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Consumption refers to a venture capital company in the profitability ratio of venture capital before consumption.
The Global Economic ICRABULLETIN Money Environment and the Indian & Financial Markets Finance JULYDEC..0 4 List of Acronyms AMFI : Association of Mutual Funds IIP : Index of Industrial Production in India IMF : International Monetary Fund BoE : Bank of England ISM : Institute for Supply Manage- BoP : Balance of Payments ment BSE : Bombay (Mumbai) Stock LAF : Liquidity Adjustment Facility Exchange LSE : London Stock Exchange CBDT : Central Board of Direct Taxes MBA : Mortgage Bankers Association CFNAI : Chicago Fed National Activity MF : Mutual Fund Index MPC : Monetary Policy Committee CMIE : Centre for Monitoring Indian MSB : Market Stabilisation Bonds Economy MSS : Market Stabilisation Scheme CMR : Call Money Rate NSE : National Stock Exchange CPI : Consumer Price Index NTPC : National Thermal Power CRR : Cash Reserve Ratio Corporation ECB : European Central Bank OMO : Open Market Operations EPF : Employees’ Provident Fund PCE : Personal Consumption Euro zone : Belgium, Germany, Greece, Spain, Expenditures France, Ireland, Italy, Luxem- PDI : Personal Disposable Income bourg, the Netherlands, Austria, PLR : Prime Lending Rate Portugal and Finland PMI : A composite diffusion index EU25 : Belgium, the Czech Republic, used in US ISM’s Manufacturing Denmark, Germany, Estonia, Report On Business; Greece, Spain, France, Ireland, Purchasing Manager’s Index Italy, Cyprus, Latvia, Lithuania, (for the Euro zone) Luxembourg, Hungary, Malta, qoq : quarter on quarter the Netherlands, Austria, Poland, RBI : Reserve Bank of India Portugal, Slovenia, Slovakia, SA : Seasonally Adjusted Finland, Sweden and the United SAAR : Seasonally Adjusted Annual Kingdom Rate FII : Foreign Institutional Investment SEBI : Securities and Exchange Board FOMC : Federal Open Market Committee, of India US STT : Securities Transaction Tax GDP : Gross Domestic Product WEO : World Economic Outlook HICP : Harmonised Index of Consumer WPI : Wholesale Price Index Prices yoy : year on year 163 ICRABULLETIN Global Economy In the second quarter of 2004, growth momentum moderated Money & throughout the global economy, vis-à-vis the exceptionally fast pace of expansion in the first quarter of the year. The recent volatility and hike Finance in oil prices, driven by a combination of surging demand and supply concerns in several major oil-exporting countries, and to an extent JULYDEC..0 4 exacerbated by low excess capacity and speculative activity, have so far had a moderate impact on economic stability. Nevertheless, persistently high and further increasing oil prices could very well repress corporate profits and household real incomes. Financial markets globally are adjusting to the interest rate tightening cycle initiated in Financial markets the US in June. The resurgence of inflationary pressures, primarily due globally are to geopolitical tensions and a high possibility of further oil price rises, has however tempered expectations about the steepening of rates adjusting to the globally. interest rate The US US GDP growth was revised upwards (from an estimated 2.8 tightening cycle per cent) to 3.3 per cent (SAAR) in the second quarter of 2004; thus the US economy has slowed somewhat from the (revised) 4.5 per cent initiated in the US in growth of the first quarter. Consumer spending growth looked quite weak, but other categories of aggregate spending appear to have June. The mitigated some of the weakness in the consumer sector. The contributors to the increase in real GDP in the second quarter were non- resurgence of residential fixed investment, PCE, residential fixed investment, private inflationary inventory investment, exports, and government spending; imports, which are a subtraction in the calculation of GDP, increased. Compared pressures, primarily to the first quarter, the deceleration in real GDP growth in the second quarter reflected decelerations in PCE and in private inventory due to geopolitical investment and an acceleration in imports that was partly offset by accelerations in non-residential fixed investment and in residential fixed tensions and a high investment. PCE increased 1.6 per cent in the second quarter, compared with an increase of 4.1 per cent in the first; non-residential fixed possibility of further investment increased 12.5 per cent, compared to 4.2 per cent; non- residential structures increased 6.9 per cent, in contrast to a decrease of oil price rises, has 7.6 per cent; equipment and software increased 14.2 per cent, compared however tempered with an increase of 8.0 per cent; residential fixed investment increased 16.5 per cent, compared with an increase of 5.0 per cent; real exports expectations about of goods and services increased 7.3 per cent in the second quarter, the same increase as in the first; while real imports of goods and services the steepening of increased 12.6 per cent, compared with an increase of 10.6 per cent. Real federal government consumption expenditures and gross rates globally. investment increased 2.7 per cent in the second quarter, compared with an increase of 7.1 per cent in the first. National defence expenditure increased 1.9 per cent, compared with an increase of 10.6 per cent; non-defence expenditure increased 4.4 per cent, compared with an 164 increase of 0.2 per cent. [Chart G.1.1 shows the contributions of the CHART G.1.1 ICRABULLETIN Contributions to change in US GDP* in 2004 (percentage points) Money 3.0 2.5 & 2.0 2004:Q1 2004:Q2 Finance 1.5 JULYDEC..0 4 1.0 0.5 0.0 -0.5 -1.0 s s Private Fixed Energy goods Housing investment investment Net exports & Investment Durable goods Consumption PCE Motor & parts Services Govt vehicles Residential Another cause for concern is that the * percentage change (SAAR). financial sector still various components to the change in US GDP in the second quarter accounted for 42% compared to the first]. Corporate profits from current production (with inventory valuation and capital consumption adjustments), considered of US corporate as the best measure of industry profits, increased by only $8.3 billion in the second quarter, after a first quarter increase of $36.5 billion. profits in the first Current-production cash flow (net cash flow with inventory valuation and capital consumption adjustments), which gives the internal funds half of 2004, available to corporations for investment, in fact decreased $5.7 billion compared with just in the second quarter, in contrast to an increase of $5.9 billion in the first. Taxes on corporate income increased $14.7 billion in the second about 12% for the quarter, compared with an increase of $4.2 billion in the first. Profits after tax with inventory valuation and capital consumption adjustments manufacturing decreased $6.4 billion in the second quarter, after increasing $32.3 billion in the first. Profits both before and after tax (without inventory sector; this seems to valuation and capital consumption adjustments) increased in the second quarter after decreasing slightly in the first. Private businesses increased be a clear indication inventories to the tune of $61.1 billion in the second quarter, following increases of $40.0 billion in the first quarter and $8.6 billion in the of consumer fourth quarter of 2003 [Chart G.1.2.1]. Another cause for concern is that the financial sector still accounted for 42 per cent of US corporate financing excesses. profits in the first half of 2004, compared with just about 12 per cent for the manufacturing sector [Chart G.1.2.2]; this seems to be a clear indication of consumer financing excesses. Industrial production rose a disappointing 0.1 per cent in September, even as the August figure was revised downward to -0.1 per cent, following an upward revised increase of 0.7 per cent in July. After decreasing 0.1 per cent in June, manufacturing output gained 0.9 per cent in July and 0.2 per cent in August, but edged down in September by -0.3 per cent [Chart G.1.3]. Economic activity in the manufacturing sector grew in August and September at a slower pace, according to the ISM, while the CFNAI, though positive, went down sharply to an 165 ICRABULLETIN CHART G.1.2.1 US Corporate Profits and Taxes (percentage change, qoq) Money & 12.0 Corporate profits* Taxes on corporate income Finance 10.0 Profits after tax* Profits before tax** JULYDEC..0 4 8.0 Profits after tax** Net cash flow* 6.0 4.0 2.0 0.0 -2.0 2003:Q3 2003:Q4 2004:Q1 2004:Q2 * with inventory valuation and capital consumption consumption adjustments. ** without inventory valuation and capital consumption consumption adjustments. CHART G.1.2.2 US Corporate Profits in the Financial and Manufacturing sectors Financial Non-Financial* Retail trade Manufacturing 100% 54.1 66.8 93.4 81.5 94.8 90% 82.6 78.9 74.7 80.0 73.1 80% 70% 60% 230.1 251.9 252.6 244.9 280.9 50% 40% 30% 20% 295.4 306.1 305.3 313.7 306.4 10% 0% 2003:Q2 2003:Q3 2003:Q4 2004:Q1 2004:Q2 As percentage of Domestic profits with inventory valuation adjustments (values in billion US$). *excludes manufacturing and retail trade. estimated 0.19 in August, from an upward revised 0.53 in July. August’s CFNAI was revised downwards further to a mere 0.03 and for September the index is estimated at -0.01, showing that growth was below trend for the latest month. The pace of services sector expansion slowed considerably in recent months, as the ISM Non-Manufacturing index tumbled 6.6 points down to 58.2 in August and further down to 56.7 in September. The impacts of recent hurricanes pushed up jobless claims for a few weeks but claims for benefits declined again by end-September. The 166 unemployment rate for August stood unchanged at 5.4 per cent, while CHART G.1.3 ICRABULLETIN US Business and Manufacturing Activity Indicators Money Apr-01 & Apr-02 Apr-03 Apr-04 Oct-01 Oct-02 Oct-03 Jan-01 Jan-02 Jan-03 Jan-04 Jul-01 Jul-02 Jul-03 Jul-04 Finance 1.5 65 JULYDEC..0 4 1 60 0.5 55 ISM_PMI 0 50 -0.5 45 -1 40 The balance on the -1.5 35 US current account -2 30 IIP Manufacturing growth* CFNAI ISM_PMI registered another * percentage change over previous month. sharp decline of $19 wage growth slowed modestly to 0.4 per cent in August from 0.6 per billion during the cent in the previous month. PDI rose 0.4 per cent in August, after a weak 0.2 per cent growth the prior two months, while PCE increased by second quarter, after a very weak 0.1 per cent after a strong 1.1 per cent growth in July compared to a negative in June. Farm prices fell 5 per cent in a $20 billion decline September, as the composite price indexes for crops and livestock during the first. An products dropped 5.9 per cent and 4.1 per cent, respectively. Despite higher energy prices, PPI for finished goods fell by 0.1 per cent in increase in the August; excluding food and energy, core prices for both crude and intermediate goods rose sharply. In September, PPI for finished goods goods deficit increased by 0.1 per cent, and would been larger if not for a 0.9 per cent decline in the finished energy goods index. Rapid inflation pushed the overall continued among core intermediate goods, which increased for the 14th consecutive month in September. CPI rose 0.2 per cent in September, balance to -$166.2 while core consumer prices rose 0.3 per cent, taking core inflation to 2.0 per cent, for the first time in almost two years. The MBA index of billion. housing finance activity after an increase in late September, fell back sharply in early October, with both the refinance and purchase indices registering losses despite decline in mortgage interest rates; both have however, reversed to strength in mid-October. The balance on the US current account registered another sharp decline of $19 billion during the second quarter, after a $20 billion decline during the first. An increase in the goods deficit pushed the overall balance to -$166.2 billion. High oil prices and a plunge in exports of capital goods during June drove the larger goods deficit. Oil imports pushed the US trade balance deeper into the red during August, as exports increased marginally, and imports rose further to push the balance of trade to -$54.0 billion. Import prices rose a smaller than expected 0.2 per cent in September, following a revised 1.4 per cent 167 ICRABULLETIN increase in August.1 Petroleum prices rose just 0.6 per cent for September, increasing the likelihood of a larger increase next month, Money & given the surge in crude prices in early October. Export prices rose 0.4 per cent on the strength of a 1.6 per cent increase in agricultural Finance export prices, while in August, export prices had fallen 0.5 per cent as a sharp decline in agricultural commodity prices had more than offset JULYDEC..0 4 the 0.4 per cent increase in other export prices. The trade weighted value of the US dollar rose further through September and early October despite indications of a weak US economy. Till date the US Government is continuing to add to its Strategic Petroleum Reserve, rather than depleting it in order to intervene and reduce oil prices. Fiscal policy is The unified Treasury budget surplus for September, the last likely to be mildly month of the current fiscal, was $24 billion, after a $41 billion deficit in August. For the full fiscal year 2004, the federal government ran a restrictive over the deficit of $413 billion, a new record in nominal dollar terms. The FOMC unanimously decided to raise its overnight federal funds target next few years, by 25 basis points on September 21, to 1.75 per cent as widely expected. The Fed continues to see the risks facing its growth and while at the same inflation outlooks as balanced and reaffirmed its expectation that the current accommodative stance of monetary policy can be removed at a time higher interest measured pace. Fiscal policy is likely to be mildly restrictive over the next few years, while at the same time higher interest rates and oil rates and oil prices prices are giving rise to some pessimism regarding US consumer spending,2 so far a dominant contributor to the global economic are giving rise to revival. some pessimism Euro Area regarding US The euro area experienced moderate growth during the second quarter of 2004, with real GDP advancing by 0.5 per cent (qoq, SA), consumer spending, slightly slower than the first quarter turnout of 0.6 per cent. The quality of growth remained doubtful, with private consumption slowing down so far a dominant and business demand still very soft. Both exports and imports however accelerated. During the second quarter, household final consumption contributor to the expenditure grew by 0.3 per cent (after a 0.6 per cent growth in the first quarter) [Charts G.2.1-G.2.3]; however, government consumption global economic increased by 0.6 per cent (compared to 0.1 per cent); investments revival. increased by 0.1 per cent (compared to -0.2 per cent); exports rose by 3.7 per cent (compared to 1.4 per cent); and imports by 2.9 per cent (compared to 0.3 per cent in the first quarter). Both industry and the 1 In August, excluding petroleum products, import prices rose 0.4 per cent, which was the largest increase since February. 2 Home price to rent ratio is also expected to come down in line with historical averages either through a sharp correction or through a period of stagnation in home prices. If it does happen, it might induce the typical American 168 household to think of saving more, thus reducing consumption. CHART G.2.1 ICRABULLETIN Private consumption expenditure (percentage change over the previous quarter*) Money & 1.5 Euro-zone Finance 1 EU25 JULYDEC..0 4 0.5 Germany 0 France -0.5 United -1 Kingdom Growth in the euro 2002:Q2 2002:Q1 2001:Q4 2004:Q2 2004:Q1 2003:Q4 2003:Q3 2003:Q2 2003:Q1 2002:Q4 2002:Q3 zone service sector slowed modestly in CHART G.2.2 Government consumption expenditure August with euro (percentage change over the previous quarter*) zone Services PMI 2.5 dipping to 54.5 from 2 1.5 1 55.3 in July; the 0.5 Euro- 0 zone index fell further to a -0.5 EU25 -1 -1.5 Germany 13-month low of 2004:Q2 2003:Q4 2003:Q2 2002:Q4 2002:Q2 2001:Q4 France 53.3 in September, United though it remained CHART G.2.3 above the key 50 Gross fixed capital formation (percentage change over the previous quarter*) watermark between 3.0 contraction and 2.0 1.0 growth. Euro-zone 0.0 EU25 -1.0 -2.0 Germany -3.0 France 2002:Q2 2002:Q1 2001:Q4 2004:Q2 2004:Q1 2003:Q4 2003:Q3 2003:Q2 2003:Q1 2002:Q4 2002:Q3 United * from SA values in constant prices. 169 ICRABULLETIN services sector trended up in the second quarter as gross value added in industry grew by 1.1 per cent; financial services and business activities Money & rose by 0.8 per cent; trade, transport and communications services grew by 0.6 per cent; and construction expanded by 0.5 per cent. EU25 Finance GDP grew by 0.6 per cent in the second quarter of 2004 after 0.7 per cent growth in the first quarter; household final consumption JULYDEC..0 4 expenditure grew by 0.6 per cent; investments increased by 0.4 per cent (compared to 0.1 per cent in the first quarter); exports rose by 3.5 per cent (compared to 1.1 per cent); and imports by 2.8 per cent (after 0.2 per cent growth in the first). Construction activities decelerated, while gross value added in industry; financial services and business activities; In September euro- trade, transport and communications services expanded significantly. zone HICP inflation The euro zone industrial sector started off the third quarter on a stronger note as activity rose in July by 0.4 per cent (SA) compared to cooled for a third June 2004, matching expectations and more than reversing a 0.2 per cent contraction reported in June. Consumer goods notched by far the successive month, largest increase, though in part that is a reflection of June’s considerable weakness. Output in the EU25 grew by 0.2 per cent in July rising 0.2% in the 2004, after a fall of 0.1 per cent in June. However, industrial production decreased 0.6 per cent (SA) in August from July, with both month and only utilities, as well as finished goods showing declines. Growth in the euro zone service sector slowed modestly in August with euro zone Services 2.1% in the year. On PMI dipping to 54.5 from 55.3 in July; the index fell further to a 13- month low of 53.3 in September, though it remained above the key 50 the basis of current watermark between contraction and growth. National indices for market expectations Germany and France slipped to 13-month lows of 52.1 and 53.1, respectively and growth also slowed in the UK, Italy, Ireland and for oil prices, it Spain. The manufacturing index for September also dipped to a seven- month low of 53.1. appears unlikely that The balance on the current account for the euro area deteriorated for the fourth consecutive month in August from a 2.1 annual inflation billion euro (SA) surplus in June to a 1.0 billion euro surplus in July and to a marginal deficit of 400 million euros in August. This resulted rates will return to from a decrease in the surplus of goods (by 3.7 billion euros), partially counterbalanced by a rise in the services surplus (by 1.1 billion euro) levels below 2% in and a reduction in the deficits in both income (by 0.4 billion euros) and the remainder of current transfers (by 0.8 billion euros). In the financial account, combined direct investment and portfolio investment recorded net this year. inflows that predominantly reflected the repayment of inter-company loans by foreign affiliates of euro area companies and net inflows in portfolio equity securities. The EU25 external current account recorded a deficit of 3.0 billion euros in the second quarter of 2004, as compared with a deficit of 3.8 billion euros in the first quarter of 2004. In the second quarter of 2004, compared to the second quarter of 2003, a higher surplus was recorded in the services account (14.3 billion euros compared to 11.7 billion), and a smaller deficit for goods (-0.9 billion 170 compared to -2.4 billion), while the income (-8.3 billion compared to -6.9 billion) and current transfers accounts (-8.1 billion compared to ICRABULLETIN -7.7 billion) registered higher deficits. Money Euro-zone and EU25 unemployment stood at 9.0 per cent (SA) in August 2004, unchanged from July. Recent oil price developments & have had a visible direct impact on price developments in the euro Finance area. The euro-zone PPI for industrial products rose by 0.4 per cent in JULYDEC..0 4 August 2004 over July, and by 0.5 per cent in the EU25 nations. In July PPI had increased by 0.5 per cent in the euro-zone and by 0.4 per cent in the EU25. Monthly inflation in August inched up over July by 0.2 per cent, so that annual HICP inflation, stood at 2.3 per cent, unchanged from July. In September euro-zone HICP inflation cooled for In Japan, growth a third successive month, rising 0.2 per cent in the month and only 2.1 per cent in the year. On the basis of current market expectations for oil slowed in the prices, it appears unlikely that annual inflation rates will return to levels below 2 per cent in the remainder of this year. The ECB held second quarter of monetary policy constant in October, keeping the minimum bid rate on main refinancing operations (the repo rate), which is the central bank’s 2004, though the main policy instrument, constant at 2.0 per cent. Industrial production in Europe’s largest economy rebounded in underlying growth July expanding by 1.6 per cent over June, but declined again in August by 1.0 per cent, though growth remained strong compared to one year momentum is ago. The German unemployment rate however, stood at 10.6 per cent inching up from 10.5 per cent in July; taking into account the ongoing judged to be robust. decrease in payroll employment numbers, these data underline the grim GDP grew by 0.4% condition of Germany’s labour market despite the largely export-led recovery. The French industrial sector contracted sharply as industrial (qoq), after an activity slid 1.9 per cent (SA) in August from July; the setback was led by a mammoth 14.4 per cent drop in automotive activity. French upward revised rate Consumer price inflation accelerated modestly, rising a 0.3 per cent (SA) in August over July; in September CPI growth moderated, rising of 1.6% in the first 0.2 per cent, mirroring trends across much of the euro zone. The French unemployment rate once again seesawed in August and rose to 9.9 per quarter. The cent, reversing July’s small improvement. Italy got off to a promising start in the third quarter, with industrial production rising 0.4 per cent decomposition of in July over June, the best growth in three months; however industrial GDP figures shows production reversed course and fell 0.8 per cent in August. Industrial production in Portugal slumped in August, falling 1.9 per cent over the that external previous month, eclipsing July’s fall of 1.7 per cent. In the UK, activity remained robust in the second quarter, as demand remains an despite higher oil prices, private consumption remained strong, underpinned by sustained income growth and rising housing wealth; important driving private investment has firmed up, and government expenditures have continued to support domestic demand. In the third quarter, UK growth factor. has been pulled back with GDP advancing by 0.4 per cent (qoq, SA), as service activity remained strong, but manufacturing output displayed a sharp contraction. The UK labour market which remained firm in July and August, continued to tighten as joblessness both by claimant count 171 ICRABULLETIN (for September) and by ILO standards (through August) fell, while job vacancies continued to rise. The central risk remains an abrupt Money & adjustment in the housing market, where prices still appear higher than can be explained by economic fundamentals. Housing prices rose at a Finance subdued rate for a second consecutive month in September—the index rose only 0.2 per cent over August triggering a further cooling in the JULYDEC..0 4 annual housing price inflation rate to 17.8 per cent from 18.9 per cent in August. EU-harmonised CPI inflation rose 0.3 per cent in August over July, fully reversing July’s monthly decline. In line with easing of housing prices and slowing of the services sector, the MPC of the BoE held its benchmark repo rate at 4.75 per cent in October too; the MPC In China the fear of a had earlier raised rates by 25 per cent in August. hard landing has so In Sweden output rose 2.9 per cent (SA) in August over July, regaining some of the ground lost in June and July, when output had far been refuted, as dipped 2.2 per cent and 2.1 per cent, respectively. As was widely anticipated, the Swedish monetary authorities left their benchmark there have been policy rate unchanged at a historically low 2.0 per cent in October. Underpinning the decision to hold were the central bank’s forecasts of changes in policy to moderate inflation despite high oil prices, a strengthening recovery, and rising capacity utilisation. Polish real GDP grew 6.1 per cent (yoy) in soften the economic the second quarter; however, investment spending disappointed, slowing from 3.5 per cent in the first quarter to 3.3 per cent in the second. For landing, but not an the first time in four monetary policy council meetings, the National Bank of Poland did not elect to increase interest rates from 6.50 per entire reversal. cent, in September and held rates steady in October too. The central Despite decelerating bank did, however, maintain its restrictive stance, suggesting that further hikes may be coming. In Hungary, second quarter GDP grew bank credit, China 4 per cent (yoy); components of growth have shifted from domestic consumption to investments and exports. Industrial production grew a still sees strong very disappointing 3.9 per cent in August with the industrial sector slowing much faster than expected; hence the National Bank’s policy industrial rate, which was left unchanged at 11 per cent in September, was cut by 50 basis points in October. The Czech economy expanded by 4.1 per production, retail cent (yoy) in the second quarter of 2004, while the first quarter growth estimate of 3.1 per cent was revised higher to 3.5 per cent. Surging sales, trade, and business investment is responsible for the acceleration in overall investment, while growth. Industrial output adjusted for work days expanded 1.4 per cent from June to July, and increased 18.0 per cent (yoy), this being the fifth inflation pressure is consecutive month of double-digit growth. Production however recorded the slowest pace of growth in six months at 6.5 per cent (yoy) in still around. August. In end-September and October, all monetary policy instruments were left unchanged. Asia In Japan, growth slowed in the second quarter of 2004, though the underlying growth momentum is judged to be robust. GDP grew by 172 0.4 per cent (qoq), after an upward revised rate of 1.6 per cent in the first quarter. The decomposition of GDP figures shows that external ICRABULLETIN demand remains an important driving factor; exports increased by 3.5 Money per cent, with the relative growth contributions of exports to Europe, Asia and the US becoming more balanced. Import growth slowed & somewhat resulting in a net trade contribution of 0.3 percentage point. Finance In the domestic economy, private consumption growth remained robust JULYDEC..0 4 at 0.6 per cent, reflecting improvements in the labour market and disposable income. Private non-residential investment spending, earlier an important driver of growth was flat in the second quarter, despite rising machinery orders and robust corporate profits. The decline in Questions have public investment accelerated as fiscal consolidation continues. The arisen about the GDP deflator continues to indicate more pronounced deflationary pressures, declining by 2.6 per cent (yoy) in the second quarter. The rise Chinese real in commodities and intermediate goods prices has resulted in corporate goods prices (former wholesale prices) rising by 1.6 per cent (yoy) in unemployment rate; July. Bank of Japan decided to maintain its pre-existing monetary policy settings and keep its target for the outstanding balance on the the published current accounts held at the bank at 30-35 trillion yens; the quantitative easing strategies will possibly remain until consistent inflation is numbers only observed. In China the fear of a hard landing has so far been refuted, as include those who there have been changes in policy to soften the economic landing, but are officially not an entire reversal. Despite decelerating bank credit, China still sees strong industrial production, retail sales, trade, and investment, while registered as inflation pressure is still around. In the second quarter economic activity continued to expand rapidly, although it has decelerated unemployed in somewhat from the pace reached in the first quarter, largely due to tightening policies targeted at selected overheated sectors. Industrial urban areas and do production rose by 15.5 per cent (yoy) in July, led by exports and fixed asset investment which rose by 33 per cent and 31 per cent, not include those respectively. In July, annual CPI inflation reached 5.3 per cent, driven by surging food and housing prices. China’s third quarter GDP is who are being laid estimated to have expanded at 9.1 per cent (yoy), marking the third consecutive quarter of slower growth as breakneck investment and off from state-owned lending were reined in. However, there were no indications on any enterprises. plans to scale back credit and investment curbs, which have helped to slow the pace of annual growth in GDP from 9.8 per cent in the first Considerable inter- quarter and 9.6 per cent in the second quarter. Questions have arisen about the Chinese real unemployment rate; the published numbers only regional disparities include those who are officially registered as unemployed in urban areas and do not include those who are being laid off from state-owned also show up in the enterprises. Considerable inter-regional disparities also show up in the employment statistics. In South Korea, the expansion in economic employment activity has overall been rather strong, with industrial production trending higher by 12.8 per cent (yoy) in July [Chart G.3]. This statistics. favourable outcome, however, remains driven by rapid export growth, while domestic demand continues to be subdued. South Korean 173 ICRABULLETIN CHART G.3 Industrial Activity in South Korea in 2004 Money & Q1 2004 Q 2 2004 June July Aug. Finance 5.0 82.0 4.0 81.5 Capacity Utilisation Ratio JULYDEC..0 4 81.0 3.0 80.5 2.0 80.0 1.0 79.5 0.0 79.0 78.5 -1.0 78.0 -2.0 77.5 -3.0 77.0 AverageCapacity Utilisation Ratio (%) Industrial Production Index Producer's Shipment Index Wholesale & Retail Trade Singapore’s SA percentage change over the previous Month /Quarter. manufacturing consumption slumped in July by 3.0 per cent over June, and 0.4 per output rose only cent in August, after having gained by 4.4 per cent in June. Orders for domestic machinery sharply reversed trend from the increases of 19.0 5.3% (yoy) in per cent and 18.1 per cent in May and June, respectively, to a 12.4 per cent decline in July and a 23.3 per cent decline in August. Construction August, chasing investment however continued its upward trend, with the value of construction works increasing by 9.9 per cent (yoy) in July after an 8.1 growth of 19.1% in per cent increase in June and by 8.9 per cent in August. Manufacturing production continued to be favourable, with a high growth of 13.2 per July; however, cent (yoy) in July and 10.7 per cent in August; on the contrary, service sector activities remained lacklustre in July and August, contracting by output grew 11.8% 1.4 per cent (yoy) and 1.7 per cent, respectively, compared to the 0.8 (yoy) in September, per cent gain in June. Unemployment rose in July, to 3.6 per cent and CPI inflation rose by 0.6 per cent in July over June and by 0.9 per cent recovering from the in August. Both employment and consumer prices remained stagnant in August and September, respectively. Exports remained buoyant, weak showing in increasing by 28.8 per cent (yoy) in August and 23.5 per cent in September, after expanding by 36.3 per cent in July. In August, the August. Bank of Korea decided to lower its policy interest rate from 3.75 per cent to an all-time low of 3.5 per cent. Thailand’s economy expanded at a moderate pace during the second quarter, gaining only 0.8 per cent over the first. Slower global growth, high oil prices, new outbreaks of the bird flu and ongoing tensions in the country’s south worked to dampen gains. Thai industrial production in July advanced 9.4 per cent (yoy), following gains of 9.2 per cent in June. Strong regional demand and ongoing strength in Chinese imports of Thai output continued to buoy gains and domestic consumption also promoted July’s output expansion. Thailand’s industrial production slipped in August, 174 expanding 8.9 (yoy); lower electronic and electrical product output was the likely cause of August’s weaker output data. Higher oil prices may ICRABULLETIN weigh on industrial production over the coming months. Bank of Money Thailand has raised the 14-day repo rate for the second time in a year in October, by 25 basis points, and it is now at 1.75 per cent. & Indonesian industrial output slipped 2.4 per cent (yoy) in August; a Finance slight improvement from the declines of 4.6 per cent and 4.9 per cent in JULYDEC..0 4 July and June, respectively. Singapore’s manufacturing output rose only 5.3 per cent (yoy) in August, chasing growth of 19.1 per cent in July; however, output grew 11.8 per cent (yoy) in September, recovering from the weak showing in August. Taiwan’s industrial output rose by 8.8 per cent (yoy) in August, down from 9.2 per cent growth in July; the pace Brazilian output of growth slowed further in September to 8.1 per cent. Industrial output in the Philippines slipped 0.2 per cent (yoy) in July and fell sharply by showed another 5.0 per cent in August. strong gain in Latin America and Other Countries In Latin America, industrial output has picked up across August as total countries. Mexican industrial production continues to rise, with July’s output levels increasing by 3.8 per cent (yoy). Mexican inflation output increased accelerated once again in August, as CPI rose a higher than expected 0.62 per cent in August, creating annual inflation of 4.8 per cent. 1.1% in August Mexican inflation showed no sign of slowing in September as CPI inflation was up 0.82 per cent and annual inflation rose 5.1 per cent from July with (yoy). Mexican unemployment fell to 4.0 per cent in September, from strong production 4.3 per cent in August; it still remains higher than the 3.9 per cent of September last year. The Brazilian economy is on an upward trend as across the board, output increased 0.5 per cent (SA) in July over June. Production of capital and consumer goods declined, while output of intermediate and output of capital materials showed a large increase. Brazilian output showed another strong gain in August as total output increased 1.1 per cent in August equipment rallying from July with strong production across the board, and output of capital equipment rallying from last month’s decline. Consumer-price from last month’s inflation in Brazil slackened to 6.7 per cent in the year to September. The unemployment rate ticked up in Brazil during August to 11.4 per decline. Consumer- cent from 11.2 per cent earlier and average wages also fell in the price inflation in month. September yielded employment and income gains for Brazilian workers, as the unemployment rate fell to 10.9 per cent. In Chile Brazil slackened to manufacturing activity surged during August, with the country’s industrial production index up 9.0 per cent, with broad-based gains 6.7% in the year to across most segments of the industrial base. High energy prices have not dampened manufacturing activity in Chile. In September, industrial September. production in the country jumped 12.0 per cent (yoy), registering the largest monthly expansion this year. In early September in an aggressive move, the Central Bank of Chile had raised its monetary policy instrument by 25 basis points, pushing the Nominal Interbank Rate to 2.00 per cent. In Venezuela industrial production continued its return to normalisation in July at a slow pace, as output increased by 175 ICRABULLETIN 27.2 per cent (yoy), but mainly due to base effects. Argentine industrial output expanded in September by 10.7 per cent (yoy), completing the Money & third quarter with a 2 per cent (qoq) increase. The Turkish economy remains on an above-trend growth Finance trajectory with real GDP growing by 19.9 per cent (SAAR) in the first quarter of 2004. The incoming economic data confirm even stronger JULYDEC..0 4 growth performance in the remainder of the year; the industrial production index, for example, rose by 15.9 per cent in the second quarter, up from an average of 11.3 per cent in the previous period. Industrial production in Turkey continued to expand strongly in July, up 12.8 per cent (yoy). Monthly CPI inflation in September was 0.94 Despite steps per cent and WPI inflation at 1.85 per cent, pushing annual CPI towards inflation to 9 per cent (yoy) and WPI inflation to 12.5 per cent. Turkey’s credit ratings for foreign currency debt were raised by liberalisation, there Standard & Poor’s and Moody’s, consequent on improved fiscal scenario and the accelerated disinflation process; ratings however are still plenty of remain below investment grade. Russian GDP reached 2,268.6 billion roubles in the second risks in the Russian quarter growing by 7.3 per cent (yoy), with output of the base sectors remaining steady and trade surplus increasing steadily in later months energy business; too [Charts G.4.1-4.2]. Crude oil exports accounted for 28.4 per cent of the overall exports of Russia during the first half of 2004. Russia apart from lowered its crude oil exports by 14.3 per cent (yoy) to 17.2 million tonnes in June, but still first half exports climbed 4.2 per cent, over the uncertainty over the comparable period to 110.2 million tonnes. A $87.9 per tonne customs licensing regime CHART G.4.1 and taxation, there Main Macroeconomic Indicators for Russia in 2004 (yoy change) is uncertainty over 120 10.0 9.5 the construction of 9.0 115 8.5 Unemployment Rate new oil pipelines. 8.0 110 7.5 7.0 6.5 105 6.0 5.5 100 5.0 Jan. Feb. Mar. Apr. May June July August Sept. IBS* Industrial Output Fixed Capital Investments Consumer price index** Real Personal Cash Incomes Unemployment Level# % of same period a year ago. * Output dynamics index of five base sectors (industry, agriculture, construction, transport, retail trade). ** average for the period since the start of the year as compare to the same period of the previous year. 176 # % of total work force (ILO Methodology). CHART G.4.2 ICRABULLETIN External Sector Indicators for Russia in 2004 (US $ billion) Money 18.0 29.4 & 16.0 29.2 Finance 14.0 29.0 Exchange Rate JULYDEC..0 4 12.0 10.0 28.8 8.0 28.6 6.0 28.4 4.0 2.0 28.2 Auguring well for 0.0 28.0 Feb. Aug. Apr. June Sept. July Jan. May Mar. financial stability, Exports Imports Official Ruble/Dollar Exchange Rate Russia’s currency reserves exceeded tariff on Russian crude oil and oil products exported outside member states of the Customs Union has come into force from early October. $100 billion in mid- Russia’s foreign trade growing 26.3 per cent (yoy) touched $21.7 billion in June 2004, which is 4.2 per cent higher than May; exports were at October, for the first $13.8 billion and imports at $7.9 billion, with a trade surplus of $5.877 billion. Industrial production index increased 5.2 per cent (yoy) for the time in its history, month of August and 3.5 per cent in September. Inflation amounted to 0.4 per cent in August compared to July and to 7.6 per cent in the and are expected to January to August period. Prices for food products advanced 0.1 per rise further, fuelled cent in August and 7.2 per cent in comparison to the beginning of 2004; prices for other products increased 0.5 per cent in August (4.6 per cent by the oil price from January). Despite steps towards liberalisation, there are still plenty of risks in the Russian energy business; apart from uncertainty hikes. over the licensing regime and taxation, there is uncertainty over the construction of new oil pipelines. The government has decided to work on creating an adequate banking system as the number of banks that participate in joint projects with foreign partners is now growing and there are more Russian banks that have been assigned international credit ratings. Moreover, large international banks have been opening their branches in Russia. The Russian trade surplus has contributed to the rouble’s strengthening. Auguring well for financial stability, Russia’s currency reserves exceeded $100 billion in mid-October, for the first time in its history, and are expected to rise further, fuelled by the oil price hikes. The central bank has resorted to buying of petro- dollars to keep the rouble steady as the currency has already gained substantially against the dollar in the last two years. In order to prevent the oil gains from spurring inflation the Russian government is also putting most of the export revenues into a stabilisation fund, which could very well serve to improve the rating outlooks for Russia by international agencies. 177 ICRABULLETIN Financial Markets in India Emerging markets and developing countries continue to Money & experience a strong recovery, with GDP growth forecasts for 2004 being revised upward markedly in all major regions. Notwithstanding the Finance instability in Iraq and structural imbalances in the US economy, the global economic environment and outlook continue to provide a benign JULYDEC..0 4 backdrop for consolidating India’s growth process. According to the latest WEO,3 the Indian economy appears to be in a resilient mode in terms of growth, inflation and balance of payments and there are signs of improvement in the investment climate in recent months. It also states that despite recent adverse weather conditions, growth in India is being underpinned by the global expansion and supportive monetary conditions, although unfavourable patterns in this year’s monsoon are raising concerns about agricultural growth. However the fact remains that the prospects of the economy, which seemed bright at the turn of the current financial year, have somewhat lost their shine with hopes of The fact remains second consecutive normal monsoons evaporating,4 possibility of that the prospects of interest rate hardening in the face of burgeoning inflation in the recent past and surging international crude oil prices. The RBI, in its mid-term the economy, which review of Annual Policy Statement, lowered the projected GDP growth for the year 2004-05 from 6.5-7.0 per cent to 6.0-6.5 per cent, assuming seemed bright at the that the combined downward risk of high and uncertain oil price and sudden change in international liquidity environment remain turn of the current manageable (see Appendix). Even as it left its key policy rate, the Bank rate, unchanged, the RBI has indicated a tightening bias by mentioning financial year, have that liquidity provided would now be appropriate instead of adequate. A variety of factors had their bearing on the financial markets somewhat lost their during the July-September quarter. These include the steadily ascending shine. rate of inflation, oil-prices that are perched at high levels with hardly any signs of easing, global hardening in interest rates, a depreciating rupee-dollar rate and other domestic eco-political uncertainties. But the factor that affected the market sentiment most, was probably the unabated pace of domestic inflation, which crossed 6 per cent according to data released in the first half of July [Chart F.1]. The year- on-year inflation rate then surged by almost a full percentage point, from 6.52 per cent for the week ended July 17, to 7.51 per cent for the following week (i.e. week ending July 24) due to rising vegetables, minerals and manufactured product prices. According to the apex bank, both global and domestic factors such as liquidity overhang and the monsoon conditions had played a vital role in the surge in inflation. The promise of a measured approach on the part of the RBI somewhat improved sentiments in the market in early August. But inflation 3 WEO, IMF, September 2004. 4 Faced with prospects of slowdown in the agriculture sector, in mid- August, the CMIE lowered its estimate of economic growth to 6 per cent in 2004-05 178 from the earlier forecast of 6.3 per cent. CHART F.1 ICRABULLETIN Inflation Rate (based on WPI) Money 9 & 8 Finance JULYDEC..0 4 7 6 5 4 18-Feb-04 16-Aug-04 31-Aug-04 3-Feb-04 17-Jun-04 18-Apr-04 20-Dec-03 21-Sep-03 15-Sep-04 30-Sep-04 17-Jul-04 20-Nov-03 2-Jun-04 1-Aug-04 3-Apr-04 6-Sep-03 21-Oct-03 5-Dec-03 19-Jan-04 15-Oct-04 2-Jul-04 5-Nov-03 18-May-04 6-Oct-03 19-Mar-04 4-Jan-04 3-May-04 4-Mar-04 continued its upward trend, touching 7.61 per cent for the week ended Surging prices of July 31. Surging prices of fuel, commodities, fruits and vegetables since fuel, commodities, June have been largely responsible for the hike in inflation along with the liquidity overhang. In an effort to check the alarming inflationary fruits and vegetables pressure, the Union Government, during the third week of August, announced duty cuts for petrol and LPG with immediate effect. Along since June have with that, allaying apprehensions on the rising inflationary expectations and volatility in the domestic economy, the RBI again been largely expressed confidence in ensuring price stability and containing the inflationary expectations. But defying all assurances and expectations, responsible for the inflation touched a four-year high of 8.17 per cent for the week ended August 21 and 8.33 per cent in the following week.5 Finally, the central hike in inflation bank had to intervene by adopting monetary policy measures like hiking CRR in the second week of September. In October the inflation along with the rate, though prevailing above 7 per cent, showed a sign of a mild liquidity overhang. diminution. Money and Debt Markets The easy liquidity in the money market witnessed throughout the current financial year continued to persist during the July- September quarter, with some setbacks towards the end, emanating from the steps taken by the central bank on concern relating to a rapidly expanding inflation rate. In July, the CMR was steady around the narrow range of 4.13 to 4.54 per cent, ruling mostly at a sub-repo level [Chart F.2]. Towards the middle of August, the CMR shot up to more than 5 per cent due to heavy demand on part of a large nationalised bank. This spurt, however, proved to be short-lived and 5 This was a sharp increase compared with the inflation rate of 4.4 per cent at the beginning of this financial year (for the week ended April 3). 179 ICRABULLETIN CHART F.2 CMR and Tbill Yields Money & 5.6 Finance 5.4 CMR 90-day 364-day 5.2 JULYDEC..0 4 5.0 4.8 4.6 4.4 4.2 In a bid to check the 4.0 5-Dec-03 5-Aug-03 5-Aug-04 5-Sep-03 5-Sep-04 5-Nov-03 5-Nov-04 5-Feb-04 5-May-03 5-Apr-04 5-May-04 5-Apr-03 5-Oct-03 5-Oct-04 5-Jan-04 5-Jun-03 5-Jul-03 5-Jun-04 5-Jul-04 5-Mar-04 liquidity overhang in the system, during The chart is based on 6-days per week. the second week of the rate declined to as low as below 4 per cent towards the end of the September, the RBI month with improved liquidity condition. In a bid to check the liquidity overhang in the system, during the second week of September, the RBI hiked CRR by 50 hiked CRR by 50 basis points, to 5 per cent.6 The move was expected to drain around Rs. 8,000 crore worth of liquidity from the system. The basis points, to 5%. apex bank also reduced the interest payable to banks on their eligible The move was cash balances maintained with the RBI under CRR requirement, to 3.5 per cent per annum from 6 per cent. This move followed close on the expected to drain heels of inflation surging to a four-year high at 8.33 per cent for the week ended August 28.7 As a consequence, the call rate inched up around Rs. 8,000 slightly, to 4.87 per cent towards the third week of the month, after which it fell back to around 4.5 per cent at the end of the month. In crore worth of October too it hovered around 4.3 to 4.8 per cent. Trading in the government debt market had many ups and liquidity from the downs, influenced by many factors during the period from July to September. In early July, the sentiment was bearish with steady yields system. as traders waited anxiously for the Government’s borrowing programme for the current fiscal year. The stability of yields was attributable to factors like the lower than expected Fed funds rate hike and the RBI mop-up of close to Rs 20,000 crore from the markets through its twin bonds issues8 and the MSS. This also coincided with redemptions of some dated securities and treasury bills. Apart from 6 The CRR was raised in two stages by 25 basis points each: first, from the fortnight beginning September 18 and then from October 2. 7 This was the first monetary measure to combat rising rate of inflation. Earlier, the government tried to contain it through fiscal measures like reducing customs duty on steel and excise duty on crude oil prices. 8 The cut-off yields for the 6.13 per cent maturing in 2028 was fixed at 6.70 per cent. This issue, along with the 11-year floating rate bond auction, sailed 180 through with little difficulty. that, the market stranded over the concern about transaction tax ICRABULLETIN proposal in the Union Budget. Towards the middle of the month, this, Money along with the fears of higher inflation figures led to a sharp fall in bond prices, a crash of around 80 paise across maturities. Moreover, & towards end-July, the better than expected US consumer confidence data Finance ensued to a possibility that the US Federal Reserve would be inclined to JULYDEC..0 4 hike rates a little more aggressively. This unsettled the government securities market, making bond prices plunge by almost a rupee across the maturity spectrum. The surging inflation continued to drag down bond prices in early August too, by over a rupee across medium term maturities and this came as a blow to the confidence of the market. In early September, During the second week of the month, the one percentage point cut in the EPF rate by the government to 8.5 per cent, failed to improve despite a surge in sentiment in the government securities market.9 However, shortly after this move, yields dropped after a weeklong rise following the re- inflation to a new introduction of one-day repo by the RBI, with the repo rate unchanged at 4.5 per cent. Also, cut in customs and excise duties on petro products four-year high of lifted sentiments. But the market succumbed again when the RBI lowered the cut-off prices at the auction of 364-day t-bills and the 6.18 8.17%, a distinct per cent 2005 stock under the MSS.10 Again towards the end of August, the yields on government securities, across maturities, fell remarkably11 impact of the new as statements on part of the central bank that the inflation rate would gradually soften with a substantial base effect impact created a positive RBI guidelines on impression on market sentiment. banks’ gilts In early September, despite a surge in inflation to a new four- year high of 8.17 per cent, a distinct impact of the new RBI guidelines investments could on banks’ gilts investments could be observed on the government securities market, with benchmark gilts registering sharp gains of over be observed on the 40-120 paise. In this month, too, factors like CRR hike had a negative impact, while ample liquidity in the system acted as a cushion to government recover some losses. Towards the end of the month, sentiment turned distinctly bearish on the back of a spurt in world crude oil prices and securities market, also renewed worries over a possible interest rate hike. These weighed heavily on bond prices that faltered across the spectrum. In October, with benchmark possibility of overshooting the government borrowing target after the gilts registering news of fall in revenue receipts added to the worsening of sentiment in the market. Towards the middle of the month, an auction at an sharp gains of over 9 Apprehensions of the possible tightening of monetary policy to curb 40-120 paise. inflation, and a probable 0.5 percentage point hike in the repo rate had a significant impact. 10 In the process there was a devolvement of around Rs. 249 crore in the 364-day paper. The cut-off led to a fall in the prices of securities across maturities by about Re. 1 and lifted yields. 11 The prices of long-term paper rose by Rs. 1.20; in the medium term the gain was 50-60 paise. 181 ICRABULLETIN unexpectedly high cut-off yield12 led to a fall in bond prices of over a rupee across maturities. Money & Maintaining the upward trend witnessed in June, the constant maturity yield curve for July shifted entirely up from that of the Finance previous month, the rise being more pronounced at the longer end [Charts F.3.1- F.3.2]. Yields at the shorter end hardened by around 20 JULYDEC..0 4 basis points while those for the longer maturities inched up by around 40 basis points. During August, yields further went up across the maturity spectrum making the curve shift once again; the surge being greater compared to July. The 1-year, 5-year and 10-year yields increased by about 30, 60 and 80 basis points, respectively. In September, however, yields more or less remained at the August level with very little fluctuations across all maturities and this made it difficult to distinguish the September yield curve from the one for the previous month. The yield curve for October moved up again, with yields for the shorter and medium term securities showing greater increase compared to the longer term ones. Yields for the 1- and 5-year securities inched up by around 40 to 50 basis points while that for the 15-year rose by about 20 basis points only. CHART F.3.1 CHART F.3.2 Constant Maturity Yields Constant Maturity Yields 6.3 7.0 6.0 6.6 5.7 6.2 5.4 5.8 5.1 5.4 4.8 5.0 4.5 4.6 4.2 4.2 CMR 1 year 2 year 3 year 4 year 5 year 7 year 10 year 15 year 90 day CMR 1 year 2 year 3 year 4 year 5 year 7 year 10 year 15 year 90 day Apr-04 May-04 Jun-04 Jul-04 Jul-04 Aug-04 Sep-04 Oct-04 Note: October yield curve is based on data till Oct 23rd. The hardening of yields to a greater extent at the longer end made the spread between different maturities widen during the recent past [Chart F.4]. The spread between 1-year and 5-year government securities was around 30 basis points during March this year, but it shot up to around 100 basis points during September. On the other hand, the spread between 5-year and 10-year securities went up from about 35 basis points to more than 70 basis points during the same 182 12 The yield to maturity for 7.37 per cent 2014 security rose to 6.99 per cent. period. However, during October, the spreads between 1-year and 10- ICRABULLETIN year and 5-year and 10-year securities declined slightly as the 10-year Money yield remained stable with yields at short ends moving up. & CHART F.4 Finance Spreads of Government Securities JULYDEC..0 4 2.0 1.5 The spread between 1.0 1-year and 5-year 0.5 government 0.0 Feb-04 Aug-04 Dec-03 Apr-04 Jun-04 Sep-04 Nov-03 Jul-04 Jan-04 Oct-03 Oct-04 May-04 Mar-04 securities was around 30 basis 1-yr&5-yr 5-yr&10-yr 1-yr& 10-yr points during March Foreign Exchange Market this year, but it shot The IMF in its September 2004 issue of the WEO, has appreciated India’s achievement regarding gradual introduction of up to around 100 greater exchange rate flexibility without hiccups even when reforms to policy frameworks were in progress. The country also maintained the basis points during managed float without major distress even during times of international September. market turbulence. In mid-term review of the Annual Policy statement, the apex bank has addressed the widely discussed issue of foreign exchange reserves. The RBI indicated that the overall approach to the management of foreign exchange reserves in recent years has reflected the changing composition of the BoP, and has endeavoured to reflect the “liquidity risks” associated with different types of flows. Taking these factors into account, India’s reserves are at present comfortable and consistent with the rate of growth, the share of the external sector in the economy and the size of risk-adjusted capital flows. In view of the level of comfort provided by the international financial architecture, it is necessary to provide cushions against shocks arising from uncertain monsoon conditions in the real sector, variations in global oil prices in the external sector and high levels of public debt in the fiscal arena. Foreign exchange reserves thus should not be considered as an insurance against volatility in capital flows only. During the July-September period, the rupee was on a depreciating trend against the USD except some short spells of gains in early July and the first half of September [Chart F.5.1]. From the second week of July, the rupee-dollar rate started to lose against the dollar, 183 ICRABULLETIN Chart F.5.1 Spot Rates Money & 57 55 49.2 Finance 53 48.2 51 47.2 Dollar Euro JULYDEC..0 4 49 46.2 47 45 45.2 43 Euro 44.2 41 Dollar 39 43.2 19-Nov-03 23-May-03 17-May-04 25-Aug-04 11-Aug-03 31-Aug-03 10-Oct-03 30-Oct-03 24-Oct-04 3-May-03 5-Aug-04 23-Jan-03 18-Jan-04 4-Oct-04 13-Apr-03 3-Jan-03 24-Mar-03 4-Mar-03 7-Apr-04 27-Apr-04 20-Sep-03 18-Mar-04 14-Sep-04 12-Jun-03 12-Feb-03 26-Jun-04 27-Feb-04 6-Jun-04 7-Feb-04 29-Dec-03 9-Dec-03 16-Jul-04 2-Jul-03 22-Jul-03 In view of the level of comfort provided by the international Chart F.5.2 Spot Rates financial 88 architecture, it is 86 43 84 42 82 necessary to provide 80 41 Pound Yen 78 cushions against 76 40 74 39 Pound shocks arising from 72 Yen 70 38 19-Nov-03 11-Aug-03 31-Aug-03 25-Aug-04 10-Oct-03 30-Oct-03 24-Oct-04 23-Jan-03 23-May-03 12-Jun-03 18-Jan-04 17-May-04 5-Aug-04 13-Apr-03 26-Jun-04 4-Oct-04 3-May-03 27-Apr-04 3-Jan-03 20-Sep-03 18-Mar-04 14-Sep-04 7-Apr-04 24-Mar-03 12-Feb-03 4-Mar-03 27-Feb-04 6-Jun-04 22-Jul-03 7-Feb-04 16-Jul-04 2-Jul-03 29-Dec-03 9-Dec-03 uncertain monsoon conditions in the real sector, going above Rs. 46. Persistent dollar demand from corporates and variations in global small inflows from foreign funds dragged the rupee down. However, the intervention on part of the central bank to curb any sharp fall extended oil prices in the limited support to the rupee. In August, the rupee faced downward pressure caused by soaring international oil prices and upward moving external sector and domestic inflation, but the exchange rate was more or less stable around Rs. 46.19 to 46.43. However, in September, with concerns over high levels of rising oil prices mitigating, the rupee strengthened and ruled below Rs. public debt in the 4613 for the rest of the month, before it started to weaken again from the fag end of the month. In October however, it recovered and fiscal arena. returned to its gaining track and the exchange rate fell below Rs. 46 again. The rate averaged around 45.8 till the third week of the month. Among other major currencies, the rupee was quite stable during the past few months against euro, pound and yen [Chart F.5.2]. 13 The rupee was little moved by the inflation flutter, though the inflation 184 at more than 8 per cent rattled debt and equity investors. Chart F.5.3 ICRABULLETIN Annualized Premia (3 Month) Money 4 3 & 2 Finance 1 JULYDEC..0 4 0 -1 Dollar -2 Euro -3 -4 19-Nov-03 23-Jan-03 12-Jun-03 18-Jan-04 26-Jun-04 3-Jan-03 6-Jun-04 22-Jul-03 16-Jul-04 2-Jul-03 12-Feb-03 27-Feb-04 7-Feb-04 4-Mar-03 24-Mar-03 13-Apr-03 18-Mar-04 27-Apr-04 7-Apr-04 11-Aug-03 31-Aug-03 20-Sep-03 29-Dec-03 25-Aug-04 14-Sep-04 9-Dec-03 5-Aug-04 10-Oct-03 30-Oct-03 24-Oct-04 4-Oct-04 3-May-03 23-May-03 17-May-04 The trend of the three-month premia Chart F.5.4 remaining above the Annualized Premia (3 Month) six-month one 5 4 observed since June 3 2 this year still 1 0 -1 continues, implying -2 Pound -3 Yen that the outlook of -4 19-Nov-03 11-Aug-03 31-Aug-03 25-Aug-04 10-Oct-03 30-Oct-03 24-Oct-04 23-Jan-03 23-May-03 12-Jun-03 18-Jan-04 17-May-04 5-Aug-04 13-Apr-03 26-Jun-04 27-Apr-04 4-Oct-04 3-May-03 3-Jan-03 20-Sep-03 18-Mar-04 14-Sep-04 7-Apr-04 24-Mar-03 12-Feb-03 4-Mar-03 27-Feb-04 6-Jun-04 22-Jul-03 7-Feb-04 16-Jul-04 2-Jul-03 29-Dec-03 the rupee-dollar rate 9-Dec-03 in the shorter term is more uncertain Particularly, from the second half of September the rupee strengthened against pound and yen. than in the relatively A notable phenomenon in the foreign exchange market has been that the pace of accretion of foreign exchange reserves has longer term. somewhat receded during the last four months. It has shrunk from USD million 1,19,511 during June to 1,18,359 in end-September, with some fluctuation from time to time. In October it again increased slightly to become USD million 1,19,284. Forward premia for dollar was mostly in tune with the movement of the rupee-dollar exchange rate during the second quarter of the financial year, except for September. The three-month and six- month annualised premia hardened considerably, tracking the weakening rupee, by more than 100 basis points, from early July till the end of the month [Charts F.5.3- F.5.4]. In August, premia remained stable with small fluctuations. However, in September, forward premia started to decline with an appreciating rupee. Especially during the third week, they dipped below 2 per cent, just after which, started to 185 ICRABULLETIN rise again, defying the rupee’s strengthening, probably on concerns relating to surging inflation and international oil prices. The premia Money & continued to remain more or less stable till the third week of October, slightly inching up from the previous month. The trend of the three- Finance month premia remaining above the six-month one observed since June this year still continues, implying that the outlook of the rupee-dollar JULYDEC..0 4 rate in the shorter term is more uncertain than in the relatively longer term. As a positive development, Standard & Poor’s, during the latter half of August, raised its outlook on India’s long-term foreign currency as well as local currency ratings. The outlook on BB long-term foreign The unrelenting currency rating was raised from stable to positive, while that of BB+ escalation in long-term local currency rating from negative to stable. The outlook revisions reflect India’s improving external liquidity and better international oil prospects for the government’s debt burden to stabilise. India’s robust foreign exchange reserves, which exceed 2000 per cent of short-term prices has been the debt, mitigate the risk of volatility in external confidence. main player in Capital Markets In capital markets across the globe the transition from a low capital markets over interest rate regime to a more stringent policy regime started off rather smoothly, aided by a number of factors such as adequate pre-warning the globe during from the US FOMC and the assurance of measured increases with relatively low inflationary pressures; the large official purchases of US recent months. dollar-denominated bonds, in particular, by Asian central banks, which Trading in equity have provided a stabilising influence in the bond and foreign exchange markets; and finally, higher economic growth, which has supported the markets across credit quality and earnings prospects of corporations in most economies.14 several countries The unrelenting escalation in international oil prices has been the main player in capital markets over the globe during recent remained ashen due months. Trading in equity markets across several countries remained ashen due to concerns over energy costs cutting into corporate profits. to concerns over Even relatively strong second quarter corporate earnings failed to arrest a general downward drift in major indices except in a few markets, energy costs cutting notably South Korea and Taiwan, which yielded good returns into corporate particularly due to a domestic rate cut and flush of foreign institutional investments, respectively in these countries. In the US markets, the profits. industrial blue-chip index, the DJIA15 [Chart F.6] trended down in July, closing the month with a 295.77 point difference from its closing value in June; though there was a slight improvement in the index by end- 14 Corporate balance sheets have continued to improve across countries in varying degrees and global corporate default rates have come down markedly in the year so far. 15 The DJIA is not limited to traditionally defined industrial stocks, but the index serves as a measure of the entire US market, covering such diverse industries as 186 financial services, technology, retail, entertainment and consumer goods. CHART F.6 ICRABULLETIN The US Stock Indices in 2004 Money 2300 NasdaqComposite DJIA 10700 & 2200 10600 10500 Finance 10400 JULYDEC..0 4 2100 10300 2000 10200 10100 1900 10000 9900 1800 9800 1700 9700 10-May-04 25-May-04 20-Jan-04 23-Mar-04 2-Jan-04 10-Jun-04 28-Jun-04 29-Jul-04 14-Jul-04 13-Aug-04 30-Aug-04 15-Sep-04 30-Sep-04 8-Mar-04 23-Apr-04 20-Feb-04 7-Apr-04 4-Feb-04 15-Oct-04 In the Indian capital markets, apart from August—higher by 34.21 points from July-end—the index again trended down in September closing at 93.65 points lower than August. The the external factors, technology stock heavy Nasdaq index, on the other hand, seems to have suffered less, ending July with a fall of 83.03 points from its June’s domestic inflation closing, then going down another 88.95 points by end-August,16 but recovering by 63.19 points by end-September. In October, the DJIA and budgetary suffered further, and reached historic lows in the third week of October, due to ebbing market sentiments, stemming primarily from anxiety on proposals also had further hikes in oil prices and the upcoming US presidential elections. a role to play. The Nasdaq however remained relatively stable in this period too. In the Indian capital markets, apart from the external factors, domestic inflation and budgetary proposals also had a role to play. Union Budget 2004-05, in early July 2004, led to some amount of volatility in the market due to the proposal of imposing a turnover tax on transactions in a stock exchange, at the rate of 0.15 per cent of the value of the security transacted, payable by the buyer, in lieu of capital gains tax;17 the BSE Sensex [Chart F.7] registered an intra-day drop of over 100 points, while NSE Nifty fell by nearly 49 points. As a fallout of protests by the brokers of stock exchanges all over India, on July 21, the proposals were amended by significantly lowering the tax burden and by proposing a new STT regime with different tax rates for 16 Profit warnings issued by National Semiconductor acted as a dampener on technology stocks. However, Internet major Google made a strong debut on Nasdaq on August 18, after its IPO, in which it sold 25.7 million shares. 17 The finance minister proposed to abolish the current 10 per cent tax on long-term capital gains from securities transactions. In the case of short-term capital gains from securities, he proposed to reduce the rate of tax to a flat rate of 10 per cent; short-term gain is aggregated with taxable income from other income classes and the short-term capital gains tax is levied at personal income tax rates. 187 ICRABULLETIN CHART F.7 Movement in Indian Stock Indices Money & 6000 1950 Finance 5700 1850 BSE Sensex NSE Nifty 5400 1750 JULYDEC..0 4 5100 1650 4800 1550 BSE-Sensex 4500 1450 NSE-S&PCNXNifty 4200 1350 9-Mar-04 2-Apr-04 11-Oct-04 23-Oct-04 4-Dec-03 21-Mar-04 17-Oct-03 29-Oct-03 9-Jan-04 16-Dec-03 28-Dec-03 14-Apr-04 7-Jul-04 26-Apr-04 21-Jan-04 10-Nov-03 22-Nov-03 5-Sep-04 8-May-04 1-Jun-04 31-Jul-04 19-Jul-04 2-Feb-04 13-Jun-04 25-Jun-04 12-Aug-04 24-Aug-04 20-May-04 17-Sep-04 29-Sep-04 14-Feb-04 26-Feb-04 While surging international oil prices were taking different types of securities. In the third week of July, market players their toll of the responded positively to the announcement that the 0.15 per cent STT proposed in the Budget would not only be slashed to 0.015 per cent on market sentiment the value of the transactions but also would be confined to only delivery-based trade in equities, even while totally exempting sale and since early August, purchase of bonds from the levy. Day-traders and arbitrageurs have been virtually freed of the levy as they have been allowed to set off the weekly inflation their entire STT liability against the tax paid on business profits. A figures, released in similar concession has been made to derivative traders, as the STT rate applicable on future and options trades has been pegged even lower at the middle of the 0.01 per cent. The Sensex crossed the psychologically important 5000 mark barrier in the third week of July, and moved up consistently since month, further then. While surging international oil prices were taking their toll of the market sentiment since early August, the weekly inflation figures, dampened the released in the middle of the month, further dampened the bourses; the annual WPI inflation, which had already edged to 7.6 per cent, surged bourses. to a new high of 7.96 per cent in the week ended August 7 due to higher energy and manufactured product prices. This led to losses, particularly in auto, pharma and cement stocks, and the BSE Sensex, which had earlier crossed 5250, ended at 5064.66 and the NSE Nifty also closed lower. Inflation, which reached a peak of 8.3 for the last week of August, came down gradually to 7.2 for early October. Sentiments improved through end-August to September, and the Sensex crossed the 5500 mark by mid-September. In fact, from the lows of Black Monday—May 17, 2004—the stock markets bounced back by an encouraging 20 per cent in the past four months, with market capitalisation also increasing by Rs. 242,000 crore in these four months.18 The CBDT had notified October 1 as the date from which the 18 As per the Business Standard Research Bureau almost all sectors, 188 classified by them, except the automobile (cars) segment, gained. Of the 2,213 actively traded stocks on the BSE, almost 83 per cent (1,835 stocks) have new STT regime would come into force in respect of all taxable ICRABULLETIN securities transactions;19 the Sensex surged over 90 points on this day Money and crossed 5750 in October. In the third week of October, further threats from oil prices and fall in global markets dampened sentiment, & with there being an all-round selling pressure, especially in mid-cap Finance and banking stocks. However, following the international trends, 20 oil JULYDEC..0 4 and technology heavyweights Reliance21 and Infosys held up the market from any major fall. With oil prices climbing up steadily since the summer of 2004, energy stocks have performed well internationally. The BSE Oil and Gas sector index was launched effective August 23, 2004 to capture the In the third week of movement in this sector [Chart F.8]. The BSE OILGAS index, which covers 90 per cent of the sectoral market capitalisation and is based on October, further the Free-Float methodology,22 trended up steadily from the initial levels of 2500 points to over 3000 points by mid-October. After this the index threats from oil CHART F.8 prices and fall in Movement of Domestic Oil & Gas Stock Prices global markets 3100 dampened 3000 2900 sentiment, with 2800 there being an all- 2700 BSE OILGAS Index round selling 2600 2500 pressure, especially 23-Aug-04 26-Aug-04 29-Aug-04 10-Oct-04 13-Oct-04 16-Oct-04 19-Oct-04 1-Oct-04 4-Oct-04 7-Oct-04 10-Sep-04 13-Sep-04 16-Sep-04 19-Sep-04 22-Sep-04 25-Sep-04 28-Sep-04 1-Sep-04 4-Sep-04 7-Sep-04 in mid-cap and banking stocks. Starting August 23rd, 2004 with February 1, 1999 = 1000 . appreciated in value, while only 17 per cent (378 scrips) have lost ground in the last four months. The rally is led by mid-cap stocks, with the NSE S&PCNX Mid-cap index rising to an all-time high of 1930.40, up 37.47 per cent in the last four months. 19 Any purchase or sale of an equity share in a company or a derivative or a unit of an equity-oriented unit, entered into in a recognised stock exchange, or sale of a unit of an equity-oriented fund to a mutual fund would be considered as taxable securities transaction. 20 Energy stocks such as Statoil (Norway), ENI (Italy) and France’s Total helped markets recover across the euro zone. The Nasdaq’s stability helped IT stocks. 21 Reliance reported a 39 per cent jump in its second quarter net profit at Rs. 17.52 billion. 22 The constituent stocks (with their respective weightages) are Bharat Petro (0.35), Castrol (0.30); Chennai Petro (0.35), Gail (India) Ltd (0.35), Hindustan Petro (0.50), Indian Oil (0.10), Kochi Refinery (0.50), MRPL(0.15), ONGC(0.15) and Reliance Industries (0.55). 189 ICRABULLETIN dipped slightly, possibly due to the unexpected announcement of IOC posting a 31 per cent fall in post-tax earnings in the second quarter Money & despite a 19 per cent rise in gross turnover.23 The SEBI has revised the eligibility criteria for stocks and Finance indices on which futures and options can be introduced. According to the new rules, effective September 1, stocks will be chosen from among JULYDEC..0 4 the top 500 scrips in terms of average daily market capitalisation and average daily traded value for the previous six months on a rolling basis. Derivative contracts on an index can now be introduced by stock exchanges if 80 per cent of the index constituents are individually eligible for derivatives trading. However, no single ineligible stock in In August the United the index can have a weightage of more than 5 per cent in the index. Nations Employees The index on which futures and options contracts are permitted will be required to comply with the eligibility criteria on a continuous basis, Pension Fund has according to the market regulator. The LSE identified India, China and Russia as the core markets registered itself as for future growth as global companies are increasingly focussing on these markets. In August the United Nations Employees Pension Fund an FII in India, has registered itself as an FII in India, following the lead shown by such large entities as California Public Employees Retirement System following the lead (CalPERS). FIIs continue to invest aggressively in Indian equities; between August 2004 and October 21, FIIs reported a net inflow of $1.4 shown by such billion into Indian equities—second only to Taiwan, which witnessed a $3.8 billion influx during the same period. In August FIIs invested a net large entities as of Rs. 2892.30 crore in the equity markets, while they withdrew a net California Public amount of Rs. 371.4 crore from the Indian debt market. In September FIIs brought in Rs. 2385.60 crore and Rs. 189.70 crore worth of funds Employees to the country through their investments in the equity and debt markets, respectively. FII investment in equities was positive in October24 at Retirement System. Rs. 2278.5 crore, while they were net sellers in the debt market with net outflows of Rs. 602.2 crore. Domestic MFs have been net sellers in equity markets till October so far; after net purchases of Rs.1005.09 crore in equities in May, MFs consistently withdrew funds from the market to register a net outflow of Rs. 970.77 crore during the current financial year so far (April to October 21, 2004); the outflow in October was the largest and to the tune of Rs. 700 crore. On the other hand, their investment in debt securities in the fiscal year has been a good Rs. 4585.6 crore. Equity funds have been selective in their stock picking and, in particular, have bought into banking and steel sector stocks, but they have bailed out of oil, IT, pharmaceutical, auto and cement sector stocks. There was also 23 Given that retail prices of transportation fuels were not revised sufficiently upwards to reflect the jump in global oil prices, a fall in profits was certainly expected, but not to the extent brought about mainly by under-realisations from petrol and diesel and the subsidy on cooking gas and kerosene. 190 24 Up to the 21st of the month. evidence of their continuing interest in undiscovered mid-cap and ICRABULLETIN small-cap stocks.25 The net outflow from the secondary markets comes Money as a surprise as MFs are witnessing an increase in investor interest in equity or equity-linked schemes, which is reflected in the net addition of & Rs. 371 crore to total equity assets managed between May and Finance September 2004, according to AMFI. Withdrawal from the secondary JULYDEC..0 4 market may possibly be explained by the increased liquidity requirements for investing in the numerous primary issues on the anvil. In the primary market, in early August, India’s top software services exporter Tata Consultancy Services Ltd. concluded its IPO, which raised Rs. 54.2 billion; the TCS IPO was oversubscribed by eight The net outflow times.26 The 865.8 million-share NTPC offer in mid-October, which was a combination of new shares and a sale by the Government, raised from the secondary Rs. 53.86 billion. Though the stock market has been in a volatile phase after the massive crash in May, fund houses are launching new schemes markets comes as a mostly to expand their product basket as also to fill gaps in the risk- return spectrum. Notably, schemes launched in the recent past were not surprise as MFs are just plain vanilla diversified equity schemes, but most have different stock picking themes.27 witnessing an The Securities Market Infrastructure Leveraging Expert Task Force28 has called for far-reaching changes in the primary market increase in investor procedures. The SMILE report notes that the progress in the two segments of the Indian securities market has been uneven; while the interest in equity or secondary market has shown greater resilience and absorbed equity-linked technology to the extent that it can now be compared to the best stock exchange systems in the world, the new issues market has languished schemes, which is partly because the number of quality offerings has not been steady, and primary market intermediaries probably found no reason to upgrade in reflected in the net the absence of steady business. If some suggestions of the report are implemented one could expect considerable revamping of the primary addition of Rs. 371 issues segment of the Indian securities market. crore to total equity [Section closed on October 26, 2004] assets managed between May and September 2004, 25 Equity funds bought into stocks such as JK Paper, KEC International, according to AMFI. Ricoh India, Bongaigaon Refinery and IDBI Bank. 26 Later, TCS reported an increase of 51.8 per cent in its net profit (excluding exceptional items) and a 43.5 per cent increase in consolidated revenues for the quarter ended September 30. 27 These are, for instance, Kotak opportunity fund, and the ING Vysya domestic opportunities fund. In August-September, ABN Amro MF raised Rs. 388 crore in its IPO of a floating rate fund. In October, HDFC MF has garnered Rs. 400 crore in its Core & Satellite Fund and Rs. 600 Crore in its Multiple Yield fund. 191 28 SMILE Task Force First Report on Infrastructure And Process Flows For The Primary Market, SEBI. ICRABULLETIN Appendix: Mid-term Review of Annual Policy Statement for the year 2004-05 Money & The overall stance of monetary policy for 2004-05, as stated by the apex bank, would be to provide appropriate liquidity in order to Finance meet credit growth and support investment and export demand in the economy, while placing equal emphasis on price stability. Also, an JULYDEC..0 4 interest rate environment conducive to macroeconomic and price stability would be pursued, maintaining the momentum of growth at the same time. Whenever necessary, measures would be taken in a calibrated manner, in response to evolving circumstances with a view to stabilising inflationary expectations. As the magnitude and persistence of supply shock was partly unanticipated, demand management needs closer attention, particularly for stabilising inflationary expectations. Although global economic recovery is gaining strength, there is some increase in downside risk primarily on account of persistence of uptrend in global oil prices. For the past six months, the developments in the domestic and external fronts were like the following in a nutshell. GDP growth projection for 2004-05 was brought down in the range of 6.0-6.5 percent from the earlier expectation of 6.5-7.0 per cent. Annual inflation, as measured by point-to-point variations in the WPI, rose from 4.6 per cent at end-March to 8.3 per cent in end-August but has since come down to 7.1 per cent by October 9, 2004. Money supply (M3) growth in this fiscal year (up to October 1, 2004) is lower at 5.4 per cent as compared with 7.8 per cent in the previous year. The pick-up in investment activity and significant growth in non-food credit (11.5 per cent) appear to be broad based and are not temporary phenomena. The Central Government has completed gross market borrowings of Rs. 75,044 crore in the fiscal year (up to October 21, 2004), which is 49.8 per cent of the budgetary amount. The market borrowing programme in the remaining part of the year needs to be calibrated carefully in view of strong credit demand. Financial markets have remained generally stable though the government securities market tended to show some nervousness in recent months. The market interest rates have displayed some upward movement, particularly at the longer end. The exchange rate of the rupee depreciated vis-à-vis US dollar, Euro, Pound sterling and Japanese yen by October 21, 2004. Foreign exchange reserves increased by US$7.6 billion from US$113.0 billion at end-March 2004 to US$120.6 billion as on October 21, 2004. India’s exports during April-September 2004 increased by 24.4 per cent in US dollar terms, while imports rose faster by 34.3 per cent. The higher trade deficit reflects high oil imports bill as also the growth in overall import demand. The current account remained in surplus consecutively over the past three years, the current account in the first quarter of 2004-05 also posting a surplus of US$1.9 billion. 192 Financial Sector Reforms and Monetary Policy Measures: ICRABULLETIN Highlights Money • • Bank Rate kept unchanged at 6.0 per cent. Repo Rate increased by 25 basis points to 4.75 per cent. & • Revised Liquidity Adjustment Facility to operate with Finance overnight fixed rate repo and reverse repo. JULYDEC..0 4 • Ceiling on Interest Rates on NRE Deposits raised by 50 basis points over US dollar LIBOR/SWAP rates of corresponding maturities. • Limit on advances under priority sector enhanced for improving credit delivery to the agriculture sector. • Banks to increase their disbursements to small and marginal farmers under special agricultural credit plans (SACP) by March 2007. • Private sector banks are urged to formulate SACPs from the year 2005-06, targeting an annual growth rate of at least 20-25 per cent. • Composite loan limit for SSI entrepreneurs enhanced from Rs. 50 lakh to Rs. 1 crore. • Investment by banks in securitised assets pertaining to SSI sector to be treated under priority sector. • Banks may now extend direct finance to housing sector up to Rs. 15 lakh under priority sector lending. • Banks are urged to keep up the momentum of lending to agriculture. • The minimum maturity period of CP is reduced to seven days. • Automated value-free transfer of securities between market participants and the CCIL facilitated. • Capital Indexed Bonds to be introduced during the year 2005- 06 in consultation with the Government. • The ceiling on MSS raised from Rs. 60,000 to Rs. 80,000 crore. • The RBI would prepare draft guidelines for implementation of Basel II norms and place them in the public domain. • Dissemination of credit information by CIBIL for improving asset quality of banks. • Enhancement of Capital Base for Asset Reconstruction Companies to 15 per cent of assets acquired, or Rs. 100 crore, whichever is less. 193
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