A Summary of Economic News in India, January 20061 IMF New Delhi Office Markets
Nominal Exchange Rate (Rs/US $)
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Rupee appreciated. The rupee/dollar rate appreciated by 92 paise during the month on a considerable slowdown in imports and the weakening of the US dollar against major international currencies. The sixmonth forward premium on the US dollar was 2.48 percent at month-end, 110 bps higher than at endDecember 2005.
Net Weekly FII flows (mln US $) 600 400 200 0 -200 -400 -600 Jan 2-6 Jan 9-13 Jan 16-20 Jan 23-31
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43.0 43.5 44.0 44.5 45.0 45.5 46.0 46.5 47.0
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Portfolio inflows declined. Portfolio investment declined during January 2006. Net inflows were US$ 536 million (net of equity inflows of US$ 738 million and debt outflows of US$ 202 million) compared to net inflows of US$ 2.0 billion in January 2005 and US$ 1.9 billion in December 2005.
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Reserves declined. Foreign reserves, measured in US dollars, declined sharply by US$ 6.8 billion for week ending December 30, due to the redemption of maturing India Millennium Deposits (IMDs). Reserves were, however, up by US$ 2.1 billion and US$ 153 million for weeks ending January 6 & 13, respectively, but declined again by US$ 70 million for week ending January 20. Reserves were US$ 139.4 billion on January 20. YF 6, 13, 20, 27, HBL 9 & 16 Stock market rose. The stock market rose further to reach new peaks during the month on modest Q3 corporate results and continued FII investment . The BSE index closed near to 10,000, up by 451 points, or 5.6 percent, on a month-end basis.
10000 9800 9600 9400 9200 9000 8800
8.50 8.00 7.50 7.00 6.50 6.00 5.50 5.00 4.50 4.00
BSE Index
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Call M oney Rate
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Call money rate rose. The overnight call money rates were high amid tight liquidity conditions and rose further toward the end of the month ahead of a 25 bps hike in the reverse repo and repo rates by the RBI. HBL 24
The yield curve steepened. Yields [primary market] on 91-day Treasury bills increased by 16 bps to 6.17 percent during January, while yields [primary market] 2-Jan 9-Jan 16-Jan 23-Jan 30-Jan on 364-day Treasury bills rose by 12 bps to 6.28 percent. Yields [secondary market] on the 10-year government bonds also went up by 32 bps to 7.43 percent.
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This is a factual summary of news stories that appeared in the press during the month and does not represent the views of IMF staff.
Policy Announcements
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Monetary policy. In its Q3 review of credit and monetary policy in January, the RBI hiked the reverse repo and repo rate by 0.25 percentage point to 5.5 percent and 6.5 percent, respectively, while keeping the Bank Rate and CRR unchanged, to rein in inflationary expectations. HBL 24 Pay commission. The Prime Minister announced the Government’s decision to constitute the sixth Pay Commission for central government employees, in response to a threat by employee unions to go on indefinite strike from March 1, 2006. TOI Feb 1 & FE Feb 2 Rural employment guarantee scheme. The Prime Minister has formally launched the Rural Employment Guarantee Scheme on February 2, 2006. HBL 18 & Feb 2 Food subsidy. Following strong opposition from the Left parties and others, the Government reportedly put on hold its decision to reduce the quantity of food grains under the public distribution system (PDS) in an effort to bring down food subsidies. The Government had earlier announced a reduction in the off-take quantity of food grains for both above poverty line (APL) and below poverty line (BPL) families to 20 kg and 30 kg, respectively, while increasing the issue prices for wheat and rice under PDS. These measures were expected to save nearly Rs 45.3 billion in food subsidies for 2005/06. FE 7 & HBL 10 Employees Provident Fund (EPF). The Government has notified a 100 bps reduction in the interest rate on EPF deposit to 8.5 percent from 9.5 percent for 2005/06, in spite of the opposition from the Left Parties. HBL 11 Disinvestment developments. It was reported that Left parties have agreed to the Government’s suggestion of selling its equity holdings in non-navratna PSUs to public sector banks and financial institutions. This ‘third route’ would allow the Government to retain its hold (indirectly) on the PSUs, while raising funds for social investment. Accordingly, it sold 8.0 percent equity in Maruti Udyog to eight state-run banks and financial institutions to raise Rs 15.7 billion. It was also reported that the Government has cleared the proposal to divest 5 percent equity in the Power Finance Corporation (PFC) and 15 percent of its stake in National Mineral Development Corporation (NMDC). HBL 12, T 13, HBL 18 & BS 23 Infrastructure. After much political and administrative dithering, the Government awarded contracts for the modernization of Delhi and Mumbai airports to two private sector bidders. The process, however, got further complicated, with employees of the public sector Airports Authority of India (AAI), responsible for running airports, going on strike, protesting against the decision, and with one of the loosing bidders moving to court alleging a lack of transparency and fairness in the bidding process. FE Feb 1& 2. Power sector. The Government is reportedly planning for creation of an additional power plant capacity of 62,000 MW during the 11th Plan period (2007-2012). Of this, 38,000 MW is expected to be produced by coal and lignite-based projects, 15,000 MW by hydro-projects, 6,000-7,000 MW by gas/LNG based projects and 3,000 MW by nuclear power based projects. FE 19 Railways. The Government has allowed private container operators to run container trains for import-export and domestic traffic. T 6 Oil reserves. The Government has reportedly approved a proposal to build a 5 million tons of strategic crude reserves, estimated to cost Rs 112.7 billion. YF 6 FDI. In an effort to further liberalize the FDI regime, the Government has allowed FDI (up to 100 percent) in power trading, processing and warehousing of rubber and coffee, diamond and coal mining, greenfield airports and petroleum infrastructure under the automatic route. It has also allowed up to 51 percent FDI in single brand retailing (currently operating only through the franchisee route), up to 100 percent in up linking of television channels in the non-news category, and up to 26 percent for news channels through the approval route. It has also announced several measures to simplify procedural hurdles. FE 5, HBL 17, ET 19 & HBL 27 Textile sector. In an effort to introduce flexibility in labour laws for the textiles sector, the Government is reportedly considering a proposal whereby firms could be given the go-ahead to employ "non-permanent" workers if they would furnish bank guarantees against the names of these workers, earmarking their salaries against a specified minimum period of employment during a year, thus keeping workers under this category outside the ambit of the existing set of labour laws. HBL 27
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Real Sector
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GDP quick estimate for 2004/05. The Central Statistical Organization (CSO), in its quick estimates, has revised GDP growth upward for 2004/05 to 7.5 percent from the earlier estimates of 6.9 percent, with a new base year 1999/00=100 (previous base year was 1993/94=100). YF 31 & GOI 31 Growth prospect for 2005/06. In its Q3 review of annual credit policy 2005/06, the RBI has expressed optimism on economic activities across sectors and revised upward GDP growth projections to 7.5-8 percent in 2005/06. HBL 24 Industrial production. The Index of Industrial Production (IIP) grew y-o-y by 6.9 percent in November 2005, with manufacturing growing by 8.1 percent, mining by -1.4 percent, and electricity by 2.7 percent. The cumulative increase during April-November 2005 y-o-y was 8.3 percent compared with 8.6 percent last year. Six core infrastructure industries grew by 4.7 percent y-o-y in December 2005 (4.8 percent). The cumulative increase during April-December 2005 y-o-y was 4.5 percent (6.4 percent). HBL 12, GOI 12, YF 27 & HBL 30 Industry survey. According to the latest industrial outlook survey by the RBI, profit margins, selling prices, imports and employment generation were expected to improve during Q4 (January-March 2006) over Q3 (October-December 2005), while the overall business and financial situation, production, order books, capacity utilization and exports are expected to show some decline. The business expectations index for Q4 increased by 2.4 percent over Q3. The CII Business confidence index at 65.7 was also up by 1.5 percentage points for the period of September 2005-March 2006 over the corresponding period in the previous year. BS 24 & ET 3 Inflation stable. WPI inflation remained mostly stable. Weekly inflation rates were 4.4 percent, 4.4 percent, 4.2 percent and 4.4 percent for the weeks ending December 24 & 31 and January 7 & 14, respectively. The CPI for industrial workers increased to 5.6 percent in November 2005 from 5.3 percent in November 2005. BS 16
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Fiscal Sector
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Fiscal update. According to the data released by the Controller General of Accounts, the Center’s net tax collections totaled Rs 1687.2 billion (61.7 percent of Budget Estimate), and non-tax revenue totaled Rs 480.3 billion (61.8 percent of Budget Estimate) through the end of December 2005. The total expenditure was at Rs 3325.0 billion (64.6 percent of Budget Estimate). The revenue deficit totaled Rs 796.8 billion (83.6 percent of Budget Estimate), and the fiscal deficit totaled Rs 1083.3 billion (71.7 percent of Budget Estimate) during April-December, 2005. HBL 13, GOI 31 & YF 31 VAT revenue. Revenue collection (April through December 2005) by VAT implementing States and Union Territories was reported to be up by 15.8 percent to Rs 537.8 billion (Rs 464.6 billion). HBL 30 State finance. Various states governments have reported high cash surpluses with the RBI, estimated at Rs 410 billion, due to the higher share in the central taxes (up to 30.5 percent from 29.5 percent) going to states and the mobilization of large deposits under small saving schemes. BS 9
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External Sector
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Trade data. Growth in exports accelerated to 16.2 percent y-o-y in December 2005 (-11.4 percent in November 2005), while they grew at 18.3 percent y-o-y in April-December 2005. Growth in imports, however, decelerated to 8.4 percent y-o-y in December 2005 (8.7 percent in November 2005), while it grew by 27.3 percent y-o-y in April-December 2005. The trade deficit widened to US$ 29.8 billion in AprilDecember 2005 compared to US$ 19.3 billion during the same period a year ago. GOI 16 & YF 16 FDI inflow. The Government is reportedly expecting a record gross FDI inflow of around US$ 7.5 billion in 2005/06 and is setting a higher target of US$ 10 billion in 2006/07. HBL 27 Textile exports. The Government has reportedly raised its medium-term textile export target substantially to US$ 85 billion by 2010 from US$50 billion, based on the encouraging export trend to the US and EU countries since January 1, 2005. FE 25 Edible oil import. The Government has reduced the base import price of crude palm oil to US$ 415 a ton from US$ 417 a ton and that of crude soybean oil to US$ 492 a ton from US$ 497 a ton. YF 16
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Financial Sector
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Interest rates. ICICI Bank, the biggest domestic private sector bank, has raised the benchmark prime lending rate (BPLR) by 25 bps to 11.25 percent, but has maintained the home loan rate. HDFC, the leading housing finance institution, however, has announced a 50 bps hike in home loan rate. IDBI, another private sector bank, raised retail lending rates by 25 basis points. It was also reported that most of the public sector banks have raised their effective lending rates on corporate loans by 200 bps, without changing the BPLR (current lending rates were at BPLR minus 200 basis points against BPLR minus 400 basis points previously). SBI, the largest PSU bank, has hiked its interest rates on domestic term deposits by 25 to 50 bps. HBL 9 & BS 13 & Feb 1 Foreign banks. The Government and the RBI have reportedly agreed to allow foreign banks to open 20 branches a year in the country as against 12 now. The easing of the restriction would, however, be contingent on RBI’s policy that new branches should preferably be opened in under-banked areas. FE 4 Basel-II. According to fresh guidelines issued by the RBI, banks have been allowed to issue four new debt and equity instruments to raise Tier-1 and Tier-2 capital to meet their increasing business requirements as well as to maintain their capital adequacy ratio under the Basel-II norms. These instruments are expected to benefit banks, especially those public sector banks in which the government holding has reached close to mandatory 51 percent, to raise capital to the extent of Rs 1,000 billion in the next few years. HBL 27 Outsourcing in banks. Acting on the recommendations of the Khan Committee report on promoting banking in rural areas, the RBI has reportedly permitted commercial banks to outsource lending and deposit-taking activities to NGOs, micro finance agencies, post offices and NBFCs, which would act as their business correspondents or agents. This is expected to popularize ‘doorstep banking’, especially in rural and remote areas. IE 17 & HBL 27 IPO scam. The Securities Exchange Board Of India (SEBI) has reportedly unearthed a scandal in the issue of IPOs involving two companies. The modus operandi was through opening of demat accounts with banks under fictitious names and transferring funds to these accounts. This was a violation of norms as the banks concerned had not verified the credentials of the account holders. HBL 26 Banking supervision. The RBI has reportedly imposed penalties on seven banks (Bharat Overseas bank, Citibank, HDFC Bank, ICICI Bank, Indian Overseas Bank, Standard Chartered Bank and Vijaya Bank) for violation of prudent banking practices and facilitating misuse of IPO finance to ineligible borrowers. It has also issued fresh guidelines for bringing domestic private sector banks and foreign banks under the ambit of the `Protected Disclosure Scheme', which allows the employees of these banks to ‘blow the whistle’ in case of irregularities such as corruption, misuse of office, fraud, or failure to comply with RBI rules. A similar scheme was already in operation in the public sector banks and the RBI itself. HBL 24 & 26 Bank takeover. The RBI has reportedly agreed in principle to a proposal by Federal Bank to buy privately owned Ganesh Bank, which is marred in financial troubles. YF 10 External commercial borrowings (ECBs). The RBI has reportedly allowed multi-state co-operative societies, engaged in manufacturing activity, to raise funds through ECBs. BS 24 National Payment Corporation. The RBI is reportedly considering the registration of the National Payment Corporation of India (NPCI), an umbrella organization, conceived to undertake retail payment and settlement systems, and to be jointly owned by private, public and foreign banks. NPCI is expected to be operational by April 1, 2006. HBL 18 Bank autonomy. The draft report by a Working Group on "Conflicts of Interest in the Indian Financial Services Sector", set up by the RBI, has reportedly asked the Government to create specialized agencies, e.g., trusts or SPVs, to exercise its ownership rights over public sector banks and other financial institutions and also to pass on the responsibility for corporate governance to their respective boards from the administrative Ministries. HBL 17
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____________________________________________________________________________ Sources Key: RBI-Reserve Bank of India Press Release/Notification; BS-Business Standard; CM-Capital Markets.com; YF/R-Yahoo Finance.com/Reuters; DJ-Dow Jones, TOI-Times of India; OL-Outlook; ETEconomic Times; HBL-Hindu Business Line; H- The Hindu; FE-Financial Express; IE-Indian Express; TTelegraph; TR-Tribune; PIB-Press Information Bureau; GOI- Government of India