RBI Governor has announced Annual Policy Statement for the year 2007-08 around noon today. Allaying fears of the market, key rates have been left unchanged. The earlier CRR hike of 25 basis points to 6.25, announced on March 30, 2007, will come into effect on April 28, 2007.
A perusal of the Policy shows that the objective of RBI is to progress the war on inflation without hurting the growth momentum. This is significant keeping in view the recent past when RBI rushed ahead with stringent measures to tame inflation, least bothered about the overall growth.
It is stated that the aim is to bring down the inflation to 5 percent during 2007-08. Going forward, the resolve is to condition policy and perceptions for inflation in the range of 4.0-4.5 percent over the medium term. It is a welcome measure. The earlier tolerance band was set at 5.0-5.5.
M3 money expansion will be pegged at around 17.0-17.5 per cent, which is currently hovering above 20%. In order to achieve this target, RBI has adopted following measures for accelerating outflow of funds:
i. the overseas investment limit of Indian corporates is enhanced from the existing 200 per cent of net worth to 300 per cent of net worth
ii. the limit for portfolio investments abroad in listed overseas companies by listed Indian companies is enhanced from 25 per cent of net worth to 35 per cent of net worth
iii. Prepayment of external commercial borrowings (ECBs) allowed upto US $ 400 million as against the existing limit of US $ 300 million by authorized dealer banks
iv. Permitting remittances on account of donations by corporates for specified purposes, subject to 1 per cent of their foreign exchange earnings during the previous three financial years of US $ 100,000 whichever is lower.
v. Permitting Indian companies to remit up to US $ 10 million as against the current limit of US $ 1 million for consultancy services for executing infrastructure projects
vi. the aggregate ceiling on overseas investment by mutual funds to be increased from US $ 3 billion to US $ 4 billion.
vii. remittance limit of US $ 50,000 to be enhanced to US $ 100,000 per financial year for any permitted current/capital account transaction or a combination of both by individuals.
How much bearing these measures will have on reducing the domestic availability of funds is a million dollar question. The measures at (i), (iii) & (vi) may, to some extent, aid the RBI’s initiative. Ceiling on the rate of interest payable on Foreign Currency Non Resident (FCNR) accounts have been reduced by 50 basis points. This is a bad news to NRIs, who have been taking advantage of the higher interest rates on their FCNR accounts. Inflow of funds may reduce a tad.
Notwithstanding, the larger picture emerging is that RBI has been preparing the stage for full float of rupee, albeit gradually.
Commercial banks can now heave a sigh of relief. Risk weight on domestic housing loans to individuals for loans upto Rs.20 lakhs has been reduced to 50 per cent from 75 per cent as a temporary measure, allowing flexibility to banks to extend loans to retail housing sector, with reduced provisions.
Non Banking Financial Companies (NBFCs) now onwards can pay upto 12.5 per cent interest on deposits.
Overall, it is a growth-oriented Credit Policy. Pragmatism is writ large across the fine print. Globally, financial risks have increased on account of various reasons including the behaviour of oil prices, adverse development in the US housing market and large leveraged positions in the financial markets. The scope and role of central bankers, particularly in the emerging markets, is increasingly coming under threats in the wake of global funds relentlessly chasing assets in the rapidly developing markets.
Cheers to Reddy Saheb for coming out with a feel-good Credit Policy in the midst of inflationary pressures
Tuesday, April 24, 2007
Saturday, April 14, 2007
Bellwether
Much awaited numbers of Infosys Technologies Limited (Infy) are announced this morning. Beating the bearish sentiments of the street, which has been expecting a slowdown in the prospects in the wake of appreciating rupee, Infy has come out with stupendous performance, lifting the markets by nearly 170 points (at the time of writing this piece). Infy is up by 4 percent.
Income for the year ending March 31, 2007 was up by 46% to Rs13,893/- crores and net profit (after tax) was Rs.3850 crores showing a growth rate of 56.6%. Annualised EPS was up by 53% to Rs.69.11 from previous year’s Rs.45.03. The Board recommended a final dividend of 130%.
It has in fact become a custom for the company to come out strong figures quarter after quarter. The results have even beaten its own guidance by a big margin.
The company forecasts conservative growth for the immediate quarter and for the whole of financial year. It indicates in its guidance that income will grow at 29.2% – 29.8% and EPS will grow at 24.2.%. Lower estimates are understandable on account of premature withdrawal of tax holiday to IT companies and the imposition of MAT and the rising rupee.
Despite these, I am upbeat about the actual performance of Infy. It will be higher than the forecasts on account of various factors stated in its press release. Acquisition of 34 new clients, prized one being European aerospace giant (guess it is EADS); Infosys BPO continued its growth momentum and has been strengthening its operations by entering into lucrative markets and sectors. It was recently ranked fourth globally in the first ever FAO (Finance and Accounting Outsourcing) worldwide ranking of service providers. One of the world’s largest media and entertainment conglomerates has reportedly signed up for providing a range of services across the media process outsourcing spectrum. Infosys Consulting Inc. has been well positioning in the highly competitive business of consulting and has been fairly successfully in transforming the business of its clients winning the trust in the process; is likely to join the big four very soon.
Though share price-wise, it may not do wonders in the short term, it promises to deliver fair returns in the medium to long term horizon. A look at the balance sheet shows that reserves and surplus of Rs.10,876 crores, whereas share capital stands at Rs.286 cores. Infy may reward its shareholders with a bonus issue in the near future.
Income for the year ending March 31, 2007 was up by 46% to Rs13,893/- crores and net profit (after tax) was Rs.3850 crores showing a growth rate of 56.6%. Annualised EPS was up by 53% to Rs.69.11 from previous year’s Rs.45.03. The Board recommended a final dividend of 130%.
It has in fact become a custom for the company to come out strong figures quarter after quarter. The results have even beaten its own guidance by a big margin.
The company forecasts conservative growth for the immediate quarter and for the whole of financial year. It indicates in its guidance that income will grow at 29.2% – 29.8% and EPS will grow at 24.2.%. Lower estimates are understandable on account of premature withdrawal of tax holiday to IT companies and the imposition of MAT and the rising rupee.
Despite these, I am upbeat about the actual performance of Infy. It will be higher than the forecasts on account of various factors stated in its press release. Acquisition of 34 new clients, prized one being European aerospace giant (guess it is EADS); Infosys BPO continued its growth momentum and has been strengthening its operations by entering into lucrative markets and sectors. It was recently ranked fourth globally in the first ever FAO (Finance and Accounting Outsourcing) worldwide ranking of service providers. One of the world’s largest media and entertainment conglomerates has reportedly signed up for providing a range of services across the media process outsourcing spectrum. Infosys Consulting Inc. has been well positioning in the highly competitive business of consulting and has been fairly successfully in transforming the business of its clients winning the trust in the process; is likely to join the big four very soon.
Though share price-wise, it may not do wonders in the short term, it promises to deliver fair returns in the medium to long term horizon. A look at the balance sheet shows that reserves and surplus of Rs.10,876 crores, whereas share capital stands at Rs.286 cores. Infy may reward its shareholders with a bonus issue in the near future.
Thursday, April 12, 2007
Frostbite
When I returned from Sunday evening walk, Venky was commenting ‘you are back dear so early; need to toil a lot if you want to cut down your flesh’. Yeah he is right. If one is serious to get back to usual size, one needs to work out more seriously, but not so seriously that limbs develop cramps. Only last month I embarked on weight reduction program, after my body turned bulging. Till a few summers back, I was a regular freak at the Sanjay Gandhi Park jogging either in the morning or evening; time permits. But with increasing official and personal commitments, I slowly veered away from my regular. The result is protruding belly.
Similar is the problem with Indian economy. After struggling with Hindu rate of growth for nearly four and a half decades, with the advent of liberalization and globalization, economy had finally taken off well and had become a darling in the emerging markets. When the party is going on well, comes devil in the form of inflation. You might say this is a known devil. The point is why we have not put the lid. The problem with mortals particularly we Indians is that we don’t take anything seriously until and unless it threatens seriously.
The reasons for galloping inflation are said to be raising food and commodity prices, acceleration in credit growth and M3 money. The focus of this article is only on monetary aspects, leaving supply side constraints for discussions on some other day. Till November last, inflation was not on our radar at all because of the solace derived from the fact that it had been hovering within RBI’s tolerance band 5-5.5. We raised alarm only when it shot up by 100 basis points. Ruling party’s rout at the hustings in Punjab and Uttarakhand is attributed to high inflation. The role historically played by anti incumbency factor had been forgotten this time. A look at the past twenty years’ state election results show that voters cutting across regions rejected the incumbent party. Exceptions are left wing’s rule in West Bengal, Digvijay Singh’s return to power in 1998, Chandra Babu’s nine years innings during 1995-2004 and Delhi’s Shiela Dixit government for the last eight years. However, this time most of the analysts had conveniently chosen inflation as the culprit for ruling party’s defeat. No doubt, inflation like indirect taxes hits aam admi heavily, owing to its regressive nature. But to squarely blame the State Governments for macro economic nuances is a bit unfair.
RBI has already raised panic buttons. It is under tremendous pressure to bring the inflation back to the prescribed threshold limits. But the moot question is why RBI is rushing to crush inflation by applying ‘air brakes’; steeply raising interest rates and Cash Reserve Ration (CRR), whereas our law makers recently empowered it to reduce CRR. Does not it suck much liquidity and starve a shining economy in the process? Visible signs are already there to witness across the spectrum of economic activities. The hardening interest rate regime in the meanwhile has fully become functional and taking its toll heavily on retails borrowers, who are feeling the heat by forking out fat EMIs month after month. The fear of defaults may force banks to reduce their exposure to housing and retail sector.
See, I can cut down my belly either by cutting diet (like Adnan Sami) or by arresting myself for four hours a day in a nearby gym. Would you recommend such a course of action? Anyone with average intelligence and basic common sense would suggest that a judicious mix of both, applied steadily over a period of time, would yield the desired outcome without any collateral damage. This is precisely the point RBI missed this time. Rising repo rate coupled with hiking CRR expectedly cripples the credit growth. The classical economic theory supports such a course aimed at bringing down the demand for goods, which eventually weaken prices and thus inflation. But the context has changed. Globalization had ushered in open markets. Big and not so big corporates have been resorting to external commercial borrowings, available at much cheaper rates. (Hope, ceiling on ECBs now at $500 million is not brought down as part of war against inflation), Adding to the problem of money supply is the inflow of foreign funds, which have been chasing rapidly progressing markets like India. The unintended consequence of the whole process thankfully is the restricted role of central bankers. The leeway available to central bankers is fast receding.
One of the principal jobs of central bankers is to keep money supply growth in line with the real GDP growth. Real GDP remained at 5.2 during 1990/91-2002/03, went up to 8.1 during 2003/04-2004/05 and then to 8.3 during 2005/06, and current year estimates for fiscal 2006-07 vary from 9.2. to 9.6; whereas the money supply growth at nearly 20% has been far ahead of 15.5 per cent target set by RBI itself. They say ‘trend is your friend’. In this case, the trend is clearly on the wall. The widening gap between the GDP and money supply is telling for the last few years. But attention was not given to address this issue appropriately. The inescapable conclusion is that the system either failed to catch the evolving trend much earlier than it becomes reality OR became ineffective to treat the symptoms.
Furthermore, the RBI is hell-bent on holding the appreciating rupee for the sake of safeguarding exports, particularly IT and IT enabled services, in the process purchasing foreign exchange and pumping rupees in the local market. Was it not aiding inflation to accelerate? There lies the quandary. Why don’t you allow appreciation of the rupee, at least temporarily if you are so serious about taming inflation? Our goods and services anyway have saleability in the international market on account of comparative advantage. Mind you, appreciating rupee has its benefits. Imports become cheaper. Secondly, non-intervention by RBI in rupee’s upward and downward movement against greenback, at least temporarily, constricts the money supply, which will soften inflationary pressures.
Economy is no doubt heating up. If the intension is to slow down the pace of growth, sprinkle water but don’t pour water. It takes not months but years to even warm it up again.
Similar is the problem with Indian economy. After struggling with Hindu rate of growth for nearly four and a half decades, with the advent of liberalization and globalization, economy had finally taken off well and had become a darling in the emerging markets. When the party is going on well, comes devil in the form of inflation. You might say this is a known devil. The point is why we have not put the lid. The problem with mortals particularly we Indians is that we don’t take anything seriously until and unless it threatens seriously.
The reasons for galloping inflation are said to be raising food and commodity prices, acceleration in credit growth and M3 money. The focus of this article is only on monetary aspects, leaving supply side constraints for discussions on some other day. Till November last, inflation was not on our radar at all because of the solace derived from the fact that it had been hovering within RBI’s tolerance band 5-5.5. We raised alarm only when it shot up by 100 basis points. Ruling party’s rout at the hustings in Punjab and Uttarakhand is attributed to high inflation. The role historically played by anti incumbency factor had been forgotten this time. A look at the past twenty years’ state election results show that voters cutting across regions rejected the incumbent party. Exceptions are left wing’s rule in West Bengal, Digvijay Singh’s return to power in 1998, Chandra Babu’s nine years innings during 1995-2004 and Delhi’s Shiela Dixit government for the last eight years. However, this time most of the analysts had conveniently chosen inflation as the culprit for ruling party’s defeat. No doubt, inflation like indirect taxes hits aam admi heavily, owing to its regressive nature. But to squarely blame the State Governments for macro economic nuances is a bit unfair.
RBI has already raised panic buttons. It is under tremendous pressure to bring the inflation back to the prescribed threshold limits. But the moot question is why RBI is rushing to crush inflation by applying ‘air brakes’; steeply raising interest rates and Cash Reserve Ration (CRR), whereas our law makers recently empowered it to reduce CRR. Does not it suck much liquidity and starve a shining economy in the process? Visible signs are already there to witness across the spectrum of economic activities. The hardening interest rate regime in the meanwhile has fully become functional and taking its toll heavily on retails borrowers, who are feeling the heat by forking out fat EMIs month after month. The fear of defaults may force banks to reduce their exposure to housing and retail sector.
See, I can cut down my belly either by cutting diet (like Adnan Sami) or by arresting myself for four hours a day in a nearby gym. Would you recommend such a course of action? Anyone with average intelligence and basic common sense would suggest that a judicious mix of both, applied steadily over a period of time, would yield the desired outcome without any collateral damage. This is precisely the point RBI missed this time. Rising repo rate coupled with hiking CRR expectedly cripples the credit growth. The classical economic theory supports such a course aimed at bringing down the demand for goods, which eventually weaken prices and thus inflation. But the context has changed. Globalization had ushered in open markets. Big and not so big corporates have been resorting to external commercial borrowings, available at much cheaper rates. (Hope, ceiling on ECBs now at $500 million is not brought down as part of war against inflation), Adding to the problem of money supply is the inflow of foreign funds, which have been chasing rapidly progressing markets like India. The unintended consequence of the whole process thankfully is the restricted role of central bankers. The leeway available to central bankers is fast receding.
One of the principal jobs of central bankers is to keep money supply growth in line with the real GDP growth. Real GDP remained at 5.2 during 1990/91-2002/03, went up to 8.1 during 2003/04-2004/05 and then to 8.3 during 2005/06, and current year estimates for fiscal 2006-07 vary from 9.2. to 9.6; whereas the money supply growth at nearly 20% has been far ahead of 15.5 per cent target set by RBI itself. They say ‘trend is your friend’. In this case, the trend is clearly on the wall. The widening gap between the GDP and money supply is telling for the last few years. But attention was not given to address this issue appropriately. The inescapable conclusion is that the system either failed to catch the evolving trend much earlier than it becomes reality OR became ineffective to treat the symptoms.
Furthermore, the RBI is hell-bent on holding the appreciating rupee for the sake of safeguarding exports, particularly IT and IT enabled services, in the process purchasing foreign exchange and pumping rupees in the local market. Was it not aiding inflation to accelerate? There lies the quandary. Why don’t you allow appreciation of the rupee, at least temporarily if you are so serious about taming inflation? Our goods and services anyway have saleability in the international market on account of comparative advantage. Mind you, appreciating rupee has its benefits. Imports become cheaper. Secondly, non-intervention by RBI in rupee’s upward and downward movement against greenback, at least temporarily, constricts the money supply, which will soften inflationary pressures.
Economy is no doubt heating up. If the intension is to slow down the pace of growth, sprinkle water but don’t pour water. It takes not months but years to even warm it up again.
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