RBI ups repo rate by 25 bps, cuts MSF rate by 75 bps - Moneycontrol.com

he Reserve Bank of India , in its mid-quarter policy review, raised repo rate by 25 bps to 7.5 percent. The policy, however, reduced the marginal standing facility (MSF) rate by 75 basis points from 10.25 per cent to 9.5 percent and lowered the minimum daily maintenance of the cash reserve ratio (CRR) from 99 percent to 95 percent of the requirement, effective from the fortnight beginning September 21, 2013. The reverse repo rate under the LAF stands adjusted to 6.5 per cent and the Bank Rate stands reduced to 9.5 per cent. Contrary to market expectations, the new governor Raghuram Rajan's maiden policy came in as hawkish, primarily because it maintained the apex banks views on controlling inflation. Reacting to the announcement, the rupee fell 1 percent, bond yield rose to 8.3 percent, and share prices of banking stocks witnessed a sharp decline.  Most of the economists polled by CNBC-TV18 were expecting the RBI to bring down the daily requirement to 90 percent of CRR, while a few expected it to come down below 90 percent. Jahangir Aziz of JPMorgan had opined that MSF should be brought back to its old level and instead repo rate should be hiked by about 50 bps. In a bid to control liquidity, the RBI had last month restricted banks from borrowing at 7.25 percent from the repo window. It had forced them to borrow at a higher rate of 10.25 percent from MSF.

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Source: www.moneycontrol.com

India increased the import duty on Gold

Import duty on gold jewellery to 15 percent from 10 percent on Tuesday, in a move aimed more at protecting the domestic jewellery industry rather than stemming overseas purchases to narrow its current account deficit.
India's imports of gold jewellery stood at $137.57 million between April and July, a fraction of total bullion imports, which in July alone were valued at $2.9 billion.

After the taper, what? - Anirudh Sethi

And so the day of reckoning has come. This week, the US Fed will show its hand on tapering quantitative easing (QE). Since late May, fears of tapering have already spiked both the US and global interest rates and played havoc with assets and currencies of emerging market (EM) economies with current account deficit. While the size of the first reduction in the Fed’s current monthly $85 billion of asset purchases will be the key decision to watch, equally important will be whether the central bank changes communications to anchor rate hike expectations and stop the market from conflating tapering with interest rate policy. The market is pricing that once tapering is over, a hike in Fed’s overnight rate won’t be far behind. The Fed has been trying hard to convince the market that the two are unconnected. Complicating all of this is last weekend’s withdrawal of Larry Summers as a candidate for the next Fed Chairman, making Janet Yellen, well known for her dovish views on policy, to be the leading contender.

Does any of this really matter?

Isn’t the end of QE already fully priced in global assets? Yes and no. Given the pace at which the US unemployment rate has been declining, no one really believes that the Fed’s asset purchase programme will extend too far beyond mid-2014. However, whether the tapering is front loaded or smoothed over the next 9 months will matter for capital flows in and out of EM assets. Much of the market believes that the Fed will begin with a $15 billion tapering in asset purchases; $10 billion in Treasuries and $5 billion in mortgaged-backed securities. Given that the Fed’s tapering announcement severely disrupted global markets in May, one doesn’t expect it to shock the market again. If anything, the Fed could start off with a smaller tapering of $10 billion. In that case, EM assets could benefit but only modestly as it would still mean that QE would be over by mid-2014. What would rally EM assets is prolonging QE significantly beyond mid-2014. This is unlikely. The underlying concern prompting the tapering was that risk was being severely underpriced because of QE. Nothing in the US data flow so far suggests that there is a need to subsidise risk any longer.

Related to the tapering is the Fed’s forward guidance for interest rates in 2016 and whether it changes its communications about the interest policy. The US labour market has improved substantially with employment gains averaging 180,000 per month. Tail risks to growth have abated as the euro area is exiting recession and the US has absorbed most of this year’s 2% of GDP fiscal drag. The rapid rise in long-term interest rates, including mortgage rates, is a concern but US financial conditions remain broadly healthy. Consequently, the Fed is likely to maintain a 2014 forecast of GDP growth above 3% and an unemployment rate fall to below 7%, bringing the economy close to full employment. Under normal circumstances, the Fed would be expected to set policy rates near its 4% estimate of neutral. Such guidance would disrupt the market. So, it is likely that the Fed will signal only a gradual normalisation path with a median rate forecast of about 2.25% for end-2016 with the first rate hike somewhere in 2015.

Here is where market expectations have differed from Fed guidance. There is a strong belief in the market that once tapering is over a rate hike will follow soon. The Fed has tried hard to stop the market from conflating the two by reiterating that the benchmark for considering a rate increase would be if unemployment fell to 6.5% or inflation rose to 2.5%, but that would still not trigger a hike. Thus, to anchor interest rate expectations, the Fed could recalibrate its communications. There are several options. It could lower the unemployment threshold to below 6.5% or qualify it with other indicators such as the labour participation rate, add an inflation lower bound, i.e. the Fed would not let inflation fall below, say, 1.5%, present a consensus or median interest rate forecast of the FOMC, or tie together the exit sequence (stop reinvestments on principal payments, followed by reserve draining, and then the first rate hike) with numerical thresholds. Among these options the only ones that really stand a chance are presenting a median forecast of the interest rate path and adding a lower bound to inflation outlook along with a strong reiteration that tapering is not tightening and that future tapering decisions would be data-dependent in both directions.

What does all this mean for India? Over the last two weeks things have definitely been on the mend. First the new Governor’s policy initiatives and then the passage of several Bills in the last days of the monsoon session of Parliament have helped to give a sense of policy resetting. This has been followed by better trade and IP data. And, as a result, the rupee has appreciated and capital inflows have started to trickle back. The restrictions on gold imports and the fall in non-oil/non-gold imports due to the economic slowdown have reduced the run rate of the current account deficit significantly. Indeed, it is likely that for this year the deficit could be much lower than even the government’s $70 billion estimate. The decision to fund imports of the three public sector oil companies directly through dollar loans by RBI has effectively changed the current account deficit to a modest surplus for this year, of course at the cost of losing about $80 billion in usable current reserves.

Yet there is still palpable investor nervousness about India. Why? Because it is unclear that the recent rupee appreciation has been purely because of better domestic policy. Currencies of other EM countries with current account deficits have actually appreciated much more because of improved global sentiment. How strongly these policies will support the rupee if global sentiment again turns sour is questionable. Taking out oil imports only opens up a temporary breathing space. And it is slowly sinking in that subsidising banks to market more NRI dollar deposits may not yield very much in net new inflows. The only long-term positive support has come from the proposed banking reforms. By itself, it is not sufficient to allay investor fears. Going back over and over again to the same pool of resources—NRIs and global equity funds—has run into limits. The authorities will have to find other sources of sustainable external financing. Longer they postpone this decision, longer will

India remain hostage to the whims of global sentiment.

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Rangarajan cuts FY14 GDP growth estimate to 5.3 percent - Reuters

(Reuters) - India's economy is expected to grow 5.3 percent this fiscal year, the prime minister's economic advisory panel said on Friday, sharply lower than an earlier estimate of 6.4 percent but higher than last year.

The revised forecast is roughly in line with projections of the RBI and many private economists, who expect Asia's third-largest economy to grow at around 5 percent, the same level as in 2012/2013.

A pick-up in automobile production and exports in August indicated that the manufacturing sector would do better in the second half than the first, said C. Rangarajan, the chairman of the Prime Minister's Economic Advisory Council.

"Taking these factors into account, the forecast growth rate appears reasonable," Rangarajan said.

India's industrial production unexpectedly rebounded in July while consumer inflation cooled last month, offering some relief for policymakers who have been battling the country's worst economic crisis in more than 20 years.

The rupee has fallen nearly 14 percent against the dollar so far this year, hitting a record low last month, as the economy struggles with decade-low growth, a record current account deficit and a steep fiscal shortfall.

The advisory council also said that containing the fiscal deficit within the budgeted target of 4.8 percent of gross domestic product could be a challenge. Finance Minister P. Chidambaram has said the target will not be breached.

"My fiscal deficit estimate is now 5.5 percent, but it all depends on how Chidambaram manages it," said Anjali Verma, chief economist at PhillipCapital. "He can go back to slashing planned spending like last year."

Rangarajan also said the current account deficit could be lower than the $70 billion that the government is targeting if current trends in exports and imports continued, citing data showing the trade deficit had narrowed in August.

However, a large part of the smaller trade gap was due to a $2.25 billion fall in gold imports, which are expected to rebound over the next few months as India's wedding and festival seasons kick in.

India's economy grew 4.4 percent in the three months to June -- the slowest quarterly rate since the global financial crisis -- hurt by a contraction in mining and manufacturing.

The panel said inflation for the current fiscal year was expected to be 5.5 percent, lower than the 6 percent recorded in the last fiscal year.

(Reporting by Manoj Kumar, Rajesh Kumar Singh in New Delhi and Subhadip Sircar in Mumbai, writing by Krishna Das; Editing by Ross Colvin and Kim Coghill)

Growth, deficit problems not structural: RBI chief Rajan - Reuters

(Reuters) - India's slowing economy and its massive current account and fiscal deficits are not structural problems and can be fixed with modest reforms, newly appointed central bank Governor Raghuram Rajan said on Wednesday.
Rajan acknowledged the economy will expand at a pace that will be its slowest in a decade, with annual growth this year likely to be between 5 and 5.5 percent.
In commentary published on the Project Syndicate website, he also drew an analogy between the current bearishness on the country, whose currency has barely recovered from record lows last month, to the fickle loyalties of Indian cricket fans.
"A few years ago, India could do no wrong.... Today, India can do no right," Rajan wrote in the piece.
Referring to the record current account deficit and slowing growth, Rajan said those "can all be fixed by means of modest reforms."
"This is not to say that ambitious reform is not good, or is not warranted to sustain growth for the next decade. But India does not need to become a manufacturing giant overnight to fix its current problems," he wrote.
He said the slowdown in the economy was paradoxically the effect of substantial fiscal and monetary stimulus that its policymakers had injected into its economy in the aftermath of the 2008 financial crisis.
The resulting growth spurt led to inflation, especially because the world did not slide into a second Great Depression, as was originally feared, he said.
"So monetary policy has since remained tight, with high interest rates contributing to slowing investment and consumption."
Economic growth would slow to a 5 to 5.5 percent pace, he said, adding that was "not great, but certainly not bad for what is likely to be a low point in economic performance".
Project Syndicate is a website that brings together commentary from economists.
For the full commentary, see t.co/E57XWxveEq
(Reporting by Vidya Ranganathan; Editing by Kim Coghill)

Factory output likely shrank 0.8 percent in July - Reuters

(Reuters) - India's factory output likely shrank for the third straight month in July, albeit at a slower pace than the month before as production in the country's core industries picked up, a Reuters poll found.
The poll showed output at factories, mines and utilities shrank an annual 0.8 percent, after contracting 2.2 percent in June, according to the median consensus of 22 economists.
"Underlying industrial production momentum is expected to remain weak, despite a slight improvement in the infrastructure index," economists at Barclays said in a note to clients.
Growth in Asia's third-largest economy has slowed to below 5 percent in each of the past three quarters and with the central bank concentrating on propping up the battered rupee currency many economists have slashed GDP forecasts for this fiscal year.
Infrastructure sector output rose 3.1 percent year-on-year in July from 0.01 percent in the previous month, government data showed last week.
The sector is made up of the eight core industries - coal, crude oil, oil refinery, natural gas, steel, cement, electricity and fertilisers - and accounts for 37.9 percent of India's industrial output.
Other data on Thursday is expected to show that consumer inflation probably eased to 9.55 percent year-over-year last month, only just below July's 9.64 percent, as food prices continued to rise, the poll also found.
"A weak rupee and significantly higher food and fuel prices are likely to maintain upward pressure on CPI inflation," wrote Barclays' economists.
The rapidly falling rupee has aggravated price pressures since rising crude oil and gold prices, two of India's most imported items, have swollen the country's already huge import bill.
An exodus of funds from emerging markets, triggered by the U.S. Federal Reserve's hint at paring back its stimulus, has left the Indian rupee suffering more than its peers as it is weighed down by a bloated current account deficit. (Reporting by Yati Himatsingka; Polling by Hari Kishan; Editing by Kim Coghill)

Philippines rising economic power

Indonesia-Philippine Growth Gap Widens as Banks Meet: Economy - Bloomberg

Indonesia faces pressure to add to its most aggressive monetary-tightening cycle since 2008, underscoring a widening divergence in its growth outlook with the Philippines in a reversal of fortunes for the two economies.
Bank Indonesia will probably raise its deposit facility rate tomorrow a fourth time this year, according to seven of 14 economists surveyed by Bloomberg News, with the rest forecasting no change. Analysts see the key reference rate rising as high as 7.5 percent in the first quarter of 2014 after staying at 7 percent this week. The Philippines will hold its benchmark at 3.5 percent the rest of the year, surveys showed. 

 

The split in policy direction highlights the resilience of the Philippines, which won investment-grade ratings and sustained growth of above 7 percent this year while Indonesia battles slowing expansion, a record current-account deficit and the fastest inflation since 2009. The rupiah fell 11 percent this quarter, the worst performer among 24 emerging-market currencies and about seven times the peso’s decline.
“We risk seeing markets punish Bank Indonesia again and hit the rupiah” if the central bank doesn’t raise rates further, said Robert Prior-Wandesforde, a Singapore-based economist at Credit Suisse Group AG. “Indonesia’s economic woes are worsening, while for the Philippines it all looks beautiful, as it is very much in the sweet spot of the growth cycle now.”
The Philippine benchmark stock index has risen almost 7 percent this year, outperforming the 1 percent gain for the Jakarta Composite Index. (JCI)

Reserves Fall

Indonesia raised its deposit rate, also known as Fasbi, eight times and the reference rate six times in 2008 to curb inflation. The central bank unexpectedly increased the benchmark rate during an unscheduled policy review on Aug. 29 after leaving it unchanged on Aug. 15. It also raised the Fasbi rate by half a percentage point to 5.25 percent.
Indonesia sold $1.5 billion of dollar-denominated Islamic bonds yesterday at the highest yield since 2009 as it seeks to bolster its foreign-exchange reserves to support the rupiah. Reserves held near the lowest in almost three years last month, prompting policy makers to also extend a bilateral swap deal with the Bank of Japan valued at $12 billion.
The Indonesian economy expanded 5.8 percent last quarter from a year earlier, the slowest pace in more than two years. In contrast, gross domestic product in the Philippines rose 7.5 percent from a year earlier, matching China’s pace, as President Benigno Aquino boosted spending and investment.
The Philippines is poised to be among the world’s five fastest-growing economies in 2013 and 2014, according to Bloomberg surveys. Indonesian annual growth averaged 5.3 percent from 2001-2010, compared with 4.8 percent for the Philippines.

No Urgency

Bangko Sentral ng Pilipinas sees no urgency to change its policy stance as inflation is forecast to stay within the 3 percent-to-5 percent target this year and next, Governor Amando Tetangco said today. Consumer-price gains eased to 2.1 percent in August from a year earlier, the slowest pace in four years.
“At this point in time, subject to the discussions tomorrow, there seems to be no urgency to modify or alter the stance of monetary policy,” Tetangco told reporters in Kuala Lumpur. “The inflation outlook remains benign.”
Elsewhere today, Australian consumer confidence rose to the highest level since December 2010, a Westpac Banking Corp. and Melbourne Institute survey showed. In South Korea, the jobless rate fell to 3.1 percent in August from 3.2 percent in July.
Germany, Portugal and Russia are scheduled to report inflation data today. Inventories at U.S. wholesalers probably rose in July from a month earlier, a Bloomberg survey showed.

Investment Grade

Bank of Korea and New Zealand will probably hold their benchmark rates tomorrow, according to all economists surveyed by Bloomberg News.
Fitch Ratings and Standard and Poor’s this year awarded the Philippines its first investment-grade scores, while Moody’s Investors Service, which ranks the nation a step below, has said it is reviewing its rating for an upgrade. San Miguel Corp., Ayala Corp. and JG Summit Holdings Inc., among the nation’s biggest companies, are investing in airports and railways.
“Indonesia’s star has been waning,” said Gareth Leather, a London-based Asia economist at Capital Economics Ltd. “In contrast, the economic turnaround of the Philippines has been quite remarkable and along with China, it would be the fastest-growing Asian economy in the next couple of years.”

To contact the reporters on this story: Karl Lester M. Yap in Manila at kyap5@bloomberg.net; Manish Modi in New Delhi at mmodi6@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net

China Factory Output in August Grew at Fastest Pace Since March 2012 - The Wall Street Journal

BEIJING—China's industrial sector showed signs of rebounding more strongly in August, opening space for leaders to focus on overhauls rather than steps to stimulate short-term growth.

Industrial output in August climbed 10.4% year-to-year, up from 9.7% in July and the highest growth rate since March 2012.

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Meanwhile, total social financing, a broad measure of new credit in the economy, came in at 1.6 trillion yuan ($259.4 billion), up sharply from July's 808 billion yuan.

Speaking at a closed-door meeting of executives at the start of the World Economic Forum in Dalian on Tuesday, Premier Li Keqiang said August data showed an improving trend, and that the focus of policy would be on measures to support long-term growth.

"When there's downward pressure on growth, one choice is to adjust economic policy, increase deficits, relax monetary policy. That might have a short-term benefit, but may not be beneficial for the future," he said, according to a transcript of the meeting published on the government's website.

Instead, Mr. Li said the government would focus on structural overhauls, pledging to push ahead with moves to liberalize interest rates, open the capital account and strengthen financial supervision.

"Getting the work on controlling risks right, means it's possible to accelerate financial reform," he said.

Economists said stronger industrial output signaled an end to the slide in growth seen in the first half of the year.

"Overall, these data are very strong," said Ma Xiaoping, who covers the Chinese economy at HSBC. "Growth in the third and fourth quarters will sustain a modest recovery."

Humming factory-production lines add to confidence that China's government will hit its 7.5% gross-domestic-product growth target for the year, after a slide in growth in the second quarter to 7.5% year-to-year from 7.7% in the first raised fears of a rare miss.

Still, with a fresh surge in credit helping support the stabilization, some economists doubted how long it could be sustained.

The ratio of corporate and household debt to GDP rose to 170% at the end of 2012 from around 120% in 2008, a sharp increase that raises fears of excess leverage in China's firms and instability in the financial system.

In June, the central bank, aiming to choke off reckless lending, engineered a credit crunch that alarmed markets.

Also raising concerns: The acceleration in factory output appeared tilted toward heavy industry and investment.

"Stronger data over the last couple of months have settled nerves about a possible hard landing, but there are strong echoes of the turnaround in 2009," said Mark Williams, China economist at Capital Economics. "The economy is once again being propelled, unsustainably, by state-led investment."

Meanwhile, China's labor markets also appeared to be stabilizing.

A survey of 4,219 employers by Manpower Group found the share of those planning to increase headcount in the fourth quarter edged up to 16%, from 14% in the third quarter. The share planning to decrease headcount stayed flat at 2%.

Asian markets were cheered by the data on Tuesday. In Hong Kong, the China-dominated Hang Seng Index ended the day up 0.99%. On the mainland, stocks in Shanghai rose 1.2%, extending Monday's gains.

The sharp increase in credit reflected growth in nontraditional lending, with bankers' acceptance bills surging to 304 billion yuan, after contracting in June and July.

"If regulators are strict in controlling off-balance-sheet lending, the increase in credit will be difficult to sustain," said Li Wei, China economist at Standard Chartered Bank.

The tilt toward capital spending was evident in fixed-asset investment, which advanced to 20.3% year-to-year growth in the first eight months of the year, up from 20.1% in the first seven months.

Stronger infrastructure spending by the government was a factor, with spending on highways accelerating.

Crude steel output rose 12.8% from a year earlier, after 6.2% growth in July. "Steel prices had rebounded by July, with 86 major steel mills posting strong profit levels," the China Iron and Steel Association said in a report last week.

Despite a surge in sales in the first half, investment in new property remained lackluster, with new residential floor area under construction up just 3.3% in the first eight months of the year as developers focused on clearing inventory rather than breaking ground on new projects.

Domestic consumption, which the government wants to play a larger role in driving growth, showed more modest improvements. Growth in retail sales edged up to 13.4% year-to-year growth in August, from 13.2% in July. Car sales remained stable, up 10% after July's 9.9% improvement, according to the industry association.

China's ruling Communist Party is expected to weigh far-reaching changes to areas including interest rates and the tax system at a meeting of senior leaders in November.

The timing of that meeting reduces the chances of a repeat of June's crackdown on reckless lending.

"Growth and financial stability are still highly valued for new leaders in the run-up," said Bank of America Merrill Lynch economist Lu Ting. "It's unlikely for [Premier Li] to intentionally destabilize the financial system in the near term."

—Grace Zhu, Chuin-Wei Yap and Liyan Qi contributed to this article.

Write to Tom Orlik at Thomas.orlik@wsj.com and William Kazer at william.kazer@wsj.com

August inflation likely at six-month high on fuel prices - Reuters

By Rahul Karunakar

BANGALORE | Wed Sep 11, 2013 8:56am IST

BANGALORE (Reuters) - Inflation likely edged up to a sixth-month high in August, driven by higher food prices and as the battered rupee made key imports such as fuel costlier, a Reuters poll found.Wholesale prices, India's key inflation measure, probably rose an annual 5.80 percent last month from the same period a year earlier, the poll of 20 economists showed, just above July's 5.79 percent which was the highest since February.
If realised, that consensus would be above the Reserve Bank of India's perceived comfort level of 5 percent for the second month, adding to the pressure on the central bank which is already fighting a weak currency and slowing economic growth.
"The rise would be largely because of an increase in fuel costs, resulting from rising crude prices in the international market coupled with a considerable drop in the rupee," said Shakti Satapathy, a fixed income strategist at AK Capital Services.
The rupee plunged more than 20 percent at one point against the dollar this year, hitting record lows almost daily in August, making it the worst performer among its emerging market peers. It has since clawed back some ground but most strategists in another Reuters poll do not expect much of a recovery over the coming year.
That and a pick up in prices of crude oil last month pushed state-run oil marketing firms to hike retail prices of diesel and petrol, weighing on food inflation.
"An increase in transportation costs and shortages in supply of some key perishable items such as vegetables and onions probably pushed food prices higher," said Rupa Rege Nitsure, chief economist at Bank of Baroda.
Food prices increased for a third month in a row through July, reflecting a more than 20 percent rise in vegetable and onion prices during that period.
Any further acceleration in inflation will only add to the declining popularity of the Congress-led government ahead of elections early next year.
A separate Reuters poll showed consumer inflation - scheduled to release on Thursday - probably eased to 9.55 percent year-over-over last month, only just below July's 9.64 percent.
(Polling by Hari Kishan; Editing by Kim Coghill)

August trade deficit shrinks as exports rise - Source: Reuters

Tue, Sep 10 15:17 PM IST
NEW DELHI (Reuters) - India's trade deficit narrowed to $10.9 billion in August, helped by a double digit rise in merchandise exports, provisional government data showed on Tuesday, offering some respite for the troubled rupee currency.
Merchandise exports rose 12.97 percent in August to $26.14 billion from a year earlier. Imports fell 0.68 percent year-on-year to $37.05 billion.
"We are closing the trade gap," Trade Minister Anand Sharma told reporters at a press conference.
The rupee has been hammered down in a sell-off in emerging currencies as foreign investors readjust their exposure to markets like India, anticipating higher interest rates in the United States.
The rupee hit an all-time low of 68.85 against the dollar last month on concerns over New Delhi's ability to fund its bloated trade deficit.
(Reporting by Rajesh Kumar Singh and Manoj Kumar; editing by Matthias Williams)

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Insight: Why Indian exports need more than a cheap rupee - Source: Reuters

By Manoj Kumar and Frank Jack Daniel




NEW DELHI
Mon Sep 9, 2013 5:33pm EDT



NEW DELHI (Reuters) - The upside of the Indian rupee's slump is an export boom that sets the economy straight, right? Wrong.



Prime Minister Manmohan Singh echoed classical economic theory when he told parliament last month that the plunging rupee, which has lost 18 percent against the dollar since selling pressure picked up in May, would spur exports and discourage imports.



Some industries are bracing for a depreciation bonanza and exports are already climbing. They rose at a double-digit pace over a year earlier in the last two months, but for a hosts of reasons, Asia's third-largest economy is unlikely to see the sort of sustained export-led revival that nursed the Tiger economies to the east back to health after the 1997 crisis decimated their currencies.



A multitude of stumbling blocks mean that exporters, from farmers to factory owners, are ill-placed to reap the benefits of the rupee's slide: bad news for policymakers and investors looking for a silver lining in India's worst economic slump in 20 years. These hurdles range from erratic taxes throttling special export zones to a cash crunch and clogged ports.



"Notwithstanding the rupee depreciation, relatively high inflation and infrastructural deficits continue to raise the costs of production and constrain the ramping-up of exports," said Aditi Nayar, an economist at the rating agency ICRA, an arm of the Credit Rating Agency Moody's Investors Service.



"With only a moderate improvement in demand conditions in key destinations such as the U.S. and Europe over the last six months, foreign buyers will attempt to squeeze the margins being earned by Indian exporters," she said.



To make things worse, a dependence on imports for 80 percent of India's oil needs plus a growing chunk of the coal keeping the lights on will limit the cheaper rupee's ability to reduce the world's third-largest current account deficit.



Imports weigh heavily on Indian exporters too.



Take the country's two main exports, petrochemical products and jewelry, which together accounted for nearly a quarter of India's $450 billion overseas sales last year. They are mostly made with oil and gold, India's top two imports, which also cost more now because of the rupee's diminished purchasing power.



Manufacturing suffers for the same reason: parts used in Indian car plants and factories assembling electronics largely come from overseas, pressuring margins when the rupee drops.



Hyundai Motor India Ltd, the country's leading car exporter, is bracing for some price pain. Its finance and corporate affairs director, R. Sethuraman, told Reuters the rupee would not help exports for long, if at all.



"Rupee depreciation has a limited advantage, and that too only in the short term. Continuous depreciation will have a reverse impact on pricing in the export market and an adverse impact on input costs," he said.



India's Motor City of Chennai, near the country's southern tip, is an example of the stumbling blocks preventing exporters from exploiting rupee weakness. The city is plagued by power cuts, so manufacturers rely on expensive onsite generation. Chennai port is so congested that trucks often spend three days driving just 30 km (19 miles) from the factory district to the port. A long-mooted expressway is delayed.



Chennai's story is repeated across India. The boom during the last decade was not matched by increased infrastructure, so traders struggle to get their products to cargo ships on time. Blackouts raise everybody's costs.



After authorities shut down mines two years ago largely to clamp down on illegal mining, iron ore exports fell from $6 billion to almost nothing. India's agricultural exports, swelled by a bumper monsoon harvest, are limited by a global glut, quality issues and government price restrictions.



"We are sitting on a mountain of sugar. We can export 4-5 million tonnes, but we are struggling to sign deals for a few thousand tonnes," said trader Kamal Jain. "There has been a drop in currencies of other countries as well, like Brazil."



LITTLE ITALY, VERY LITTLE



Perhaps most damaging is the government's thirst for revenue. The need for income to meet tough fiscal targets is choking Special Economic Zones (SEZs) set up in 2005 to copy the success of China's economic rise.



Orient Craft thought big when it bought 400 acres of farmland in an up-and-coming industrial town close to New Delhi airport and a railway link to the west coast. The vision was to make it north India's biggest apparel export zone, modeled on Italy's traditional textile capital, Prato.



As the global economy boomed in 2007, the aim to attract a billion dollars of investment and create 20,000 jobs in a "Fashion Village", seemed reasonable. Dupont was interested, Commercial Director A.K. Jain said.



"We started the Fashion Village apparel SEZ thinking it would become a mini-Italy," said Jain.



Orient Craft had the land designated as an SEZ, built a 13-km boundary wall and a warehouse, laid concrete roads and planted trees. In all, it invested more than $30 million.



What happened next helps illustrate the missteps of a government that businesses say translates into lost opportunity and wasted capital.



Backed by a 10-year tax holiday, exports from the zones soared 13 times over six years to reach $66 billion in 2010/11, about 17 percent of India's $384 billion of exports that year.



But in 2011, the government slapped an 18.5 percent Minimum Acceptance Tax (MAT) on future profits - in effect, killing the goose that laid the golden eggs, exporters say.



The rapid exports growth from SEZs slowed to a crawl. New investment tailed off, data from polling group Ipsos shows.



Orient Craft threw in the towel two weeks ago, surrendering its SEZ license. It was not alone: just 173 of 576 approved SEZs are operating today. Close to 60 developers, including Reliance Industries, a major exporter, have given up licenses.



In February, an Ipsos survey of 400 companies operating in SEZs found 62 percent of respondents had suspended plans to invest further in the zones, while 75 percent thought the tax hurt India's reputation.



Jain said the zones were now economically unviable for manufacturers, strong words from someone who is deputy chairman of an industry chamber promoting exports from SEZs.



"No promoter will ever think or advise the next generation to invest in SEZs or any such project for many years," Jain said.



EXPORT PRIORITY?



Exporters that do not depend so much on imports are benefitting from the weak rupee. That includes Orient Craft; its 15 factories in the Delhi area have the fullest order book in years.



Textiles and pharmaceuticals, which exported $33 billion and $15 billion respectively in 2011/12, are set for a boost.



Service industries, including IT outsourcing, which account for around one-third of India's exports, might also experience gains. Reflecting that, India's IT stock index rose 36 percent from the start of May through Friday.



Some players though, including IT solutions company Mindtree Ltd, see problems ahead.



"Our largest cost is people cost, and with the ... rupee the way it's going, inflation will go out of control and obviously salary costs will also go out of control," said Rostow Ravanan, Mindtree's chief financial officer.



For others, there is a sense of opportunity lost. In raising rates to try to stem the currency rout, the central bank made it harder for companies to expand quickly to meet new orders.



To help, the finance ministry last month increased a subsidy on interest rates on loans for exporters, but Naina Lal Kidwai, president of the Federation of Indian Chambers of Commerce and Industry, said high taxes are the main export drag.



Some relief may be coming there, too. The trade ministry is mulling a lower tax on iron ore exports. And the government's top revenue official said India will soon clarify rules to help resolve dozens of litigation cases that hit IT multinationals in the past year as taxmen scrambled to meet the government's fiscal deficit target. IT companies say these tax battles had weighed on their growth.



"Priority sector lending" - cheap interest rates - are also being discussed for exporters, a senior official at the financial ministry said.



That, exporters say, would help more than the rupee drop.



"It is possible for (goods) exports to touch $350 billion this year, surpassing the government estimate by about $25 billion if the government provides sufficient credit and marketing support," said Rafeeq Ahmed, head of an exporters' lobby group.



(Additional reporting by Rajesh Kumar Singh, Krishna Das and Matthias Williams in NEW DELHI, by Rajendra Jadhav and Siddesh Mayenkar in MUMBAI, by Harichandan Arakali in BANGALORE and by Anupama Chandrasekaran in CHENNAI; Editing by John Chalmers and Neil Fullick)

Source: Reuters

Raghuram hits first-ball sixer; looks set to bowl mkts over - Firstpost.com

Raghuram Rajan has started his innings with a bang. On the very first day after taking over from Duvvuri Subbarao as Governor of the Reserve Bank of India (RBI), he stamped his authority on the institution by announcing several measures to modernise and liberalise the Indian banking system even while clearing the cobwebs of the past.
At the same time, he promised to defend the value of the rupee, both internally and externally. ( Read the full text of his speech here )
The announcements, if followed up with efficient and quick execution, have the potential to rejuvenate the system and erase the sense of deafeatism that characterised the last days of Subbarao, which led to unending conflicts between the central bank and the finance ministry.
Unveiling his initial agenda for change, Rajan called for steps to internationalise the rupee, liberalise branch banking, open up banking to more entrants, reduce the pre-emption of bank resources for investment in government securities, rethink and, if possible reduce, the scope and target of mandated (or priority sector) lending, allow banks to borrow more from abroad to help reduce the current account deficit, and protect the savings of the ordinary bank customer by offering consumer price-linked inflation indexed certificates by November.
He emphasised that the changes proposed may be “risky” but “as India develops, not changing is even riskier. We have to keep what is good about our system, of which there is a tremendous amount, even while acting differently where warranted."
In a clear signal that the recent depredations of the rupee have not reduced the central bank to defensive thinking, Rajan said that the RBI will allow exporters and importers more leeway in cancelling and rebooking forward cover, effectively rolling back some of the restrictive measures introduced recently to reduce speculation in the rupee.
Given the bitterness recently seen between North Block and Mint Street in the final year of Subbarao’s tenure, Rajan starts with a clear advantage in terms of better relations with the finance ministry, of which he was the Chief Economic Advisor from August last year. His rapport with Chidambaram will help him send a strong message of positivity for the markets.
But challenges remain. Here are some of the key implications of what Rajan said, and the tensions that he will have to negotiate in the months ahead as the economy grapples with a slowdown.
The rupee: Rajan said: “The primary role of the central bank…is monetary stability, that is, to sustain confidence in the value of the country’s money. Ultimately, this means low and stable expectations of inflation, whether that inflation stems from domestic sources or from changes in the value of the currency, from supply constraints or demand pressures.”
The implication: If Rajan wants to maintain the purchasing power of the rupee, he will have to bring inflation down. To maintain the rupee’s internal value, he may have to hold rates, if not raise them. Since he said that he will fight for the rupee even if the inflation is the result of demand or supply pressures, the hint is about a strong line on interest rates.
Liberalisation of banking: Rajan said: “The Indian public would benefit from more competition between banks, and banks would benefit from more freedom in decision-making. The RBI will shortly issue the necessary circular to completely free bank branching for domestic scheduled commercial banks in every part of the country.”
Implication: The answer will lie in the fine print. While banks may be free to set up branches anywhere everywhere, Rajan also talked about more financial inclusion. One can expect all banks to rush to set up more branches in tier-2 to tier-6 towns, and also in some metros; pushing them to rural areas will be tougher. This policy is good, but the financial inclusion bit will be tough to achieve. Given the government’s commitment to direct cash transfers, some pressures will come from the finance ministry to ensure more rural penetration.
New banks and competition: Rajan said: “The RBI will give out new bank licences as soon as consistent with the highest standards of transparency and diligence…We will not stop with these licences. We will pursue creative ideas of the RBI staff and come up with a detailed roadmap of the necessary reforms and regulations for freeing entry and making the licensing process more frequent after we get comments from stakeholders.”
Implication: Rajan clearly does not want to issue licences only in dribs and drabs. In this, he will have the full support of the finance ministry even while facing some resistance from his own staff, who are wary about freeing up entry for banks, especially new banks set up by corporates. But Rajan will probably push it through, since he is so convinced about it. Over the next three to four years, competition from banks will bring better services and push banking charges down. Currently banking is a very high margin business, especially for smart private sector banks.
Freeing bank resources: Rajan said: “Our banks have a number of obligations that pre-empt lending, and in fact, allow what Dr Rakesh Mohan, an illustrious former deputy-governor, called ‘lazy banking’. One of the mandates for the RBI…is to ensure the flow of credit to the productive sectors of the economy. In this context, we need to reduce the requirement for banks to invest in government securities in a calibrated way, to what is strictly needed from a prudential perspective.”
Implication: It is possible for the RBI to cut pre-emption in the form of minimum investments in government securities (currently 23 percent of liabilities), but he can’t do it too fast given his commitment to fund government deficits and keep rates as low as possible. If banks are free to lend less to government, the latter will pay more for money. But over time companies will find cheaper loans. There will be pressure from the finmin to go slow here.
Priority sector lending: The new governor said: “We also subject our banks to a variety of priority sector lending requirements. I believe there is a role for such a mandate in a developing country it is useful to nudge banks into areas they would otherwise not venture into. But that mandate should adjust to the needs of the economy, and should be executed in the most efficient way possible. Let us remember that the goal is greater financial access in all parts of the country, rather than meeting bureaucratic norms.”
Implication: Banks will jump with joy if this happens. But politicians are unlikely to be happy with this in an election year, especially if money to favoured sectors such as exports, agriculture and small and medium enterprises is curtailed. A committee will look into this, but it will take time to implement.
Deepening the markets: Rajan surprised everyone by announcing liberalisation in the forward dollar market. He said:� “Presently, exporters are permitted to rebook cancelled forward exchange contracts to the extent of 25 percent of the value of cancelled contracts. This facility is not available for importers. To enable exporters/importers greater flexibility in their risk management, we will (1) enhance the limit available to exporters to 50 per cent; and (2) allow a similar facility to importers to the extent of 25 percent.” He also announced steps to develop the government bond markets by introducing cash settled 10 year interest rate future contracts; later, the RBI may allow the introduction of interest rate futures on overnight interest rates.
Implication: Both measures are signs of confidence that India can handle a certain amount of speculation even while giving both buyers and sellers of dollars a fair playing field to discover the right price. The move may introduce short-term volatility, but it will build confidence in investors that India is not afraid to let the markets play a larger role in more areas.
Taking the rupee global: The boldest idea Rajan threw on the table was internationalisation of the rupee. He said: “This might be a strange time to talk about rupee internationalisation, but we have to think beyond the next few months. As our trade expands, we will push for more settlement in rupees. This will also mean that we will have to open up our financial markets more for those who receive rupees to invest it back in. We intend to continue the path of steady liberalisation.”
Implication: Opening up the market for rupee investment is the only way to make foreigners accept payment for imports in rupees. This will call for opening up more areas for foreign investment, and fewer roadblocks. This marks a shift from the old mindset where we favoured dollar investment over rupee; now foreigners can use the rupee they earn on exports to buy Indian products and assets. Great move. But one should not expect easy acceptance for the rupee. Before foreigners accept rupees in payment, the value of the rupee must seem attractive. That is some time away.
Funding the CAD: While taking the long view, Rajan also talked of raising loan funds to finance the short-term current account deficit (CAD). He said banks which raise dollar deposits (FCNR-B) with over three-year tenures will be allowed to swap the dollars for rupees at concessional rates of just 3.5 percent. This means banks will be able to raise more resources with lower risk of exchange losses.
Banks will also be offered another swap at 1 percent below current market swap rates on dollar borrowings upto 100 percent of their unimpaired tier-1 capital. This is a doubling of the current limit.
Implication: If many banks take up this offer, which is open only till 30 November, foreign exchange inflows will increase in the short-run. The finance ministry will be fully behind this initiative.

Inflation-indexed bonds: “Households have expressed a desire to be protected against CPI inflation. Together with the government, we will issue Inflation Indexed Savings Certificates linked to the CPI New Index to retail investors by end- November 2013,” Rajan said.
Implication: Given the need to cut fiscal deficits by raising diesel and other prices, inflation is bound to rise in the short-term. Rajan, by offering bonds linked to the consumer price index, now ruling close to double-digits, is offering households a good hedge. If the certificate is well-structured, some of the lure of gold could reduce. But the primary benefit is the restoration of consumer confidence in the long-term value of his savings.
Debt recovery: Rajan said: “Promoters do not have a divine right to stay in charge regardless of how badly they mismanage an enterprise, nor do they have the right to use the banking system to recapitalise their failed ventures. Most immediately, we need to accelerate the working of Debt Recovery Tribunals and Asset Reconstruction Companies.”
Implication: The RBI will support banks in reclaiming their loans, if needed be by changing managements or selling the collateral. This will ensure that Kingfishers are spotted early and their managements sent packing. However, the political class and even crony capitalists will be unhappy. So far they have been using political clout to ensure banks lend them lots of money, and when loans go bad, they get even more favourable terms of repayment. They have been put on notice.
On Thursday, one can expect the markets to open on a happy note, and the rupee should start perking up at least in the short run.
The writer is editor-in-chief, digital and publishing, Network18 Group -Source: MONEYCONTROL.COM

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