P Chidambaram, Raghuram Rajan order banks to cut interest rates on loans

FM P Chidambaram and RBI Governor Raghuram Rajan have laid the foundation for a grand Diwali dhamaka that is likely to lead to banks cutting interest rates on loans for the festive season. Government today decided to enhance capital infusion into the PSU banks over and above what was provided in the Budget to enable them to extend more credit to auto and consumer durables sectors to stimulate demand and combat slowdown.

At a meeting between Finance Minister P Chidambaram, RBI GovernorRaghuram Rajan and Economic Affairs Secretary Arvind Mayaram a decision was taken to increase the quantum of capital infusion into PSU banks.

Related: RBI bans zero per cent interest rate scheme for buying goods

"This amount (Rs 14,000 crore provided for capital infusion in Budget) will be enhanced sufficiently. The additional amount of capital will be provided to banks to enable them to lend to borrowers in selected sectors such as two-wheeler, consumer durables, etc at lower interest rates in order to stimulate demand," a finance ministry statement said.

It further said the additional fund infusion would help in combating slowdown and boost output.

Related: The story behind zero per cent interest EMI schemes

"While this will bring relief to consumers, especially the middle class, it is also expected to give a boost to capacity addition, employment and production," it added.

As per the latest industrial output data, the output of the consumer durables sector declined by 9.3 per cent in July, from a growth of 0.8 per cent in the same month last year. The segment saw a 12 per cent decline in output in April-July compared with growth of 6.1 per cent.

Consumer durables, a reflection of demand for manufactured products, include TV, fridge, washing machine.

The two-wheeler sales recorded a flat growth of 0.72 per cent in April-August period current fiscal, as against a growth of 6.8 per cent in the corresponding period last year.

The meeting, which lasted for over an hour, discussed credit growth in different sectors.

The quantum of additional capital infusion, however, was not disclosed by the government.

The Economic Express

Let zero schemes finance growth, RBI

The RBI has done immense disservice to industrial growth in the short term by asking banks not to offer popular financing schemes for consumer durables dressed up as zero-interest equated monthly instalment (EMI) schemes. Industrial growth has been extremely weak for an extended period and the forthcoming festival season is an opportunity for assorted consumer durable companies to step up their sales.

The zero-down-payment, zero-processing-fee, zero-interest EMI schemes an increasing number of companies offer on a variety of products are good for both consumers and for companies. The RBI's move scuppers this opportunity to a large extent.

It is not the case that consumers are unaware that these financing schemes entail real costs on account of interest and documentation. They are aware that credit card-issuing banks charge a financing cost that product companies bear, to tempt consumers with "zero" offers. But this is not their concern. Nor should it be the RBI's. If the RBI is worried about the rates banks offer, it is welcome to examine the banks' books and ascertain if any rule is being violated.

Why should the bank regulator interfere with the behavioural economics at work when consumers prefer "zero" finance options on a higher price that bundles financing cost with the product price to the transparencyof a lower product price and an explicit overlay of financing cost? Nor are consumers irrational. The cost would be lower, when borne by the company for multiple transactions all together, than when financing is offered to individual consumers.

The only beneficiary from the RBI's move is the buyer with sufficient purchasing power to not need a financing scheme, now that the product would be priced lower, taking out the financing cost by which price had been marked up earlier. Product sales and industrial growth would suffer, for the benefit of a tiny elite. This is a fetish for transparency that benefits no one except bean counters at the RBI. The RBI should withdraw these strictures gracefully and wish the economy a Happy Diwali.

source:Economic Times

Lull before the storm: Rupee seen at 69.50 against US dollar

The rupee has seen a smart recovery of near 10 per cent after Raghuram Rajan took over as the Reserve Bank chief. The Indian Rupee has stabilised for now after an extremely volatile August which saw the Indian currency test new all-time lows and lose over 20 per cent against major global currencies.

This was categorically due to the growth initiatives the market was expecting from Raghuram, something on which the new man in largely disappointed.

Barring this, as far as the Indian currency is concerned, uncertainty looms over what decision the US Federal Reserve takes on its much vaunted quantitative easing programme in October or later in the year.

"Previously, we were forecasting a value of 62 for the rupee against the dollar by year-end, but now we have raised that to 69.50. We think that the policy moves by the RBI are credible for both inflation and the currency, but that is at the cost of growth. Growth will be slower than expected," Clive McDonnell, Head Equity Strategy, Standard Chartered, told ET Now.

The pressure on the rupee is likely to build up ahead of the Fed meet in October, when a decision on quantitative easing ( QE) is expected.

"We are going to see increased pressure on emerging market currencies, particularly Indonesian rupiah and the Indian rupee. That is likely to intensify ahead of FOMC meeting," said Eric Fishwick, CLSA.

But then there is more to add pressure on the Indian currency. "I would also emphasise that there is more ... I would expect pressure on the Indian rupee and the Indonesian rupiah as a result of stronger European growth," added Eric Fishwick.

What about stock markets?

"Regardless of whether there is tapering or not, what has happened globally is that the liquidity, inter-bank liquidity is drying up pretty quickly and that is the reason why the US bond yields are volatile now and therefore bank liquidity is drying up. Equity markets cannot be very buoyant under those conditions and it is happening in India as well," says market analyst Satish Ramanathan.

"I do not think we are in for a hard rally from here," he adds.

So, the euphoria about cheap valuations, etc, has died out? 

"My interaction with investors at our conference reveals that the interest exists, but it is not that there is a kind of euphoria about the country, about the valuations, etc," says Mahesh Nandurkar, Executive Research, CLSA.

And why is so? "The reason is that most of the investors are a little worried about the direction of the rupee. While the currency has appreciated, it has been quite volatile and the markets have also been volatile. So, international investors are essentially looking for more stability in both the rupee and the market. It is the volatility which is really creating some issues for foreign investors about investing in India at this point in time," Mahesh Nandurkar adds.

The S&P BSE Sensex on Thursday was witnessing a rangebound session with positive bias as traders squared off open positions on the last day of September series. The trade is likely to remain choppy as the session progresses, say dealers.

Economic Times

Why Rajan shouldn't go for monetary tightening

Travelling through Europe and England this week, we have encountered a view from some investors that there is a trade-off between FX stability and economic growth, and the RBI, under the newly appointed governor Rajan, needs to follow up its July tightening measures by even more rate hikes to support the rupee. This would inevitably entail further "sacrifice" of growth, as per the view.

The view has been bolstered by governor Rajan's inaugural statement, where he stressed the importance of low and stable inflation, regardless of its source (FX pass-through, demand pressure, supply shock). But beyond the discussion on price stability, the rest of the governor's statement was geared toward lowering the cost of doing business. Indeed, we think that RBI is done with tightening for now.

Let's examine the inflation question first: with faltering growth and worsening employment and wage outlook, inflation is clearly not being driven by demand, so the case for easing price or wage expectations through tightening is not relevant at this juncture. The risk to inflation is presently coming from INR depreciation and higher global oil prices. We don't think even weaker demand would negate pass-through risk or supply shocks; indeed in recent years demand fluctuations have not correlated well with WPI/CPI price dynamics.

Can higher rates attract bond and stock market flows? There are very few carry opportunities for foreign fixed income investors, so higher rates won't attract inflows the way it tends to be the case in more open economies. Higher rates could bring in NRI flows, but that can be accomplished by deploying narrow instruments like raising the FCNR deposit ceiling as opposed to a broad-based tightening of liquidity and spike of short term rates.

In any case, the authorities are seeking to attract stickier FDI than volatile portfolio flows, which won't be helped by higher rates and associated correction in demand and clouding of the outlook. Higher rates and ensuing slowdown won't surely help foreign equity investors, whose holdings are far larger than bond investors in India.

Finally, higher rates were supposedly aimed at curbing speculation and FX volatility. On the former, we don't know of any major channels through which widespread rupee speculation was taking place right before July 15. Indeed, FX volume had collapsed due to the various restrictions placed on futures and options market activity and curbs on trade-related FX engineering. Additionally, the fact that banks continue to access liquidity at high cost even today means that genuine transaction need, not cheaply financed FX speculation, was behind the persistently large demand seen in the LAF window prior to July 15. On the latter, the evidence shows the measure had the opposite effect. FX volatility has been higher since July 15, and currency's slide accelerated after the liquidity tightening measures were implemented.

Can India afford higher rates? Corporate and banking distress is spreading, consumer sentiment and consumption indicators are waning, and businesses are reeling from a 20% rise in the cost of imports and several hundred basis points of rise in financing costs. With growth heading toward 4%, higher rates could risk severe balance-sheet stress and cause further economic volatility and slowdown.

This is not to say that fiscal adjustment or import compression measures should be withdrawn. Those steps need to continue as current account adjustment is essential. But monetary policy should not inject further negative impulse for the reasons stated above.

As hinted in governor Rajan's inaugural statement, we expect RBI to start looking hard at stabilizing the financial system (securing financing through swaps etc, for example) and communicate that at this juncture inflation will not be assigned exceedingly high weight in its reaction function. In case we are wrong and the RBI comes out with a hawkish guidance on Sept 20, we will revise down India's growth forecast further.

Source:Economic Times

Q1 GDP grows slower than expected at 4.4%

India's Gross Domestic Product (GDP) grew at a slower than expected rate of 4.4% for the first quarter of the current financial year. This is below an ET Now Poll estimate of 4.6%. The economy grew at the slowest quarterly rate since the global financial crisis. The growth was contracted by a contraction in mining and manufacturing. 

The agricultural sector of the economy grew at 2.7% versus 1.7% QoQ. Manufacturing sector growth contracted at (-)1.2%. While the trade and hotels growth cae in at 3.9% versus 6.2% QoQ, the construction sector grew at 2.8% versus 4.4% QoQ. 

Electricity & gas sector grew at 3.7% versus 2.8% QoQ. Mining sector growth contracted at (-)2.8% versus (-)3.1 QoQ. 

The Indian economy has been steadily losing momentum in recent years. Economic growth virtually halved in two years to 5 percent in the fiscal year that ended in March -- the lowest level in a decade -- and most economists surveyed by Reuters in the past week expect 2013/14 to be worse. 

The industrial sector contracted in the first quarter, the 1.1% fall in the index of industrial production showed. The decline in the purchasing managers' index for services in the first quarter indicates a widening of the slowdown to services sector that expanded 6.5% last year. The HSBC Markit Services Purchasing Managers' Index fell to fell to 47.9 in July from 51.7 in the previous month, falling below the 50 mark that shows contraction. 

Worryingly, apart from the good monsoon that can boost the rural economy, there is not to look ahead either. Even the effect of good monsoon will show up only from the second quarter. The severe liquidity squeeze unleashed by the RBI is unlikely to be a quick relief pill as initially believed, and may soon be replaced with a wider monetary tightening. 

The rise in inflation to above 5% has further cramped RBI. "The situation calls for monetary tightening. The interest rate differential is needed to attract investment," said Devendra Pant, chief economist, India Ratings. 

Higher interest rates will dampen demand and delay investments revival, and more importantly, the central bank will be out of the equation as far as stimulating growth is concerned. 

Higher subsidies may force further reduction in spending, if P Chidambaram stays with his budgeted fiscal deficit target of 4.8% of GDP. The authorities were counting on the higher government spending to keep the economy afloat while the policy makers tried to get stalled investments moving through the cabinet committee on investments. 

Emphasising the need for Parliament to run smoothly for boosting investors' confidence,Prime Minister Manmohan Singh on Friday said, "Its incorrect to say investors have lost confidence; Parliament is the supreme body, it is not being allowed to function." 

Stating that the opposition needs to recognise its responsibility, Singh said that essential legislations need to be passed for future of the country. "Consensus building is the responsibility of government and opposition. It is the responsibility of the members of this house to send out a message," he reiterated. 

"I do recognize there is a problem, it can be solved only if opposition recognizes its role, conduct in Parliament," he said in a reply to Arun Jaitley. 

"We have a responsibility to act collectively to deal with this crisis on confidence," he said. "We need to make sure India perceived as creditworthy, bankable & viable," he added. 

Earlier in the day the PM ruled out reversal of reforms or resorting to capital controls to rescue the sliding rupee, which he said fell on account of domestic as well as global factors. 

Making a statement on the state of theeconomy in Parliament amid concerns over rapid depreciation of rupee, Singh said the country has to be ready for short-term shocks but the government will ensure that the fundamentals of economy remain strong. 

"We are faced with challenges but we have the capacity to deal with them,", he said, while seeking support of all political parties in this situation. 

Breaking his silence on the decline of rupee, he said there "may be short term shocks to our economy and we need to face them. That is the reality of the globalised economy, whose benefits we have reaped". 

There is no question of reversing the policies just because there is some turbulence in capital and currency markets, he said, adding the "sudden decline in exchange rate is certainly a shock, but we will address this through other measures, not through capital controls or by reversing reforms".

source:Economic Times

Under Raghuram Rajan, RBI to focus on currency; rupee to hit 69: Reuters poll

      
         Incoming Reserve Bank of India Governor Raghuram Rajan will prioritise currency stability over inflation and growth, according to a Reuters poll which also showed the worst is not over for the rupee. 

The rupee has lost around 15 per cent to the dollar, hitting record lows almost daily, since the US Federal Reserve hinted in May that it would soon begin paring back its massive economic stimulus programme, sparking an investor exodus from emerging markets seen as the most exposed to foreign funding.

Rajan, a widely acclaimed economist, takes over as governor of the RBI from incumbent Duvvuri Subbarao on Sept 5, at a time when the Indian economy is facing its worst crisis since 1990-1991. 

Eleven of 17 economists polled by Reuters said the currency will be the top priority for Rajan but the consensus showed it will likely weaken to 69 per dollar before rising, implying a further 7 per cent fall from Monday's spot rate of 64.10. 

Most expected it to bottom out in September. 

The Indian economy is caught in a quagmire of slow growth, high inflation, rickety government finances and a tumbling currency that is the among the worst performing in emerging markets. 

"Rajan could streamline the RBI's focus to stabilising the currency and inflation while being supportive of growth," said Nizam Idris, head of FX strategy at Macquarie Bank in Singapore. 

"The RBI must realise it cannot control the rupee, rates, capital flows and inflation all at the same time." 

Most of the RBI's moves to break the currency's fall so far have not helped. 

Since mid-July, it has tightened cash conditions which have failed to support the rupee, partly as Subbarao later said those measures were temporary. 

Changing tack, it announced last week it would buy longer-dated bonds to lower borrowing costs, but that led markets to question the RBI's resolve in defending the currency. 

Even Rajan's appointment earlier this month failed to calm markets and the rupee rallied for only a few hours after the announcement. 

Analysts, however, said the RBI will likely make some important changes under the new regime. 

While most expected greater focus on the currency and prices, a few economists said the RBI might begin targeting an inflation level while bringing the consumer price index into the realm of policy making. 

RBI VS NEW DELHI 

With elections due in 2014, New Delhi's subsidy programme, most recently the food security bill, could blow a hole into the country's weak finances -- one of the biggest causes of the rupee's thrashing. 

Policymakers are struggling with both trade and current account deficits. 

Despite that and the clamour for easy monetary policy, the RBI will be expected to maintain its tough stance on inflation and check currency volatility. 

Analysts also said under Rajan the RBI could be expected to improve its communication with markets. 

"It's a difficult job, especially when the government lacks a majority in the parliament and due to the upcoming elections which can tie Rajan's hands," said Amy Yuan Zhuang, analyst at Nordea. 

"The RBI should make efforts to increase transparency and communication in its policy making."



RBI to focus oncurrency

Rupee may gain this week on FM P Chidambaram's pep-talk

The rupee, which rebounded by a massive 135 paise last Friday, may continue to gain this week as investors hope government and Reserve Bank will make more efforts to stabilise the market, say treasury heads of banks. 

The domestic currency, which touched an intra-day low of 65.56 on August 22 on fear that the US Fed was on course to taper off its monthly asset purchase programme, recovered sharply on August 23 to end at 63.20 after the pep-talk by the finance minister on CAD and fiscal deficit. So far this fiscal, rupee has lost close to 20 per cent. 

"The rupee should continue with the Friday's trend of appreciation this week also. Investors hope the government and RBI are committed toward curbing volatility in the forex market," said Srinivasa Raghavan, treasurer at Dhanlaxmi Bank. 

Finance Minister P Chidambaram and senior ministry officials met top bankers and overseas investors over the weekend here and discussed fund-raising plans apart from allaying the fears of FIIs over capital control. 

After the meeting, Financial Services secretary Rajiv Takru told reporters that the measures to attract fund flows would be announced within a week or so. 

Economic Affairs Secretary Arvind Mayaram, who also accompanied Chidambaram, said, "There is no need to get excessively worried about funding CAD given the robust FDI inflows, which grew 70 per cent in Q1 year-on-year to USD 9 billion. 

"So, we think investment will begin to pick up and therefore one needs to continue to watch and see how we can get stability back on the rupee front." 

He also said outflows would be more than compensated by strong inflows. 

Last week, Chidambaram had said the rupee was undervalued and has overshot appropriate levels. He also asserted there is no need for excessive and unwarranted pessimism. 

Mayaram told reporters here that government was taking many structural reforms to finance the current account deficit and boost investors sentiment. 

"These reforms will begin to show results in the current year itself and we are hopeful that this will have a reflection on the growth that happens in the next three quarters," Mayaram told reporters. 

Outgoing RBI governor D Subbarao had said on Thursday that the forex reserves were enough to manage current situation of declining rupee, and RBI would take more measures to curb rupee volatility as and when necessary. 

However, some market participants expect the rupee to be range-bound and trade in the 62.50-64.50 level this week. "Fed concerns are here to stay. We may see RBI coming in on the rupee fall, but their presence may not be that strong as it was last week," said Agam Gupta, managing director and head of fixed income trading at Standard Chartered Bank. 

"Also, any fall to 64.50 will see exporters selling dollars," Gupta added. 

Dealers also expect that month-demand from oil importers may also weigh on rupee this week.



Will Rupee gain this week...


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