits, milk, and eggs, fish and meat as well as non-food articles such as oilseeds and raw cotton.
The fuel group inflation turned negative (-1.3 per cent) as on January 10, 2009 as compared to an intra-year peak of 18.0 per cent on August 2, 2008. This reflected the reduction in the price of petrol by Rs. 5 per litre and diesel by Rs. 2 per litre effective December 6, 2008 as well as decline in the prices of freely priced petroleum products in the range of 30-65 per cent since August 2008.
Manufactured products inflation, year-on-year, also moderated to 5.9 per cent on January 10, 2009 as compared with the peak of 11.9 per cent in mid-August 2008 but remained higher than 4.6 per cent a year ago. The year-on-year increase in manufactured products prices was mainly driven by sugar, edible oils/oil cakes, textiles, chemicals, iron and steel and machinery and machine tools.
Inflation, based on year-on-year variation in consumer price indices (CPIs), increased further during November/December 2008 mainly due to increase in the prices of food, fuel and services (represented by the ‘miscellaneous’ group). Various measures of consumer price inflation were placed in the range of 10.4-11.1 per cent during November/December 2008 as compared with 7.3-8.8 per cent in June 2008 and 5.1-6.2 per cent in November 2007.
Macroeconomic Outlook
The various business expectations surveys released recently reflect less than optimistic sentiments prevailing in the economy. The results of Professional Forecasters’ Survey conducted by the Reserve Bank in December 2008 also suggested further moderation in economic activity for 2008-09.
According to the Reserve Bank’s Industrial Outlook Survey of manufacturing companies in the private sector, the business expectations indices based on assessment for October-December 2008 and on expectations for January-March 2009 declined by 2.6 per cent and 5.9 per cent, respectively, over the corresponding previous quarters.
The global economic outlook has deteriorated sharply since September 2008 with several countries, notably the US, the UK, the Euro area and Japan experiencing recession. In India too, there is evidence of a slowing down of economic activity. Unlike in the advanced countries where the contagion of crisis spread from the financial to the real sector, in India the slowdown in the real sector is affecting the financial sector, which in turn, has a second-order impact on the real sector.
On the positive side factors include expected increase in consumption demand mainly reflecting rise in basic exemption limits and tax slabs, Sixth Pay Commission awards, debt waiver for farmers and pre-election expenditure.
WPI inflation has fallen sharply driven by falling international commodity prices especially those of crude oil, steel and selected food items, although, some contribution has also come from the slowing domestic demand. Going forward, the outlook on international commodity prices indicate further softening of domestic prices.
Monday, January 19, 2009
FDI will continue to flow in despite crisis: Kamal Nath
Current global crisis notwithstading, India will continue to be a magnet for foreign direct investment (FDI) funds.
Addressing the Partnership Summit 2009 “Trade & Investment: Focussing on Opportunities and Growth”, in New Delhi Union Minister of Commerce and Industry Kamal Nath said that during April-October 20008, the FDI inflows to India stood at $ 18.7 billion, which is more than double the inflow during the same period last year.
The Summit, which is organized by the Confederation of Indian Industry (CII), was attended by a large number of Ministers from India and abroad, representatives from trade and industry.
Kamal Nath said: “India looks forward to partner with countries that have a strong agri-food sector from production through processing and distribution to partner with India in bringing about the second agricultural revolution”.
The second sector that offers immense potential is the SME sector. “India’s production design and process engineering costs – especially in the case of medium sized companies, are 70-80 per cent lower than in a developed country”, he added.
On the Doha Round of talks at WTO, the Minister said: “We cannot have a Development Round without an outcome which provides full comfort to the livelihood and food security concerns of the poor in the developing countries. These are too vital to be the subject of trade-offs. There cannot be a one size fits all approach. While developing countries have aspirations of moving from poverty to a semblance of the prosperity enjoyed by common people in countries of the North, the developed countries, quite validly have expectations from the rest of the WTO membership. The challenge that we have to grapple with is how to reconcile the legitimate aspirations of some with the understandable expectations of others. The key to finding this convergence would also be, I presume, the key to finding the convergence between globalisation and social justice”.
Addressing the Partnership Summit 2009 “Trade & Investment: Focussing on Opportunities and Growth”, in New Delhi Union Minister of Commerce and Industry Kamal Nath said that during April-October 20008, the FDI inflows to India stood at $ 18.7 billion, which is more than double the inflow during the same period last year.
The Summit, which is organized by the Confederation of Indian Industry (CII), was attended by a large number of Ministers from India and abroad, representatives from trade and industry.
Kamal Nath said: “India looks forward to partner with countries that have a strong agri-food sector from production through processing and distribution to partner with India in bringing about the second agricultural revolution”.
The second sector that offers immense potential is the SME sector. “India’s production design and process engineering costs – especially in the case of medium sized companies, are 70-80 per cent lower than in a developed country”, he added.
On the Doha Round of talks at WTO, the Minister said: “We cannot have a Development Round without an outcome which provides full comfort to the livelihood and food security concerns of the poor in the developing countries. These are too vital to be the subject of trade-offs. There cannot be a one size fits all approach. While developing countries have aspirations of moving from poverty to a semblance of the prosperity enjoyed by common people in countries of the North, the developed countries, quite validly have expectations from the rest of the WTO membership. The challenge that we have to grapple with is how to reconcile the legitimate aspirations of some with the understandable expectations of others. The key to finding this convergence would also be, I presume, the key to finding the convergence between globalisation and social justice”.
Saturday, January 17, 2009
Attn Scotland Yard: The £500,000,00 fraud by email
Have received this apparently fraud email. Alerted UK cops against such traps.
Dell New Year Promo
reply-to delloffice2@onlineclaimsdept.co.uk
to undisclosed-recipients
date 18 January 2009 07:53
subject You Won
hide details 07:53 (2 hours ago)
Reply
The sum of £500,000,00 GBP Pounds has been Awarded to your E-
MAIL ID, Do get back to this office with your information via
()
Names :
Address:
Conntry :
Occupation :
Age :
==========
Please check my previous posting for RBI alert against such traps:
http://investorclubofindia.blogspot.com/2008/12/rbi-caution-against-foreign-lottery.html
Dell New Year Promo
reply-to delloffice2@onlineclaimsdept.co.uk
to undisclosed-recipients
date 18 January 2009 07:53
subject You Won
hide details 07:53 (2 hours ago)
Reply
The sum of £500,000,00 GBP Pounds has been Awarded to your E-
MAIL ID, Do get back to this office with your information via
()
Names :
Address:
Conntry :
Occupation :
Age :
==========
Please check my previous posting for RBI alert against such traps:
http://investorclubofindia.blogspot.com/2008/12/rbi-caution-against-foreign-lottery.html
Friday, January 16, 2009
Attn: Media Barons across the world......
The Government of India had issued Guidelines for (i) Publication of Newspapers and Periodicals dealing with news and current affairs; and (ii) Publication of Facsimile editions of foreign newspapers on 31st March 2006. Preamble (ii) of said guidelines is hereby clarified as under:
“Foreign Direct Investment (FDI) is permitted in case of publication of facsimile edition of foreign newspaper(s). However, when the facsimile edition proposed to be published by the owner of the original foreign newspaper(s), the limit of FDI is upto 100%. In all other cases in facsimile edition of foreign newspaper(s), the FDI limit continues to be upto 26%”.
The said clarification has already been notified by the Department of Industrial Policy and Promotion, Ministry of Commerce & Industry vide their Press Note No. 1 of 2009 Series.
“Foreign Direct Investment (FDI) is permitted in case of publication of facsimile edition of foreign newspaper(s). However, when the facsimile edition proposed to be published by the owner of the original foreign newspaper(s), the limit of FDI is upto 100%. In all other cases in facsimile edition of foreign newspaper(s), the FDI limit continues to be upto 26%”.
The said clarification has already been notified by the Department of Industrial Policy and Promotion, Ministry of Commerce & Industry vide their Press Note No. 1 of 2009 Series.
Monday, January 12, 2009
Birla Sun Life Insurance launches health plans
MUMBAI, January13, 2009: Targeting to tap the country's Rs two lakh crore health care industry, Birla Sun Life Insurance (BSLI) has announced the launch of its two plans - BSLI Health Plan and the BSLI Universal Health Plan .This is a national launch across all key centers and states in the country.
"A very small percentage of the population in India is covered by health insurance. However, the current trend is: individuals are becoming more conscious of their health today. In a study of the Asian markets, undertaken by Sun Life Financial-BSLI JV Partner, in India, 64% of the individuals are more conscious of their health today than they were 5 years ago. Studies have shown that 70% of the health care costs are borne by individuals These factors therefore indicate the potential for growth of the health insurance market BSLI health plans have been designed to meet the needs of customers and provide the much needed health protection," said Ms Anjana Grewal – Senior Vice President Head Health Business Birla Sun Life Insurance.
"By introducing health plans, we complete the handshake with our customers because we now cover their needs across a wider spectrum of protection. Birla Sun Life Insurance has led the market with innovation in product design which gives our customers an edge. Once again our health plans are designed to give the extra value to our customers" she said.
Guaranteed Insurability Health Benefit that extends insurance benefits up to the age of 80 years and cover to dependent children or parents with no medical underwriting after that at the initial stage; free medical Second Opinion by Mediguide (World's leading second opinion provider) and fixed benefits on hospitalization/surgery are among the highlights of the BSLI Health Solution bouquet.
The plans also come with tax saving up to Rs. 15,000 on self and up to Rs. 20,000 for individuals with senior citizen parents. BSLI health plans also ensure cashless facility over 5000 Hospitals across India and cover as many as 101 types of surgeries on exercising GIHB. In a unique initiative, the company has come out with a one-family-one-policy concept with flexibility to add new family members. It also guarantees increase in the Sum Assured by 20% after every three years.
Key features:
• Health Plans with cashless facility at 5,000 hospitals pan India
• Health Insurance Plan fully guaranteed for 3 years
• Life Insurance coverage up to the age of 80 yrs
• Tax benefit under section 80D
• Medical Second Opinion facility
• Grace Period of 30 days
• Universal Health Benefit for an individual and his/her family with out-of-pocket health related expenses
• Benefits on hospitalization/surgery are fixed and paid
– Irrespective of actual costs
– In addition to any other health plan
About Aditya Birla Group
The Aditya Birla Group enjoys a leadership position in all the sectors in which it operates. It is anchored by a force of 100,000 employees, belonging to 25 nationalities. Its operations span 25 countries across six continents and are reckoned as India's first multinational corporation. Headquartered in Mumbai, India, over 60 per cent of the Group's revenues flow from our overseas operations. The Group nurtures a work culture where success is built on learning and innovation. The Aditya Birla Group has been adjudged "The Best Employer in India and among the top 20in Asia" by the Hewitt, Economic Times and Wall Street Journal Study 2007.
Aditya Birla Group has a strong presence across various financial services verticals that include fund management, distribution and wealth management, security based lending, insurance broking, private equity and life insurance.
The consolidated revenues from these businesses crossed the US 1 billion dollar mark, in 2007-08. In the first half of 2008-09, the financial services business continued its strong momentum of growth with consolidated revenues crossing Rs. 2,077 crore for the first half, up from Rs. 1,463.97 crore in the corresponding period, last year.
Aditya Birla Financial Services Group has taken another step towards expanding their footprint and financial offering by entering into an agreement with the promoter family of Apollo Sindhoori to acquire a 56% stake in the company. The acquisition will fast track their entry into retail broking and is in keeping with its desire to be a broad based and integrated player, while further strengthening their position as a manufacturer and distributor of value added financial products and solutions.
About Sun Life Financial Inc.
Sun Life Financial Inc. is a leading international financial services organization providing a diverse range of wealth accumulation and protection products and services to individuals and corporate customers. Tracing its roots back to 1865, Sun Life Financial and its partners today have operations in key markets worldwide, including Canada, the United States, the United Kingdom, Hong Kong, the Philippines, Japan, Indonesia, India, China and Bermuda. Overall, Sun Life has a high quality, diversified investment portfolio with over $100 billion in invested assets as of June 30, 2008. Sun Life's $60billion bond portfolio is highly diversified across 1400 different borrowers around the world and is rated 97% investment grade. Globally, Sun Life is in a solid financial position, and maintains financial strength ratings which are amongst the highest of all insurers in North America. Sun Life has a strong balance sheet and is well capitalized beyond minimum requirements. The Company's balanced business model is an important pillar of its overall risk management framework. SLF prides itself on its prudent investment style and strong risk management controls.
About Birla Sun Life Insurance (BSLI)
Birla Sun Life Insurance (BSLI) has been operating for 7 years. It has contributed significantly to the growth and development of the life insurance industry in India. It pioneered the launch of Unit Linked Life Insurance plans amongst the private players in India. BSLI has covered more than 2 million lives since it commenced operations. And its customer base is spread across more than 1500 towns and cities in India. The company has a capital base of Rs. 1800 crores as on December 31, 2008.The current AUM of Birla Sun Life Insurance stands at Rs. 7161 Crs as on December 31, 2008.
For further information kindly contact:
Ms. Dielnawaz Damania
PR & Corporate Communication
Birla Sun Life Insurance Company Limited,
Tel: 022-6678 3333.
E-mail: dielnawaz.damania@birlasunlife.com
Or
B N Kumar
Concept PR
9321048332, 9320048332
"A very small percentage of the population in India is covered by health insurance. However, the current trend is: individuals are becoming more conscious of their health today. In a study of the Asian markets, undertaken by Sun Life Financial-BSLI JV Partner, in India, 64% of the individuals are more conscious of their health today than they were 5 years ago. Studies have shown that 70% of the health care costs are borne by individuals These factors therefore indicate the potential for growth of the health insurance market BSLI health plans have been designed to meet the needs of customers and provide the much needed health protection," said Ms Anjana Grewal – Senior Vice President Head Health Business Birla Sun Life Insurance.
"By introducing health plans, we complete the handshake with our customers because we now cover their needs across a wider spectrum of protection. Birla Sun Life Insurance has led the market with innovation in product design which gives our customers an edge. Once again our health plans are designed to give the extra value to our customers" she said.
Guaranteed Insurability Health Benefit that extends insurance benefits up to the age of 80 years and cover to dependent children or parents with no medical underwriting after that at the initial stage; free medical Second Opinion by Mediguide (World's leading second opinion provider) and fixed benefits on hospitalization/surgery are among the highlights of the BSLI Health Solution bouquet.
The plans also come with tax saving up to Rs. 15,000 on self and up to Rs. 20,000 for individuals with senior citizen parents. BSLI health plans also ensure cashless facility over 5000 Hospitals across India and cover as many as 101 types of surgeries on exercising GIHB. In a unique initiative, the company has come out with a one-family-one-policy concept with flexibility to add new family members. It also guarantees increase in the Sum Assured by 20% after every three years.
Key features:
• Health Plans with cashless facility at 5,000 hospitals pan India
• Health Insurance Plan fully guaranteed for 3 years
• Life Insurance coverage up to the age of 80 yrs
• Tax benefit under section 80D
• Medical Second Opinion facility
• Grace Period of 30 days
• Universal Health Benefit for an individual and his/her family with out-of-pocket health related expenses
• Benefits on hospitalization/surgery are fixed and paid
– Irrespective of actual costs
– In addition to any other health plan
About Aditya Birla Group
The Aditya Birla Group enjoys a leadership position in all the sectors in which it operates. It is anchored by a force of 100,000 employees, belonging to 25 nationalities. Its operations span 25 countries across six continents and are reckoned as India's first multinational corporation. Headquartered in Mumbai, India, over 60 per cent of the Group's revenues flow from our overseas operations. The Group nurtures a work culture where success is built on learning and innovation. The Aditya Birla Group has been adjudged "The Best Employer in India and among the top 20in Asia" by the Hewitt, Economic Times and Wall Street Journal Study 2007.
Aditya Birla Group has a strong presence across various financial services verticals that include fund management, distribution and wealth management, security based lending, insurance broking, private equity and life insurance.
The consolidated revenues from these businesses crossed the US 1 billion dollar mark, in 2007-08. In the first half of 2008-09, the financial services business continued its strong momentum of growth with consolidated revenues crossing Rs. 2,077 crore for the first half, up from Rs. 1,463.97 crore in the corresponding period, last year.
Aditya Birla Financial Services Group has taken another step towards expanding their footprint and financial offering by entering into an agreement with the promoter family of Apollo Sindhoori to acquire a 56% stake in the company. The acquisition will fast track their entry into retail broking and is in keeping with its desire to be a broad based and integrated player, while further strengthening their position as a manufacturer and distributor of value added financial products and solutions.
About Sun Life Financial Inc.
Sun Life Financial Inc. is a leading international financial services organization providing a diverse range of wealth accumulation and protection products and services to individuals and corporate customers. Tracing its roots back to 1865, Sun Life Financial and its partners today have operations in key markets worldwide, including Canada, the United States, the United Kingdom, Hong Kong, the Philippines, Japan, Indonesia, India, China and Bermuda. Overall, Sun Life has a high quality, diversified investment portfolio with over $100 billion in invested assets as of June 30, 2008. Sun Life's $60billion bond portfolio is highly diversified across 1400 different borrowers around the world and is rated 97% investment grade. Globally, Sun Life is in a solid financial position, and maintains financial strength ratings which are amongst the highest of all insurers in North America. Sun Life has a strong balance sheet and is well capitalized beyond minimum requirements. The Company's balanced business model is an important pillar of its overall risk management framework. SLF prides itself on its prudent investment style and strong risk management controls.
About Birla Sun Life Insurance (BSLI)
Birla Sun Life Insurance (BSLI) has been operating for 7 years. It has contributed significantly to the growth and development of the life insurance industry in India. It pioneered the launch of Unit Linked Life Insurance plans amongst the private players in India. BSLI has covered more than 2 million lives since it commenced operations. And its customer base is spread across more than 1500 towns and cities in India. The company has a capital base of Rs. 1800 crores as on December 31, 2008.The current AUM of Birla Sun Life Insurance stands at Rs. 7161 Crs as on December 31, 2008.
For further information kindly contact:
Ms. Dielnawaz Damania
PR & Corporate Communication
Birla Sun Life Insurance Company Limited,
Tel: 022-6678 3333.
E-mail: dielnawaz.damania@birlasunlife.com
Or
B N Kumar
Concept PR
9321048332, 9320048332
Friday, January 9, 2009
Impact of Global Meltdown: Painful year ahead
by Ashok Handoo
With the advent of 2009, economists are debating the extent of the impact of global meltdown on the Indian economy in 2009. The predictions range between somewhat optimistic to fairly pessimistic. But the common thread running is that 2009 will be challenging, indeed.
The Deputy Chairman of the Planning Commission Montek Singh Ahluwalia says the stimulus package part two is part of the government strategy to deal with the situation as it evolves.
The fiscal and monetary measures taken under the second package are targeted to increase liquidity for pushing up demand, addressing the concerns of the industries and provide incentives to exporters that have been hit by the recessionary conditions.
The first objective is aimed to be met by reducing the key interest rates further the CRR has been cut by point 5 percent, bringing it down to 5%. The repo and the reverse repo rates have been reduced by1% each, bringing them down to 5.5 % and 4% respectively. All this will leave more funds with the banks to enable them to lend more at lower rates of interest.
The second objective will be met by curbing cheap imports. That explains why certain duties on import of cement, Zinc and ferro-alloys, TMT bars etc. which were removed earlier to fight inflation, have been restored.
The third objective to boost exports is hoped to be met by a twin stroke-increasing duty drawbacks, which the exporters claim against the taxes paid on inputs needed to manufacture the item for export and extend the duration of the scheme up to the end of December this year.
The government is able to do this because the inflation rate is consistently falling for the last one and a half month. As Shri Ashok Chawla Economic Affair’s Secretary in the Finance Ministry observes “the trend is clear. This will translate into lower interest rates.” There is a possibility of inflation rate coming down to a tolerable 5% by the end of the current financial year.
Shri Ahluwalia is confident that despite the gloomy international economic situation India will register growth rate of 7 %.
But, he says, fiscal deficit will be higher than anticipated on account of the stimulus packages announced. The mid-year economic review presented in Parliament, projects its increase to 5 percent against the target of 2.5 percent.
The Reserve Bank of India Governor Shri. D Subbarao too admits that 2009 will be “more challenging” adding that the RBI will continue to do everything possible to mitigate the impact of global crisis on the Indian Economy. He however, says that the outlook for India and the world remains uncertain and the path of global crisis and its resolution remains unclear.
That view is shared by the Nobel laureate Amartya Sen as well. Sen recently admitted that he did not have a ready answer to how deeply global meltdown will affect India in the New Year.
The World Bank President Robert Zoellick predicts that the global economy is likely to “worsen” in the first half of 2009. The IMF chief concurs with him.
The RBI has made it more than clear that it has a road map to deal with the situation and steps will be taken as and when required. To quote Subbarao “our approach has been to cross the river by feeling the stones.” It has already lowered its key interest rates-the CRR to a 2 year low and the repo and reverse repo rates to an 8 year low.
But there are areas of concern as well. Foreign investment flows have declined. The Commerce Minister Kamal Nath informed the Lok Sabha that “FDI inflows between April and September 2008 showed an increasing trend each month in comparison to the same period in the previous year.” But he cautioned that FDI flows to the developing nations would generally decline in 2009. He was however quick to add that the government has put in place a liberal policy which permits FDI up to 100 percent on the automatic route, in most sectors and activities.
The other area of concern is that India’s industrial growth has declined for the first time in 15 years. Since Industry accounts for about 25 percent of the country’s GDP it is bound to affect the growth rate. Exports declined by 9.9% in November last which is also worrisome.
The RBI in its report says there are downsize risks from India’s increasing global integration such as the sustained outflow of capital, financial contagion and slowing world growth. It corroborates Prime Ministers view that in a globalised world, we cannot pretend that we will not be affected by the crisis that has been created somewhere else. But it says that use of a combination of instruments to absorb excessive pressure had helped cushion the impact on Indian economy.
The silver lining is that since 50% of our GDP comes from the service sector, which is not affected much by the global recession, growth rate in the current year will end up around 7%. That is what the mid- year review estimates. Five years of nearly 4% farm growth and high domestic saving rate of 36% is seen as making that possible.
That the government is alive to the situation is apparent through the measures it has been taking in association with the RBI from time to time. It has raised public expenditure by Rs.20,000 crore through the first stimulus package announced on December 7. The RBI too injected Rs.300,000 crore liquidity into the system through a series of cuts in rates . The second package will increase availability of funds with banks and non-banking financial companies by 75,000 crore. The state governments too have been allowed additional market borrowings of Rs. 30,000 crore.
It is now for the Banks and the big industries to fulfill their share of responsibilities and ensure that the measures taken are effective. They need to move hand in hand with the government.
Time and again, the Prime Minister has been assuring the people that despite the international environment the country has the capacity, ability and resilience to cope with the present global crisis. He has been citing the economic crisis of 1991 which Asia faced and which was “more” serious, but India overcame it efficiently. With steadfast commitments of all the players in the field we look forward to see India coming out of the present global crisis with minimum bruises.(PIB Feature)
(Disclaimer : The views expressed by the author in this feature are entirely his own and do not necessarily reflect the views of PIB)
With the advent of 2009, economists are debating the extent of the impact of global meltdown on the Indian economy in 2009. The predictions range between somewhat optimistic to fairly pessimistic. But the common thread running is that 2009 will be challenging, indeed.
The Deputy Chairman of the Planning Commission Montek Singh Ahluwalia says the stimulus package part two is part of the government strategy to deal with the situation as it evolves.
The fiscal and monetary measures taken under the second package are targeted to increase liquidity for pushing up demand, addressing the concerns of the industries and provide incentives to exporters that have been hit by the recessionary conditions.
The first objective is aimed to be met by reducing the key interest rates further the CRR has been cut by point 5 percent, bringing it down to 5%. The repo and the reverse repo rates have been reduced by1% each, bringing them down to 5.5 % and 4% respectively. All this will leave more funds with the banks to enable them to lend more at lower rates of interest.
The second objective will be met by curbing cheap imports. That explains why certain duties on import of cement, Zinc and ferro-alloys, TMT bars etc. which were removed earlier to fight inflation, have been restored.
The third objective to boost exports is hoped to be met by a twin stroke-increasing duty drawbacks, which the exporters claim against the taxes paid on inputs needed to manufacture the item for export and extend the duration of the scheme up to the end of December this year.
The government is able to do this because the inflation rate is consistently falling for the last one and a half month. As Shri Ashok Chawla Economic Affair’s Secretary in the Finance Ministry observes “the trend is clear. This will translate into lower interest rates.” There is a possibility of inflation rate coming down to a tolerable 5% by the end of the current financial year.
Shri Ahluwalia is confident that despite the gloomy international economic situation India will register growth rate of 7 %.
But, he says, fiscal deficit will be higher than anticipated on account of the stimulus packages announced. The mid-year economic review presented in Parliament, projects its increase to 5 percent against the target of 2.5 percent.
The Reserve Bank of India Governor Shri. D Subbarao too admits that 2009 will be “more challenging” adding that the RBI will continue to do everything possible to mitigate the impact of global crisis on the Indian Economy. He however, says that the outlook for India and the world remains uncertain and the path of global crisis and its resolution remains unclear.
That view is shared by the Nobel laureate Amartya Sen as well. Sen recently admitted that he did not have a ready answer to how deeply global meltdown will affect India in the New Year.
The World Bank President Robert Zoellick predicts that the global economy is likely to “worsen” in the first half of 2009. The IMF chief concurs with him.
The RBI has made it more than clear that it has a road map to deal with the situation and steps will be taken as and when required. To quote Subbarao “our approach has been to cross the river by feeling the stones.” It has already lowered its key interest rates-the CRR to a 2 year low and the repo and reverse repo rates to an 8 year low.
But there are areas of concern as well. Foreign investment flows have declined. The Commerce Minister Kamal Nath informed the Lok Sabha that “FDI inflows between April and September 2008 showed an increasing trend each month in comparison to the same period in the previous year.” But he cautioned that FDI flows to the developing nations would generally decline in 2009. He was however quick to add that the government has put in place a liberal policy which permits FDI up to 100 percent on the automatic route, in most sectors and activities.
The other area of concern is that India’s industrial growth has declined for the first time in 15 years. Since Industry accounts for about 25 percent of the country’s GDP it is bound to affect the growth rate. Exports declined by 9.9% in November last which is also worrisome.
The RBI in its report says there are downsize risks from India’s increasing global integration such as the sustained outflow of capital, financial contagion and slowing world growth. It corroborates Prime Ministers view that in a globalised world, we cannot pretend that we will not be affected by the crisis that has been created somewhere else. But it says that use of a combination of instruments to absorb excessive pressure had helped cushion the impact on Indian economy.
The silver lining is that since 50% of our GDP comes from the service sector, which is not affected much by the global recession, growth rate in the current year will end up around 7%. That is what the mid- year review estimates. Five years of nearly 4% farm growth and high domestic saving rate of 36% is seen as making that possible.
That the government is alive to the situation is apparent through the measures it has been taking in association with the RBI from time to time. It has raised public expenditure by Rs.20,000 crore through the first stimulus package announced on December 7. The RBI too injected Rs.300,000 crore liquidity into the system through a series of cuts in rates . The second package will increase availability of funds with banks and non-banking financial companies by 75,000 crore. The state governments too have been allowed additional market borrowings of Rs. 30,000 crore.
It is now for the Banks and the big industries to fulfill their share of responsibilities and ensure that the measures taken are effective. They need to move hand in hand with the government.
Time and again, the Prime Minister has been assuring the people that despite the international environment the country has the capacity, ability and resilience to cope with the present global crisis. He has been citing the economic crisis of 1991 which Asia faced and which was “more” serious, but India overcame it efficiently. With steadfast commitments of all the players in the field we look forward to see India coming out of the present global crisis with minimum bruises.(PIB Feature)
(Disclaimer : The views expressed by the author in this feature are entirely his own and do not necessarily reflect the views of PIB)
Friday, January 2, 2009
RBI move to inject Rs 20K cr into system
Signaling a further drop in interest rates, the Reserve Bank of India has announced the reduction of the repo rate under the liquidity adjustment facility (LAF) by 100 basis points from 6.5 per cent to 5.5 per cent with immediate effect.
The reverse repo rate under the LAF will also be slashed by 100 basis points from 5.0 per cent to 4.0 per cent with immediate effect.
The apex bank also announced that the cash reserve ratio (CRR) of scheduled banks will reduced by 50 basis points from 5.5 per cent to 5.0 per cent from the fortnight beginning January 17, 2009.
The RBI announcement said that the reduction in the CRR will inject additional liquidity of around Rs. 20,000 crore to the financial system.
It is expected that the reduction in the policy interest rates and the CRR will further enable banks to provide credit for productive purposes at appropriate interest rates. The Reserve Bank on its part would continue to maintain a comfortable liquidity position in the system.
Even as some public sector and private sector banks have cut lending rates in response to the Reserve Bank’s monetary policy stance, concerns over rising credit risk together with the slowing of economic activity appear to have moderated credit growth.
The Reserve Bank continues to urge banks to monitor their loan portfolio and take early action, including debt restructuring where warranted, to prevent the rise of bad assets down the road and safeguard the gains of the last several years in improving asset quality. At the same time, banks should price risk appropriately and ensure that quality enterprises continue to get funding.
The Reserve Bank appreciates that risk management is difficult even in normal circumstances; it is even more difficult in an environment of uncertainty and downturn.
The fundamentals of the Indian economy continue to be strong. Once the crisis is behind us, and calm and confidence are restored in the global markets, economic activity in India would recover sharply. But a period of painful adjustment is inevitable, the Bank pointed out.
The reverse repo rate under the LAF will also be slashed by 100 basis points from 5.0 per cent to 4.0 per cent with immediate effect.
The apex bank also announced that the cash reserve ratio (CRR) of scheduled banks will reduced by 50 basis points from 5.5 per cent to 5.0 per cent from the fortnight beginning January 17, 2009.
The RBI announcement said that the reduction in the CRR will inject additional liquidity of around Rs. 20,000 crore to the financial system.
It is expected that the reduction in the policy interest rates and the CRR will further enable banks to provide credit for productive purposes at appropriate interest rates. The Reserve Bank on its part would continue to maintain a comfortable liquidity position in the system.
Even as some public sector and private sector banks have cut lending rates in response to the Reserve Bank’s monetary policy stance, concerns over rising credit risk together with the slowing of economic activity appear to have moderated credit growth.
The Reserve Bank continues to urge banks to monitor their loan portfolio and take early action, including debt restructuring where warranted, to prevent the rise of bad assets down the road and safeguard the gains of the last several years in improving asset quality. At the same time, banks should price risk appropriately and ensure that quality enterprises continue to get funding.
The Reserve Bank appreciates that risk management is difficult even in normal circumstances; it is even more difficult in an environment of uncertainty and downturn.
The fundamentals of the Indian economy continue to be strong. Once the crisis is behind us, and calm and confidence are restored in the global markets, economic activity in India would recover sharply. But a period of painful adjustment is inevitable, the Bank pointed out.
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