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Saturday, December 06, 2008
ICICI Bank cuts home loan rate by 1.5%
ICICI Bank has announced reduction in its home loan rate from 13 per cent to 11.5 per cent for loans of up to Rs 20 lakh.
The new rate, however, is applicable for new customers only, according to the bank sources. As there has been no change in the bank’s prime lending rate, the benefit of the 1.5 percentage point cut in the loan rate will NOT be passed on to the existing customers.
Surprisingly, ICICI Bank had raised its home loan rate by 1.5 percentage point about a month back, that too at a time when public sector banks had started reducing their rates.
Weekly News - Dec 6 2008
Air-India, Jet cut fuel surcharge by Rs400
Air India said that it will cut its fuel surcharge for all domestic flights by Rs400 from Dec. 2 after public sector oil marketing companies lowered jet fuel prices for the sixth time in three months. The fuel-surcharge is currently Rs2,350 for sectors below 750 kilometres and Rs3,100 for sectors over 750 kms, the national carrier said. The reduction in fuel surcharge is expected to stimulate the domestic air travel market during the winter peak season, Air India said. "Although crude prices are still volatile, we hope it will stabilize at the current levels, so that there is a short to medium term relief in ATF costs," Air India chairman Raghu Menon said. Separately, Jet Airways too announced a reduction of Rs400 in fuel surcharge across distances.
Arvind to demerge brands and retail businesses
The Board of Arvind Ltd., in it's meeting held on the Nov. 28th announced plans for the demerger of its branded apparel business and the retail business into wholly owned subsidiaries with effect from April 1, 2009. The branded apparel business, which markets apparels and accessories under the brands Arrow, Flying Machine, Newport and Excalibur will be demerged into Arvind Lifestyle Brands Ltd. Retail business, under the Megamart banner operating about 150 stores across country along with the license for the world’s largest value brand Cherokee will be demerged into Arvind Retail Ltd. The demerger will be done with effect from April 1, 2009 through a court approved scheme and the company would be filing the requisite documents with appropriate authorities at the earliest.
Tata Motors to shut Pune plant for 3 days
Tata Motors said it will shut its commercial vehicle plant in Pune for three days from Dec. 5 as it tries to avoid a build-up in unsold stock amid falling sales. The plant was also closed for six days last month, and the company has closed other plants on a short-term basis to manage inventory levels. The Pune plant would be shut again for three days beginning Dec 26. Demand for commercial vehicles has been severely hit by a lack of vehicle financing, rising interest rates, higher input costs and weak demand, adds report.
Force Motors alters JV with Germany's MAN
Force Motors said it would sell up to 14.5% stake in its joint venture with MAN Nutzfahrzeuge for about Rs3bn, enabling the German auto firm to raise its stake in the JV to 50%. The proposed change in the equity structure of the JV would take place in two steps. First, Force will sell 14.2% stake to MAN for Rs3bn. Later, MAN will infuse Euro 40mn (around Rs2.5bn) in the JV through subscription of a rights issue. Force will refrain from subscribing to the issue. As a result, MAN's stake will go up to 50% from the current 30%. The transaction, which is to be completed over the next few weeks, will peg the enterprise value of the JV at Rs20bn. The JV, which was announced in 2005, is to manufacture HCVs in the 20-40 tonne range. It is located at Pithampur, near Indore, in Madhya Pradesh.
L&T wins order worth Rs14.5bn
L&T's newly formed Buildings and Factories Operating Company, part of its construction division, has bagged orders worth Rs14.5bn in the third quarter of 2008-09 for the construction of IT and office space buildings including add on orders from on going works at its airport projects. The orders for construction of IT and office space buildings has been received from major players around the country including TCS and Godrej Developers.
BHEL wins order worth Rs20bn
BHEL announced that it won a contract that would be worth Rs20bn from Oman for supplying and setting up gas turbine generator packages. The contract for 126MW units for power projects planned by Petroleum Development Oman covers an initial six-year period, with the option to renew for another three years, company said.
Punj Lloyd gets Singapore S$250mn order
Sembawang Engineers and Constructors, a wholly-owned subsidiary of Punj Lloyd, signed an agreement associated with pre-engineering activities necessary to build a thin-film solar module manufacturing plant in Brunei. Thin-film solar modules convert the sun’s irradiation into electricity. A preliminary works agreement for initial project analysis, design and pre-construction works of the thin-film solar module manufacturing plant was signed with Hamidjojo Development Sdn Bhd (HDSB), a Brunei-based industrial developer. This will be the first such thin-film solar project for both Sembawang and HDSB, and the first in Brunei. The full development cost is estimated at S$250mn.
Corus to reduce work hours in the Netherlands: report
Corus has reportedly sought financial aid from the Netherlands government to temporarily reduce the work hours of 4,600 employees to cope with the global economic slowdown. Corus employs 11,300 workers in the Netherlands. News agency ANP reported on Monday that, under the terms of the government support, if approved, Corus workers in the Netherlands would be paid 70% of their wage via unemployment benefits, while the UK company would pay the other 30% over a period of six weeks, starting January. The arrangement can be extended up to three times, for a total period of 24 weeks and to qualify for the scheme, companies must have reported a 30% decline in sales in the past two months. Dutch trade union De Unie said on its website that Corus planned to apply for the government financial assistance and that it had reached an agreement with unions.
Indo Tech up as GE mulls acquisition
Shares of Indo Tech Transformers rallied by over 16% after reports stated that GE India may acquire a majority stake in the Chennai-based company. However, the company denied that it was in talks with GE India to sell promoters' stake. Indo Tech is part of the Rs2.4bn Indo Tech Group. The company gets significant portion of revenues by supplying distribution and power transformers to state electricity boards. The stock rallied by Rs39 to Rs276 after touching an intra-day high of Rs289.90.
RIL asked to supply gas to Dabhol plant
The Government asked Reliance Industries Ltd. (RIL) to supply natural gas from the company's D-6 fields to Ratnagiri Gas & Power (erstwhile Dabhol power plant), to boost electricity generation in energy starved Maharashtra. The price at which RIL can sell natural gas from its largest field to all its customers was fixed at US$4.2 per million British thermal units (mmbtu) for crude oil equal to or more than US$60 a barrel, the Petroleum Ministry said. The Petroleum Ministry said that gas to Ratnagiri Gas would be within the overall allocation of 18 mmscmd for the power sector. "It has been decided that Ratnagiri Gas be supplied 1.4 mmscmd during January to March 2009 and 2.7 mmscmd during April to September 2009, subject to commencement of production, within the overall allocation of power sector (18 mmscmd)," the ministry said.
Actis raises US$2.9bn fund for emerging markets
Private equity major Actis raised a US$2.9bn private equity fund, Actis Emerging Markets 3 (AEM3) for emerging markets of Africa, China, India, Latin America and south-east Asia. This is one of the largest dedicated emerging markets private equity funds closed this year and doubles the amount raised by Actis in 2004. The new fund will invest around US$1bn in India over a period of 3-4 years. AEM3 includes commitments from a group of 100 investors from across the globe, including a number of first time investors in emerging markets. The fund will invest a minimum of US$50mn in buyout and growth transactions.
Global job cuts roundup...
Credit Suisse Group AG, Switzerland’s second-largest bank, said that it will cut 5,300 jobs, or 11% of its workforce, after reporting losses of about 3 billion francs (US$2.5bn) in the first two months of this quarter. The bank said that the loss, primarily in investment banking, was due to adverse market conditions and risk reduction. In addition, Credit Suisse will take a restructuring charge of 900 million Swiss francs, mostly in the fourth quarter. The job cuts will help save 2 billion francs in costs, the Zurich-based bank said.
AT&T announced a planned reduction of about 12,000 jobs, or about 4% of the company's total workforce, citing economic pressures, a changing business mix and a more streamlined organizational structure. Associated with these job reductions which will occur in December and throughout 2009, AT&T will take a charge of approximately US$600mn in the fourth quarter of 2008 to pay severance to affected employees.
DuPont slashed its fourth-quarter earnings forecast and announced plans to lay off 6,500 workers, including contractors, due to the downturn in the construction and automotive markets and a severe slump in consumer spending. The job cuts include 2,500 full-time employees and 4,000 contractors, principally from the company's motor vehicle and construction-related businesses that support markets in Western Europe and the US.
The Japanese-based bank Nomura, which in October stepped in to buy the defunct US bank Lehman Brothers' European equities and investment banking operations, said it will cut 1,000 London jobs. Most of the cuts are merger-related.
Exports slump 12% in Oct
As expected, India's merchandise exports fell in October for the first time in seven years after the worst financial crisis since the Great Depression and the subsequent slump in global economy slowed demand for the nation's goods. Exports fell by 12.1% in October to US$12.8bn from US$14.6bn in the same month last year, data released by the Commerce & Industry Ministry showed on Monday. In rupee terms, exports touched Rs623.87bn, which was 8.2% higher than the value of exports during October 2007. The last time exports fell was in October 2001, when they declined 7.4%. Imports for the month climbed 10.6% to US$23.4bn from US$21.1bn in October 2007. In rupee terms, imports increased by 36.2%. As a result, the trade deficit for October increased to US$10.5bn from US$6.5bn in the same month last year. Oil imports rose 22% in October to US$7.9bn while non-oil imports were up 5.5% at US$15.4bn, the Government data revealed.
Rupee snaps 3-week losing streak
The rupee broke a three-week slide as the selling by foreign funds tapered off after the Government said that it will announce a comprehensive stimulus package on Saturday to bolster the economy. The RBI too was scheduled to announce a fresh round of rate cuts to revive lending to consumers and companies. The local currency rose 1% this week to 49.60 a dollar after hitting an intra-week high of 49.55. FIIs were net buyers of US$111.1mn on Dec. 4, the most since Nov. 3, according to the latest data from the Securities & Exchange Board of India (SEBI). Also, India’s foreign exchange reserves rose for the first time in 10 weeks, indicating the central bank didn’t sell dollars. The currency has rebounded almost 2% from a record low of 50.60 struck last week. But, it is still down 21% this year. The rupee may climb to 48 by June 30, according to some analysts. Offshore forward contracts show traders scaled back bets for how far the rupee will weaken in the next month for a fifth day. Non-deliverable contracts show the currency will trade at 50.03 a month from now, compared with expectations for 51.26 a week ago.
RBI-BIS Seminar - Dr. D. Subbarao - RBI
On behalf of the Reserve Bank of India, it is my pleasure and privilege to welcome all of you international delegates to India, to this wonderful city of Hyderabad, and to this RBI-BIS Seminar on "Mitigating Spillovers and Contagion - Lessons from the Global Financial Crisis".
Seminar Context
This seminar is the second successive BIS seminar to be organised by the RBI, and marks an important milestone in the intellectual collaboration between the Bank for International Settlements (BIS) and the Reserve Bank of India (RBI). I want to thank the management of BIS for giving us the opportunity of hosting this seminar.
I understand the theme for this seminar, "Mitigating Spillovers and Contagion - Lessons from the Global Financial Crisis" was set several months ago. The global financial crisis has since become front page news. It is a tribute to the planners of this seminar, particularly Mr. Mar Gudmundsson of BIS and my predecessor as Governor of RBI, Dr.Y.V. Reddy, that in narrowing down to this topic they foresaw, ahead of many of us, the depth and sweep of the crisis.
Global Financial and Economic Outlook
The global financial situation continues to be uncertain and unsettled. What started off as a sub-prime crisis in the US housing mortgage sector has turned successively into a global banking crisis, global financial crisis and now a global economic crisis. Text book economics often cite housing as a prime example of a non-tradeable good. It is paradoxical that a quintessentially non-tradable good as housing has triggered a crisis of global dimensions. Such is the depth and sweep of financial globalisation. By far, the most dominant FAQ today is whether the worst in terms of the financial sector meltdown, in particular failure of financial institutions, is behind us. No one is really willing to take a definitive call on this, which is a sign of the increasing number of unknown unknowns.
The global economic outlook has deteriorated sharply over the last two months. Many economists are now predicting the worst global recession since the 1970s. In its World Economic Outlook, published in early October, the IMF forecast global growth of 3.9 per cent in 2008, and of 3.0 per cent in 2009. The IMF has since revised its forecast for global growth downwards to 3.7 per cent for 2008, and 2.2 per cent for 2009. Notably, advanced economies, as a group, are projected to contract by 0.3 per cent in 2009. If this gloomy outcome were indeed to come true, 2009 will mark the first year on record when emerging economies will account for more than 100 per cent of world growth.
Emerging Economies
Emerging economies may be the sole contributors to global growth in 2009, but they too are hit hard by the crisis. Ironically, even as late as six months ago, it was intellectually fashionable to subscribe to the 'decoupling theory'– that even if advanced countries went into a downturn, emerging economies will at worst be affected only marginally, and can largely steam ahead on their own. In a rapidly globalising world, the decoupling theory was never totally persuasive; given the evidence of the last few months - capital flow reversals, sharp widening of spreads on sovereign and corporate debt, and abrupt currency depreciations - the decoupling theory has almost completely lost credibility. Growth prospects of emerging economies have most definitively been undermined by the ongoing crisis with, of course, considerable variations across countries. The IMF revised its growth forecast for emerging economies for 2009 from its early October figure of 6.1 per cent to 5.1 per cent. Clearly emerging economies have a painful adjustment to make.
Impact of the Crisis on India
India too is having to weather the negative impact of the crisis. Even as consumption and domestic investment continue to be the key drivers of our growth, India's integration into the world has been on the increase. Going by the common measure of globalisation, India's two way trade (merchandise exports plus imports), as a proportion of GDP, grew from 21.2 per cent in 1997/98, the year of the Asian crisis, to 34.7 per cent in 2007/08. If we take an expanded measure of globalisation, that is the ratio of gross current account and gross capital flows to GDP, this ratio has increased from 46.8 per cent in 1997/98 to 117.0 per cent in 2007/08. These numbers are clear evidence of India's increasing integration into the world economy over the last 10 years.
No revolution in human history has been totally benign. So, it is the case with globalisation; globalisation comes with costs and benefits. Managing globalisation requires that we minimize the costs and maximize the benefits. India has undoubtedly benefited from integrating into the world. By corollary, we also need to manage the downside ramifications of integrating into the world, as indeed evidenced by the current context.
The Indian banking system is not directly exposed to the sub-prime mortgage assets. It has very limited indirect exposure to the US mortgage market, or to the failed institutions or stressed assets. Indian banks, both in the public sector and in the private sector, are financially sound, well capitalised and well regulated. Even so, India is experiencing the knock-on effects of the global crisis, through the monetary, financial and real channels. Our financial markets – equity markets, money markets, forex markets and credit markets – have all come under pressure mainly because of what we have begun to call 'the substitution effect'. As credit lines and credit channels overseas went dry, some of the credit demand earlier met by overseas financing is shifting to the domestic credit sector, putting pressure on domestic resources. The reversal of capital flows taking place as part of the global de-leveraging process has put pressure on our forex markets. Together, the global credit crunch and de-leveraging were reflected at home in the sharp fluctuation in the overnight money market rates in October 2008 and the depreciation of the rupee.
The outlook for India, going forward, is mixed. There is evidence of economic activity slowing down. At the same time, headline inflation, as measured by the wholesale price index, has fallen sharply, and the decline has been sustained for the past three weeks, pointing to a faster than expected reduction in inflation. Clearly, falling commodity prices have been the key drivers behind the disinflation; however, some contribution has also come from slowing domestic demand. To be sure, consumer price inflation for the months of September and October did increase. This is possibly owing to the firm trend in food articles inflation and the higher weight of food articles in measures of consumer price inflation. Historically there has been a correlation between wholesale and consumer price inflation, and given this correlation, consumer price inflation too can be expected to soften in the months ahead.
The Reserve Bank's monetary policy stance has always been to balance growth, inflation and financial stability concerns. When inflation surged earlier this year, the RBI had moved quickly to tighten policy. Then again, reflecting the unfolding global situation and expectation of decline in inflation, RBI has adjusted its monetary stance over the last couple of months. The endeavour of our monetary stance has been to manage liquidity – both domestic and forex liquidity – and to ensure that credit continues to flow for productive activities.
I do not intend to go into a detailed cataloguing of all the measures we have taken, but I do want to mention that we have instituted both aggregate measures as well as sector specific measures. Although, we remain vulnerable to global financial and economic developments, the measures taken so far have eased the liquidity and credit flow situations considerably. I must also add that in managing the impact of the global crisis, we have been mindful that no policy initiative is totally costless. Managing this delicate balance between costs and benefits has been one of our challenges.
Going forward, developments in the real economy, financial markets and global commodity prices point to a period of moderation in growth with declining inflation. The fundamentals of our economy continue to be strong. Once calm and confidence are restored in the global markets, economic activity in India will recover sharply. But a period of painful adjustment is inevitable.
The Reserve Bank's policy endeavour will be to ensure an orderly adjustment, and to minimise the pain of its impact. In particular, we will try to maintain a comfortable liquidity position, see that the weighted average overnight money market rate is maintained within the repo-reverse repo corridor and ensure conditions conducive for flow of credit to productive sectors, particularly the stressed export and small and medium industry sectors. We hope that all economic agents will plan their business activities on the basis of this assurance.
Lessons from the Crisis
The crisis is by no means over. Drawing lessons may therefore appear a bit premature. There may yet be surprises. Even so, it will be instructive to put our minds together to understand how we got here and how we may avoid the mistakes and excesses in the future. It will be presumptuous on my part to anticipate the whole gamut of issues that you will bring to the discussion. Given your collective experience and expertise, that will indeed be a rich contribution. But I want to take this opportunity to raise some of the more important debates thrown up by this crisis. I will refer to five debates.
1st debate: How do we manage global imbalances?
In popular perception, the collapse of Lehman Brothers on 15 September 2008 will remain as the trigger for the global crisis. At one level, that many well be true. Indeed, for several years ahead, I can see ourselves furiously debating the famous counterfactual, "If Lehman had not been allowed to fail, …..".
However, if only we look a little deeper, we will trace the origins of the crisis to the build up of global imbalances during the 90s and this first decade of this century. There is of course a separate debate on what caused the build up of imbalances? Is it excess consumption of the US, or is it the savings glut in emerging Asia with the US helping out as the `consumer of the last resort'?
18. Be that as it may, there is little disagreement over the mega trends that lead to the imbalances. First, there was the globalisation of labour. Emerging Asia added nearly three billion to the world pool of labour as it integrated into the world through the 90s. What this did was to reduce production costs at the aggregate level and increase Asia's comparative advantage. In a manner of speaking, Asia produced and America consumed. Asian economies ran up huge surpluses on their trade accounts which were mirrored by current account deficits in the US. This geographical savings – consumption imbalance was inherently fragile, but we refused to acknowledge it. Instead, we lulled ourselves into believing that we have entered, what Mervyn King of Bank of England famously called NICE era - `non-inflationary consistently expansionary' era. It is these imbalances that generated easy liquidity and low interest rates which in turn encouraged under-pricing of risk and deterioration in credit quality.
So, the debating issue is, can we prevent global imbalances from building up in the future? There is an argument that global imbalances are inevitable given the demographic profile of the world. Emerging economies typically have younger populations with a higher marginal propensity to save. Conversely, advanced countries with ageing populations have a higher marginal propensity to consume. If the demand for, and supply of, savings at the global level is structurally so well matched, how do we prevent a recurrence of global imbalances?
2nd debate: Is self-insurance a viable option for emerging economies?
Writing in the Business Standard last week, Arvind Subramanian of the Peterson Institute for International Economics had raised the issue of self insurance – accumulation of foreign reserves – as a buffer against financial crises. Following the Asian crisis, East Asian countries built up huge reserves as a deliberate policy of self insurance. China and India too built up reserves, with an important difference though. China's reserves derive from current account surpluses and are therefore an unencumbered asset, whereas India's reserves have been built up from capital flows, and are therefore encumbered by liabilities. It is this war chest of reserves that has given the muscle to the emerging economies to withstand the worst impact of the ongoing crisis.
Self-insurance, of course, is not costless, as Subramanian himself argues. Reserves should ideally be built through current account surpluses. This implies greater reliance on the external sector, particularly exports. But such reliance on exports can become a liability if export demand shrinks which can happen for reasons exogenous to the emerging economy. There is obviously a trade off here. Self-insurance, as defined by reserve build up through aggressive exports, offers protection against financial contagion, but it also makes the economy vulnerable to trade contagion. How do we balance this trade off between vulnerability to financial contagion and vulnerability to trade contagion?
Another relevant issue is that self-insurance may not be necessary, indeed may be redundant, if international collective arrangements - regional or multilateral – can provide easy, quick and unconditional liquidity during a crisis. For example, the motivation for self-insurance will be less compelling if the recently instituted IMF's Short-term Liquidity Facility for Market Access Countries or the swap facility offered to select countries by the US Federal Reserve become more common and can be accessed with relatively low transaction costs.
So, the second debating issue I want to raise is the following: "Is self-insurance a viable policy option for emerging economies?"
3rd debate: How do we reform financial sector regulation?
By far the most contentious and most voluble debate triggered by the crisis has been about the flaws in the regulatory architecture. Several issues have come to the fore. I will mention just a few. How can complex derivative products which transmitted risks across the system be made more transparent? What are the financial stability implications of structured products like credit derivatives? Are exchange traded derivatives better than over the counter (OTC) derivatives? How do we eliminate the drawbacks of the "originate – to – distribute" model? Is universal banking, the model that the United States has now turned to, appropriate? Can we apply the same regulatory regime for both wholesale and retail banks?
The burden of all the above questions is to identify the drawbacks in the present regulatory regimes and indicate possible solutions. There is no doubt that we must pursue all these questions. In doing so, I would urge that we remember two things. The first thing to remember is that no one size fits all. For example, universal banking may be good in some countries and in some situations, and not so in others. The second thing to remember is that some regulations arguably have been behind the curve. There is no denying that regulations have to keep pace with innovations. But in doing so, we must be mindful of the risks of over tightening regulations so much that they stifle innovation.
While on the subject of reforming regulation, there is also the larger question of risk modelling. True, the probability of risk follows a normal distribution – popularly called the bell curve. But our regulatory regimes have been tailored to respond to the central, higher probability portion of the bell curve. Typically, we ignored the black swan lying in the long tail of the curve. We now know from the benefit of hindsight that this was a fatal flaw. The black swan represents the low probability, high risk events that pose systemic risk. While our regulatory regimes were tailored to address institutional failures, they were not equipped to address systemic failures.
So, the issues for debate are the following. What are the flaws of the current regulatory regimes? How do we fix them? In what ways can international cooperation be fostered in this regard? How do we address the black swan systemic risk events?
4th debate: How do we address regulatory arbitrage?
Around the world, regulations governing the banking system have typically been quite stringent on the premise that the interests of the depositors need to be protected. But under the very nose of the regulators grew a very extensive and complex network of a 'shadow banking system', comprising hedge funds, broker-dealers, private equity funds, structured investment vehicles and conduits and money market funds. This shadow banking system was typically highly leveraged, and had an extensive nexus with the banking system. However, the shadow banking system suffered much lighter regulation. This 'regulatory arbitrage' encouraged loose practices, hunt for quick yields and non-transparent and risky financial products. When the systems began to unravel, it was realised that many of these institutions in the shadow banking system pose as much of a systemic risk as banks. The moral of the story is that if an institution is 'too big to be allowed to fail', it is also too big to be let off with loose regulations.
So, the question for debate is, how do we address the problem of regulatory arbitrage?
5th debate: How do we keep the financial sector in line with the real sector?
Last, and perhaps most important, let me turn to the debate surrounding the efficiency gains of financial engineering. We got ourselves into believing that significant value could be created by slicing and dicing securities. Illustratively, we believed that financial alchemy could turn the 'lead' of sub-prime mortgages into gold and platinum of 'AAA' securities. In many ways, the malady was worse. We failed to learn from earlier crises. We should have learnt that the modern financial system with its deregulated markets, highly leveraged players and large capital flows was dangerously fragile. We should have seen the crisis incubating behind the dazzle of financial alchemy. We should have noticed the regulatory systems getting lax and behind the curve. Instead what happened was just the opposite. The complexity, sophistication and finesse associated with it gave the financial sector a larger than life profile. Lulled by the seemingly benign economic environment, we deluded ourselves into believing that for every real life problem, no matter how complex, there is a financial sector solution.
Forgotten in the euphoria of financial alchemy is the basic tenet that the financial sector has no standing of its own; it derives its strength and resilience from the real economy. It is the real sector that should drive the financial sector, not the other way round.
So, the issue for debate is, how do we keep the financial sector in line with the real sector?
Summary and Conclusion
That brings me to the close of the five debates relating to the lessons from the global financial crises. To summarize, the five debates I have raised are the following:
- How do we manage global imbalances?
- Is self-insurance a viable option for emerging economies?
- How do we reform financial sector regulation?
- How do we address regulatory arbitrage?
- How do we keep the financial sector in line with the real sector?
I am aware that there are several other important issues beyond what I have raised. I hope and trust that we will have an opportunity to discuss all these issues. I wish you all a rewarding learning experience over the next two days.
Weekly Newsletter - Dec 6 2008
The market may remain volatile and rangebound next week, as the positive impact of the anticipated stimulus package and rate cuts will be somewhat offset by the weak US economic data. American companies slashed well over 500,000 jobs last month, while the unemployment rate climbed to 6.7%. This was the worst monthly job loss in 34 years. Since recession began 11 months ago, 1.9mn jobs have been lost, pushing jobless rate to highest level since 1993. US stock benchmarks were last down 2% while European indices tumbled 5%. It remains to be seen how these markets close.
However, everyone's keenly awaiting the release of Saturday's stimulus plan by the Government as well as the rate cut announcement by the RBI. At this moment, the details of the fiscal stimulus package are not clear nor do we know as to what the central bank will do. As a result, any disappointment could lead to further downside. On the brighter side, an aggressive stimulus package and rate reductions will be more than welcome. Having said that, the effect from the event will be short-lived on the markets, as the headwinds still remain strong. The markets will remain shut on Tuesday on account of Bakri Id.
Govt cuts fuel prices as interim measure
After dilly-dallying for several days, the Government finally bowed to growing pressure from across the board and lowered the prices of petrol and diesel. Petrol prices were cut by Rs5 per litre while that of diesel were cut by Rs2 per litre. This was the first reduction in fuel prices since February 2007. However, the prices of cooking gas and kerosene were kept untouched. Also, there were no changes in taxes on petroleum products. The cuts will trim earnings for public sector oil refiners - IOC, HPCL and BPCL - which were just starting to enjoy profitability after years of mounting losses from selling heavily discounted fuel even as crude prices surged. At the same time, it will help reduce inflation further. Inflation has fallen from a 16-year high of almost 13% in early August to over 8%.
Public sector oil firms have seen margins turn positive from November after crude oil prices plunged from record high of US$147 per barrel to US$43 a barrel. But, the Government did not want to revise prices as the Model Code of Conduct for elections was in place that bars it from making any major policy announcement. Voting in Rajasthan ended on Thursday, bringing the curtains down on assembly elections in four major states - Delhi, Rajasthan, Madhya Pradesh and Chhattisgarh. Polling in Jammu & Kashmir - one of the six states that went to elections - would end on December 24.
Govt to unveil multi-pronged stimulus package
With the Mumbai terrorist attacks dealing another brutal blow to the already slowing Indian economy, the Government decided to swing into action yet again. Prime Minister Dr. Manmohan Singh, who also assumed additional charge of the Finance Ministry, drew up a stimulus package aimed at pump-priming the economy. The package is likely to include measures like setting up a special infrastructure fund, interest subsidy for housing and export-dependent sectors (like textiles, handicrafts and leather), besides more monetary measures, such as interest rate cuts. Reports also said that Commercial Vehicle makers could get a cut in excise duty while the NBFC sector too is likely to get some sops. Other likely measures include increased spending on infrastructure, special credit window for select sectors like power and roads and enhanced credit period and insurance cover for exporters. Meanwhile, the Reserve Bank of India (RBI) will take a call on the options that include a cut in the repo and reverse repo rates, besides reduction in the CRR. Currently, the repo rate stands at 7.5%, the reverse repo at 6% while the CRR is at 5.5%. The central bank has cut the repo rate by 150 bps while the CRR has been lowered by 250 bps, and the Statutory Liquidity Ratio (SLR) 100 bps in the last 2-3 months. Tuesday's meeting, headed by the Prime Minister, was attended by Planning Commission deputy chairman Montek Singh Ahluwalia and RBI governor D. Subbarao. Former Finance Minister and newly appointed Home Minister P. Chidambaram was also present at the meeting.
Election Commission - Rule 49-0 clarification
The Election Commission Saturday said that the candidate who polls the highest number of votes would be declared the winner even if the ballots cast under the no-voting facility exceeds his winning margin.
The counting of votes for the staggered month-long assembly elections in five states, Delhi, Rajasthan, Madhya Pradesh, Rajasthan and Mizoram, will take place Monday.
In an official statement, the Commission said Rule 49-0 of the conduct of elections allowed the electorate the option to not vote for any candidate.
This did not mean that an election will be invalidated if the number of such voters is more than the candidate's victory margin.
Under this rule, the voter has an option not to exercise his franchise after he has been identified at the polling station and his name entered in the registers of voters.
His finger is also marked in the same way as those who have voted.
via IANS
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