Article first published as Indiaâ€™s Policy Review: RBI Raises Rates, Says Last Time in Near Future on Blogcritics.
RBI has raised bank ratios again by 25 basis points in its November 2 policy review. It has lifted he repo rate, at which it lends to banks, to 6.25 percent and reverse repo rate, at which it absorbs excess cash from the system, to 5.25 percent. RBI has discussed global and domestic scenarios in its second review of monitory policy 2010-11.
RBI has noted that though IMF revised upwards its forecast for world growth in its October 2010 World Economic Outlook from 4.6 to 4.8 percent, growth in advanced economies like the US and Japan has been still sluggish. Unemployment, modest income growth, lower housing wealth and tight credit were impediments for the US growth, RBI said. It noted that slowdown in industrial production and exports’ growth reflected the moderation of economic recovery in Japan.
However, the Euro region is showing signs of resilience in the aftermath of the sovereign debt crisis which is again uneven. RBI has said the growth in the Emerging Market Economies (EMEs) continued to be strong. It has particularly pointed out that the strength of the EMEs is led by domestic demand but supported by exports, indicating that without the exports’ support, the growth could be weaker.
RBI says India’s growth set in second half of last fiscal year, is consolidating with Q1 growth recording at 8.8 percent. It expects normal South-West monsoon will contribute to increase in Agricultural production. RBI and Planning Commission have been telling for last one and half years that the normal monsoon will help reduce the stubborn inflation, which is proved wrong. It seems they still do not find any fresh reason for showing as pretext for high inflation.
Industrial growth has been robust but volatile with average figure of 10.6 percent during April – August 2010. Volatility suggests deceleration but momentum is continuing. Direct and indirect taxes increased over the last year.
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.
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.
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.
Article first published as The Fall and Rise of Major Economiesâ€™ Interest Rates on Blogcritics.
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.
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
(Article first published as Reserve Bank of India Beats Forecast on Rate Hike on Technorati.)
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.
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.
Article first published as Indiaâ€™s Government Paper Proposes Weakening FDI Rules on Technorati.
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
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."
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.