In terms of (Rule 4) of the Foreign Exchange Management (Current Account Transactions) Rules 2000, prior approval of the Ministry of Commerce and Industry, Government of India, is required for drawing foreign exchange for remittances under technical collaboration agreements where payment of royalty exceeds 5% on local sales and 8% on exports and lump-sum payment exceeds USD 2 million [item 8 of Schedule II to the Foreign Exchange Management (Current Account Transactions) Rules, 2000].The Government of India reviewed the extant policy with regard to liberalization of foreign technology agreement and decided to omit item number 8. It was decided to permit, with immediate effect, payments for royalty, lump sum fee for transfer of technology and payments for use of trademark/brand name on the automatic route without the approval of Ministry of Commerce and Industry, Government of India. These new rules will be called the Foreign Exchange Management (Current Account Transactions) (Amendment) Rules, 2010, and shall be deemed to have come into force with effect from the 16th of December, 2009. The Ministry of Commerce and Industry (Government of India) issued a press release on 17 December, 2009 stating that it has removed certain requirements to obtain prior government approval for the transfer of technology into India with immediate effect.
Under the earlier policy, government approvals were required for foreign technology transfers into India involving lump-sum payments of over US$2 million, and payments of royalty of over 5% on domestic sales and 8% on exports. Even if no technology transfer was involved and the foreign collaboration was limited to licensing of trade marks, prior government approvals were required if the royalty payments were over the prescribed limits of up to 2% for exports and 1% for domestic sales. In December 2009 a new policy removed any such restrictions, however, all such payments were subject to Foreign Exchange Management (Current Account Transactions) Rules, 2000 (FEMA Rules), which has now been amended further easing foreign collaborations in the field of technology.
Monday, May 17, 2010
Thursday, April 22, 2010
RBI Balances Inflation and Financing Needs for Sustained Growth
The Reserve Bank of India tightened monetary policy another notch in its Annual Policy Statement for the new fiscal , hiking the short-term indicative borrowing and lending rates — repo and reverse repo — and the mandatory Cash Reserve Ratio (CRR) of banks by 25 basis points each. As a result of the increase in the CRR, about Rs.12,500 crore of excess liquidity will be absorbed from the system. This move was expected given the high inflation numbers which are now not solely supply driven — with inflation at 9.90% in March and spreading from food prices to manufactured goods. The tightening builds on a surprise inter-meeting rate hike in March. While, not ruling out mid-cycle action, the RBI referred to the fact that growth is coming from sectors which are interest-rate sensitive, and the need to step cautiously so as not to derail growth at this juncture. Lenders have indicated that this move is unlikely to result in an immediate increase in cost of borrowing even though the interest rate bias is clear. Real interest rates are still mostly negative.
The monetary policy stance was formulated in the backdrop of the need to continue steadily with tightening, while attempting to ensure, among other things, minimal disruptions in fund flows, both to the government’s already stretched market borrowing programme and to private corporations, and also to ensure a pick up in private consumption. RBI also mentioned measures designed to deepen financial markets and augment policy transmission channels in future which should gain clarity by its first policy review in July.
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The monetary policy stance was formulated in the backdrop of the need to continue steadily with tightening, while attempting to ensure, among other things, minimal disruptions in fund flows, both to the government’s already stretched market borrowing programme and to private corporations, and also to ensure a pick up in private consumption. RBI also mentioned measures designed to deepen financial markets and augment policy transmission channels in future which should gain clarity by its first policy review in July.
The SurgeRS Summary of the Macro-economic Developments & Annual Policy will be appended to E-UpDates Ecofin’s monthly statistical bulletin. For subscription details please e-mail us.
Monday, March 22, 2010
Inflation Drives Exit-from-Stimulus Strategies
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The US FOMC continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period and will maintain the target range for the federal funds rate at 0 to 1/4 percent. However, in light of improved functioning of financial markets, the Fed has been closing the special liquidity facilities that it created to support markets during the crisis. The only remaining such program, the Term Asset-Backed Securities Loan Facility, is scheduled to close on June 30 for loans backed by new-issue commercial mortgage-backed securities and on March 31 for loans backed by all other types of collateral. To provide support to mortgage lending and housing markets the Fed has been purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt; those purchases are likely to be executed by the end of this month.
ECB decided to leave the key interest rates unchanged as Euro zone inflation in February is at 0.9% and monetary analysis confirms the assessment of low inflationary pressures over the medium term, with money and credit growth remaining weak. But ECB announced the gradual phasing-out of our non-standard operational measures which includes return to variable rate tender procedures in the regular three-month longer-term refinancing operations (LTROs), starting with the operation to be allotted on 28 April 2010, further allotment amounts in these operations will be set with the aim of ensuring smooth conditions in money markets and avoiding any significant spreads between bid rates and the prevailing MRO (main refinancing operations) rate.
Policy makers in UK on the other hand had to acknowledge emerging evidence on the upside risks to inflation, though at the moment Bank Rate would be maintained at 0.5% despite the fact that UK inflation has increased to 3.5%, above the government's target. BoE would also maintain the stock of asset purchases financed by the issuance of central bank reserves at £200 billion as lending growth to households and businesses had remained weak, reflecting both demand and supply factors and was likely to remain constrained until the banking sector had completed the process of balance sheet restructuring and the refinancing of its own funding maturing over the coming years.
RBI of course decided to act prior to its annual policy review and has increased its key rates by 25 bps citing that containing overall inflation and anchoring inflation expectations have become imperative as inflationary pressures have intensified beyond RBI’s baseline projection and heighten the risks of supply-side pressures translating into a generalised inflationary process. After revision, the reverse repo rate — the rate of interest that the RBI offers banks when they leave their funds with the central bank — is 3.50%, nearly 42% lower than the pre-crisis level of 6%. The repo rate, at which banks can borrow from the central bank, is now 5%, 44% lower than the pre-crisis peak of 9% leaving enough scope for further hawkish measures probably again before its annual review, as headline WPI inflation which on a year-on-year basis stands at 9.9 per cent in February is expected to reach double digits in March 2010.
The US FOMC continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period and will maintain the target range for the federal funds rate at 0 to 1/4 percent. However, in light of improved functioning of financial markets, the Fed has been closing the special liquidity facilities that it created to support markets during the crisis. The only remaining such program, the Term Asset-Backed Securities Loan Facility, is scheduled to close on June 30 for loans backed by new-issue commercial mortgage-backed securities and on March 31 for loans backed by all other types of collateral. To provide support to mortgage lending and housing markets the Fed has been purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt; those purchases are likely to be executed by the end of this month.
ECB decided to leave the key interest rates unchanged as Euro zone inflation in February is at 0.9% and monetary analysis confirms the assessment of low inflationary pressures over the medium term, with money and credit growth remaining weak. But ECB announced the gradual phasing-out of our non-standard operational measures which includes return to variable rate tender procedures in the regular three-month longer-term refinancing operations (LTROs), starting with the operation to be allotted on 28 April 2010, further allotment amounts in these operations will be set with the aim of ensuring smooth conditions in money markets and avoiding any significant spreads between bid rates and the prevailing MRO (main refinancing operations) rate.
Policy makers in UK on the other hand had to acknowledge emerging evidence on the upside risks to inflation, though at the moment Bank Rate would be maintained at 0.5% despite the fact that UK inflation has increased to 3.5%, above the government's target. BoE would also maintain the stock of asset purchases financed by the issuance of central bank reserves at £200 billion as lending growth to households and businesses had remained weak, reflecting both demand and supply factors and was likely to remain constrained until the banking sector had completed the process of balance sheet restructuring and the refinancing of its own funding maturing over the coming years.
RBI of course decided to act prior to its annual policy review and has increased its key rates by 25 bps citing that containing overall inflation and anchoring inflation expectations have become imperative as inflationary pressures have intensified beyond RBI’s baseline projection and heighten the risks of supply-side pressures translating into a generalised inflationary process. After revision, the reverse repo rate — the rate of interest that the RBI offers banks when they leave their funds with the central bank — is 3.50%, nearly 42% lower than the pre-crisis level of 6%. The repo rate, at which banks can borrow from the central bank, is now 5%, 44% lower than the pre-crisis peak of 9% leaving enough scope for further hawkish measures probably again before its annual review, as headline WPI inflation which on a year-on-year basis stands at 9.9 per cent in February is expected to reach double digits in March 2010.
Wednesday, March 3, 2010
Focal Points of Indian Union Budget 2010-11
India's recent GDP numbers show that the economy grew 6 percent in the December quarter, as farm output fell 2.8 percent after a drought. The core sector, comprising six key infrastructure industries, grew 9.4 per cent in January 2010, compared with 2.2 per cent in January 2009 and pushes up hopes of a robust rcovery. The prime concern remains inflationary pressures which have built up by 8.9% (WPI based) in this fiscal so far, as compared to 1.51% in the last fiscal, pushed by food price inflation which has built up by a massive 14.7% during thi sfiscal compared to a 5.4% build up in the last fiscal. The Union Budget for the FY2010-11 addressed concerns on fiscal discipline with a plan to reduce the fiscal deficit to 5.5 percent of GDP in the new FY from 6.9 percent this fiscal, and further declines in coming years. Additional borrowing of 1.3% was proposed and given that the fiscal stimulus withdrawal was not aggressive so as to not choke wavering recovery, the case for policy tightening by RBI seems to be stronger. The budget lacked any direct measures to curb rising food prices, further the duty rollback on petroleum could contribute somewhat to inflationary pressures, however, reigning in of the fiscal deficit despite difficult circumstances should help cool long term inflation expectations.
Infrastructure, agriculture and social sector have been the key focus areas of budget 2010-11. From the infrastructure sector perspective, the positives are increased allocation for infrastructure by providing 46% of the total plan allocations, especially with respect to roads and the power sector and clean energy initiatives. The proposed tax relief for investment in long-term infrastructure bonds will further boost investment in infrastructure, while increased refinancing through IIFCL would help bank lending to infrastructure. Bank recapitalisation plans and the farm loan waiver are expected to benefit the banking sector. Much needed measures to boost farm spending and research and lift agriculture sector growth to 4 percent in the medium term were taken. With the key focus on inclusive growth social sector by allocation is around 37% of the total plan outlay, while urban development allocation has been increased by more than 75%.The budget has extended the interest subvention on pre-shipment credit for key export-oriented sectors and similarly extended the housing-loan interest subsidy scheme for another year, thus indicating that the fiscal stimulus would continue to sensitive sectors affected by the global slowdown. The expansion of direct personal tax slabs would help stabilise the nascent demand recovery.
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Infrastructure, agriculture and social sector have been the key focus areas of budget 2010-11. From the infrastructure sector perspective, the positives are increased allocation for infrastructure by providing 46% of the total plan allocations, especially with respect to roads and the power sector and clean energy initiatives. The proposed tax relief for investment in long-term infrastructure bonds will further boost investment in infrastructure, while increased refinancing through IIFCL would help bank lending to infrastructure. Bank recapitalisation plans and the farm loan waiver are expected to benefit the banking sector. Much needed measures to boost farm spending and research and lift agriculture sector growth to 4 percent in the medium term were taken. With the key focus on inclusive growth social sector by allocation is around 37% of the total plan outlay, while urban development allocation has been increased by more than 75%.The budget has extended the interest subvention on pre-shipment credit for key export-oriented sectors and similarly extended the housing-loan interest subsidy scheme for another year, thus indicating that the fiscal stimulus would continue to sensitive sectors affected by the global slowdown. The expansion of direct personal tax slabs would help stabilise the nascent demand recovery.
To read our comprehensive summary of the Economic Survey and the Union Budget subscribe to our Monthly e-bulletin of Economic data & indicators. E-mail us at ecofin.surge@gmail.com for all details.
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Wednesday, January 20, 2010
Into 2010 —Views on Sustainability of Recovery
Into the new decade beginning 2010 much of the Global economy is technically out of recession, thanks to the unprecedented synchronized monetary and fiscal stimulus provided by governments across the globe, even though major economic indicators continue to see-saw. The combination of improvement in the functioning of financial markets, higher prices for risky assets and the recent slower pace of tightening bank lending standards are expected to increase the chances for sustainable recovery according to the Global Economic Forum of Morgan Stanley. A slower pace of inventory liquidation and a gradual shift to inventory accumulation should add to growth. Past aggressive payroll cuts may now give rise to an increase in demand for labour and help to strengthen recovery. GEF points out that inflation risk will be a crucial factor for markets henceforth; as (particularly due to rising commodity price inflation) market-based inflation expectations are gradually rising. The end of easing and beginning of exit can be expected to cause wobbles in financial markets pushing inflation premia and thus bond yields significantly higher. The aggressive provision of stimulus has also theoretically led to significant increase in sovereign fiscal balances and default risks, which also pushes up bond yields.
Another threat to the nascent recovery in the form of existing global imbalances of distortionary /risky nature has been discussed in an IMF policy note, which points out that crisis induced changes in saving and investment patterns across the world have narrowed previously rising imbalances considerably. However, policy measures are required to correct for distortionary effects of — large current account deficit in the US, high oil prices and the large savings of oil exporters, high and rising saving rates in China, the investment boom driven by asset prices in peripheral Europe, the collapse in investment in emerging Asia (excluding China) and in Japan. An increase private and public US saving, an increase in social insurance, strengthening corporate governance, and implementation of reforms to increase access to credit for households and SMEs in China, a move from export-led towards more domestic-demand led growth in a number of emerging market countries, room for higher domestic demand and more spending on social infrastructure needs in some oil-exporting countries would help global rebalancing and ensure sustainability of recovery.
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Another threat to the nascent recovery in the form of existing global imbalances of distortionary /risky nature has been discussed in an IMF policy note, which points out that crisis induced changes in saving and investment patterns across the world have narrowed previously rising imbalances considerably. However, policy measures are required to correct for distortionary effects of — large current account deficit in the US, high oil prices and the large savings of oil exporters, high and rising saving rates in China, the investment boom driven by asset prices in peripheral Europe, the collapse in investment in emerging Asia (excluding China) and in Japan. An increase private and public US saving, an increase in social insurance, strengthening corporate governance, and implementation of reforms to increase access to credit for households and SMEs in China, a move from export-led towards more domestic-demand led growth in a number of emerging market countries, room for higher domestic demand and more spending on social infrastructure needs in some oil-exporting countries would help global rebalancing and ensure sustainability of recovery.
To keep yourself updated with the trends this year subscribe to our monthly e-bulletin of latest economic data/indicators on the Global & Indian economy. Charges Rs.2000 ($ )(for 12 issues). Simply e-mail to us for details or visit our website.
Sunday, January 3, 2010
Happy New Year 2010
The SurgeRS (Surge Research Support) wishes all friends and visitors a very Happy New Year.
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E-UpDates the monthly statistical bulletin by EcoFin-Surge is a comprehensive compilation of Indian data covering Macro-economic variables like GDP, Industrial Production indices, Inflation and Banking & Financial market indicators like Monetary developments, Interest rates and yields in the Govt. and Corporate debt market, Stock & Commodity market indices. It also gives you snapshots of the global economy by providing crucial indicators for economies like the US, Euro-zone, UK, Japan and some of India’s major trading partners. Previous month’s data reaches your inbox by the 9th of each month. Our sample bulletin for June-09 Issue of E-UpDates (visit our website) includes the Indian Union Budget highlights. For more Data and Indicators visit our Website.
Friday, December 11, 2009
FDI Focus
The OECD’s Investment Policy Review of India, 2009 lauds India for the policies to encourage investment as part of market-oriented reforms since 1991. However, according to OECD further reforms are needed as India’s policy framework for FDI still remains restrictive compared with most OECD countries and particularly as India’s investment needs remain massive, with poor infrastructure holding back improvements in both living conditions and productivity. In its first investment policy review of India, the group of 30 developed countries, OECD has recommended further easing of restrictions on foreign investment flows to India, in areas such as banking, insurance and retail distribution where productivity levels are low and greater foreign investment could help raise incomes.
However, one cannot help but question whether it is the opening up of these particular sectors, or a policy thrust towards directing FDI to focus areas, which is the need of the hour, in order to actually promote growth with equity. In retail, the OECD has pointed out that local laws are aimed at protecting small shops and has argued in favour of opening up the sector, but given India’s socio-economic backdrop, it would only probably lead to more of inequality with employment focused more on the educated youth, for whom a lot of opportunities have already been opened up. Looking at the cumulative FDI flows between Apr-’00 to Sep-’09, in different sectors we see that the services sector already accounts for about a fourth of total FDI(21.94%). Probably the government should now concentrate more on designing policies to attract industry-specific FDI to select focus areas in the manufacturing sector, which would generate higher number of jobs while improving technology and technical skills and also on the education (now accounting for 0.35%) and health (0.67%) sectors, where long term developmental benefits would be significant. Drawing higher FDI to industries like food processing (now at 0.90%) for example could also bring greater benefits to the agricultural sector, whose growth rate has been suffering in recent times.
On the hand, in the OECD report more attention-worthy is the review’s stress on the need to expedite the judicial process in the country pointing out that for investors, significant delays in justice can mean bankruptcy and strengthening the capacity of the judicial system could make a big difference to investment.
The report has rightly pointed out that while the central government has reduced the number of approvals needed for new investment, there remains a need to streamline administrative procedures at the state level.
The OECD has also proposed to undertake joint future work on green growth, promoting infrastructure development through public-private partnerships, developing nationally consistent regional FDI statistics and launching a review of the regulatory policies of India, all of which should be extremely beneficial for the economy.
However, one cannot help but question whether it is the opening up of these particular sectors, or a policy thrust towards directing FDI to focus areas, which is the need of the hour, in order to actually promote growth with equity. In retail, the OECD has pointed out that local laws are aimed at protecting small shops and has argued in favour of opening up the sector, but given India’s socio-economic backdrop, it would only probably lead to more of inequality with employment focused more on the educated youth, for whom a lot of opportunities have already been opened up. Looking at the cumulative FDI flows between Apr-’00 to Sep-’09, in different sectors we see that the services sector already accounts for about a fourth of total FDI(21.94%). Probably the government should now concentrate more on designing policies to attract industry-specific FDI to select focus areas in the manufacturing sector, which would generate higher number of jobs while improving technology and technical skills and also on the education (now accounting for 0.35%) and health (0.67%) sectors, where long term developmental benefits would be significant. Drawing higher FDI to industries like food processing (now at 0.90%) for example could also bring greater benefits to the agricultural sector, whose growth rate has been suffering in recent times.
On the hand, in the OECD report more attention-worthy is the review’s stress on the need to expedite the judicial process in the country pointing out that for investors, significant delays in justice can mean bankruptcy and strengthening the capacity of the judicial system could make a big difference to investment.
The report has rightly pointed out that while the central government has reduced the number of approvals needed for new investment, there remains a need to streamline administrative procedures at the state level.
The OECD has also proposed to undertake joint future work on green growth, promoting infrastructure development through public-private partnerships, developing nationally consistent regional FDI statistics and launching a review of the regulatory policies of India, all of which should be extremely beneficial for the economy.
Sunday, November 22, 2009
A Check on Indian & Global Recovery
India's industrial output jumped by a higher-than-forecast 9.1% in September from a year earlier with 9.3% growth in manufacturing output. Production of consumer durables, that was particularly hard hit as India suffered the fallout from the international slump, grew by 22.2 percent in September underpinned by robust consumer spending fuelling hopes that Asia's third-largest economy is firmly on the up-trend. Emerging market leader China recorded industrial production expansion of 16.1 percent in October. US industrial production figures for October showed a mixed picture; manufacturing output eased after several strong months as auto production fell 2.0 percent, reflecting some of the volatility from the end of a government incentive program. With the U.S. unemployment rate at 10.2 percent, U.S administration faces a delicate balance of trying to boost the economy and spur job creation while putting the economy on a path toward long-term deficit reduction. In fact, the US president has again reiterated the need to contain rising U.S. deficits, saying that if government debt were to pile up too much, it could lead to a double-dip recession — two issues we have written about in two previous posts to this blog.
India’s Merchandise shipments dropped 11.4 percent from a year earlier to $12.5 billion after sliding 13.8 percent in September. September's figures for several Asian economies including China showed weakness in outbound shipments. In India the continued decline in heavy-weight sectors like engineering goods or readymade garments is a cause for concern, as much of the boost has come from high value sectors like pharma and electronics and also from a diversification to new markets. The improvements in recent months, compared with earlier slides like a 33-39% drop between March-May this year, suggests that the global demand slump may finally be easing. Indeed, U.S. imports rose by $9.3 billion in September to $168.4 billion; the 5.8% increase from August was the largest one-month percentage gain in 16 years and is a sign of improvement in US domestic demand. In UK too, overall imports rose by 7.5%, due to an increase in auto exports of 29.2% over the month. In the Euro zone, Germany’s economic recovery accelerated in the third quarter as government stimulus programs fueled company spending and a rebound in global trade boosted exports, helping the 16-nation euro area return to growth in the third quarter. German imports also rose strongly in the quarter. The Euro zone's main consumption-driven economy, France, is growing but at a slower-than-expected pace. Japan’s Q3 growth at 1.2% is almost double that of market expectations, however, deflation is back to haunt the economy as the domestic demand deflator fell by 2.6% recording its steepest fall in over half a century not boding well for global economic recovery.
FII flows of Rs 73,440 crore so far this year in India’s bourses is the highest ever investment made in rupee terms in a single year. Measured at about $15 billion, flows are likely to exceed record levels of close to $17.65 billion seen in 2007. This is perpetuated by the fact that FIIs are able to borrow money at near zero per cent interest rates in the developed markets and park such capital into Indian equities made attractive by the country’s growth potential. Such heavy inflows has become a concern for policy makers and exporters alike and a Brazil style tax on short-term cross border flows has been suggested to discourage USD carry trades. However, the Finance Ministry is not considering any immediate curbs on foreign portfolio flows, probably as the stock market recovery is nascent and domestic investors may not have enough drive to keep the bullish sentiments going in the secondary capital market. (More on this issue in our next post.)
India's annual food inflation, which has been the key inflation driver, jumped to 13.68 percent in the last week of October and further to 14.55% in the first week of November; as we have detailed in the previous post to the blog, the central bank has already turned somewhat hawkish to control inflationary pressures which are mounting (Click here to see summary of latest RBI policy). The government may set out the time frame for the withdrawal of stimulus measures in the Union Budget presented before the next fiscal, if global recovery remains on track. The interest rate tightening cycle could begin if the WPI based inflation rate, which was at 1.3% for October, crosses 5%.
As countries around the world recover from the crisis, unanswered questions about the necessary restructuring of the global economy require urgent attention, according to leaders from business, academia and society. Speakers at the World Economic Forum's Summit on the Global Agenda expressed the view that the crisis has focused the minds of governments, particularly the G20, on what you need to do to rebalance globalization; it means rebuilding economies, balancing exports with domestic demand and investing in jobs and social protection. Some also opined that, while global efforts to address the crisis have stopped the downward spiral of the broad economy and sparked renewed confidence in the financial markets, there are acute worries that the momentum for reform might be ebbing.
India’s Merchandise shipments dropped 11.4 percent from a year earlier to $12.5 billion after sliding 13.8 percent in September. September's figures for several Asian economies including China showed weakness in outbound shipments. In India the continued decline in heavy-weight sectors like engineering goods or readymade garments is a cause for concern, as much of the boost has come from high value sectors like pharma and electronics and also from a diversification to new markets. The improvements in recent months, compared with earlier slides like a 33-39% drop between March-May this year, suggests that the global demand slump may finally be easing. Indeed, U.S. imports rose by $9.3 billion in September to $168.4 billion; the 5.8% increase from August was the largest one-month percentage gain in 16 years and is a sign of improvement in US domestic demand. In UK too, overall imports rose by 7.5%, due to an increase in auto exports of 29.2% over the month. In the Euro zone, Germany’s economic recovery accelerated in the third quarter as government stimulus programs fueled company spending and a rebound in global trade boosted exports, helping the 16-nation euro area return to growth in the third quarter. German imports also rose strongly in the quarter. The Euro zone's main consumption-driven economy, France, is growing but at a slower-than-expected pace. Japan’s Q3 growth at 1.2% is almost double that of market expectations, however, deflation is back to haunt the economy as the domestic demand deflator fell by 2.6% recording its steepest fall in over half a century not boding well for global economic recovery.
FII flows of Rs 73,440 crore so far this year in India’s bourses is the highest ever investment made in rupee terms in a single year. Measured at about $15 billion, flows are likely to exceed record levels of close to $17.65 billion seen in 2007. This is perpetuated by the fact that FIIs are able to borrow money at near zero per cent interest rates in the developed markets and park such capital into Indian equities made attractive by the country’s growth potential. Such heavy inflows has become a concern for policy makers and exporters alike and a Brazil style tax on short-term cross border flows has been suggested to discourage USD carry trades. However, the Finance Ministry is not considering any immediate curbs on foreign portfolio flows, probably as the stock market recovery is nascent and domestic investors may not have enough drive to keep the bullish sentiments going in the secondary capital market. (More on this issue in our next post.)
India's annual food inflation, which has been the key inflation driver, jumped to 13.68 percent in the last week of October and further to 14.55% in the first week of November; as we have detailed in the previous post to the blog, the central bank has already turned somewhat hawkish to control inflationary pressures which are mounting (Click here to see summary of latest RBI policy). The government may set out the time frame for the withdrawal of stimulus measures in the Union Budget presented before the next fiscal, if global recovery remains on track. The interest rate tightening cycle could begin if the WPI based inflation rate, which was at 1.3% for October, crosses 5%.
As countries around the world recover from the crisis, unanswered questions about the necessary restructuring of the global economy require urgent attention, according to leaders from business, academia and society. Speakers at the World Economic Forum's Summit on the Global Agenda expressed the view that the crisis has focused the minds of governments, particularly the G20, on what you need to do to rebalance globalization; it means rebuilding economies, balancing exports with domestic demand and investing in jobs and social protection. Some also opined that, while global efforts to address the crisis have stopped the downward spiral of the broad economy and sparked renewed confidence in the financial markets, there are acute worries that the momentum for reform might be ebbing.
Thursday, October 29, 2009
RBI commences the exit process
The central bank of Asia's third-largest economy, the Reserve Bank of India, has begun the unwinding of its loose Monetary Policy; though it has kept key rates unchanged the RBI has signaled the end of fiscal stimulus by withdrawing some of the emergency liquidity support measures that were implemented during the peak crisis period. To read a summary of the Macro-economic review and policy measures taken please visit this link.
The Indian stock markets have reacted violently as the feeling is that tightening bias comes a tad earlier than expected. However, RBI, analysts and bankers have expressed the view that the changes implemented so far will not have any impact as much of it constitutes reversals of measures no longer being used. The SLR change really will have no real impact on the economy as the scheduled commercial banks are already in maintaining a SLR of 27.6 per cent, so there is no immediate impact on liquidity. Discontinuing the support to Mutual funds could have an impact on the Net Asset Values of the funds, if they face large scale redemptions; to prevent this RBI has allowed MFs to borrow from banks to meet the needs for redemption. Withdrawal of two repo facilities, one for banks and one for the funding needs of mutual funds, non-bank finance companies and housing finance companies are unlikely to affect liquidity levels as both these facilities had not been used for more than a couple of months. Lowering the limit of export credit refinance facility to 15 percent from 50 percent, and discontinuation of a forex swap facility for banks, is unlikely to have much impact on market conditions as a review had found use of the facilities was low.
Central banks in all the major developed economies, barring Australia, are continuing with easy monetary policy and have held policy rates steady in recent months. They have also continued with measures to provide liquidity and other support to alleviate stress in the financial markets following the crisis. In the current cycle, the Reserve Bank of Australia has been the first G-20 central bank to raise its policy rate (Cash Rate) by 25 basis points to 3.25 per cent on October 6 on the back of diminished risk of serious economic contraction. The Reserve Bank of New Zealand has withdrawn some temporary emergency liquidity facilities put in place during the financial crisis of 2008. China has reiterated its commitment to proactive financial policies and moderately loose monetary policies amid market speculation that it might be preparing an exit strategy. Despite the fact that the country's economic growth is likely to speed up in the fourth quarter (from an average of 7.7 per cent in the last three quarters), the Chinese government has said that it will stay on course of its fiscal stimulus spending.
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The Indian stock markets have reacted violently as the feeling is that tightening bias comes a tad earlier than expected. However, RBI, analysts and bankers have expressed the view that the changes implemented so far will not have any impact as much of it constitutes reversals of measures no longer being used. The SLR change really will have no real impact on the economy as the scheduled commercial banks are already in maintaining a SLR of 27.6 per cent, so there is no immediate impact on liquidity. Discontinuing the support to Mutual funds could have an impact on the Net Asset Values of the funds, if they face large scale redemptions; to prevent this RBI has allowed MFs to borrow from banks to meet the needs for redemption. Withdrawal of two repo facilities, one for banks and one for the funding needs of mutual funds, non-bank finance companies and housing finance companies are unlikely to affect liquidity levels as both these facilities had not been used for more than a couple of months. Lowering the limit of export credit refinance facility to 15 percent from 50 percent, and discontinuation of a forex swap facility for banks, is unlikely to have much impact on market conditions as a review had found use of the facilities was low.
Central banks in all the major developed economies, barring Australia, are continuing with easy monetary policy and have held policy rates steady in recent months. They have also continued with measures to provide liquidity and other support to alleviate stress in the financial markets following the crisis. In the current cycle, the Reserve Bank of Australia has been the first G-20 central bank to raise its policy rate (Cash Rate) by 25 basis points to 3.25 per cent on October 6 on the back of diminished risk of serious economic contraction. The Reserve Bank of New Zealand has withdrawn some temporary emergency liquidity facilities put in place during the financial crisis of 2008. China has reiterated its commitment to proactive financial policies and moderately loose monetary policies amid market speculation that it might be preparing an exit strategy. Despite the fact that the country's economic growth is likely to speed up in the fourth quarter (from an average of 7.7 per cent in the last three quarters), the Chinese government has said that it will stay on course of its fiscal stimulus spending.
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Tuesday, October 6, 2009
Recovery and Government Debt
US
The US Federal Reserve has said economic activity is picking up but it expects to keep interest rates close to zero for an extended time. US interest rates were cut to the current level of between 0% and 0.25% in December last year, and have been left unchanged. The 0.7% fall in second-quarter US GDP was better than market expectations and an improvement from the first quarter's 6.4% contraction; importantly, business investment which had slumped 39.2% in the first quarter, fell at a 9.6% rate in the second quarter. Conditions in financial markets have improved further, and activity in the housing sector has increased, though household spending remains constrained by ongoing job losses. The Fed also pledged to continue a program with $1.45 trillion to help keep credit flowing to the housing market and other segments of the economy by purchasing mortgage securities and debt. Meanwhile, US jobless rate hit 26-year high of 9.8%, underscoring the fragility of the economy's recovery from its worst recession in 70 years as businesses remain cautious about the future. The IMF said it now expects the US economy to grow 1.5% in 2010, up from its July forecast for 0.8% growth, however, it warned that the financial crisis had contributed to a high and rising debt trajectory that could become unsustainable without significant medium-term measures. The IMF estimated that US debt would reach almost 110% of gross domestic product by 2014, and called it a worrisome deterioration given looming healthcare and pension pressures. The US budget deficit topped $1 trillion for the first nine months of the fiscal year that began in October and totalled $1.1 trillion, as individual and corporate tax receipts are sliding because the jobless rate continues to rise and companies have yet to see a sustained increase in demand; the shortfall is also widening as the government ramps up spending. For the fiscal year that ends in September, the Office of Management and Budget has forecast the deficit to reach a record $1.841 trillion, more than four times the previous fiscal year’s $459 billion shortfall.
India
The Reserve Bank of India feels that choices with regards to policy changes like revision of monetary policy are becoming increasingly complex for India's central bank as signs of economic recovery continue to be tentative while inflation is firming up. Several indicators are pointing to an economic recovery, such as better-than-expected economic growth numbers, improvement in industrial output during April-July and higher relative growth in infrastructure industry or core sector performance, revival of capital flows and strong recovery of the stock markets. Indeed, the bellwether Sensex broke the 17,000-mark this week — a level first reached two years ago in September 2007 and last seen 16 months ago in May last year — on sustained capital inflows. Yet, there are downside risks on account of the impact of poor monsoons on agriculture, slowdown in exports and sluggishness of global recovery. On the other hand, rising inflationary pressures could limit the scope for sustained growth supportive monetary policy stance; WPI-based inflation for mid-September rose to 0.83% from 0.37% in the previous week on costlier food items.
The country’s fiscal deficit—the gap between receipts and spending that is usually financed through borrowings—rose 35% in the first five months of the fiscal compared to the same period a year ago as the government continued with tax cuts and higher public spending to boost the economy. Fiscal deficit in the April-September period stood at Rs 1,82,290 crore, which is 45.5% of the budget estimate for the current fiscal. In the same period a year ago, it had scaled 87% of the budget estimate and the government had to revise the annual fiscal deficit from a target of 2.5% to 6% as the economic downturn prompted it to step up spending and cut taxes. The government had set an annual gross borrowing target of Rs.4.51 trillion for 2009-10 (April-March), and has already sold Rs 2.95 trillion of bonds until September; it will sell bonds totalling Rs.1.23 trillion ($25.6 billion) between October and March as part of its borrowing schedule. Expenditure curbs are being put in place so that the fiscal deficit target of 6.8% of GDP would not be exceeded. For the first time, RBI is offering more flexibility to state governments to rein in their market borrowing costs and has allowed West Bengal to borrow funds by selling state government securities with a put option after four years, which means investors can redeem these securities prematurely after completion of the fourth year of maturity; states, typically, borrow from the market by selling 10-year securities called State Development Loans (SDLs) through RBI s auction window.
The US Federal Reserve has said economic activity is picking up but it expects to keep interest rates close to zero for an extended time. US interest rates were cut to the current level of between 0% and 0.25% in December last year, and have been left unchanged. The 0.7% fall in second-quarter US GDP was better than market expectations and an improvement from the first quarter's 6.4% contraction; importantly, business investment which had slumped 39.2% in the first quarter, fell at a 9.6% rate in the second quarter. Conditions in financial markets have improved further, and activity in the housing sector has increased, though household spending remains constrained by ongoing job losses. The Fed also pledged to continue a program with $1.45 trillion to help keep credit flowing to the housing market and other segments of the economy by purchasing mortgage securities and debt. Meanwhile, US jobless rate hit 26-year high of 9.8%, underscoring the fragility of the economy's recovery from its worst recession in 70 years as businesses remain cautious about the future. The IMF said it now expects the US economy to grow 1.5% in 2010, up from its July forecast for 0.8% growth, however, it warned that the financial crisis had contributed to a high and rising debt trajectory that could become unsustainable without significant medium-term measures. The IMF estimated that US debt would reach almost 110% of gross domestic product by 2014, and called it a worrisome deterioration given looming healthcare and pension pressures. The US budget deficit topped $1 trillion for the first nine months of the fiscal year that began in October and totalled $1.1 trillion, as individual and corporate tax receipts are sliding because the jobless rate continues to rise and companies have yet to see a sustained increase in demand; the shortfall is also widening as the government ramps up spending. For the fiscal year that ends in September, the Office of Management and Budget has forecast the deficit to reach a record $1.841 trillion, more than four times the previous fiscal year’s $459 billion shortfall.
India
The Reserve Bank of India feels that choices with regards to policy changes like revision of monetary policy are becoming increasingly complex for India's central bank as signs of economic recovery continue to be tentative while inflation is firming up. Several indicators are pointing to an economic recovery, such as better-than-expected economic growth numbers, improvement in industrial output during April-July and higher relative growth in infrastructure industry or core sector performance, revival of capital flows and strong recovery of the stock markets. Indeed, the bellwether Sensex broke the 17,000-mark this week — a level first reached two years ago in September 2007 and last seen 16 months ago in May last year — on sustained capital inflows. Yet, there are downside risks on account of the impact of poor monsoons on agriculture, slowdown in exports and sluggishness of global recovery. On the other hand, rising inflationary pressures could limit the scope for sustained growth supportive monetary policy stance; WPI-based inflation for mid-September rose to 0.83% from 0.37% in the previous week on costlier food items.
The country’s fiscal deficit—the gap between receipts and spending that is usually financed through borrowings—rose 35% in the first five months of the fiscal compared to the same period a year ago as the government continued with tax cuts and higher public spending to boost the economy. Fiscal deficit in the April-September period stood at Rs 1,82,290 crore, which is 45.5% of the budget estimate for the current fiscal. In the same period a year ago, it had scaled 87% of the budget estimate and the government had to revise the annual fiscal deficit from a target of 2.5% to 6% as the economic downturn prompted it to step up spending and cut taxes. The government had set an annual gross borrowing target of Rs.4.51 trillion for 2009-10 (April-March), and has already sold Rs 2.95 trillion of bonds until September; it will sell bonds totalling Rs.1.23 trillion ($25.6 billion) between October and March as part of its borrowing schedule. Expenditure curbs are being put in place so that the fiscal deficit target of 6.8% of GDP would not be exceeded. For the first time, RBI is offering more flexibility to state governments to rein in their market borrowing costs and has allowed West Bengal to borrow funds by selling state government securities with a put option after four years, which means investors can redeem these securities prematurely after completion of the fourth year of maturity; states, typically, borrow from the market by selling 10-year securities called State Development Loans (SDLs) through RBI s auction window.
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