Reserve Bank of India Likely to Reduce Rates

By Dr Suvrokamal Dutta

With inflation hovering in the region of 4-4.5 per cent, it has come into the notice of The India Street that there is a consensus among bankers that Reserve Bank of India (RBI) would ease up on tightening monetary policy. As a matter of fact, ICICI Bank CEO K.V. Kamath had expected rates to soften.

Interestingly, RBIs quarterly review of monetary policy announced on July 31, left the key Bank Rate and repo rates unchanged, but once again increased the cash reserve ratio (CRR) by another 50 basis points to 7 per cent and erased the Rs 3,000-crore cap on daily reverse repos under RBIs liquidity adjustment facility.

Taking a closer look at the RBI development for the last one-year or so this is the fourth time in eight months that the RBI has raised the CRR, in all by 200 basis points. The main aim, it says, is to maintain appropriate liquidity. If experts are to be believed, the latest increase will drain Rs 16,000 crore out of the banking system.

You may ask: What will be the fallout of RBIs measures this time? The good news is that the CRR hike is unlikely to translate into higher interest rates. In terms of statistic, there is an estimated Rs 40,000-crore excess liquidity in the system. Taking this into account, I have no doubt in my mind that it will certainly put an end to the banking sectors plans of minimizing lending rates as few banks had already started to do.

Few banks such as Bank of India and Bank of Baroda have already minimized their rates on one-year deposits by 50 basis points to 9 per cent. In my opinion, for the middle class of India, which has already been hit by the steady increase in interest rates on home and consumer loans over the last year, this is a double whammy. First and foremost, the CRR hike almost certainly rules out any immediate softening of interest rates. In addition, they will get lower returns on their bank deposits.

”The Reserve Bank of India is keen on ensuring that excess liquidity in the banking system does not push the inflation rate upwards once again,” pointed out Devendra Barua, economist based at India. According to sources, RBI is likely to intervene actively in the forex market in the coming days to keep the rupee stable at 40-40.50 levels to give some respite to exporters.

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Top 5 India Banks ranked by Online Traffic

In conjunction with www.compete.com, The India Street has compiled the online statistics for India’s top Banks. In terms of Online usage in visits, ICICI Bank clearly leads the pack while Citibank is close behind. Noticeably, State Bank of India’s traffic has decreased 21% year over year while ICICI Bank has risen an astounding 76.9% year over year.

It’s interesting to note that banks like Canara Bank, Bank of Boroda, and Punjab National Bank that have some of the highest deposits, don’t even come close to making the list.

Timeframe: 07/2006 to 07/2007 (Click image to enlarge)

Date: 07/2007	People	Month Δ	Year Δ	What is this?
statebankofindia.com	5,368	26.1%	-21.2%	The number of people visiting a site.*
hdfcbank.com	16,385	20.1%	34.8%
citibank.co.in	44,463	-4.7%	22.2%
standardchartered.com	8,672	70.8%	54.4%
icicibank.com	64,890	62.6%	76.9%
*People Counts are also known as unique visitors - they only count a person once no matter how many times they visit a site in a given month. People Counts are typically used to determine how popular a site is.

In terms of daily growth Standard Chartered is really make a move, while the remainder are gaining users at slower pace. A small mention, it appears that over the last month, Citibank’s online growth is actual negative.

Date: 08/14/2007	What is this?
hdfcbank.com	Velocity reports the relative change in daily Attention. Velocity is used to determine the relative growth of a domain over a particular timeframe or compared to other sites. Velocity is an effective way to measure the impact of planned (or unplanned) events, such as new advertising campaigns, product/service launches or general site growth. Simply choose an event date as the starting point to see how it has affected a site's attention over time. See Full Description
citibank.co.in
standardchartered.com
icicibank.com

Some other key findings of the study of India banks, pertaining to the period FY06, are as follows:

• Total assets for the 82 Scheduled Commercial Banks (SCB)s stood at Rs 27,785,739 mn in FY06, of which PSBs had the largest share of 72.5%, followed by Private Sector Banks with 20.2% and Foreign Banks at 7.3%.

• The total income for the 82 banks stood at Rs 2,215,280 mn in FY06, of which the Public Sector Banks held the highest share of 72.7%, Private Sector Banks at 19.5% followed by 7.8% for the Foreign Banks.

• In terms of break-up of total income, non-interest income was the highest for Foreign Banks at 31%, followed by Private Sector Banks at 19.8%, thus highlighting the contribution of valueadded services these banks offer. For Public Sector Banks, non-interest income was 15.3%.

• The net profit for the 82 banks together stood at Rs 248,281.5 mn for FY06. The top ten banks (6 PSBs, 2 Private Sector and 2 Foreign Banks), based on the net profit classification, accounted for nearly 58.5% of the total net profit of all the 82 banks.

• The overall deposit growth was at 18.2% y-o-y for FY06, with Private Sector Banks posting the strongest growth at 39.2%, followed by Foreign Banks at 31.7%. For Public Sector Banks, total deposits grew at about 13%.

• Total Advances of all 82 banks grew by 32% year-on-year; Private Sector banks again witnessed the strongest growth at 44%, followed by a growth of 30.7% for PSBs and 30% for Foreign Banks.

• The ratio of operating expense to total expense for the PSBs was 26.5%, for Private Sector Banks was 28.4%, while for Foreign Banks the ratio was nearly one-third of their total expenses in FY06.

The Indian banking sector is poised for healthy growth in the forthcoming years. D&B India is confident that India’s Top Banks 2007 will provide the right platform to enable the banks to prepare for the upcoming opportunities. We will continue to track the growth of this sector and enhance this publication as an authoritative reference guide.

• Source for key findings Dunn and Bradstreet India

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Overview of India financial system

By Vipin Agnihotri

Financial intermediation in the organized sector of India is conducted by a wide array of institutions functioning under the overall surveillance of the Reserve Bank of India (RBI).

Reserve Bank of India-

The Reserve Bank of India as the central banking authority is at the apex of the Indian financial system. Established in 1935, it became a government owned institution from 1949 under the Reserve Bank Act of 1948. Under this Act, the Indian government is empowered to issue directions to RBI, after consulting with RBI’s governor.

RBI performs the following traditional functions of the central banking authority:

• It formulates and implements monetary and credit policies

• It functions as the banker’s bank

• It manages the liquidity reserves of the credit institutions and supervises their operations

• It plays an important role in maintaining the exchange value of the rupee

• It controls payments and receipts for international trade and regulates other foreign exchange transactions.

In addition to the traditional functions of the central banking authority, RBI performs number of functions aimed at developing the Indian financial system.

• It seeks to integrate the unorganized financial sector with the organized financial sector

• It encourages the extension of the commercial banking system in the rural areas

• It influences the allocation of credit

• It supports innovation in cooperative banks

• It promotes the development of new institutions (for example, it set up the Unit Trust of India, the Industrial Development Bank of India and the National bank for Agriculture and Rural development)

Commercial banks-

After RBI, commercial banks represent the most important institutions in the financial system of India. Public sector commercial banks dominate the commercial banking scene in the country. The changes in banking structure and controls in the last few years have resulted in

• Wider geographical spread and deeper penetration of rural areas

• Higher mobilization of deposits

• Reallocation of bank credit policy to priority activities

• Lower operational autonomy for bank management

One of the major activities of the commercial banks is to provide working capital advance to industry. “In recent years, RBI has been monitoring closely the credit extended by commercial banks to industry, which traditionally relied heavily on commercial banks and were the primary beneficiaries of the banking system,” pointed out Shalabh Saxena, business journalist based at India.

Number of committees – the Dehejia Committee, the Tandon Committee has been set up to look into the problem of working capital credit and make suggestions. The major recommendations of these committees have been two fold: reduction in bank credit to industry and inculcation of a greater sense of financial discipline in industrial borrowers. By and large, RBI has accepted the recommendations of these committees.

A major problem faced by commercial banks in India is that their profitability is low. This is largely because of over staffing, inefficient procedures, subsidized lending to the priority sector and high incidence of bad debts.

RBI working overtime to minimize liquidity in the face of relentless forex inflows

It has come into the notice that the Reserve Bank of India (RBI) and the government are working on new methods to minimize liquidity in the face of relentless forex inflows without only relying on instruments such as the cash reserve ratio (CRR).

In its recent currency and finance report, released last week, RBI said there is a requirement to explore further instruments or options for liquidity management, particularly in the context of a move towards fuller capital account convertibility.

“The government and RBI are looking at new options to counter liquidity,” pointed out a official at RBI. He also added that RBI would prefer using a ‘series of approaches with existing instruments’ without shutting off any one option completely, the source said.

Theoretically speaking, RBI has number of options to take into account and it can use a combination of measures to tackle forex inflows and liquidity. According to experts, these include diversifying a part of its foreign assets into non-sovereign assets like China has done, enhancing substantially the incremental CRR, go for a freer float of the rupee or even look at a disguised Tobin Tax to discourage the inflow of short-term hot money. It is worthwhile remembering that Tobin Tax is a levy on currency trades across borders to discourage short-term speculation in currencies.

The pivotal factor here is that last month; China’s new state investment agency invested $3 billion of its forex assets in US private equity firm The Blackstone Group. If experts are to be believed, these are unusual times, such unusual options can be looked at. But fact remains that such a proposal is fraught with risk since sovereign funds parked in such vehicles would expose RBI not only to currency risks but also to equity risk. “The list of entities that RBI can invest in can be expanded to accommodate not just sovereign debt but triple-A securities,” pointed out Kadar Khan, noted analyst based at India.

In my opinion, RBI can look at hiking CRR on incremental flows, rather than total deposits, as suggested by SS Tarapore, chairman of the committee on fuller capital account convertibility. In an ideal scenario, incremental CRR prescribes a reserve ratio based on the extent of growth in deposits. “The impact of this is in stemming excess liquidity in banks showing high growth without penalising the entire system,” pointed out official at finance ministry.

While there is no denying the fact that commercial banks are not needed to presently maintain incremental CRR, in the past they were required to maintain a 10% incremental CRR on non-resident deposits to reduce the liquidity created by flow of funds from NRIs. “The option of using dollar swaps to manage liquidity becomes limited as the rupee gains strength. RBI will not close the CRR option. It will look at augmenting its existing instruments to tackle inflows and liquidity, “ pointed out highly placed source at RBI. For instance, a slew of auctions will be conducted this week. This normally does not happen often.

Besides, with a 60% appreciation in the ECB limit from $14 billion to $22 billion in a single year, it significantly contributed to forex inflows. Whatever the options are, the time is now ripe for RBI to experiment, given that inflation is under control at 4.68 percent.

Source: The Economic Times.

What's next for Stock Market?

By Vipin Agnihotri

No doubt, Bombay Stock Exchange (BSE) Sensex is making valiant attempts to decisively cross the 14,697 peak it reached on February 8 but has not been able to ever since.

In theory, the NSE Nifty, which is not a free-float index such as the Sensex, has managed to cross its previous peak. “Two large IPOs, DLF and ICICI Bank, will divert part of the funds that could otherwise have gone into the secondary market,” pointed out Rangita Chatterjee, stock market expert.

Last week, the Sensex failed to get its chin above the 14,697 bar and dropped back to end the week at 14,003, down 506 points. The biggest contributors were Reliance Industries (with 98 of those 506 points), Larsen & Toubro (47) and ITC (44). Investors are wondering which way the breakout will happen.

As far as money flow into the stock market is concerned, it has come into the notice of The India Street that Life Insurance Corporation of India is planning to invest Rs 115,000 crore in equity and corporate debt.

In addition, pension funds will be allowed to invest partly in equity. Furthermore, private sector mutual funds will get access to surplus PSU funds. “The Reserve Bank of India is releasing $5 billion of its over $200 billion forex kitty for investment in infrastructure. As India’s economy grows and the equity cult spreads, more money will keep pouring into the stock market,” pointed out N Yadav, business journalist based at India.

But experts believe that there are reasons to being cautious in the short term. First and foremost, public governance is abysmal, and getting worse as elections approach. Quite a number of times it is downright foolish as in the quest to squeeze tax resources with not a thought on how poorly those already raised are being utilized.

In my opinion, the fringe benefit tax on sweat equity is one example. Another one is the levy of a 12.3 per cent service tax on sale of tickets for international flights out of India. The result: ticketing business has gone to other countries.

“The most valuable state-owned company is ONGC, which has been headless ever since the Government refused an extension to its former chairman who made the firm hugely profitable,” pointed out Ramesh G, CEO of India research.

It is worthwhile remembering that the man nominated by an internal committee, RS Sharma, was refused the post by the Prime Minister’s Office and now, funnily, has been re-nominated! Similarly, State Bank of India, which has an unbelievable uninterrupted dividend history of over 150 years, is valued at $17 billion, less than private sector ICICI Bank and far lower than ICBC of China, which is valued at over $230 billion.

To see how the private sector extracts value, it is of utmost importance that one observes the $1 billion valuation sought to be extracted by Reliance Communication by hiving off its tower business into a separate entity.

The present stock of 110,000 towers is expected by the telecom regulator to grow to 350,000 by 2010. Reliance Communication’s valuation has shot up.

On the other hand, that of public sector Bharat Petroleum, Hindustan Petroleum and Indian Oil Corporation are languishing, because of the burden of subsidy forced upon them. Its not that these managements cannot extract value but, sadly, they are not allowed to. All in all, it’s better, therefore, to await a better opportunity to invest.

Indian rupee to be traded in the futures market, dealers apprehensive

By Vipin Agnihotri

Lucknow, India: It has come into the notice of The India Street that for the first time in the history, the Indian rupee is going to be traded in the futures market. According to sources, trading is scheduled to start on June 7 on the Dubai Gold and Commodity Exchange (DGCX).

It is worth mentioning in this regard that while DGCX chairman Colin Griffith announced the launch of the world's very first Indian Rupee currency contract, some of the dealers in India have expressed apprehension to The India Street that the move might enhance volatility in the currency.

The pivotal factor here is that, as the transaction will take place in Dubai, Reserve Bank of India cannot do anything. Apart from that, there would not be any settlement in Indian rupee in the transaction. “RBI was unable to object to the move though it could affect the rupee's market value,” pointed out M Subri, a senior Forex dealer.

At the present juncture, rupee trades in non-deliverable forward market in Singapore, Hong Kong and Dubai and what’s more only big players participate. “While Rupee will be the underlying currency on DGCX, the transaction will be in dollar terms and trading will be open to everyone,” pointed out Rahul Bhandari, noted Indian economist.

Now, as Reserve Bank of India has allowed an individual to remit $100,000 a year overseas, a requirement is being felt for an international futures market. The interesting aspect in the whole issue is that the value of rupee in the global futures market identical to DGCX would be influenced by its value in the domestic market. In the domestic forward market, a transaction is settled with the physical exchange of rupee.

According to experts, at DGCX, each Indian rupee contract would represent Rs 20 lakh. Prices will be quoted in US cents per Rs 100, with a minimum price fluctuation of $ 0.000001 per rupee. Furthermore, at any point in time DGCX will list the trading price for the present and next two calendar months, in addition to the next three calendar quarterly months.

Home loan rates to stay hard for some more time

By Vipin Agnihotri

Home loan borrowers in India have to wait for a bit before they see interest rates softening up. Home loan experts while speaking to The India Street has said that this can only happen if the Reserve Bank of India (RBI) relaxes few of the fiscal curbs it has imposed on banks.

With loans no longer affordable in nature, and the ongoing correction in real estate prices, there is a possibility that the demand for home loans can slow down marginally. It is worth mentioning in this regard that the home loan industry grew by 25 per cent in 2006-07 compared to the previous year, but fact remains that the growth is expected to come down to around 18 per cent in the current financial year.

In my opinion, the correction phase in the real estate industry would continue till September. But during the festival season the market should see the reversal of the present trend. According to one estimate, real estate price are expected to correct between 15 to 20 per cent in certain pocket from its peak level.

“The real estate sector will again witness the same type of buoyancy it showed last year in 2008,” pointed out Dr Suvrokamal Dutta, real estate expert. Point to be noted here is that demand is a function of cost of funds - the interest rate- and the price of the product. According to Dr Dutta, in the coming eight to 10 months, both these would undergo changes.

There is no doubt that the present trend towards price correction would be finished, and more importantly they would stop falling any further. Simultaneously, if one takes into account the inflation trend, the interest rate would also begin softening during this time.

The main factor is the availability of housing in few areas. Though, there is a strong possibility that prices would remain inelastic in those regions. Furthermore, there were few pockets in almost all the cities where prices had not seen any correction because of the fact that no new products could be made available.

For example, in the case of Delhi, since the demand is far greater than supply, there has been hardly any correction, but experts believes that there is certainly few correction outside Delhi where supply of fresh products is coming or expected to come.

In other word, because of the rise in the interest rate, average size of the home loan in the last one or two years has dip down to Rs 12 lakh from Rs 14 lakh a year ago. The borrowers eligibility has come down due to substantial rise in the interest cost.

Interestingly, banks have not seen any slippage in their book. "The increase in interest rate and subsequent increase in he monthly installments have not affected the portfolio almost all the borrowers are the end users," pointed out Rajiv Sabharwal, Senior General Manager at ICICI Bank, and in-charge of its home loan division.

Indian govt may cut customs duty to keep inflation below 5 per cent

By Vipin Agnihotri

Indian government may minimize custom duties on number of items to keep inflation below 5 percent. Finance Minister P Chidambaram, while talking to The India Street said government was ready to take further fiscal steps to control inflation and keep it below 5 percent.

It is worth mentioning in this regard that inflation had crossed 6.7 percent in starting of the year- the highest level seen in more than two years. Though, due to number of measures taken by government and Reserve bank of India (RBI), it has since softened to 5.7 percent by the end of April.

“It is still above the tolerance limit. Our objective now is to keep inflation between 4 and 4.5 percent. We will make every effort to bring it down,” pointed out Chidambaram. The pivotal factor here is that if government’s fiscal measures would not be adequate, the central bank would also take further monetary steps towards this end.

If experts are to be believed, government’s determination to check inflation between 4 and 4.5 percent and not allowing rupee to depreciate, in turn, will see continuation of tightening of the money supply. From the starting of the year, government has taken various measures such as reducing custom duties on the import of pulses, edible oils, steel, cement and other essential commodities.

In addition, Reserve Bank of India also took a number of measures to restrict the money supply. These sorts of steps led to rise in interest rates, which affected sectors like real estate and consumer durables. Statistic wise: In the last three months, home loan interest rates have increase by around three percentage points to 12 percent from 9 percent. What’s more, the consumer loan rates have also increased substantially. The increase in the interest rates have also raised interest burden on the companies.

“To contain inflation through restricting money supply, Reserve Bank of India almost stopped buying dollars from the market. This has led to steep appreciation of rupee by around 8 percent since the starting of the year,” pointed out Dr Suvrokamal Dutta, renowned finance expert.

This move has affected exporters very badly. But one thing is for sure; it has helped the government to contain inflation. In other word, as rupee appreciated, the prices of imported items in rupee term declined, which has forced the domestic producers not to increase prices of their products.

At the same point of time last year, inflation had moved up in the range of 5 percent, lots of analysts were of the opinion that it would automatically come down to around 5 percent in the next two weeks because of the base effect. But, fact remains that if government is interested in bringing down inflation in the range of 4 percent to 4.5 percent, the high interest rate regime would continue for some more time.

Finance minister has already said that high global prices of crude oil and metals were due to rising demand in India and China, besides stagnation in Indian agricultural production, were the main reason behind high inflation. “There is no short cut to bring down inflation. Prices will not come down unless we augment supply of food grains including wheat, rice, pulses and edible oil,” pointed out Chidambaram.