ECONOMIC BRIEFS – 05.12.08
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'SBI to raise Rs 2,000 cr via bonds' (BL 05.12.08)
State Bank of India plans to raise at least Rs 2,000 crore through an issue of upper tier-II subordinated debt this month, market sources said.
Rate cut in the offing (BL 05.12.08)
The Reserve Bank of India is expected to announce another set of measures, including a rate cut, on Saturday, as part of its efforts to boost demand in the economy. The central bank has called a press conference on December 6, which will be addressed by the Governor, Dr Subbarao. The market has been expecting a sharp cut in reverse repo by the RBI to prevent banks from parking their surplus funds with it or invest in government securities, instead of lending. Inflation has also eased to a seven-month low. The Wholesale Price Index (WPI) based inflation has come off to 8.40 per cent in the week ended November 22 as compared to 8.84 per cent noted in the previous week. Softer inflation will give the central bank headroom to pare signal rates. “We expect the RBI to cut the reverse repo and repo by around 100 basis points each. The cut in reverse repo rate will force the banks to go back to their core function of lending. It is unlikely that the RBI will tinker with CRR and SLR,” said a dealer with a public sector.
Cheaper fuel pulls down inflation rate to 8.4% (BL, BS, ET 05.12.08)
The annual Wholesale Price Index-based inflation rose 8.4 per cent for the week ended November 22, lower than the previous week’s annual rise of 8.84 per cent. The dip in the year-on-year inflation rate was entirely on account of a big fall in the inflation in the fuels group. The annual rate of inflation, calculated on point-to-point basis, was 3.11 per cent during the corresponding week of the previous year. In the ‘Primary Articles’ group, the annual year–on-year inflation increased further to 11.98 per cent during the latest reported week, as compared to 11.90 per cent reported the previous week. It was 4.68 per cent during the corresponding week a year ago. The annual rate of inflation for ‘Food Articles’ stood at 10.43 per cent points for the week ended November 22 as compared to 9.93 per cent points in the previous week. It was 3.01 per cent during the previous week a year ago.
As inflation falls, RBI is shifting focus to growth (BL, BS, ET 05.12.08)
The Reserve Bank of India (RBI) is shifting its policy focus to growth, moving away from measures directed at curbing the inflation, according to Dr D Subbarao, its Governor. He said the monetary steps taken in the recent past had given positive results. As inflation has been decreasing for the last three weeks, there is now a need to maintain a balance between growth and inflation as well, he added. When quizzed on the much-anticipated rate cut, Dr Rao said "The RBI and the Government are monitoring the situation closely and would take appropriate action at an appropriate time. Though the rate cut is a key tool to boost demand, it is not the only tool,” he said. "The RBI would do the needful to ensure liquidity for the banks and credit flow to the productive sectors. Our aim is to maintain comfortable liquidity and we will do it,” he said.
‘India facing knock-on effect of global crises’ (BL, FE 05.12.08)
The impact of global financial crisis on India is “stronger and longer than expected” and there is a need to weather its negative impact on the domestic economy, according to Dr D. Subba Rao, Governor, Reserve Bank of India. “India is experiencing the knock-on effects of the global crisis, through the monetary, financial and real channels,” even so the Indian banking system is not directly exposed to the sub-prime mortgage assets, Dr Rao said. “Our financial markets have come under pressure mainly because of what we have begun to call ‘the substitution effect’. Together, the global credit crunch and de-leveraging were reflected at home in the sharp fluctuation in the overnight money market rates in October 2008 and the depreciation of the rupee,” he added. The RBI chief indicated a “mixed” outlook for the country. “There is evidence of economic activity slowing down. At the same time, headline inflation, as measured by the wholesale price index, has fallen sharply, and the decline has been sustained for the past three weeks, pointing to a faster than expected reduction in inflation. Clearly, falling commodity prices have been the key drivers behind the disinflation; however, some contribution has also come from slowing domestic demand,” he said.
Award for YES Bank (BL 05.12.08)
YES Bank has been recognized as the ‘Most Innovative Bank in India’ at the New Economy First Annual Banking and Finance Awards 2008. The awards function was held in London. The bank’s Managing Director and CEO, Mr Rana Kapoor, said that it was the only Indian bank to have bagged the award. He attributed the success to dedicated ‘hard work in deploying differentiated customer-centric strategy built around trust, technology, knowledge, human capital and responsible banking’.
ECB, Bank of England cut rates steeply (BL, ET, FE 05.12.08)
The European Central Bank delivered the biggest interest rate cut in its 10-year history after the economic slump deepened and the inflation rate plunged while the Bank of England cut the benchmark interest rate to the lowest level since 1951 as lenders rationed credit, pushing the UK economy deeper into a recession. ECB policy makers lowered the benchmark lending rate by 75 basis points to 2.5 per cent. The Monetary Policy Committee of the Bank of England, led by Governor Mr Mervyn King, reduced the bank rate by 1 percentage point to 2 per cent, the central bank said in London. Swedens Riksbank sliced 175 points off its main rate, taking it to 2 per cent. New Zealand cut 150 points. Indonesia unexpectedly lowered borrowing costs for the first time in a year. The US Federal Reserve has reduced its key rate by 325 points this year, taking it to 1 percent. The interest rate now matches the lowest in the Bank of England's history. It was last at 2 per cent when Winston Churchill's victory in a general election made him prime minister for the second time.
Capital infusion (BL, BS, ET, FE 05.12.08)
German banking major Deutsche Bank has infused tier I capital to the tune of Rs 325 crore into its Indian operations. This infusion takes the group's total capital in India to over Rs 6000 crore, a press release issued by the company said.
Credit Suisse issues profit warning (BL, ET 05.12.08)
Swiss banking giant Credit Suisse said it would slash 5,300 jobs in a bid to save 2.0 billion Swiss francs ($1.65 million), as it sustained further losses due to the financial crisis. In view of the negative performance, the Chairman, Group Chief Executive and Investment Bank Chief Executive said they would give up their bonuses for the year.
Insurers getting more queries on terror cover (BL 05.12.08)
Seafood exporter Gul Kripalani never thought about an insurance cover against terror attack until last week. He has his unit near Colaba Causeway, the epicentre of last week’s terror attack in Mumbai. Now he is thinking of taking a comprehensive insurance policy that covers terrorist attack. The Mumbai terror strikes have brought into sharp focus the necessity of having a cover to take care of the risks arising on this front. While large corporates are well aware of this cover, post-the Mumbai incident, general insurers such as ICICI Lombard, IFFCO Tokio, and Future Generali have reported stepped-up enquiries from SMEs and individuals. Terrorism cover can be given for property or personal accident. It is offered as an add-on cover and an individual has the choice to request the same while insuring property. Similarly, personal accident cover for terrorism could encompass accidental death, total disability, loss of limbs, loss of a sensory organ, partial disability or loss of pay due to disability.
Reliance Life mulls overseas expansion (BL, FE 05.12.08)
Reliance Life Insurance said it is looking at expanding its operation beyond Indian shores. "We do believe that there is opportunity outside India as well," said Reliance Life Insurance Chief Executive Officer, Mr P Nadagopal. "If foreign companies are allowed in India, I see no reason why Indian companies cannot go out of the country," he added.
MFs welcome SEBI move on close-ended schemes (BL, BS, ET, FE 05.12.08)
Fund managers welcomed Securities Exchange Board of India decision making listing mandatory for close-ended schemes of mutual funds, and disallowing early exit from these schemes. SEBI’s decision comes at a time when the mutual fund industry is still hurting from the severe redemption pressure it faced in October, mainly in close-ended fixed income schemes.
HDFC Bank, HSBC reduce deposit rates (BS 05.12.08)
HDFC Bank and HSBC have set the ball rolling for their private sector and foreign peers to lower deposit rates. Effective on Thursday, the country’s second-largest private sector lender HDFC Bank lowered deposit rates by 50-225 basis points across various maturities. A senior bank executive said that, based on the impact on fund mop-up, HDFC Bank will decide over the next few weeks if it will cut lending rates too. “We have seen a very healthy flow of deposits in the last few months, probably next only to State Bank of India,” he said. Similarly, HSBC also lowered interest rates on deposits with tenure of six months to three years. Now, deposits with the bank will earn between 7 per cent and 8.25 per cent. Public sector banks have lowered both deposit and lending rates, while almost all private and foreign banks have stayed away from rate cuts despite the RBI reducing key rates. Public sector banks cut deposit rates from December 1. “Interest rates are definitely headed southwards and it is in our interest to cut lending rates over the next few weeks. We are examining the possibility,” said a senior executive of a large private sector bank.
NHB revises risk weight for home finance firms (BS 05.12.08)
In a move to boost capital adequacy of housing finance companies (HFCs), National Housing Bank (NHB) has revised their risk weightage and based it on their loan-to-value (LTV) ratio. Under the revised norms, HFCs will have to set aside capital depending on the LTV ratio. According to the new norms, the risk weightage for any housing loans sanctioned with an LTV ratio of more than 75 per cent has been increased from 50 per cent to 100 per cent. For loans above Rs 30 lakh and with an LTV ratio of less than 75 per cent, the risk weightage will be 75 per cent. However, for housing loans up to Rs 30 lakh with an LTV ratio of less than 75 per cent, the risk weightage stands unchanged at 50 per cent. “It is a very fair move as capital to be set aside should be linked to the risk taken. The higher the loan-to-value ratio, the higher is the risk. So, the capital requirement must also be higher,” said HDFC Vice-Chairman and MD Keki Mistry. “Earlier, any loans up to Rs 20 lakh attracted a risk weightage of 50 per cent. Now, the cap has been raised to Rs 30 lakh, which is a good thing for HFCs. The Capital Adequacy Ratio will be better off as the proportioning would be less for such loans,” said LIC Housing Finance Director and CEO R R Nair. The average loan size of LIC Housing Finance is Rs 13.25 lakh.
MF schemes hike exposure to equity derivatives (ET 05.12.08)
ABIT of hedging and some speculative bets that hold the promise of good returns are prompting mutual fund schemes to increase exposure to equity derivatives. The past 10 months have witnessed several equity funds raising their investments in the derivatives segment to 15-28% of net assets managed. Industry watchers say much of the exposure is largely to derivatives, F&O, on the Nifty. “When equities are not doing well, mutual fund schemes initiate hedging strategies against volatility. Fund managers like sufficient cushion when they are accumulating stocks at a lower level, especially in current market conditions. Well-hedged portfolios are not acutely impacted by recurring dips in the equities market,” said Crisil Fund Services head Krishnan Sitaraman.
RBI announces interest on FRB (FE 05.12.08)
The rate of interest on the government of India Floating Rate Bonds, 2009 (FRB, 2009) applicable for the half-year, December 6, 2008 to June 5, 2009, shall be 7.54% per annum. It may be recalled that the rate of interest on the FRB, 2009 was set at a mark-up, as decided in the auction held on December 5, 2001, over and above the variable base rate. The variable base rate for payment of interest shall be the average rate, rounded off up to two decimal places, of the implicit yields at cutoff prices emerging in six auctions of government of India 364-day Treasury Bills immediately preceding the relative half yearly coupon reset date.
AI’s US Exim Bank loan not to hit air pocket (FE 05.12.08)
India’s 7% GDP growth amid the global downturn has made international banks, which have of late intensified scrutiny on borrowers, bullish on the country. According to experts, this may remove roadblocks for Air India to procure 85% of its loan from the US Exim Bank for acquiring 68 aircraft at a total cost of $11.5 billion. Dinesh Keskar, senior vice-president, sales, Boeing, said, “The US Exim Bank has given a loan for over 20 aircraft which have already been delivered to the carrier by Boeing. The bank has given preliminary commitment for deliveries. Looking at the track record of Air India and India’s healthy growth rate when the global finance markets are in a turmoil, there will not be any hurdle in getting a final commitment from the bank to finance the remaining aircraft which will be delivered by 2011.” Air India has been consistently in talks with the government to get a bailout package of Rs 4,550 crore to meet its working capital requirements and pay for aircraft deliveries due from February. The carrier is also in talks with several commercial banks to finance the remaining 15% cost of aircraft.
China likely to resist calls to ease bank ownership curbs (FE 05.12.08)
China may resist calls by the US government to relax restrictions on foreign ownership of its banks, a person familiar with the matter said. Chinese rules limit overseas ownership of local lenders to 25%, with a 20% ceiling for any individual foreign investor. The government may consider loosening the curbs in special cases, such as a bank being in distress, the person said, declining to be identified as deliberations are private. "Foreign banks remain very interested in investing in Chinese lenders, even in the current circumstances,'' said Liao Qiang, a Beijing-based analyst at Standard & Poor's. The restrictions bar HSBC Holdings Plc, Europe's largest bank, from becoming a controlling shareholder in China's fifth biggest lender, Bank of Communications Ltd. London-based HSBC has said it wants to raise its holding in BoCom to 19.9% from the current 18.6%.
ICICI Prudential FMPs get Crisil AAAf (FE 05.12.08)
Thirty-five fixed maturity plans (FMP) of ICICI Prudential AMC have been rated AAAf by Crisil. The ratings indicate that ICICI Prudential FMPs’ portfolio holdings provide very strong protection against losses from credit default. ICICI Prudential is the only AMC with largest number of AAAf rated FMPs by Crisil in its stable.
Insurance growth in India to slow down’ (FE 05.12.08)
Swiss Re, the largest reinsurance company, has said that insurance in the emerging markets is expected to grow at a slower pace in 2008 and 2009, but its longer-term growth prospects remain positive. In India, growth of new business in life insurance fell from 145.7% in 2006 to 9.6% in 2007. Annual growth is likely to drop from the 2002 to 2007 levels of 11.4% in life and 10.6% in non-life to 7-10% in life and 38% in non-life between 2008 and 2013, said the company in its latest Sigma report. Growth in the life market slowed from 18% to 14% in 2007. Premium volume in 2007 amounted to $223billion. The strong performance of the stock markets in the first three quarters of 2007 led to increased sales of investment-linked life products.
Major rates & parameters as on 04.12.08 (BL, RBI)
Auction under RBI’s LAF
Govt. Securities (Yield)
8.24% 10-Yr 2018
7.95% 24 Yr- 2032
Rs 27,655 Cr
Rs 24,405 Cr
Source BL= Business Line, BS=Business Standard, ET=Economic Times & FE=Financial Express