Indian Economy: News and Discussion

[Pintu]

http://economictimes.indiatimes.com...k-its-financial-pulse/articleshow/6832868.cms

29 Oct, 2010, 08.25AM IST, Deepshikha Sikarwar,ET Bureau
India lets IMF, World Bank check its financial pulse

NEW DELHI: India has agreed to an International Monetary Fund (IMF) and World Bank scrutiny of its financial system to assess the country's capacity to manage a financial crisis , as part of the global efforts to prevent a 2008 type of financial meltdown, which could also trigger some financial sector reforms.

Experts say the move should be seen in positive light as it would benefit the global economy as a whole. "What needs to be seen is that the same principles of assessment would be applied to other countries and could trigger reforms there as well benefitting the global economy and also India," economist and director general FICCI Rajiv Kumar said.

The government has communicated to the Financial Stability Board to be considered for a full-fledged financial sector assessment programme by IMF and World Bank, said a government official. This follows asuggestion by the FSB in this regard after the results of self-assessment were communicated to it.

India had opted for a self assessment by the committee on financial sector assessment chaired by RBI deputy governor and finance secretary in 2006. The CFSA had in its report released in 2009 said that India's financial sector is robust and stable.

"IMF has emerged a neutral body especially after reforms so there should not be any apprehension," Mr Kumar said.

India has already carried out very comprehensive assessment so such an assessment is only in the fitness of things, Mr Kumar added.

Moreover, the report would only be recommendatory and there would not be any mandatory obligations on India to carry out any reform it does not agree to.

The FSAP provides the framework for comprehensive and in-depth assessments of a country's financial sector, and was established in 1999, in the aftermath of the Asian crisis.

It is essentially a step towards enhancing the IMF's economic surveillance in the backdrop of the recent crisis, which originated in financial imbalances in large and globally interconnected countries.

"This is good programme as it studies the strength of financial systems... is the system well financed... if there is an asset bubble building," said former RBI governor Bimal Jalan .

India was among the first to undertake the pilot FSAP in 2000-01. In addition, India also undertook a comprehensive self-assessment of International Financial Standards and Codes during 2002 and undertook a review in 2005.

 

[Pintu]

http://economictimes.indiatimes.com...ollapse-Rating-agency/articleshow/6834489.cms

29 Oct, 2010, 02.49PM IST,AGENCIES
Indian microlenders face possible collapse: Rating agency

NEW DELHI: India's government may be forced to step in to save the country's 6.7-billion-dollar microfinance industry from collapse, a leading industry ratings agency warned on Friday.

The Microfinance Institutions Network or MFIN, which represents 44 leading Indian microfinance lenders, has said commercial bank loans to the sector are drying up and borrowers are reneging on their debts.

Pioneered on the sub-continent by Nobel prize winner Muhammad Yunus, microfinance was hailed as a saviour of India's poor for providing small loans, but has been hit by sharp criticism from politicians and scrutiny of its loan recovery methods.

"It could come to a systemic banking crisis -- that is why I feel the central government won't let it go that far," said Sanjay Sinha, managing director of M-CRIL or Micro-Credit Ratings International Ltd, a New Delhi-based leader in rating the sector.

The head of MFIN, Vijay Mahajan, warned the industry "could face collapse" and was "not at all out of the woods".

"The commercial bankers and everyone else are hoping against hope that things will improve," said Mahajan, a pioneer of lending to the poor who also heads a top microfinance institution, BASIX.

The industry was thrown into turmoil this month when the southeastern state of Andhra Pradesh, the hub of small loan activity, cracked down on microfinanciers.

Lenders were accused of benefiting from usurious interest rates of up to 36 percent and using aggressive debt collectors who were blamed for over 30 suicides.

After news of the suicides surfaced in mid-October, India's leading microlender SKS said 17 were among its borrowers, but rejected responsibility, saying "our ethical way of doing microfinance has not caused these tragedies".

The Andhra Pradesh government introduced a measure aimed at halting "harassment" of borrowers, imposing penalties of up to three years in jail and Rs 100,000 (2,000 dollars) in fines for attempting to coerce borrowers.

The state also ordered the suspension of debt collections. The order was later overturned by a court but industry officials said debt recovery agents were still being blocked.

Andhra Pradesh's share of outstanding microfinance loans accounts for around 35 percent of the sector's total 6.7-billion-dollar portfolio.

Before the crisis, the sector boasted loan repayment rates of 99 percent.

Finance Minister Pranab Mukherjee said this week the government was in talks with the state to ease the situation in Andhra Pradesh for microlenders but also urged the industry to develop a code of conduct to help restrain interest rates and prevent the use of coercive recovery methods.

Sinha pointed to pressure from opposition parties in Andhra Pradesh who have started a campaign to ask for loan cancellations.

"This situation is tailor-made for populist sentiment against the microlenders," Sinha said. "The commercial banks have been shutting down loans given what is happening in Andhra Pradesh and current repayments are running at 20 percent of what they should be."

A senior executive of a leading Indian bank, who requested anonymity, told AFP: "The push for waivers by some may change the credit discipline of borrowers who will think they don't have to pay."

 

[Pintu]

http://economictimes.indiatimes.com...f-economy-overheating/articleshow/6826117.cms

28 Oct, 2010, 10.24AM IST,New York Times
Soaring Rupee poses threat of economy overheating

At present Indian Rupee trades : 1 US $ = 44.3963 INR . Please check : http://www.x-rates.com/d/INR/USD/graph120.html, In view of the above , I think we can expect some expert comment regarding the matter.

Regards

 

[The Messiah]

We have deliberately under-valued rupee for decades now so that we import less and export more.

 

[pmaitra]

I still don't understand how this overheating of economy can pose the threat to India? Why are they talking about textile exports where a strong rupee is a bane and not about importing Boeing or Airbus aircraft where a strong rupee is a boon?

Newspaper reports, unlike research papers, seldom give the full picture.

 

[Rage]

http://economictimes.indiatimes.com...f-economy-overheating/articleshow/6826117.cms

28 Oct, 2010, 10.24AM IST,New York Times
Soaring Rupee poses threat of economy overheating

The issue is a little more complicated than that. The reason the rupee is soaring is because of quantitative easing <Federal printing> of the dollar. A strong rupee is indicative of strong demand, which in turn is indicative of India's position in global finance and commodity/service trades.

A strengthening rupee will certainly benefit the whole import sector- which in turn will benefit the middle-class- who increasingly consume a greater portion of their goods from abroad. But the RBI has already intervened several times in the last few weeks through dollar purchases in an attempt to shore up the currency. And the reason it did that was because of lobbying by the export sector- primarily the IT industry. Though, that influence will start to wane: because of the movement toward the manufacturing industry, which sources a lot of its inputs like iron & steel, cement, oil & gas, machinery, etc. from abroad. On the whole, the economy stands to gain by a marginally appreciating rupee- at least initially and then, from a marginally depreciating rupee as manufacturing starts to play a more dominant role in the economy: which is starting to happen now and as agriculture gets more efficient. Particularly because imports currently greatly exceed exports, and manufacturers hugely depend on foreign sources from inputs because of the inefficiency in our own extractive industries.

One good thing about appreciation is that it will tend to curb inflation, particularly for mid-class consumers. But for diminished-income consumers, especially for those working in the agricultural, pharmaceutical and textile industries, the govt should alleviate the pressure on their export prospects from a rising rupee through various schemes and measures.

The Rage Recommendation: Let the rupee appreciate marginally <by about 5 to 6% per year> in the short run; project constantly a depreciation in the rupee through intermittent interventions in the short and medium run; and finally, depreciate the rupee gradually in the long run.

 

[thakur_ritesh]

About the article:

Article clearly has been written with an intent to put forth the PoV of the textile industry and nothing more.

The only two downsides that come across are that with the drop in the exports of the textiles the number of people who are employed also comes down, which means you have a rising unemployment more so because in a semi-skilled the revenue per employee is generally quite low and especially in an industry like textile which means quite a few people losing jobs as a result of strengthening of rupee.

The other drawback is with the rising rupee the earnings/profits of the exporter take a hit, which is what the concern really is.

On over heating happening

Rage has made a point which I see as one side of it.

The overheating happening in the economy is because of the sudden availability of cheap money in the market and two primary markets seeing the direct effect are the stock market with all the FII funding making way since it is the Indian market which at the moment is giving the best returns and so everyone seems to be rushing to the Indian markets and the other realty market which has seen a lot of investment coming in.

Once you have dollars and other foreign currency coming into the market at such a rapid pace the demand for rupee increases since you cant trade in the local market with that foreign money so the institution/investor holding rupee will demand more dollars in return which will lead to strengthening of rupee. Inflation has been trading at double digits for a very long time, the attempt on part of the government so far is not to tame the inflation but sustain it at the levels at which we see it since they feel them getting too aggressive on that front will hit the growth which seems to be the primary target today but still the talk of GoI hinting at lower revised growth rate figs of 8.25-8.75% in comparison to that of IMF estimate of 9.7% is an indicator of which way the lending rates will head in times to come and I think we will see the government/rbi making sure the entry of cheap money is significantly restricted.

i hope its not difficult understanding why the overheating is happening taking the above 2 examples. when the market is flooded with availability of cheap money then there is more money to buy the same since supply has not increased at the same pace which means a sudden spurt in prices which leads to inflation. what the GoI needs to do immediately is root out the money making way to the stock market as has been done by various other countries else we could be heading for a stock market bubble similar to what is happening ion china in the realty market and also they need to closely follow the indian realty market and to check that the best thing they can do is tighten up the lending rates.

 

[Daredevil]

I think soaring rupee has to do with depreciating dollar in world markets rather than appreciating of rupee on its own strength.

 

[Agantrope]

Soaring Rupees:

Black economy saved india's face to far extent in the recession period. But now it is a growing problem now. Thanks to Coal India Limited for sucking out $55B from the market. Money should need to be sucked out and new flow should happen. This is a natural phenomenon after the recession that the liquidity will increase and it will soon get drained in mean time.

 

[Rage]

About the article:

Article clearly has been written with an intent to put forth the PoV of the textile industry and nothing more.

The only two downsides that come across are that with the drop in the exports of the textiles the number of people who are employed also comes down, which means you have a rising unemployment more so because in a semi-skilled the revenue per employee is generally quite low and especially in an industry like textile which means quite a few people losing jobs as a result of strengthening of rupee.

The other drawback is with the rising rupee the earnings/profits of the exporter take a hit, which is what the concern really is.

On over heating happening

Rage has made a point which I see as one side of it.

The overheating happening in the economy is because of the sudden availability of cheap money in the market and two primary markets seeing the direct effect are the stock market with all the FII funding making way since it is the Indian market which at the moment is giving the best returns and so everyone seems to be rushing to the Indian markets and the other realty market which has seen a lot of investment coming in.

Once you have dollars and other foreign currency coming into the market at such a rapid pace the demand for rupee increases since you cant trade in the local market with that foreign money so the institution/investor holding rupee will demand more dollars in return which will lead to strengthening of rupee. Inflation has been trading at double digits for a very long time, the attempt on part of the government so far is not to tame the inflation but sustain it at the levels at which we see it since they feel them getting too aggressive on that front will hit the growth which seems to be the primary target today but still the talk of GoI hinting at lower revised growth rate figs of 8.25-8.75% in comparison to that of IMF estimate of 9.7% is an indicator of which way the lending rates will head in times to come and I think we will see the government/rbi making sure the entry of cheap money is significantly restricted.

i hope its not difficult understanding why the overheating is happening taking the above 2 examples. when the market is flooded with availability of cheap money then there is more money to buy the same since supply has not increased at the same pace which means a sudden spurt in prices which leads to inflation. what the GoI needs to do immediately is root out the money making way to the stock market as has been done by various other countries else we could be heading for a stock market bubble similar to what is happening ion china in the realty market and also they need to closely follow the indian realty market and to check that the best thing they can do is tighten up the lending rates.

Those are very good points. And I agree with all you've said. But, I think this particular appreciation has more to do with dollar debasement, than with anything else.

Also with respect to developing country equity markets, and specifically with respect to India's eqty mkt., Foreign Institutional Investors typically respond to changes in the exchange rate, rather than directly cause them. This is not, of course, true in well-developed bourses like Western Europe and North America.

Appreciation also has the tendency to lower inflation, through partial (i.e. import-sector) disinflation. So from that perspective, a marginal appreciation may be a good strategy. What they need to watch out for is for sectors disenfranchised by the export-sector disincentives. And act accordingly: that'd be short term.

Long term, I think a depreciation of the rupee is in order, as more manufacturing moves to India. That I think is inevitable.

At the peak of the appreciation would be a good time to import all of that capital equipment, stock etc. necessary for road building that they planned on doing under their ambitious "20 km of highway a day" for the fiscal 2011.

 

[RAM]

India to unveil National Manufacturing Policy

-On Board PM's Special Aircraft

Concerned over the low share of manufacturing sector in the GDP, India will soon unveil a National Manfuacturing Policy to push it to 25 per cent of the GDP by 2020 from the present 17 per cent.

The new policy will be moved before the Union Cabinet soon, Commerce and Industy Minister Anand Sharma told journalists accompanying Prime Minister Manmohan Singh on his visit to Hanoi.

"This is major concern for India. When we want to be a major player in the manufacturing sector, we are concerned about the share of manufacturing sector in the overall GDP," he said.

He said the share of the manufacturing sector had remained close to 17 per cent, where it was in 1991 in terms of percentage, whereas all the other economies -- emerging and developed -- don't have manufacturing's share at less than 25-26 per cent of their GDP.

"Our objective is to take it to 25 per cent by 2020. That is why we are coming out with National Manufacturing Policy," the Minister said, adding "We intend to move the Cabinet note soon".

He said the intention was to ensure integrated manufacturing zone development, particularly green field industrial townships. "These mega investment and manufacturing zones, we hope, will attract not only investment but also technologies and hubs of collaborations and innovation," Sharma said.

"There is going to be a wave of new technologies, with clean development technologies and partners," he said, adding discussions in this regard have made significant progress with Germany, Singapore, Japan and many others.

http://www.deccanherald.com/content/108466/india-unveil-national-manufacturing-policy.html

 

[ajtr]

It's Morning in India​

By THOMAS L. FRIEDMAN

This week's award for not knowing what world you're living in surely goes to the French high school and college students who blockaded their campuses, and snarled rail traffic, in a nationwide strike against the French government's decision to raise its pension retirement age from 60 to 62. If those students understood the hypercompetitive and economically integrated world they were living in today, they would have taken to the streets to demand smaller classes, better teaching, more opportunities for entrepreneurship and more foreign private investment in France — so they could have the sorts of good private sector jobs that would enable them to finance retirement at age 62. France already discovered that a 35-hour workweek was impossible in a world where Indian engineers were trying to work a 35-hour day — and so, too, are pension levels not sustained by a vibrant private sector.

What is most striking to me being in India this week, though, is how many Indians, young and old, expressed their concerns that America also seems at times to be running away from the world it invented and that India is adopting.

With President Obama scheduled to come here next week, at a time when more than a few U.S. politicians are loudly denouncing immigration reforms, free trade expansion and outsourcing, more than a few Indian business leaders want to ask the president: "What's up with that?" Didn't America export to the world all the technologies and free market dogmas that created this increasingly flat, global economic playing field — and now you're turning against them?

"It is the Silicon Valley revolution which enabled the massive rise in tradable services and the U.S.-built telecommunication networks that allowed creation of the virtual office," Nayan Chanda, the editor of YaleGlobal Online, wrote in the Indian magazine Businessworld this week. "But the U.S. seems sadly unprepared to take advantage of the revolution it has spawned. The country's worn-out infrastructure, failing education system and lack of political consensus have prevented it from riding a new wave to prosperity." Ouch.

Saurabh Srivastava, co-founder of the National Association of Software and Service Companies in India, explained that for the first 40 years of Indian independence, entrepreneurs here were looked down upon. India had lost confidence in its ability to compete, so it opted for protectionism. But when the '90s rolled around, and India's government was almost bankrupt, India's technology industry was able to get the government to open up the economy, in part by citing the example of America and Silicon Valley. India has flourished ever since.

"America," said Srivastava, "was the one who said to us: 'You have to go for meritocracy. You don't have to produce everything yourselves. Go for free trade and open markets.' This has been the American national anthem, and we pushed our government to tune in to it. And just when they're beginning to learn how to hum it, you're changing the anthem. ... Our industry was the one pushing our government to open our markets for American imports, 100 percent foreign ownership of companies and tough copyright laws when it wasn't fashionable."

If America turns away from these values, he added, the socialist/protectionists among India's bureaucrats will use it to slow down any further opening of the Indian markets to U.S. exporters.

It looks, said Srivastava, as if "what is happening in America is a loss of self-confidence. We don't want America to lose self-confidence. Who else is there to take over America's moral leadership? American's leadership was never because you had more arms. It was because of ideas, imagination, and meritocracy." If America turns away from its core values, he added, "there is nobody else to take that leadership. Do we want China as the world's moral leader? No. We desperately want America to succeed."

This isn't just so American values triumph. With a rising China on one side and a crumbling Pakistan on the other, India's newfound friendship with America has taken on strategic importance. "It is very worrying to live in a world that no longer has the balance of power we've had for 60 years," said Shekhar Gupta, editor of The Indian Express newspaper. "That is why everyone is concerned about America."

India and America are both democracies, a top Indian official explained to me, but emotionally they are now ships passing in the night. Because today the poorest Indian maid believes that if she can just save a few dollars to get her kid English lessons, that kid will have a better life than she does. So she is an optimist. "But the guy in Kansas," he added, "who today is enjoying a better life than that maid, is worried that he can't pass it on to his kids. So he's a pessimist."

Yes, when America lapses into a bad mood, everyone notices. After asking for an explanation of the Tea Party's politics, Gupta remarked: "We have moved away from a politics of grievance to a politics of aspiration. Where is the American dream? Where is the optimism?"

 

[ajtr]

ONGC beats China's CNOOC to be Asia's No. 1 oil and gas firm​

Public Sector upstream giant ONGC has moved up eight steps to the 18th rank in the overall listing of global energy companies in Platts " Top 250 Global Energy Company Ranking 2010". Platts, a reputed energy research agency, carries out global rankings of Top 250 listed energy companies every year. These rankings were released in Singapore on Wednesday.

This is the highest ever ranking for ONGC in the list of Platts Top 250, ahead of global leaders like Conoco Phillips, Statoil, Chinese major CNOOC, BG and others. ONGC was ranked 26th in 2009.

The select list is topped by US oil giant ExxonMobil, followed by British energy major BP, Russia's Gazprom, Petrobras of Brazil and French oil major Total in that order. India's Reliance Industries Ltd ( RIL) figures at the 13th position.

ONGC has also relegated Chinese rival CNOOC to the second position to become Asia's top company in the oil and gas exploration segment.

Platts ranked Reliance Industries as the top oil refining and marketing company in Asia while public sector gas major GAIL India was ranked No. 1 company among gas utilities.

NTPC was ranked No 2 power utility in Asia behind Constellation Energy Group. Indian Oil Corp ( IOC) was placed third in Asia's refining and marketing company rankings, with Bharat Petroleum at the fifth spot and Hindustan Petroleum at 19th position.

Tata Power was ranked the fourth fastest growing Asian company. Reliance Infrastructure was sixth on the list headed by China Resources Power Holdings.

In Asia's overall top 10, which includes downstream oil refining and marketing companies, PetroChina Co Ltd retained the top spot, while China Petroleum & Chemical Corp came in second, ousting CNOOC Ltd, which fell to sixth place. India's Reliance Industries moved from the fourth to third spot, while ONGC rose from fifth to fourth, Platts said.

Among the firms that moved out of the Asian top 10 list was IOC. Platts annually carries out global rankings of the top 250 listed energy companies evaluated on four key metrics - assets, revenues, profits and return on invested capital.

 

[ajtr]

China vs. India: An Investment Dilemma?​

When we think about the two emerging giants of the East, historically most have gravitated towards China. About a year ago I invested a sizeable sum of my investment capital in India. Many people have since asked me why, as if I've committed a cardinal sin by breaking from conventional wisdom or thinking, but for me that was the primary factor prompting my decision in the first place

For many people, the crisp and modern infrastructure of China, along with the countries overwhelming ability to adopt new policy and practices at break neck speed, and with seemingly little effort, have been enough for them to park their money there. It is important to point out that this is merely window dressing and hides growing internal problems which we will explore later. Furthermore, China has always pumped a lot more money into its infrastructure, 11% of its GDP as opposed to 6% for India. Last but not least, it's important to remember that China has roughly a ten year head start on India. It began its awe inspiring growth back in the early 80's, India began in the 90's.

It's very true that China's infrastructure and cities are far more advanced than India's, as China's economy has seen 9% GDP growth for the past 30 years, but India has never been far behind in terms of economic growth, averaging around 6-7%, and is pumping huge sums into developing its infrastructure. For me though, the Chinese economic model has reached its pinnacle and cracks are beginning to appear.

China has a very poor democratic track record, decision making is always done by central government and passed down to its tightly regulated state owned banks and businesses, which then obediently comply. The state is huge in China, which is a reminder of its Communist past. The advantage of this has always meant that China has been able to implement policy changes and huge investment initiatiatives with extreme efficiency, but huge sums of money are wasted amongst the bureaucracy and red tape.

India by contrast has always been deregulated with decision making taken locally and democratically. This has meant that decisions often take a long time to be made, but all of India's financial and Commercial Institutions are managed independent of central government. India's largest companies today started out as small independent start ups. It's no doubt a country that fosters, values, and indeed practices entrepreneurialism with great vigor. The advantage with this is that Indian companies utilize capital with far greater efficiency, with little to no waste. In stark contrast to it's behemoth neighbor to the north

Essentially, India's economic model has a great deal more in common with that of the West, particularly the United States. Think about it, it was a bunch of small businesses run by energetic and innovative entrepreneurs that propelled America along a trajectory which lead it to superpower status in a relatively short period of time. No reason it can't happen again.

Although the figures in this table favor China, I strongly believe China is in for a rude awakening, and soon. I want to draw particular attention to the recent Global financial crisis of 2008. That crisis began in the U.S. and quickly emanated outward like a blast wave, to infect the rest of the world. As a result, India has surprisingly emerged from it and indeed dealt with it much better than China. Since the crisis Chinese stocks have performed poorly.

About 35% of China's GDP stems from exports. With the West still in trouble, China has lost much of its growth over the past 2 years. India on the other hand has for the first time seen it's GDP overtake China's, growing 9.2% in 2010. India exports account for only 24% of its GDP and internal consumption accounts for a massive 57%. In China, internal consumption accounts for 35%. In other words, India will continue to grow whether Western consumers tighten their spending or not.

Furthermore, China has pumped huge sums of money into its economy, with it's stimulus package constituting 6% of GDP, and India only 3%.

It should be noted also that China is facing an impending financial crisis of it's own. During the past year or so, while the rest of the world has been tenderly licking it's wounds from the great recession, Chinese banks have been loaning vast sums of money to Chinese consumers in an attempt to compensate for sluggish export sales. The Chinese government recently announced that 20% of all loans made will likely be non-performing. A more realistic number of 30% of loans turning sour could well bankrupt the entire banking system. Even conservative estimates have put bad loans at a staggering 8% of GDP, more than double what the savings and loan crisis amounted to in the United States. Food for thought indeed.

My money will be in India for the long term. I also believe, further to the observations above, China will cease to become an attractive destination for Western corporations looking for cheap labor, which has been the magnet for so long. I believe that China will be unable to keep its currency from appreciating for much longer and will see more internal pressure from unions for higher wages and better working conditions, as seen earlier this year. China is about to sail through some very choppy water.

 

[Pintu]

http://www.thestatesman.net/index.php?option=com_content&view=article&id=347391&catid=35

Food inflation falls to 12.85%, down for third week in a row

4 November 2010
Press Trust of India
NEW DELHI, 4 NOV: Sliding for the third straight week, food inflation fell to 12.85 per cent for the week ending 23 October as prices of vegetables, especially potato and onion, softened with improved supplies.
Food inflation stood at 13.75 per cent for the week ending 16 October, government data showed. On an annual basis, potato prices were sharply down by 51.22 per cent and vegetables became cheaper by 4.20 per cent. Also, onion prices eased by 0.13 per cent. Other essential items like cereals, milk and fruits continued to remain costly.
On an annual basis, cereal prices rose by 4.07 per cent. While pulses became costlier by 0.67 per cent on a yearly basis, prices of wheat and rice increased by 4.36 per cent and 3.17 per cent, respectively.
Among other food items, milk prices soared by 21.72 per cent during the week compared to the same period last year, while fruit rates rose by 16.03 per cent.
Egg, meat and fish became dearer by 28.85 per cent on an annual basis.
Although prices of some perishable food items are easing, however demand supply mismatch persist in several essential commodities.
"Notwithstanding some moderation, food price inflation has remained persistently elevated for over a year now, reflecting in part the structural demand-supply mismatches in several commodities," RBI said in its second quarter review of the monetary policy on Tuesday.
After some moderation in July, food inflation remained high during August and September over supply disruptions, caused by heavy rains.

 

[Pintu]

http://www.thestatesman.net/index.php?option=com_content&view=article&id=348172&catid=40

Food inflation at 12.3%; falls for 4th week

11 November 2010
Press Trust of India
NEW DELHI, 11 NOV: Food inflation declined to 12.30 per cent for the week ending 30 October, on improved supply of items, showing a downward movement for the fourth straight week. It was 12.85 per cent in the previous week.
While most food items like wheat, pulses and potatoes turned cheaper, onions became costlier as their prices rose about 10 per cent within a week.
Considering that food inflation stood at a high of 12.59 per cent during the corresponding week of last year, even 12.30 per cent inflation is quite elevated.
Earlier this month, RBI raised its short-term rates to tame inflation saying prices of protein based food items are still high.
However, Prime Minister's advisory panel believes that food inflation could be tamed through improved production. At a function, Prime Minister's Economic Advisory Council chairman Mr C Rangarajan said: "Food inflation is caused by shortage of food and supply. In the mid-term we need to ensure that supply is increased through production to curb inflation."
Finance minister Mr Pranab Mukherjee said: "I hope this (declining trend of food inflation) will continue....Therefore, the basic point which you can derive is that though the coming down is slow, but as it is on year-on-year basis... because this time last year also base was reasonably high, that it why it is coming like that."

 

[Pintu]

http://economictimes.indiatimes.com...in-a-month-Rangarajan/articleshow/6908125.cms

11 Nov, 2010, 06.00PM IST,PTI
Liquidity situation to ease in a month: Rangarajan

NEW DELHI: The Prime Minister's economic advisory panel today said the current shortage of money supply because of the festive season and public offers of PSUs will start easing within a month because of an expected increase in expenditure by the government and continued capital inflows.

"I think it should start easing in a month time," Prime Minister's Economic Advisory Council Chairman C Rangarajan told reporters on the sidelines of a function organised by consultancy firm SKOCH. Rangarajan said there is liquidity shortage in the system and RBI's future actions will depend on the unfolding situation. "I think there is (liquidity shortage)... The whole thing depends upon how the situation develops. If there is extreme tightness in the liquidity, then the RBI will act," he said. Earlier this week, the Reserve Bank had opened an additional window for banks to borrow and lend money to the central bank till the middle of December.

The RBI had said there has been a liquidity crunch in the system due to festive season demand and the Coal India IPO that sucked liquidity over Rs 15,000 crore out of the system. Liquidity is expected to be tight even in the days to come, as there are a slew of IPOs lined up and credit offtake is likely to pick up. A follow-on public offer by Power Grid Corporation of India Ltd is already attracting strong interest in the market and is expected to mop up another Rs 6,500 crore.

Rangarajan said an increase in public expenditure in the second half of the fiscal will also help ease the liquidity situation. "As you know, in the second half of the year, the public expenditure has also increased and therefore, liquidity tightness may be temporary," the former RBI governor said.

He said capital inflows will also ease pressure on liquidity to the extent they are added to forex reserves. Rangarajan said the RBI will also have to decide whether it wants to maintain separate rates for short-term borrowing and lending. "The LAF corridor has been narrowed now. If it can remain at that level... but sooner or later, we will have to decide whether we need to operate two rates. Only one (rates operate) in many nations of the world.

We really have to make up our mind about that," he said. The liquidity adjustment facility (LAF) corridor is the difference between the short-term lending (repo) and borrowing (reverse repo) rates of the central bank. The LAF corridor is a narrow 1 per cent at present, as the repo rate stands at 6.25 per cent and the reverse repo rate is 5.25 per cent.

The gap was wider when the RBI eased money supply to enable the economy to shrug off the impact of the global financial meltdown that occurred in September, 2008.

 

[Pintu]

http://economictimes.indiatimes.com...-see-bad-loans-rising/articleshow/6892219.cms

9 Nov, 2010, 05.36AM IST,ET Bureau
Boom time rap: Banks may see bad loans rising

MUMBAI: Bad loans are set to jump in the coming quarters as banks' aggressive lending during boom times are set to haunt them, a report by the Reserve Bank of India says. International banks are leading the jump in bad loans as many consumer loans turn sour due to the unsecured nature of lending.

"Management of NPAs by banks remains an area of concern, particularly due to the likelihood of deterioration in the quality of structured advances," says the report on Trends and Banking in India. "Asset quality can get compromised during periods of high credit growth and this can result in the creation of non-performing assets for banks in the later years."

Gross bad loans of scheduled commercial banks rose to . 84,747 crore in the fiscal year ended March 2010, from . 68,328 crore a year earlier.

Among the sector, foreign banks such as Citigroup , HSBC and Standard Chartered led the jump in non-performing assets to . 7,180 crore from . 6,444 crore. For state-run banks such as the SBI and PNB, it rose to . 59,926 crore, from . 44,957 crore a year ago. In private sector banks, it rose to . 17,639 crore in 2009-10 , from . 16,926 crore.

The share of bad loans among the priority sector funding has fallen in 2010 from a year earlier as lenders benefitted form the government compensating them due to agricultural debt waiver and debt relief scheme.

Reflecting the popular theory on the success of microfinance institutions, the central bank report said weaker sections comprising small and marginal farmers, scheduled caste and tribes have shown a steady decline in the NPA ratio in recent years. For all domestic banks, the proportion of NPAs from other areas in priority sector lending , apart from agriculture and small scale industries , has come down from . 13,159 crore in 2009 to . 12,611crore in 2010, thus strengthening the above fact. But the NPA ratio for weaker sections for public sector banks was higher at 3% than 0.5% for private sector banks at end march 2010.

The recovery of bad loans has also improved with some recent legislation helping banks.

Loans recovered under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest, or the SARFAESI Act, 2002, formed over half the total amount of recovery in 2009-10 . The report says securitisation and reconstruction companies failed to attract commercial banks because of non-realisation of security receipts by them within the stipulated five years from the time of acquisition of NPA.

 

[Pintu]

http://economictimes.indiatimes.com...uality-may-take-a-hit/articleshow/6892214.cms

9 Nov, 2010, 05.34AM IST,ET Bureau
Banks profitability, asset quality may take a hit

MUMBAI: Indian banks' apparently growing strength may be concealing a possible weakness that is setting in below the surface on slowing growth in profits, deposits and a rise in bad loans , says the Reserve Bank of India's annual report on the trends and progress of banking in India.

The central bank said it is disappointed with the Indian banks' slow progress in financial inclusion that poorly compares with Asian peers, but said even the statistical achievements so far do not translate into significant gains for society.

Net profit growth rate has fallen by two-thirds in the fiscal year ended March 2010 from a year earlier. Deposits growth rate declined for the third year in a row, which partly is a fallout of the strategy of the central bank itself that kept policy rates lower than inflation rate.

"There were some emerging concerns with regard to the second important soundness indicator of banks of non-performing assets," said the report. "There was a slowdown in the growth of balance sheets of public sector banks as well as old private sector banks."

The net profit of all commercial banks rose 8.3% in 2009-10 over the previous year against a rise of 23.5% in 2008-09 . While net profit amounted to . 57,109 crore, operating profit amounted to . 1,22,419 crore, up 10.4% over the previous year. The net interest margin, a key parameter for profitability, declined due to poor credit offtake and subdued interest rate environments, the RBI report said.

The report, which is a mandatory publication to be submitted to the government, signed by the governor , presents a detailed analysis of the performance of the banking sector in India.

The report notes that every indicator of profitability, including return on assets, return on equity and the net interest margin and spread (the difference between the return and cost of funds), declined at the aggregate level in 2009-10 .

On financial inclusion, RBI said banks had opened 5.06 crore nofrills accounts, but they remained cosmetic.
"While no-frills accounts have grown phenomenally, an important challenge before the banking system is to keep these accounts operational , as many such accounts are found to be dormant since the poor often find it difficult to save and deposit money into these accounts," it said.

RBI said bank deposits which constituted around 78% of total liabilities , decelerated for the third consecutive year since 2007-08 . One of the factors responsible for decline in the deposits growth was low interest rates for the major part of the year. Meanwhile, PSU banks' share of credit to capital markets, real estate and commodities fell while that of foreign banks increased.

It advised banks to support the process of economic recovery in the short-term. In the medium to long-term , RBI said there was a need to transform banks to become more efficient and vibrant so as to ensure a more sustainable and inclusive economic growth.

 

[Pintu]

RBI's report :

http://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=23386


Date : 08 Nov 2010
RBI releases Report on Trend and Progress of Banking in India 2009-10

The Reserve Bank of India today released its statutory Report on Trend and Progress of Banking in India, 2009-10. This yearly Report provides a detailed account of policy developments relating to as well as the performance of commercial banks, cooperative banks, and non-banking financial institutions for the year 2009-10. While retaining the essential analytical rigor and maintaining continuity in crucial data, the size of the current Report has been rationalised to enhance readability.

Notwithstanding some knock-on effects of the global financial crisis, the Report indicates that the Indian banking sector remained largely resilient in 2009-10. While some slippages in profitability and asset quality were evident during the year, robust capital adequacy of banks provides enough cushion for absorption of future losses. The Indian approach to regulation, which is geared to forward looking assessment and preparedness of financial institutions, has allowed calibrated financial sector reforms without disruption. The Indian economy, which has managed quick recovery post-crisis, is poised to reach higher growth trajectory. Going forward, banking sector needs to support the growth momentum in the economy, while maintaining asset quality, prudent provisioning and asset liability management to balance emerging returns and risks. In the long-run, banks need to leverage on scale-neutral technology to step up efforts towards financial inclusion and boost economic growth with equity.

The Report has six chapters: (i) Perspectives, (ii) Global Banking Developments, (iii) Policy Environment, (iv) Operation and Performance of Commercial Banks, (v) Developments in Cooperative Banking, and (vi) Non-Banking Financial Institutions. The statistical appendices provide data on various indicators of performance of the financial sector.1

Key findings of the Report are set out below:

Perspectives

*

The global financial crisis brought a number of lessons to fore, viz., (i) the need for financial regulation to stay ahead of innovations, (ii) the importance of inter-agency coordination to ensure financial stability, (iii) an in-depth understanding of the implications of large scale bail-outs on financial and fiscal health, and (iv) a closer analysis of complex derivative products (para 1.1; page 1).
*

In the aftermath of the financial crisis, multipronged initiatives have been taken by standard setting bodies, such as the Basel Committee on Banking Supervision (BCBS) and national authorities to address weaknesses of the extant financial architecture – notably in the areas of re-calibration of capital and enhancement of regulatory perimeter (para 1.9; pages 3-4).
*

The sovereign debt crisis that emerged in early 2010 highlighted the exposure of banks to sovereign debts and the adverse feedback loop between public finances and the financial system. This has underscored the need for credible fiscal reforms and implementation of prudent macroeconomic policies to prevent overheating (para 1.27; page 8).
*

The enhanced Basel II capital and liquidity norms are not likely to have immediate effect on Indian banks given their already existing higher levels of capital adequacy and the limited leveraging of balance sheets. However, going forward, banks need to make efforts to further shore up their capital base (para 1.34 and 1.35; pages 9 to 10).
*

The Reserve Bank has introduced the Base Rate system from July 2010, which would improve transparency and pricing of credit, and thus increase the efficacy of the interest rate channel of monetary policy transmission (para 1.43; pages 11 to 12).
*

Indian banks need to support long term financing without running into ALM mismatches. This would be facilitated by the use of innovative credit enhancement mechanisms such as credit default swaps (CDS) for which draft guidelines were issued by the Reserve Bank in August 2010 (para 1.37 to 1.39; pages 10 to 11).
*

Financial inclusion is accorded top priority by the Reserve Bank. These efforts need to be carried forward using innovative technological solutions, and explicit and implicit incentives (para 1.47 to 1.49; page 13).

Global Banking Developments

*

The global economy, after contracting in 2009, witnessed a significant recovery during the first half of 2010. Further, emerging and developing economies are projected to grow at a faster rate than the advanced economies (para 2.6; page 16).
*

The performance of the global banking industry showed some improvements during 2009-10, after witnessing a tumultuous period of large income losses and write downs in the wake of global crisis in 2008-09. A positive development in the aftermath of the global crisis was that during the first three months of 2010, the international claims of global banking industry rose for the first time since the third quarter of 2008 (para 2.16; page 22).
*

Though the large scale monetary and fiscal stimulus measures led to economic recovery, various concerns over downside risks to the global banking industry remained, especially those regarding the quality of banks' assets and profitability. Going forward, banks would have to address challenges arising from the need to refinance large portions of their liabilities and ending their dependence on emergency support measures from the public sector (para 2.1; page 15).
*

Keeping in view the higher capital charge proposal under the enhanced Basel II framework, the global banking industry in some regions like the Euro area is bound to witness further challenges to recapitalisation as private sector funding matures and extraordinary public support is withdrawn (para 2.33; page 27).

Policy Environment

*

The year 2009-10 witnessed a gradual shift in policy focus of the Reserve Bank from crisis management to that of recovery management. On the credit delivery front, new developments included the introduction of the Base Rate and waiver of security/margin norms for agricultural loans, among others.
*

Apart from measures to ease the flow of credit particularly to small and marginal farmers, and micro and small enterprises to increase self employment, initiatives for improving financial literacy and inclusion in seven focus States formed an important part of the policy agenda in 2009-10 (para 3.15-3.21; pages 32-33).
*

The Securities and Insurance Laws (Amendment and Validation) Bill, passed by the Parliament to provide a joint mechanism to resolve inter-regulatory differences in opinion is among the important legislative measures unveiled during 2009-10 (para 3.149; page 56).
*

The supervisory practices in respect of concerns relating to banking frauds, overseas operations, financial conglomerates, electronic banking and technology risk received attention in 2009-10. Focused attention was also placed on improving customer service and the efficiency of payments and settlement system (para 3.53-3.59 pages 39-40).
*

In 2009-10, the Reserve Bank undertook a number of initiatives for improving IT infrastructure facilities, implementing new applications and initiating steps for further adoption of technology in the financial sector (para 3.144-3.150; pages 56-58).

Operation and Performance of Commercial Banks

*

The year 2009-10 experienced a relatively subdued performance of the Indian banking sector with deceleration in the growth of consolidated balance sheet of scheduled commercial banks (SCBs) contributed mainly by slowdown in deposits growth (para 4.3; page 60).
*

The composition of deposits changed in favour of Current and Saving Accounts (CASA) with CASA accounting for 35.4 per cent of total deposits at end-March 2010 as compared to 33.2 per cent in the previous year (para 4.6; page 62).
*

In line with the deceleration in deposits growth, there was a slowdown in the growth of bank credit of SCBs in 2009-10. However, on an intra-year basis, there were signs of a pick up in bank credit after November 2009, as economic recovery became more broad-based (para 4.8; page 62).
*

Another concern was the decline in the growth of profits of SCBs. At the aggregate level, the growth in net profits, which was on a steady rise during the four years up to 2007-08, posted a decline in 2008-09, which was repeated in 2009-10 (para 4.22, page 69).
*

Return on Assets (RoA) of SCBs declined from 1.13 per cent in 2008-09 to 1.05 per cent in 2009-10 (para 4.22-4.25; page 69-71). Further, there was a decline in all other indicators too at the aggregate level, such as Return on Equity, net interest margin and spread (defined as the difference between return on and cost of funds) in 2009-10 (para 4.26; page 72).
*

The other emerging concern was with respect to asset quality of banks. The gross Non-Performing Assets (NPAs) ratio showed an increase from 2.25 per cent in 2008-09 to 2.39 per cent in 2009-10. Moreover, there was an increase in the proportion of doubtful and loss assets in 2009-10. The increase in gross NPA ratio coupled with a decline in the (outstanding) provisions to gross NPA ratio in 2009-10 at the aggregate level, underlined the need for further strengthening of provisions by banks (para 4.35 to 4.42, pages 74 to 79).
*

However, even against the backdrop of an increase in NPA ratio, there was a rise in the Capital to Risk Weighted Assets Ratio (CRAR) of SCBs, which stood at 14.5 per cent at end-March 2010, far above the stipulated minimum ratio of 9 per cent under the Basel II framework indicating the robust capital adequacy of banks in India (para 4.30; page 73).
*

As regards financial inclusion, a welcome development in the recent years has been the steady increase in the penetration of bank branches and ATMs (reflected in a decline in population per bank branch/ATM). The increased penetration of both branches and ATMs could be seen across rural India.
*

As regards technological advancement in banks, an important development was the near completion of computerisation and an increase in the extent of adoption of Core Banking Solutions (CBS) in public sector banks in 2009-10.

Developments in Cooperative Banking

*

An outcome of the on-going consolidation of the urban cooperative banking (UCB) sector was the further decline in the number of UCBs in 2009-10. However, there were also signs of increasing concentration of banking business within the UCB sector with the share of banking business in the larger asset-size categories and business-size categories showing an increase (para 5.5 to 5.7; pages 104 to 106).
*

Unlike SCBs, the consolidated balance sheet of UCBs expanded at a higher rate in 2009-10 attributable to the growth in deposits on the liability side, and a growth in both investments, and loans and advances on the asset side (para 5.12; page 108).
*

There were emerging concerns with respect to profitability of the UCB sector as net profits posted a decline in 2009-10, due to the decline in the operating profits. Consequently, the RoA of the UCB sector registered a fall from 0.8 per cent in 2008-09 to 0.7 per cent in 2009-10 (para 5.17; page 110).
*

There was an improvement in the asset quality of the UCB sector with a decline in the gross NPA ratio from 13.0 per cent at end-March 2009 to 11.8 per cent at end-March 2010 (para 5.20; page 111).
*

More importantly, the capital adequacy of UCBs was reasonable, with 86.3 per cent of UCBs complying with the minimum CRAR norm of 9 per cent at end-March 2010 (para 5.22; page 112).
*

In line with their role in financial inclusion, about 65 per cent of total advances of UCBs was made towards priority sectors with more than 16 per cent of the total advances being provided to weaker sections in 2009-10 (para 5.27; page 115).
*

While State Cooperative Banks, District Central Cooperative Banks and State Cooperative Agriculture and Rural Development Banks earned net profits, the ground level institutions, viz., Primary Agricultural Credit Societies, and Primary Cooperative Agriculture and Rural Development Banks reported net losses in 2008-09 (para 5.32; page 116).
*

Despite the improved financial performance, the asset quality of rural cooperative credit institutions witnessed deterioration with the short-term rural cooperative credit institutions accounting for the major share of non-performing loans at end-March 2009 (para 5.32; page 116).

Non-Banking Financial Institutions

*

The financial performance of the Financial Institutions (FIs) sector improved during 2009-10 as compared with 2008-09 mainly on account of substantial increase in interest income, notwithstanding the decline in non-interest income (para 6.19; page 140).
*

At the aggregate level, there was an increase in the amount of net NPAs for FIs in 2009-10 attributable only to SIDBI. The capital adequacy of FIs, however, was robust with the CRAR remaining above the stipulated minimum of 9 per cent for all FIs (para 6.20 to 6.23; pages 142 to 143).
*

There was an improvement in the asset quality of NBFCs-D with a decline in their gross NPA ratio from 2.0 per cent at end-March 2009 to 1.3 per cent at end-March 2010. There was an improvement in their capital adequacy too, with only 3 out of 216 NBFCs-D having CRAR below 9 per cent as at end-March 2010 (para 6.41 to 6.44; pages 150 to 152).

Alpana Killawala
Chief General Manager

Press Release : 2010-2011/640

1The detailed bank-wise data on the banking sector will be provided in Statistical Tables Relating to Banks in India, 2009-10.

Regards