Summary of Economic News in India, April 2006

A Summary of Economic News in India, April 20061 IMF New Delhi Office Markets Nominal Exchange Rate (Rs/US $) • Rupee depreciated. The rupee/dollar rate depreciated by 38 paise during the month on account of weak FII inflows. The six-month forward premium on the US dollar was 1.28 percent at month-end, 80 bps lower than at end-March 2006. Net Weekly FII flows (mln US $) 43.0 43.5 44.0 44.5 45.0 45.5 46.0 600 400 200 0 -200 -400 -600 3-Apr • 8-Apr 13-Apr 18-Apr 23-Apr 28-Apr Portfolio inflows slowed down. Portfolio investment became weak, following strong inflows in the previous month. Net inflows were US$ 177 million compared to net outflows of US$ 432.8 million in April 2005 and net inflows of US$ 1.4 billion in March 2006. April 3-7 • April 10-13 April 17-21 April 24-29 Reserves up. Foreign reserves, measured in US dollars, increased sharply reflecting some revaluation effect and intervention by the RBI in the forex market. Reserves were up by US$ 3.0 billion, US$ 2.5 billion, US$ 1.0 billion and US$ 2.1 billion for weeks ending March 31 and April 7, 14 & 21, respectively. Reserves were US$ 157.3 billion on April 21. YF 7, HBL 15, YF 21 & 28 12400 BSE Index • Stock market rose. The stock market rose further to reach new peaks during the month on robust Q4 corporate results. The BSE index was up 763 points, or 6.8 percent, on a month-end basis. 12000 11600 11200 10800 10400 10000 3-Apr 8-Apr 13-Apr 18-Apr 23-Apr 28-Apr 8.50 8.00 7.50 7.00 6.50 6.00 5.50 5.00 4.50 4.00 Call M oney Rate • Call money rate stable. The overnight call money rate remained stable with substantial improvement in liquidity conditions. The yield curve steepened. Yields [primary market] on 91-day Treasury bills declined by 70 bps to 5.39 percent during April, while yields [primary market] on 364-day Treasury bills also fell by 0.52 bps to 5.89 percent. Yields [secondary market] on the 10-year government bonds, however, declined by 16 bps to 7.39 percent. • 3-Apr 8-Apr 13-Apr 18-Apr 23-Apr 28-Apr 1 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 • 2 Credit policy. In its annual credit policy statement for the year 2006/07, the RBI maintained the key rates, e.g., the Bank Rate at 6.0 percent, the reverse repo rate at 5.5 percent and the cash reserve ratio (CRR) at 5.0 percent, respectively, with inflation projected to be around 5.0-5.5 percent. However, to dampen the asset price markets, the provisioning for standard advances were raised to 1.0 percent (from 0.40 percent) for personal loans, capital market exposures, residential housing beyond Rs 2 million and commercial real estate loans and the risk weight on exposures to commercial real estate was raised to 150 percent from 125 percent. The statement projected that the non-food credit growth would decelerate to 20.0 percent (from around 30.0 percent). BS 18 & 21 FDI. The Government is reportedly considering a proposal to allow more FDI in retail (currently 51 percent FDI is allowed in single brand outlets). It is also planning to raise the cap on FDI to 49.0 percent in the insurance sector. BS 24 & FE 25 Infrastructure. The Supreme Court has imposed a fine of Rs 0.5 million on the Karnataka State Government and Rs 50,000 each, on two members of the State Legislative Assembly, for obstructing the construction work of Rs 22.5 billion Bangalore-Mysore express highway project by filing “frivolous” petitions. T 21 Airport modernization. The Government has reportedly signed agreements to handover Delhi and Mumbai airports to private companies, while in a related development the Delhi High Court declined a plea, made by a rival bidder, to grant an interim stay. It has also given the in principle approval to merge the state-run carriers Indian Airlines and Air India. O 4, IE 4, FE 4 & 5 Special economic regions. The Government is reportedly planning to set up special economic and investment regions in six states, possibly of the size of 200-250 km, with a world-class infrastructure set up. BS 26 Insurance sector. The Government has reportedly allowed private sector professionals to join the Insurance Regulatory & Development Authority (IRDA) as full-time members, which till date had officials from public sector companies only. FE 17 Postal reform. The Government has reportedly allowed the Department of Posts to invest up to Rs 100 billion in revenue-generating instruments, including stocks, to reduce its budgetary deficit. HBL 15 • • • • • • Real Sector • Growth outlook. India’s GDP is projected to grow above 7.0 percent in 2006/07 (RBI : 7.5-8.0 percent; ADB : 7.6 percent; IMF : 7.3 percent; and CII : 8.3 percent). According to Indian weather officials monsoon rains are forecast to be below normal at 93.0 percent of long-term average rainfall. ET 7 & FE 21 & 23 Industrial production. The Growth of the Index of Industrial Production (IIP) accelerated y-o-y to 8.8 percent in February 2006 (7.9 percent in January 2006), with manufacturing growing by 9.5 percent, mining by 0.9 percent, and electricity by 9.0 percent. The cumulative increase during April-February 2006 y-o-y was 8.0 percent (8.2 percent last year). Six core infrastructure industries grew by 8.8 percent y-o-y in March 2006 (6.9 percent in March 2005). The cumulative increase during April-March 2006 y-o-y was 4.9 percent (5.8 percent in April-March 2005). GOI 12, YF 12 Petroleum products. In spite of the buoyant economic activities, sales of petroleum products, at 94.6 million tons, were lower by 0.8 percent during 2005/06 compared to 95.4 million tons in 2004/05. HBL 27 Q4 corporate results. The Q4 (January-March 2006) net profit of 175 corporates, that have announced their results so far, was up by 41.0 percent and sales by 23.4 percent, largely supporting the buoyancy in the stock market. BS 24 & FE 24 Business confidence. The Business Confidence Index (BCI), published by the NCAER, has touched the highest point in January-March 2006 to 154, though its growth momentum is slowly petering out. The purchasing managers' index (PMI), brought out for the first time by the ABN AMRO bank and UK based NTC Research, at 55.1 in March 2006, also indicated that activities are expanding. For the first time in a decade there has not been a single default among CRISIL-rated companies in the calendar year 2005, as per the annual default study of the rating company. YF 12 & HBL 15 Resource mobilization. According to data compiled by Bloomberg, Indian corporates raised nearly US$ 40.0 billion (US$ 25.0 billion from overseas sources and US$ 15.0 billion from domestic sources) in equity and debt in 2005/06, nearly 80.0 percent higher than US$ 22.0 billion in 2004/05. FE 4 & HBL 12 • • • • • • 3 Inflation declined. WPI inflation mostly remained below 4.0 percent level on account of lower prices of food articles. Weekly inflation rates were 4.0 percent, 3.5 percent, 3.2 percent and 3.6 percent for the weeks ending March 25 and April 1, 8 & 15, respectively. YF 7, HBL 13, YF 21 & 28 Fiscal Sector • Government borrowing. The Centre Government has raised Rs 1,685 billion from the market in 2005/06, which was 5.6 percent lower than the budgeted Rs 1,785 billion. Net borrowings, after redemption of securities of Rs 691 billion, stood at Rs 994 billion. It has announced the borrowing program of Rs 890 billion for the first half of 2006/07, higher than Rs 810 billion raised in the same period in 2005/06. ET 10 VAT revenue. While the total tax revenue of VAT implementing states at Rs 678 billion were up by 15.4 percent during April-February 2006 (Rs 588 billion in April-February 2005), the total compensation to states is projected to exceed Rs 30 billion in 2005/06. According to a survey by PricewaterhouseCoopers, the implementation of VAT in 22 states has not resulted in an increase in prices of goods. HBL 12 & FE 21 & BS 21 Service tax. The Government has notified the imposition of service tax on new services like ATM operations, maintenance and management, share transfer agents, sale of space or time (other than print media), sponsorship of events (other than sports events), and ship management as announced in the Budget to be effective from May 1, 2006. BS 24 Farm credit subsidy. The public sector banks have reportedly asked for a minimum 2.5 percentage point interest subsidy for providing short-term farm credit at 7.0 percent as announced in the 2006/07 Budget. BS 25 Oil price. According to an internal report on the impact of global prices on domestic prices and state-owned oil companies, prepared by the Petroleum Ministry, under-recoveries of oil companies would touch a record high of Rs 570 billion during 2006/07, if domestic product prices were not revised. FE 27 Revenue loss through SEZs. According to some initial estimates by the Finance Ministry, as reported in the press, the Government is expected to forego almost Rs 700 billion in direct taxes and another Rs 200 billion in indirect taxes by 2009/10, on account of the fiscal exemptions and various entitlements given to corporate operating in the new SEZs. It was also reported hat the Ministry has raised objections to the provision to allow re-construction or transfer of an existing unit from the local area into the SEZs. ET 12 & BS 13 Multilateral loan. Following the withholding of funding of US$ 1.0 billion for health projects by the World Bank, after corruption complaints, the Finance Ministry has reportedly directed states and Central Government departments to ensure complete “transparency and integrity” in awarding contracts. The Ministry has also reportedly approached Bank to discuss an “alternative” procurement mechanism to ensure transparency. On the positive side the Bank is reportedly planning to revive a US$ 1.3 billion investment in hydel power projects after staying away for five years. The Government has also approached the ADB to raise its loans to US$ 2.0 billion per annum by 2009 from US$ 1.2 billion in 2005. IE 4, ET 21, FE 25 & BS 27 Debt trap. The Comptroller and Auditor General (CAG) of India has reportedly expressed its concern that Maharashtra state was gradually falling into a debt trap due to the increasing gap in revenue and expenditure, with salaries, interest payments and pensions having consumed nearly 70.0 percent of the revenue receipts in 2004/05. ET 21 • • • • • • • External Sector • Trade data. Growth in exports accelerated to 20.6 percent y-o-y in March 2006 (12.3 percent in February 2006), while cumulative exports y-o-y April-March 2006 were up by 24.7 percent. Growth in imports, however, decelerated to 18.7 percent y-o-y in March 2006 (21.4 percent in February 2006), while they increased by 31.5 percent y-o-y in April-March 2006. The trade deficit widened to US$ 39.6 billion in AprilMarch 2006 compared to US$ 26.0 billion in 2004/05. The robust growth in merchandise exports has resulted in India’s share in world exports increase marginally to 0.9 percent (0.8 percent in 2004) and its world ranking to 29th from 30th. However, its share in world services exports rose substantially to 2.8 percent (1.9 percent in 2004) and its ranking to 10th from 16th. GOI 12 & FE 12 Exports target. In its annual supplement 2006 to the Foreign Trade Policy, the Government has set a target of 20.0 percent growth in exports in 2006/07 (24.7 percent in 2005/06), while reportedly holding back key steps to open up the economy in order to retain its negotiating leverage at the WTO. YF 7, BS 10 & ET 24 • • 4 Rating outlook. Standard & Poor's have revised the outlook on India's sovereign credit rating to positive from stable (BB-plus, one notch below investment grade), with improved prospects of a stabilizing debt burden based on greater effort across all levels of Governments to consolidate their fiscal position. YF 19 IT exports. India's software and IT-enabled services exports rose by 36.0 percent to US$ 22 billion in 2005/06. HBL 25 FDI inflow. According to initial estimates by the Government the total FDI inflow was at US$ 7.5 billion in 2005/06 (US$ 5.3 billion in 2004/05) and is projected to be over US$ 10.0 billion in 2006/07. YF 19 • • Financial Sector • Interest rates. State Bank of India (SBI) and HDFC have raised their home loan rates by 50 bps. The SBI has also raised its deposit rates by 25-50 bps. BS 29 & May 2 Corporate deposits. The RBI has reportedly cautioned commercial banks against raising high cost corporate deposit, reportedly at a range of 8-8.5 percent, as credit growth would not be sustainable with high cost. BS 28 ALM guidelines. The RBI has issued draft guidelines on a new set of framework for asset liability management (ALM) of the banks that would graduate them from the conventional method of traditional gap approach (TGA) to duration gap approach (DGA) for ALM management, under which ALM is managed by matching the actual maturity of the deposits and loans and taking measures to avoid mismatches. BS 19 Hybrid capital. The RBI has reportedly asked all banks not to consider raising hybrid tier-I and tier-II capital in foreign currency till the external commercial borrowing (ECB) policy is reviewed. BS 19 Money laundering. The insurance regulator, IRDA, has issued anti money laundering (AML) guidelines that include strict adherence of 'know your customer' (KYC) norms by insurance companies. It has asked the insurers to put in place a proper policy framework by July 1, 2006 as the AML regime becomes effective from August 1, 2006. HBL 4 National Stock Exchange (NSE). In an effort to cool down the over heated derivative market, the NSE had twice raised exposure margin in the cash and Futures & Options segments in April. The margins on index products were raised from 3.0 percent to 4.5 percent and subsequently to 6.0 percent, while on stock products from 5.0 percent to 7.5 percent and subsequently to 10.0 percent. HBL 13, BS 25 & HBL 27 Stock market scam. In an interim order the Securities and Exchange Board of India (SEBI), has barred key depository participants and leading banks from carrying out capital market operations for their involvement in the initial public offers (IPO) scam. These include major banks such as HDFC Bank, Centurion Bank of Punjab, IDBI Bank, ING Vysya Bank and Infrastructure Leasing & Financial Services. ET 28 Public holding in listed company. According to a SEBI directives companies listed in stock exchanges would have a mandatory requirement of a minimum of 25 percent public shareholding, with effect from May 1, 2006, with a few exceptions to Government-owned and infrastructure companies. HBL 17 Bank finance to corporate. The RBI has reportedly asked all banks to seek either an affidavit or an undertaking from companies, certifying the end-use of working capital during the disbursement of funds, in an effort to check the flow of funds into speculative activities. BS 27 Real estate finance. The RBI has issued directives, restricting FII subscription to public equity offerings by real estate companies, even though India permits FDI up to 100 percent in such companies. The regulator has clarified that such firms can sell their initial or follow-on public stock offerings to FIIs, only if the real estate projects being developed fulfill the conditions set for FDI. ET 28 Hedge fund. D E Shaw, the world’s second-largest hedge fund, is reportedly planning to open operation in India, in spite of the reported reservation expressed by the RBI. BS 26 IPO ratings. The SEBI is reportedly working on a pilot project to put in place a mechanism for rating of public issues of companies (IPOs) in consultation with stock exchanges. Though the ratings would be optional for the companies, if opted they would have to disclose them in their offer documents. T 24 • • • • • • • • • • • ____________________________________________________________________________ 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