A Summary of Economic News in India; IMF New Delhi Office; December 2006

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					A Summary of Economic News in India, December 20061 IMF New Delhi Office Markets
45.5
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Nominal Exchange Rate (Rs/US $)

Rupee strong. The rupee/dollar rate appreciated by 41 paise during the month to reach Rs 44.33 on December 29 on account of the dollar weakening against major international currencies. The six-month forward premium on the dollar was 3.66 percent at month-end, 148 bps higher than end-November.

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Net monthly FII flows (mln US $)
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8-Dec

15-Dec

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Portfolio inflows negative. FII inflows in December turned negative at -$588 million, against the average inflow of $800 million in 2005. During 2006 net inflows were $ 8.8 billion, somewhat lower than the $ 9.6 billion recorded during 2005. Reserves up. Foreign reserves increased by $ 1.8 billion in December, reflecting some revaluation and intervention by the RBI in the forex market. Reserves were $ 177.3 billion on December 29.

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Stock market volatile. The BSE Sensex, which had declined sharply in the first fortnight in reaction to the developments in the Asian markets, almost recovered the lost ground in the second fortnight in anticipation of good Q3 corporate results. The Sensex closed the year at 13,787, up by 4,389 points (46.7 percent) over endDecember 2005.

BSE Index 14500 14000 13500 13000 12500

Call Rate (in percent) 18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0
1-Dec 8-Dec 15-Dec 22-Dec 29-Dec
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Call money rate up. The call money market came under severe strain after the RBI announced its decision to raise CRR by 25 percentage points, w.e.f. December 23 and another 25 percentage points, w.e.f. Jan 6, which was expected to suck out liquidity of Rs 135 billion from the banking system. The overnight call money rate overshoot the corridor to reach a nine-year high of 17.0 percent on December 29, as some banks, with inadequate stocks of government securities, could not access liquidity support provided by the RBI

through its repo window. HBL 30

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.
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Yield curve higher. Yields [primary market] on 91-day Treasury bills rose by 50 bps to 7.12 percent during December (Jan 3, 2007), while yields [primary market] on 364-day Treasury bills increased by 21 bps to 7.17 percent. Yields [secondary market] on the 10-year government bonds increased by 20 bps to 7.62 percent.

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Yield Curve

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91-Da y T-bills

364- Da y T-bills

10-Ye ar Gilt

Bank Credit Growth (Y/Y)
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In percent

34.0 31.0 28.0 25.0

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Non-food credit Total bank credit

Credit growth stable. Non-food credit (excludes credit extended to government agencies for food procurement) by commercial banks, grew 30.3 percent y/y in December, marginally up from 30.2 percent in November. RBI weekly data

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Credit/deposit ratio
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Credit-deposit ratio up. The credit-deposit ratio moved up to 0.74 in December from 0.72 in November. RBI weekly data

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0.70

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Policy Announcements
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Monetary policy. In move that took many a market player by surprise, the RBI raised the cash reserve ratio (CRR) by 0.50 percentage point to 5.5 percent of net demand and time deposits.[It was to be implemented in two stages- 0.25 percentage point from December 23 and another 0.25 percentage point from January 6.] The move, expected to suck out a total of Rs 135 billion from the banking system, aimed at preventing excess liquidity from fuelling overheating of the economy, reining in inflationary expectations and slowing down credit growth. BS 11, Mid-year review of the Budget. In its Mid-year review of the Budget 2006/07, presented to the Parliament, the government indicated that the mismatch witnessed in the central government finances in the first half would even out in the second half and it would be able to meet the fiscal deficit target of 3.4 percent of GDP and revenue deficit of 2.1 percent of GDP. The review also suggested that the government would introduce a sunset clause for all tax exemptions and concessions, estimated to cost Rs 1,001 billion in revenue during 2006/07. BS 19, 20 & HBL 20

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Divestment developments. The Government has reportedly decided to sell its residual 10.27 percent stake in auto major Maruti Udyog, which at current market prices would fetch nearly Rs 27 billion. The government also informed the Parliament that it would bring out a white paper on disinvestment in central public sector enterprises. It has also approved a proposal to allow the National Hydro-electric Power Corporation (NHPC), a PSU power producer, to raise capital through an initial public offering (IPO). YF 8, HT 12, H 20 & FE 21 SBI divestment. The Government has reportedly agreed to buy the RBI’s 59.73 percent stake in the State Bank of India (SBI) and is working on a scheme to carry out the transfer in a cash neutral way. ET 8 & BS 11 Road sector. After an almost one-year gap, the National Highway Authority of India (NHAI) has reportedly awarded three contracts for national highway sections in Chhattisgarh, Maharashtra and Punjab. The government is reportedly planning to promote industrial corridors along the proposed Delhi-Mumbai railway freight corridor and golden quadrilateral route. FE 5, BS 7, HBL 20 & FE 28 Power sector. Private participation in the proposed ultra mega power projects, each with a generation capacity of 4,000 mw, got a much needed boost as Lanco group and Tata power were declared successful bidders for the first two such projects at Sasan (Madhya Pradesh) and Mundra (Gujarat), respectively. The government is also planning to invite private sector participation on a build-own-operate basis for its 14 ultra mega transmission projects at a cost of Rs 220 billion. IE 19, BS 19 & FE 29 Airport sector. The government has reportedly given its in principle approval to build a greenfield airport with capacity to handle 55 million passengers in Mumbai. The airport is expected to be ready by 2012 at an estimated cost of Rs 40 billion. BS 19 Infrastructure finance. The government has set up a committee, headed by Deepak Parekh, to look into infrastructure financing issues. The committee is expected to submit an initial report on the issue in the next 6 weeks and a detailed report in another 3 to 4 months. The government is also reportedly preparing a note on the modalities for using foreign exchange reserves to finance infrastructure needs, projected at Rs 1,570 billion ($350 billion) in the 11th 5-year plan (2007-2012). India Infrastructure Finance Company Ltd (IIFCL) is reportedly planning to tap the debt market to raise funds to finance Rs 50 billion for 31 projects. YF 20, FE 21 & BS 22 Energy sector regulator. The government is reportedly considering a proposal to set up a common energy regulator for electricity, coal, oil and gas sectors. In the first stage it would set up a ‘hydrocarbon regulator’ for coal, oil and gas sectors and create a super regulator for the energy sector as a whole, encompassing electricity at a later stage. ET 27 FDI in stock exchanges. The RBI has issued directives allowing 49 percent foreign investment in stock exchanges with a cap on FDI at 26 percent and FII at 23 percent. YF 26 FDI in retail. The government is reportedly considering a proposal to allow FDI in at least five specialty retail activities, including electronics, sports goods, building equipment, stationery and furniture. BS 27 FDI in civil aviation. The Government is reportedly considering a proposal to raise the FDI ceiling in air cargo and non-scheduled operations to 74 percent from the current 49 percent. BS 6 SEZ policy. The Singapore government has reportedly started marketing its proposed model SEZ, to be set up in India, targeting investments from companies in Japan and Italy. Singapore has proposed to set up three SEZs, starting with a model SEZ to be developed by a consortium of Singaporean companies, with Ascendas being the lead agency for the project. Both the governments have reportedly formed a high-level coordinating committee to monitor the progress. BS 15 & ET 19 Special Education Zone. With the prospect of a shortage of nearly 0.5 million manpower by 2010, the National Association of Software and Services Companies (Nasscom) has reportedly suggested the creation of special education zones, which would be free from bureaucratic interference and have the flexibility to design courses that suit current-day business. HBL 19 Bilateral trade. India and China signed an agreement envisaging joint exploration, production and acquisition of oil assets in third countries. India and Japan agreed to start talks towards a bilateral free trade agreement within two years time. The government is also working on a FTA with Gulf Arab nations, to be signed by the end of 2007. YF 8, H 15 & BS 18

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Sugar export. The Government partially lifted the ban on sugar export by mills that had earlier imported raw sugar with a commitment to export the same quantity of refined sugar. FE 19 Financial sector reform. Long-pending reforms in the financial sector were set to be delayed as the Government failed to table the bills to amend the Insurance Act, 1954, IRDA Act, 1999, LIC Act, 1956, Pension Funds Regulatory & Development Authority (PFRDA) Bill 2005 and Banking Regulation Act in the winter session of the Parliament. It was reportedly planning to refer all insurance-related Bills to a group of ministers (GoM) for further consideration and was initiating a fresh round of discussions with states to build a consensus on the pension Bill. BS 11 & FE 22 ECBs. Following its announcement in the October credit policy, the RBI has issued the necessary guidelines liberalizing the norms for corporates to raise funds through ECB route. Corporates can now borrow an additional $250 million (average maturity 10 year) through ECB, over and above the existing limit of $500 million (average five-year maturity) during a financial year under automatic route. BS 5 Overseas investment norms. The RBI has relaxed its guidelines to allow resident individuals freedom to invest in any listed foreign company. Previously, individuals were restricted to investing in a listed foreign company that had a minimum 10 percent investment in a listed Indian company. BS 21 Services sector. The finance ministry, in a draft strategy paper circulated to various industry and trade bodies, has proposed setting up a nodal department for services, the fastest growing sector in the economy. ET 12 Panchayats. The Government is reportedly considering a new scheme for devolution of funds to Panchayati Raj institutions (local self governments). The scheme would allow Panchayats to compete to get extra funds from the central government based on their progress in implementing projects, as measured by a newly designed “Devolution Index.” IE Jan 2

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Real Sector
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Industrial production. Growth in the Index of Industrial Production (IIP) decelerated to 6.2 percent y/y in October, with manufacturing growing by 6.0 percent, mining by 4.0 percent, and electricity by 9.7 percent. On a cumulative basis IIP grew by 10.3 percent y/y in April-October. The core infrastructure sector output rose 9.0 percent y/y in October, compared to 7.5 percent y/y in April-October. The seasonally adjusted Purchasing Managers' Index (PMI), compiled by NTC research, fell to 56.6 in December from 58.9 in November as the strong momentum of previous months slackened due to slower domestic and external demand. FE Jan 2 Inflation. The point-to-point WPI inflation moved up. Weekly inflation rates were 5.32 percent, 5.43 percent, 5.48 percent and 5.58 percent for the four weeks through December 30.

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Fiscal Sector
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Fiscal update. During April-November 2006 the central government’s total revenue was at Rs 2,212 billion (54.8 % of Budget estimate) and expenditure was at Rs 3,365 billion (59.7 % of Budget estimate).
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Using three months moving average, the y/y revenue growth in November was 23.9 percent, while expenditure rose by 11.3 percent. The April-November revenue deficit totaled Rs 845 billion (99.7 % of Budget estimate), and the fiscal deficit totaled Rs 1,082 billion (72.8 % of Budget estimate). Gov 29.

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Income tax. The Income tax department has assessed Rs 600 billion in additional tax, based on the scrutiny of around 2 percent of income-tax returns filed during assessment year 2004/05 and is hoping to collect nearly Rs 300 billion in additional tax revenue. The department had recovered around Rs 240 billion (against a demand of Rs 560 billion) for the 2003/04 assessment year. BS Jan 2 State finance. According to the report on state finance 2006, published by the RBI, the gross fiscal deficit of state governments would decline to 2.8 percent of GDP in 2006/07 from 3.2 percent of GDP in 2005/06, revenue deficit would almost be wiped out in 2006/07, compared to 0.5 percent of GDP in 2005/06. The improvements were attributed to higher grants from the central government, deceleration in revenue expenditure and rise in tax revenue on account of the implementation of VAT. The report also urged the state governments to assess their respective fiscal capacities before implementing any pay hike recommendation by the Sixth Pay Commission. BS 28 Small savings. Collections under various small savings schemes declined by 11.3 percent to Rs 735 billion during April-August, compared to Rs 828 billion during the same period last year. HBL 6

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External Sector
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Trade data. Growth in exports accelerated to 57.1 percent y/y in November, compared to 39.5 percent y/y in April-November. Imports grew by 60.3 percent y/y in November, compared to 36.5 percent y/y in AprilNovember. The trade deficit widened to $ 36.0 billion in April-November compared to $ 27.6 billion during the same period a year ago. GOI 18, Balance of Payments data. The current account posted a deficit of $6.9 billion in Q2 (July-September), double the level in Q2 2005/06, as the merchandise deficit reached $17.9 billion, driven by a 31.0 percent rise in oil imports. The capital account, however, posted a surplus of $ 9.2 billion in Q2, compared to $ 8.8 billion in the corresponding quarter in the previous year. The overall balance of payment surplus was lower at $ 2.3 billion in Q2, compared to $ 5.3 billion last year. For H1 (April-September) the current account deficit was $ 11.7 billion compared to a deficit of $ 7.2 billion last year. The capital account surplus in H1 was of $ 20.3 billion. RBI Dec 29 & ET Jan 2 External debt. India’s external debt increased by $4.3 billion in Q2 to reach $136.5 billion on endSeptember. HBL 30 FDI. FDI inflows in H1 (April-October) were up by 134 percent to $6.1 billion, compared to $2.6 billion in the same period last year. ET 20 & 21 Multilateral lending. The ADB is extending $1 billion loan to India to support anti-poverty programs in rural areas. YF 11

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Financial Sector
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Interest rates. Following the RBI’s decision to raise CRR, some leading private and public sector banks have raised their prime lending rates by 25-150 bps - ICICI bank by 50 bps, HDFC bank by 150 bps, Canara bank by 25 bps and Bank of Baroda by 50 bps. The State Bank of India (SBI) raised its domestic term deposit rates by 25-75 bps across maturities. It had also hiked Foreign Currency Non-resident Accounts Banks Scheme [FCNR (B)] deposits and Non Resident External (NRE) rupee term deposits by 11-17 bps across all maturities. BS 10, 22, HBL 30 & Jan 2

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Bank NPAs. The Government has reportedly asked five commercial banks to reduce their net non-performing asset (NPA) to below 2 percent level. The five banks are Central Bank (2.59%), Dena Bank (3.04%), Punjab & Sind Bank (2.1%) and Uco Bank (2.10%). FE 21 Urban co-operative banks (UCBs). The state government of Maharashtra and RBI have reportedly signed a memorandum of understanding (MoU) for evolving measures to help depositors in case of any UCB failure. BS 15 Corporate bonds. The SEBI has announced the creation of a uniform platform for trading in corporate bonds from January 1. As per its directives all transactions in corporate bonds of Rs 0.1 million and above are to be reported to the proposed platform, to be operated by the Bombay Stock Exchange (BSE), within 30 minutes of closing the deal and the information on the settlement within one trading day. BS 12 NBFCs. The RBI has allowed financially sound NBFCs to distribute mutual fund products and issue cobranded credit cards with scheduled commercial banks. It has also informed the government that it had initiated proceedings to close 84 NBFCs for default and had filed criminal complaints against many other NBFCs for cheating the public. BS 5 & ET 6 Banks' exposure to NBFCs. The RBI has directed banks to limit their exposure (both lending and investment, including off-balance sheet exposures) to a single NBFC and NBFC-Asset Financing Companies (AFCs) to 10 percent and 15 percent, respectively, of their capital funds. H 12 Derivatives. In its draft guidelines on derivative transactions by banks and primary dealers, the RBI was reportedly of the view that every transaction should be marked to market (valued at the current market price). It has also favored banning structured products, e.g., the second order products (products derived from other derivative products and not on underlying financial products such as option on future). BS 12 Bank merger. The all-stock merger of the Sangli bank with ICICI bank was approved by their respective boards. FE 11 IFCI. The Government is considering a proposal to induct a strategic investor into IFCI, a public sector financial institution with a accumulated loss of over Rs 40 billion, to revive the institution. ET Jan 2 Exchange for SMEs. SEBI has reportedly formed a small in-house committee to study and prepare a roadmap for creating an exclusive trading platform for the small and medium companies (SMEs). The new trading platform would help SMEs shop in the overseas markets like Luxembourg and London's AIM market to raise their resources. BS Jan 2 FIIs. The number of FIIs registered with the SEBI increased by 217 in 2006, the highest in a single calendar year, to reach 1,030. BS 29 Long-term finance. The Industrial Development Bank of India (IDBI) and Life Insurance Corporation of India (LIC) have forged an alliance to fund Rs 350 billion to the infrastructure sector. BS 22

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____________________________________________________________________________ Sources Key: RBI-Reserve Bank of India Press Release/Notification; SEBI-The Securities and Exchange Board of India, BS-Business Standard; CM-Capital Markets.com; YF/R-Yahoo Finance.com/Reuters; DJ-Dow Jones, TOI-Times of India; OL-Outlook; ET-Economic Times; HBL-Hindu Business Line; H- The Hindu; FE-Financial Express; IE-Indian Express; T- Telegraph; TR-Tribune; PIB-Press Information Bureau; GOI- Government of India