Tagged: Policy review

Deflation Fears Linger for the US, Fed Data Shows

Article first published as Deflation Fears Linger for the US, Fed Data Shows on Technorati.

Market analysts are predicting that the US may have to face deflation for the coming one or two years. Consumer confidence has fallen to its 13-month low for August month.

deflation Even though the consumer prices rose by 0.3 percent and food prices and energy costs have gone up consumer confidence dropped as they are generally ignored due to their volatility. Speculations are floating that the US Federal Bank may resort to large-scale debt purchases. Some analysts reject for such case saying the data was not so weak.

Consumer Confidence

Reuters index of consumer sentiment dropped from 68.9 in August to 66.6 in September’s preliminary reading, Reuters said in a report (Go to consumer sentiment graph here). Despite encouraging results posted by Oracle Corp and RIM, the Fed data prevented the stock prices from raising that ended nearly flat.

Fed data showed that the household wealth came down by $1.5 trillion to 53.5 trillion due to high unemployment of 9.6 percent. The household wealth had reached its peak $64.2 trillion at the end of 2007 when the US economy began crumbling into recession.

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The Fall and Rise of Major Economies’ Interest Rates

Article first published as The Fall and Rise of Major Economies’ Interest Rates on Blogcritics.

macro-economics The world financial crisis, the worst since the great depression of 1930s, forced major economies of the world reduce their central banks’ interest rates to their least level possible. This was done to overcome “the credit crunch” that erupted as a byproduct of the financial crisis. Credit crunch was also a result of the bankers ceasing their lending to one another, due to mistrust developed out of lack of transparency over the exposure of each bank to the toxic sub-prime mortgage loans.

As the banks, investment as well as commercial, stopped releasing their funds for lending, the central banks stepped in to see that the required funds are available to market. This prompts people believing that the banks are in dearth of funds, which is not true. If market players stall their activities, the theories of free market economy would become useless. Ironically the people (or consumers in market language), on whose purchasing capacity and spending activity the markets depend upon, had no role in this entire fiasco except paying taxes and losing jobs.

Interest Rates

The central banks exercise their control mainly on four rates. They are Bank Rate (or discount rate), repo rate (repurchasing rate), reverse repo rate and CRR (cash reserve ratio). A bank rate is the interest rate that is charged by a country’s central bank (federal bank in some countries) on loans and advances

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Reserve Bank of India Beats Forecast on Rate Hike

(Article first published as Reserve Bank of India Beats Forecast on Rate Hike on Technorati.)

RBI_logo The Governor of Reserve Bank of India, Duvvuri Subba Rao could not allow himself lagging behind the trend of beating forecast by growth numbers of India. At the quarterly review meeting on Sept 16, 2010, the RBI raised interest rates more aggressively than expected. The RBI lifted repo rate, at which it lends to banks and other financial intermediaries, by 25 basis points to 6 percent. It also lifted reverse repo rate, at which RBI absorbs the cash from the system, by 50 basis points to 5 percent.

Inflation concerns

The deference between the repo rate and reverse repo rate is decreased from 1.25 percent to 1 percent, signalling that the central bank is committed to control the high rate of inflation. "Inflation remains the dominant concern in macroeconomic management," the central bank said in a statement released to reporters. “Monetary Policy Review: September 2010,” almost confirmed that the inflation rates have reached their peak, but cautioned it is likely to remain at unacceptably high levels for some months.

Several factors prompted the central bank to rein in the inflation, which is still nearer to the double-digit figure. Almost double the forecast growth (13.8 percent) of Industrial output in July 2010; rocket speed rise of the share markets; and robust annualized growth rate of GDP (8.8 percent) for the quarter ending with June 2010 necessitated controlling the money supply in the system.

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India’s Government Paper Proposes Weakening FDI Rules

Article first published as India’s Government Paper Proposes Weakening FDI Rules on Technorati.

FDI-logo The Commerce and Industry Ministry on Friday, released proposals for discussion on whether to abolish foreign investment caps imposed on the companies invested in joint ventures in India prior to the year 2005. The discussion paper released is said to be a part of series of papers released by the ministry as a measure to attract more FDIs. Such papers also inform foreign investors how the Government of India is changing over time the policies and priorities.

Before 2005, there was a rule for the companies who tied up with Indian partners in joint ventures to seek approval from the federal government before bidding for expansion outside the tie-up. The problem is that the policy was reviewed in 2005 after which the rule exempted the companies that invested after 2005 from seeking approval for further expansion of their own. This is clearly observed as discrimination between the companies entered India before and after 2005.

Vedanta’s Acquisition Bid

Maybe the recent bid by Vedanta Resources to acquire Cairn India, a subsidiary of the U.K. based Cairn, prompted the ministry to release the discussion paper. It is a common practice in India that when the government intends a policy review, it would first release discussion papers to identify the opposition so that it can calm them properly. Cairn India has a tie-up with ONGC, a public sector oil exploration company, in its biggest oil well in Rajasthan State. Cairn India holds 70% stake and ONGC the rest in it.

India focused Vedanta Resources made a highest bid for Cairn India of $9.6 billion and sought the government’s approval which is still pending. When the matter came to light there were huge expectations that the ONGC might

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INDUSTRY VIEW: RBI raises key rates

MSN News | Reuters | 27/07/2010

The Reserve Bank of India on Tuesday raised interest rates more forcefully than expected in the face of inflation that has held stubbornly above 10 per cent for the past five months. The RBI lifted the repo rate, at which it lends to banks, by 25 basis points to 5.75 per cent, in line with expectations, but raised the reverse repo rate, at which it absorbs excess cash from the system, by 50 basis points to 4.50 per cent. Following are the views of industry officials to the policy.

PRAMOD MENON, CHIEF FINANCIAL OFFICER, JSW ENERGY

"The rate hike is well warranted and there should not be any problem until the rate of economic growth continues to be robust. There will be a slight impact on interest rates, but I believe, everybody is prepared for it."

SANTOSH SINGHI, CFO, AMTEK AUTO LTD

"The rates will firm up. This may lead to a liquidity crunch in domestic market in the coming months as many large projects are still rupee-funded. I do not think the OEMs (original equipment makers) will accept an increase in component prices because of a rise in rates. The only way we can compensate is increasing our volumes and scale of operations".

VIRENDRA MHAISKAR, CMD, IRB INFRASTRUCTURE DEVELOPERS

"In our case we have tied up the funds with a fixed rate for next three years, anticipating the tightening. We won’t be impacted at all. For the infrastructure (sector), it’s a counter-productive move on a long-term basis if the interest rates are hiked for the growth sector."

RUPEN PATEL, MANAGING DIRECTOR, PATEL ENGINEERING

"RBI has increased reverse repo by 50 basis points and repo rate by 25 basis points. CRR has remained unchanged at 6 per cent. Market anticipated much more tightening than what has been announced. As such we feel no negative impact on our sector for the action taken by RBI." 

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RBI raises rates to stamp on inflation

Reuters | Tue Jul 27, 2010 | 1:48pm IST

The Reserve Bank of India (RBI) raised interest rates more forcefully than expected on Tuesday, signalling its urgency to stamp on inflation that is on track to hit double-digits for the sixth month running in July. One-year overnight interest rate swap rates jumped after the Reserve Bank of India (RBI) notched up its fourth rate rise this year and said it was "imperative" to normalise policy in line with the economy’s growth and inflation. Before Tuesday, the RBI had promised a "calibrated" exit from the loose monetary policy adopted during the global downturn, which markets had taken to mean 25 basis point rate hikes on Tuesday and again at quarterly reviews set for October and January. "The dominant concern that has shaped the monetary policy stance in this review is high inflation," the RBI said. "With growth taking firm hold, the balance of policy stance has to shift decisively to containing inflation and anchoring inflationary expectations," it said.

Bond yields and swap rates rose in reaction to the RBI’s decision. The 10-year benchmark bond yield gained 3 basis points to 7.70 percent. The most-traded 1-year overnight indexed swap rate jumped 19 basis points to 6.1 percent, its highest since November 2008. The RBI lifted the repo rate, at which it lends to banks, by 25 basis points to 5.75 percent, which was in line with expectations. But its bumped up the reverse repo rate, used to absorb excess cash from the system, by 50 basis points to 4.50 percent. A 25 basis point rise had been expected. Analysts said the moves showed the RBI was trying to take more decisive action following criticism that it had acted too timidly so far to tackle rising prices that the authority acknowledged had spread beyond food to the broader economy. "Of course, they are behind the curve on inflation," said Dariusz Kowalczyk, senior economist and strategist at Credit Agricole CIB in Hong Kong. "They are trying to catch the train that has left the station and they are running to accomplish that. Unfortunately, they were late to the races and this means they would have to tighten more than they would have if had they started earlier," he said. 

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INDIA CORPORATE DEBT – Quiet week seen, policy eyed

Reuters | Mon Jul 26, 2010 | 2:41pm IST

India’s primary corporate bond market is headed for a quiet week as participants await Tuesday’s central bank policy review for cues on the trajectory of monetary policy tightening, bankers said on Monday. The Reserve Bank of India (RBI) is widely expected to raise key rates by 25 basis points at the review to rein in inflation that has stayed stubbornly high. India’s central bank will outline the macroeconomic review report at 5 p.m. (1130 GMT) on Monday, which will be closely watched for clues on Tuesday’s interest rate decision. "Tomorrow is going to be vital for at least the next 2-3 months. It is difficult to guess what the RBI governor is going to do as in some form or the other he has been surprising the markets either in quantity or timing (of rate hikes)," said a senior official at a private bank. "I won’t be surprised if he continues to look to surprise the market," the official added. The RBI has already raised rates three times since March, two of which were surprise off-cycle moves accompanied by often contradictory statements from policy makers and advisers. At its January review, the bank had raised the cash reserve ratio by 75 basis points, outwitting markets that had priced in a 50 basis points hike.

SHORT-TERM ISSUES SEEN

Commercial paper issuances should continue as the unavoidability of meeting short-term fund requirements should keep them coming, bankers said, but added that companies have preferred to wait and watch on potential longer term issuances. Rashtriya Ispat Nigam and Airport Authority of India are on Monday expected to raise at least 2 billion rupees each via CP. "In the short-term view, rates are higher than what the repo rate would suggest, considering liquidity is currently the tool financing interest rates," said a merchant banker, "but in the longer term rates haven’t moved up much for private firms." Cash has been tight since June following payments by companies toward telecom spectrum sales and quarterly tax that drained around 1.36 trillion rupees from the banking system. This has led the call money rate INROND= to rise above the central bank’s lending rate of 5.5 percent, pushing the yield on the top-rated three-month CP IN3MCP=FITM to around 7.10 percent from below 6 percent in late May.  

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Inflation Will Quicken in July on Fuel, Government’s Top Statistician Says

Bloomberg News | Jul 19, 2010

India’s inflation will accelerate in July, the government’s top statistician said, increasing pressure on the central bank to raise interest rates next week for a fourth time in five months. “The inflation number in July will be higher than in June, in large measure because of what has happened to fuel prices,” T.C.A. Anant, 52, said in a July 16 interview in New Delhi, without providing details. The benchmark wholesale-price index jumped 10.55 percent in June after climbing 11.23 percent in April, the most in 19 months, a report showed last week. Prime Minister Manmohan Singh’s government on June 25 allowed state-run refiners including Indian Oil Corp. to raise prices of gasoline and diesel in a bid to cut its oil subsidy and narrow the budget deficit. Governor Duvvuri Subbarao is due to announce the next monetary policy decision on July 27.

“The full impact of the fuel price revision on inflation numbers is yet to be seen,” the New Delhi-based Federation of Indian Chambers of Commerce & Industry said in a report on July 17. “While normalization of the monetary policy is expected and the Reserve Bank of India would continue to tighten rates in the months ahead, premature and aggressive rollback of easy money policy can jeopardize growth.” Subbarao has increased the reverse repurchase and repurchase rates by three-quarters of a percentage point since mid-March. The reverse repurchase rate is 4 percent and the repurchase rate is 5.5 percent.  

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May IIP raises worry of slowing growth – Kotak

Reuters | Tue Jul 13, 2010 | 11:19am IST

The unexpected slowing of industrial growth in May has raised concerns on the severity of moderation in economic growth, Kotak Mahindra Bank said, adding that a month’s data may be insufficient to draw conclusions. Industrial output rose 11.5 percent in May from a year earlier, well below analysts’ forecast of a 16 percent rise and the revised 16.5 percent growth in April, data showed on Monday.

While some moderation was expected as a result of the withdrawal of stimulus measures, the extent of the slowdown was a surprise, Kotak economists Indranil Pan and Shubhra Mittal wrote. "We are keeping ourselves open to the risk of a larger than expected slowdown in industrial activity, especially as PMI Manufacturing fell in June," they said. "We now think that June could be the first month of a single digit print in industrial growth due to a strong unfavourable base effect in that month," they added.  

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RBI seen tightening policy further

Reuters | Tue Apr 13, 2010 | 1:02pm IST

The reserve Bank of India (RBI) is expected to further tighten its monetary policy, R. Gopalan, secretary for financial services in the finance ministry, said on Tuesday. India’s rising inflation has kept markets betting on another interest rate rise next week. Investors have already priced a 25-basis point rate rise at the central bank’s policy review on April 20 after it raised rates last month. "I share the views of some experts that some further amount of tightening is required," Gopalan told reporters.

A pick up in the economy has seen a rise in inflation with the headline number expected to have breached 10 percent in March, for which the data is due on Thursday. The RBI had cited increased capacity utilisation as one of the principal factors driving up inflation and analysts expect the central bank to try to cool demand until companies boost their potential output.    

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RBI lifts cash reserve ratio holds rates 

Reuters | Mumbai | Fri Jan 29, 2010 | 1:55pm IST

(Click to enlarge)

The Reserve Bank of India (RBI) surprised markets by raising banks’ cash reserve requirements by more than expected and warned of mounting inflation, suggesting its next move may be an interest rate rise. The Reserve Bank of India (RBI) kept short-term interest rates steady at its quarterly policy review on Friday and warned that monetary policy would be ineffective unless the government rolls back its borrowing, on track to hit a record 4.5 trillion rupees ($97 billion) this fiscal year. The RBI lifted the reserve ratio by 75 basis points rather than by up to half a percentage point as pencilled in by markets, joining other Asian central banks in gradual tightening of loose monetary policies.

On Thursday, the Philippines raised a rate on a short-term lending facility, and this month China started to tighten policy by raising banks’ reserve requirements, clamping down on loan growth and accepting higher yields at bill auctions. Despite rising inflationary pressures, the government has pressured the RBI to hold off raising rates, saying it would undermine economic recovery, hurt only slowly picking up bank lending and spark potentially destabilising capital inflows. “An increased confidence in recovery has encouraged RBI to clearly and explicitly shift their stance from ‘managing the crisis’ to ‘managing the recovery’,” said Deepali Bhargava, economist at ING VYSYA Bank in MUMBAI.     Continue reading →

Govt faces food price discontent, violent protests 

Reuters | New Delhi | Thu Jan 28, 2010 | 3:14pm IST

Violence erupted against rising food prices in Bihar, one of the country’s poorest states, on Thursday, heaping more political pressure on the government to focus on inflation rather than growth and financial reform. Mobs stoned trains and jammed roads with burning tyres in eastern Bihar, trying to enforce a day-long shutdown. Shops, offices and schools remained closed on Thursday, when official data showed that food prices in Asia’s third-largest economy rose an annual 17.4 percent in mid-January.  At least 12 passengers were injured when angry crowds stoned a train in Hajipur town, while thousands marched in the street in different parts of the state asking shops to shutter.

“Their anger is natural,” said Lalu Prasad, head of the Rashtriya Janata Dal (RJD) party, the state’s main opposition, referring to rising food prices. Food prices have soared because last year’s monsoon rains, which irrigate 60 percent of the country’s farms, were the worst in 37 years. Higher prices paid by government agencies to buy grains from farmers have also helped push the headline inflation rate to 7.31 percent in December, the highest in a year. Inflation and a high fiscal deficit are major risks to the country’s ambitious plan to return economic     Continue reading →

RBI seen holding rates, raising CRR next week 

Reuters | Fri Jan 22, 2010 | 1:48pm IST

A Reuters poll found 24 out of 25 economists expected the RBI to raise the cash reserve ratio (CRR), the proportion of deposits banks need to keep with the Reserve Bank of India, by up to 50 basis points in its Jan. 29 policy review. By the end of April, one analyst expected the total quantum of CRR increase at 150 basis points, while nine saw a total of 100 basis points rise and three projected the CRR to go up by 75 basis points. Eight out of 25 analysts polled expected the RBI to raise its reverse repo and repo rates by 25 basis points each. Other analysts expected no change to policy rates. Twenty-three analysts expected the central bank to raise both the reverse repo and repo rates by between 25 and 100 basis points by the end of April, when the RBI announces its annual review for the fiscal year 2010/11.

Seven out of eight who expected a rate increase in the January review, forecast a further rise in the reverse repo and repo rates by April. Twelve expected a rise of at least 50 basis points in the reverse repo rate by April, while only 10 expected the repo rate to rise by the same quantum. The central bank absorbs excess funds from the banking system at the reverse repo rate, which is at 3.25 percent, and lends money to banks at the repo rate, which is 4.75 percent.     Continue reading →

RBI liquidity tweaks won’t hit infra investment 

Reuters | New Delhi | Fri Jan 22, 2010 | 6:04pm IST

Any short-term liquidity adjustments in the Reserve Bank’s January monetary policy review would not affect investments in India’s infrastructure sector in the medium term, a top policy adviser told Reuters on Friday. “We should not be overly concerned about short-term adjustments in the liquidity situation,” Montek Singh Ahluwalia, deputy chairman of the Planning Commission said. The Reserve Bank of India (RBI), which reviews its quarterly policy on Jan. 29, is widely expected raise banks’ cash reserve ratio, the level of deposits that banks must keep in cash, by 50 basis points. But analysts are equally divided over when the RBI will start raising policy rates. Ahluwalia said global slowdown and local regulatory issues had hit infrastructure investments, which would see the country miss its 2007/12 investment target of $500 billion.

India’s failure to introduce insurance, pension, banking and bond market reforms over the years has hampered investment growth in the sector, analysts say. “I think infrastructure needs long-term funding and that is why it’s important to develop the bond markets and also reform the pension and the insurance sectors,” said N.R. Bhanumurthy, economist at National Institute of Public Finance and Policy, a      Continue reading →