RBI hikes CRR by 75 bps; policy rates left unchanged

The Reserve Bank of India (RBI) never ceases to surprise the markets. It did it again on Friday. As against the consensus expectations of a 50 basis points (bps) hike in the cash reserve ratio (CRR), the RBI hiked it by a wider than anticipated 75 bps to 5.75%. At the same time, the RBI left all other policy rates unchanged. So, the reverse repo has been kept static at 3.25%, as is the repo rate, which remains at 4.75%. The bank rate also stays steady at 6%. The central bank also raised the FY10 GDP forecast, to a much stronger 7.5% from 6% earlier. Inflation target for the current fiscal year has also been hiked to a substantially higher 8.5%, from 6.5% earlier.

The RBI has scaled down the annual non-food credit growth target to 16% from 18% earlier. Money supply (M3) estimate has also been pared to 16.5% from 17% earlier. The projection for deposit growth has been scaled down to 17% from 18% earlier. The 75bps hike in the CRR will suck out Rs360bn from the banking system. The central bank has been receiving about Rs1 lakh crores in excess liquidity from banks over the past several months. The CRR increase will be executed in two stages, the RBI said. The first 50bps hike will be done with effect from Feb. 13 while the balance 25bps will come into effect from Feb. 27.

RBI Policy - CRR Hike

RBI Policy - CRR Hike

CRR hike coming ..?

Hinting at a possible increase in cash reserve ratio (CRR) or short-term interest rates, Reserve Bank of India (RBI) governor YV Reddy on Thursday said that the central bank would take all measures to curb inflationary expectations. “We are vigilant and ready to take recourse to conventional and unconventional measures required to anchor inflationary expectations,” Mr Reddy said on Thursday.

He also promised to make forex reserves available to manage oil stocks, but clarified that oil bonds would not get the SLR (or statutory liquidity ratio) status like government securities. The recently-announced oil bond repo, which would make it possible for oil PSUs to take short-term credit and foreign currency from the central bank, was part of the unconventional measures.

However, Mr Reddy made it clear that the policy space available to the central bank to tame inflation was limited. “The policy space available to RBI is basically confined to managing aggregate demand through money supply, interest rates, exchange rates and flow of credit through banks,” Mr Reddy said while speaking at the annual convocation of Acharya NG Ranga Agricultural University in Hyderabad.

The governor said that in India fundamental drivers of growth continue to be strong and the GDP growth is expected to be in the range of 8-8.5%. However, the situation was extraordinary in respect of oil prices and that the basic approach of RBI was to carefully manage liquidity conditions.

“We will continue to place highest importance on orderly conditions in the money, forex and government securities market,” said Mr Reddy. The governor also indicated that oil bonds were unlikely to get the status of bonds that qualify for meeting statutory liquidity ratio of banks. “We will maintain integrity of the SLR regime,” he said.

While oil prices were a worry, the governor saw encouraging signs on food prices.

He added that the turbulence in global markets had come down and there were signs of a move towards normal conditions. “Our markets have been orderly, and we do not expect contagion,” said the governor. Commenting on food prices, the governor said that the increase in food prices in recent months was only a fraction of what observed in other countries.

The current outlook for wheat appears positive with a significant improvement in production. Edible oil prices have seen some moderation in the current fiscal. Prospects for sugar also appear bright for the current year. On the current global price situation, Mr Reddy admitted that the current global food situation was a serious one and triggered by a host of factors, including high energy costs in advanced economies and turbulence in financial markets and financial institutions.

“There are several imponderables, especially relating to the path of future prices in oil, progress in restoring normalcy in the financial market, especially the currency market and the extent of the slowdown in the US economy and its impact on the world economy.

Further, food policies, especially diversion to bio-fuel, cross-border trading, subsidies and the use of buffer stocks would impact global food prices,” he said. But he expected foodgrains supplies to improve in a year or two. Back home in India, Mr Reddy underscored the need to augment food supplies within the country since marginal requirements or even perceptions of shortfall in domestic supplies can have significant influence on world prices. We have scope to raise productivity in agriculture and ensure food security at a minimum, he said.

via ET

CRR Hike, Wipro

CRR Hike, Wipro

CRR Hike

CRR Hike

Industry reaction to CRR hike

Industry bodies Ficci, CII, Assocham, PHDCCI and FIEO today gave a mixed reaction to the 50 basis point increase in cash reserve ratio (CRR) announced by the Reserve Bank of India in its mid-term monetary policy review.

Ficci, Assocham and FIEO were of the view that the CRR hike may further hurt credit growth.

"While RBI has maintained the Bank Rate and Repo Rate at the earlier levels, the increase in CRR by 50 basis points will impound liquidity thus reducing lendable resources of the banks," Ficci said in a release.

Ficci president Habil Khorakiwala expressed hope that the CRR increase will not have an adverse impact on the lending rates, which are already at a high level.

Federation of Indian Export Organisations (FIEO) said the 50 basis points increase in the cash reserve ratio will adversely impact small and medium enterprises.

FIEO president Ganesh Kumar Gupta expressed disappointment that no significant measures had been taken to reduce the cost of credit to the SME export sector in view of the appreciating rupee impacting export growth.

"An increase in CRR by 50 bps will restrict credit for the SME sector, and could create a liquidity crunch adversely affecting trade and industry," he said.

Gupta also appealed for a package to bail out the SME export sector.

CII said RBI’s review of monetary policy was on expected lines. However, keeping in mind the international trends in interest rates, and particularly the indications coming in from the United States, RBI could have considered an interest rate (Repo Rate) cut to go along with the CRR hike of 50 bps, CII said.

Associated Chambers of Commerce and Industry of India (Assocham) said interest rates should have been reduced to help the industry. Assocham president Venugopal N. Dhoot said banks would now find it difficult to reduce the interest rates. CRR hike may also further hurt the credit offtake, he added.

Sanjay Bhatia, president, PHDCCI, said the increase in CRR should have been avoided. He, however, welcomed no change in Bank Rate, Repo Rate and the Reverse Repo Rate.

FICCI, CII and PHDCCI also welcomed measures announced by the RBI to permit importers and exporters having foreign currency exposures to write covered call and put options and permitting oil companies to hedge their foreign exchange exposures. These measures would help the relevant players deal with rupee appreciation more effectively, they said.

CRR hiked

Reserve Bank of India (RBI) today dashed hopes of interest rates easing in the near future as it hiked the cash reserve ratio (CRR) by 0.5% to 7.5% to suck out liquidity with effect from the fortnight beginning November 10, 2007. The central bank, however, left all key rates (Bank Rate - 6%, Repo - 7.75% and Reverse Repo - 6%) unchanged in the mid-term review of the monetary policy. CRR is the amount of cash banks need to park with RBI, which does not pay any interest on such deposits. Between December 2006 and July 2007, RBI has raised CRR by 2% to 7%, and has sucked out about Rs 56,000 crore from the financial system. Unveiling the busy season monetary policy, RBI Governor Y V Reddy sent strong signals that the apex bank's hawkish stance would continue in order to ensure price stability, credit quality and orderly conditions in the financial market. Flush with funds, commercial banks have been reducing deposit rates to bring down their cost of funds and slashing rates on new retail loans to improve credit offtake. This had raised hopes of interest rates falling further although bankers maintained there would be no change in the rate regime. ICICI Bank joint managing director Chanda Kochhar said the CRR hike will stabilise liquidity, and "further hike in interest rates is unlikely." The central bank left the economic growth projection for 2007-08 unchanged at 8.5% and continued to focus on keeping inflation low. Though inflation has come down to 3.07%, RBI expects it to be in the vicinity of 5% by the end of 2007-08. Going forward, it resolved to contain inflation expectations in the range of 4-4.5% so that an inflation rate of around 3% becomes a medium-term objective. Highlighting several challenges facing the conduct of monetary policy, RBI said management of capital flows, related liquidity implications and overall stability were the biggest challenges. Yet another challenge was rapid escalation in asset prices, particularly equity and real estate, driven by capital flows which are often opaque, highly leveraged and largely unregulated, the RBI observed. "Monetary policy will have to contend with the risks to overall macroeconomic stability and threats to inflation expectations emanating from fluctuations in asset prices, the re-pricing of risks and their diffusion across the financial system," it said. It observed that the momentum in investment has been affected by changes in the interest rate cycle and spending on capital expenditure and infrastructure has weathered the transient slack in industrial activity in the second quarter. Key monetary aggregates like the reserve money and money supply have been running well above initial projections, it said. Asset prices remain at elevated levels although there is some anecdotal evidence of stabilising real estate prices, the RBI said. The apex bank said equity prices were at record highs and although inflation, in terms of wholesale prices appears to have eased, remains high in terms of consumer prices. To curb the menace of recovery agents, RBI has asked banks to prescribe specific considerations while engaging recovery agents.

The third quarter review of the annual policy statement will be undertaken on Tuesday, January 29, 2008, the central bank said. Following is the press release issued by the central bank today: Dr. Y. Venugopal Reddy, Governor, presented the mid-term review of annual policy for the year 2007-08 today in a meeting with chief executives of major commercial banks. The Mid-term Review consists of two parts: Part I Mid-term Review of the Annual Statemenat on Monetary Policy for the Year 2007-08; and Part II Mid-term Review of the Annual Statement on Developmental and Regulatory Policies for the Year 2007-08. Highlights Bank Rate, Repo Rate and Reverse Repo Rate kept unchanged. The flexibility to conduct overnight repo or longer term repo including the right to accept or reject tender(s) under the LAF, wholly or partially, is retained. CRR increased by 50 basis points to 7.5 per cent effective fortnight beginning November 10, 2007. GDP growth forecast retained at 8.5 per cent during 2007-08, assuming no further escalation in international crude prices and barring domestic or external shocks Inflation to be contained close to 5.0 per cent during 2007-08 while resolving to condition expectations in the range of 4.0-4.5 per cent, with a medium-term objective of inflation at around 3.0 per cent. Moderating net capital flows so that money supply is not persistently out of alignment with indicative projection of 17.0-17.5 per cent. Covering of ‘Short-sale’ and ‘When Issued’ transactions to be permitted outside the Negotiated Dealing System – Order Matching (NDS-OM) system. Systemically important non-deposit taking NBFCs (NBFC-ND-SI) to be considered as ‘qualified entities’ for accessing the NDS-OM using the Constituents’ Subsidiary General Ledger (CSGL) route. Reinstatement of the eligible limits under the past performance route for hedging facility to be permitted. Oil companies to be permitted to hedge foreign exchange exposures by using overseas over-the-counter (OTC)/ exchange traded derivatives up to a maximum of one year forward. Importers and exporters having foreign currency exposures to be allowed to write covered call and put options in both foreign currency/ rupee and cross currency and receive premia. Authorised Dealers (ADs) to be permitted to run cross currency options books subject to the Reserve Bank’s approval. ADs to be permitted to offer American options as well. Working Group to be constituted for preparing a road-map for migration to core banking solutions (CBS) by Regional Rural Banks (RRBs). RRBs and State/ Central Cooperative Banks to disclose their capital-to-risk weighted assets ratio (CRAR) as on March 31, 2008 in their balance sheets. A road-map to be evolved for achieving the desired level of CRAR by these banks. High Level Committee to be constituted to review the Lead Bank Scheme. Financial assistance to RRBs for implementing information and communication technology (ICT) based solutions. Working group to be constituted to lay down the road-map for cross-border supervision and supervisory cooperation with overseas regulators, consistent with the framework envisaged in the Basel Committee on Banking Supervision (BCBS). Besides general market risk, specific risk, especially the credit risk arising out of deficient documentation or settlement risk to be covered under the supervisory process. Action plan to be drawn up for implementation of National Electronic Clearing Service (NECS) with centralised clearing and settlement at Mumbai. Domestic Developments Real GDP growth during the first quarter of 2007-08 is placed at 9.3 per cent as against 9.6 per cent in the corresponding quarter a year ago. The year-on-year (Y-o-Y) wholesale price index (WPI) inflation eased from its peak of 6.4 per cent on April 7, 2006 to 3.1 per cent by October 13, 2007. The average price of the Indian ‘basket’ of international crude has increased to US $ 80.0 per barrel as on October 23, 2007 from US $ 72.1 per barrel in July-September, 2007. The Y-o-Y CPI inflation for industrial workers showed a sharp increase to 7.3 per cent in August 2007 as against 6.3 per cent a year ago. The Y-o-Y growth in money supply (M3) was higher at 21.8 per cent on October 12, 2007 than 18.9 per cent a year ago. The Y-o-Y growth in aggregate deposits at Rs.5,69,061 crore (24.9 per cent) was higher than that of Rs.3,88,528 crore (20.4 per cent) a year ago. Total credit exhibited a Y-o-Y growth of Rs.3,81,333 crore (23.3 per cent) as on October 12, 2007 on top of an increase of Rs.3,66,463 crore (28.8 per cent) a year ago. The Y-o-Y growth in total resource flow from scheduled commercial banks (SCBs) to the commercial sector was 22.1 per cent, over and above the growth of 28.0 per cent a year ago. Banks’ holdings of Government and other approved securities increased to 30.0 per cent of their net demand and time liabilities (NDTL) as on October 12, 2007 from 28.0 per cent at end-March 2007. The overhang of liquidity under the LAF, MSS and the Central Governments’ cash balances taken together increased to Rs.2,22,582 crore by October 24, 2007 from Rs.85,770 crore at end-March 2007. The Government of India, in consultation with the Reserve Bank, revised the ceiling under MSS for the year 2007-08 from Rs.1,10,000 crore to Rs.1,50,000 crore on August 8, 2007 and further to Rs.2,00,000 crore on October 4, 2007. During the second quarter of 2007-08, financial markets remained generally stable with conditions of abundant liquidity and interest rates moderated in almost all segments of the financial system. During April-October 2007, public sector banks (PSBs) decreased their deposit rates, particularly at the upper end of the range for various maturities, by 25-60 basis points. During April-October 2007, the benchmark prime lending rates (BPLRs) of private sector banks moved from a range of 12.50-17.25 per cent to 13.00-16.50 per cent. The range of BPLRs for PSBs and foreign banks, however, remained unchanged at 12.50-13.50 per cent and 10.00-15.50 per cent, respectively, during this period. The BSE Sensex increased from 13,072 at end-March 2007 to 19,243 on October 26, 2007. The gross market borrowings of the Central Government through dated securities at Rs.1,27,060 crore (Rs.1,17,548 crore a year ago) during 2007-08 so far (up to October 26) constituted 67.3 per cent of the budget estimates (BE) while net market borrowings at Rs.75,387 crore (Rs.65,951 crore a year ago) constituted 68.7 per cent of the BE. External Sector Merchandise exports rose by 18.2 per cent in US dollar terms during April-August 2007 as compared with 27.1 per cent in the corresponding period of the previous year while import growth was higher at 31.0 per cent as compared with 20.6 per cent in the previous year. Non-oil imports rose by 44.3 per cent (10.9 per cent a year ago); oil imports, however, slowed down to 6.0 per cent (44.5 per cent), mainly on account of moderation in the price of the Indian basket of crude oil by 0.5 per cent during April-August 2007. India’s foreign exchange reserves increased by US $ 62.0 billion during 2007-08 and stood at US $ 261.1 billion on October 19, 2007. The rupee appreciated by 10.3 per cent against the US dollar, by 2.4 per cent against the euro, by 5.4 per cent against the pound sterling and 7.1 per cent against the Japanese yen during the current financial year up to October 26, 2007. Global Developments The downside risks to the global economic outlook have increased from a few months ago, accentuated by the recent financial market turmoil, firm inflationary pressures and high and volatile crude prices. According to the IMF’s World Economic Outlook (WEO) released in October 2007, the forecast for global real GDP growth on a purchasing power parity basis has been retained at 5.2 per cent for 2007 as in the July 2007 update, down from 5.4 per cent in 2006, but forecast for 2008 has been revised down to 4.8 per cent in October from 5.2 per cent in the July 2007 update. In the US, real GDP growth had risen to 3.8 per cent in the second quarter of 2007 as compared with 2.4 per cent a year ago - The IMF’s October 2007 WEO expects the US economy to grow at 1.9 per cent in 2007 and 2008 as against 2.9 per cent in 2006. There was a sudden fall in credit market confidence in late July brought on by the spread of risks from exposure to the US sub-prime mortgages with credit crunch spreading into corporate bond markets and equity markets. The European Central Bank and the US Federal Reserve, which have intervened since August 9 by providing liquidity to the inter-bank market, were joined by central banks in Canada, Japan, Australia, Norway and Switzerland. Bank of England has provided liquidity support to a mortgage lending bank, while giving a blanket guarantee to depositors on the safety of their deposits. Several central banks have cut policy rates during the third quarter of 2007 after financial markets were significantly affected by turbulence, such as the US Federal Reserve, the Banco Central do Brasil, Bank Indonesia (BI) and the Bank of Thailand. The central banks that have tightened their policy rates include the European Central Bank; the Bank of England; the Bank of Japan; the Bank of Canada; the Reserve Bank of Australia; the Reserve Bank of New Zealand; the People’s Bank of China; the Bank of Korea; the Banco de Mexico; and the Banco Central de Chile. A few central banks in Asia have used supplementary measures for tightening, besides increasing key policy rates. The only central bank that has kept policy rates steady is the Bank Negara Malaysia. Overall Assessment Some positive elements in the global economy are (i) the global economy is strong and resilient; (ii) EMEs, by and large, have a better macro-environment than before; (iii) globally, corporate balance sheets are strong and less leveraged than in the past; (iv) large financial intermediaries are perhaps adequately capitalised to absorb the shocks of credit infirmities; and (v) the inflation environment has been, on the whole, benign. The global environment is fraught with uncertainties with international crude prices at new highs, having breached the level of US $ 90 per barrel while elevated food and metal prices would, in current circumstances, pass through to domestic inflation. The US Federal Reserve has been the most aggressive in terms of easing monetary policy, with a higher than expected rate cut, reflecting the concerns over impact of housing issues on consumption and, hence, growth. The most important issue for India is the possible impact of global financial market developments and policy responses by central banks in major economies. The immediate task for public policy in India, therefore, is to manage the possible financial contagion which is in an incipient stage with highly uncertain prospects of being resolved soon. On the domestic front, aggregate demand conditions have remained firm and on the uptrend. Key monetary aggregates, i.e., reserve money and money supply have been running well above initial projections, reflecting the impact of higher than expected deposit growth and the exogenous expansionary effects of capital inflows as well as the drawdown of fiscal cash balances. The incomplete pass-through of international prices of crude, metals, food and commodities in general to consumer prices is indicative of suppressed inflation which carries destabilising potential into the future. The policy responses in the form of active liquidity management operations to modulate expansionary monetary and financial conditions were reflected in a generally orderly evolution of market liquidity. Since late July, global financial markets have experienced unusual volatility, strained liquidity and heightened risk aversion. While the trigger was the rising default rates on sub-prime mortgages in the US, the source of the problem was significant mis-pricing of risks in the financial system. Easy monetary policy, globalisation of liquidity flows, wide-spread use of highly complex structured debt instruments and inadequacy of banking supervision in coping with financial innovations also contributed to the severity of the crisis. At the current juncture and looking ahead, on the domestic front, the biggest challenge for monetary policy is the management of capital flows and the attendant implications for liquidity and overall stability. Yet another challenge is the rapid escalation in asset prices, particularly equity and real estate, which are significantly driven by capital flows. Over the next twelve to eighteen months, risks to inflation and inflation expectations would also continue to demand priority in policy monitoring. Stance of Monetary Policy Real GDP growth in 2007-08 is placed at 8.5 per cent for policy purposes, as set out in the Annual Policy Statement of April 2007 and reiterated in the First Quarter Review. Policy endeavour would be to contain inflation close to 5.0 per cent in 2007-08 and the resolve, going forward, would be to condition expectations in the range of 4.0-4.5 per cent so that an inflation rate of 3.0 per cent becomes a medium-term objective. Moderating the expansionary effects of net capital flows is warranted so that money supply is not persistently out of alignment with the indicative projections. The Reserve Bank will continue with its policy of active demand management of liquidity through appropriate use of the CRR stipulations and open market operations (OMO) including the MSS and the LAF, using all the policy instruments at its disposal flexibly, as and when the situation warrants. Barring the emergence of any adverse and unexpected developments in various sectors of the economy and keeping in view the current assessment of the economy including the outlook for inflation, the overall stance of monetary policy in the period ahead will broadly continue to be: * To reinforce the emphasis on price stability and well-anchored inflation expectations while ensuring a monetary and interest rate environment that supports export and investment demand in the economy so as to enable continuation of the growth momentum. * To re-emphasise credit quality and orderly conditions in financial markets for securing macroeconomic and, in particular, financial stability while simultaneously pursuing greater credit penetration and financial inclusion. * To respond swiftly with all possible measures as appropriate to the evolving global and domestic situation impinging on inflation expectations, financial stability and the growth momentum. * To be in readiness to take recourse to all possible options for maintaining stability and the growth momentum in the economy in view of the unusual heightened global uncertainties, and the unconventional policy responses to the developments in financial markets. Monetary Measures The Bank Rate has been kept unchanged at 6.0 per cent. The repo rate under the LAF is kept unchanged at 7.75 per cent. The reverse repo rate under the LAF is kept unchanged at 6.0 per cent. The Reserve Bank has the flexibility to conduct repo/reverse repo auctions at a fixed rate or at variable rates as circumstances warrant. The Reserve Bank retains the option to conduct overnight or longer term repo/reverse repo under the LAF depending on market conditions and other relevant factors. The Reserve Bank will continue to use this flexibility including the right to accept or reject tender(s) under the LAF, wholly or partially, if deemed fit, so as to make efficient use of the LAF in daily liquidity management. CRR increased by 50 basis points to 7.5 per cent effective fortnight beginning November 10, 2007. Developmental and Regulatory Policies Financial Markets Non-Competitive Bidding Scheme in the Auctions of State Development Loans (SDLs) to be operationalised by March 31, 2008. Re-issuance of SDLs in the second half of 2007-08. The facility of new issuance structure for floating rate bonds (FRBs) is being built into the new Negotiated Dealing System (NDS) auction system being developed by the Clearing Corporation of India Limited (CCIL). The Reserve Bank is committed for permitting market repos in corporate bonds, once the corporate debt markets develop and the Reserve Bank is assured of availability of fair prices, and an efficient and safe settlement system based on delivery versus payment (DvP) III and Straight Through Processing (STP) is in place. Covering of ‘Short-sale’ and ‘When Issued’ transactions to be permitted outside the Negotiated Dealing System – Order Matching (NDS-OM) system. Systemically important non-deposit taking NBFCs (NBFC-ND-SI) to be considered as ‘qualified entities’ for accessing the NDS-OM using the Constituents’ Subsidiary General Ledger (CSGL) route. The facility of permitting all exporters to earn interest on their Exchange Earners’ Foreign Currency (EEFC) accounts to the extent of outstanding balances of US $ 1 million per exporter is extended up to October 31, 2008 and banks are free to determine the rate of interest. Reinstatement of the eligible limits under the past performance route for hedging facility provided that supporting underlying documents are produced during the term of the hedge undertaken. Oil companies to be permitted to hedge their foreign exchange exposures to the extent of 50 per cent of their inventory volume as at the end of the previous quarter by using overseas over-the-counter (OTC)/ exchange traded derivatives up to a maximum of one year forward. Importers and exporters having foreign currency exposures to be allowed to write covered call and put options in both foreign currency/ rupee and cross currency and receive premia. Authorised Dealers (ADs) to be permitted to run cross currency options books, subject to the Reserve Bank’s approval. ADs to be permitted to offer American options as well. Credit Delivery Internal Working Group to be constituted to examine the recommendations of the Committee on Agricultural Indebtedness (Chairman: Dr. R. Radhakrishna) relevant to the banking system in general and the Reserve Bank, in particular. Working Group to be constituted with representatives from the Reserve Bank, the NABARD, sponsor banks and RRBs for preparing a road-map for migration to core banking solutions (CBS) by RRBs. RRBs and State/ Central Cooperative Banks should disclose the level of CRAR as on March 31, 2008 in their balance sheets. A road-map may be evolved for achieving the desired level of CRAR by these banks. Working Group to be constituted to study the recommendations of Sengupta Committee report on ‘Conditions of Work and Promotion of Livelihood in the Unorganised Sector’ relevant to the financial system and suggest an appropriate action plan for implementation of acceptable recommendations. High Level Committee to be constituted to review the Lead Bank Scheme. Proposed to prepare a concept paper on financial literacy-cum-counseling centres detailing the future course of action. Financial assistance to RRBs for implementing information and communication technology (ICT) based solutions, including installation of solar power generating devices for powering ICT equipment in remote and under-served areas. Prudential Measures Final guidelines on Credit Default Swaps would be issued by end-November 2007. Banks are urged to follow prescribed specific considerations while engaging recovery agents. Abusive practices followed by banks’ recovery agents would invite serious supervisory disapproval. Constitution of a working group to lay down the road-map for adoption of a suitable framework for cross-border supervision and supervisory cooperation with overseas regulators, consistent with the framework envisaged in the Basel Committee on Banking Supervision (BCBS). In order to enhance the effectiveness of the banking supervisory system, the process of consolidated supervision to be integrated with the financial conglomerate monitoring mechanism for bank-led conglomerates. It is proposed to cover, besides general market risk, specific risk, especially the credit risk arising out of deficient documentation or settlement risk, under the supervisory process. Institutional Developments Banks are urged to ensure that adequate disaster recovery systems are put in place to fully comply with the requirements. Banks are urged to draw up time-bound action plans for implementation of CBS across all their branches. An action plan to be drawn up for implementation of National Electronic Clearing Service (NECS) using the existing infrastructure of National Electronic Funds Transfer (NEFT) system with centralised clearing and settlement at Mumbai. Working group to be constituted comprising representatives of the Reserve Bank, State Governments and the Urban Cooperative Banks (UCBs) to examine the various areas where IT support could be provided by the Reserve Bank to UCBs. The Committee on Financial Sector Assessment (CFSA) (Chairman: Dr.Rakesh Mohan; Co-Chairman: Dr.D.Subbarao) submitted an interim report delineating its approach and reviewing the progress of work to the Finance Minister and Governor, Reserve Bank of India in July 2007. The CFSA is expected to complete the assessment by March 2008 and lay out a road-map for further reforms in a medium-term perspective.

RBI's first quarter policy review for FY07-08

RBI's first quarter policy review for FY07-08

The RBI & You

The Reserve Bank of India Governor, Dr Yaga Venugopal Reddy, has taken three significant steps in the first quarter credit policy review.


1) The Cash Reserve Ratio (CRR) has been hiked by 50 basis points from 6.5% to 7%. This is the amount that banks need to deposit with the RBI.

2) The repo (7.75%), reverse repo (6%) and bank rates (6%) have been left unchanged.

3) The ceiling of Rs 3,000 crore currently set on the daily reverse repo has been withdrawn.

Now banks are expected to review their credit and deposit rates following the CRR rate hike. The hike in CRR would suck out an estimated Rs 15,000 - 16,000 crore from the banks. Though they will not act hastily and lower rates in a hurry, bankers have already hinted at a downward revision of deposit rates.

The CRR rate hike will leave the banks with lesser funds available for loans. Hence, their margins are likely to come under pressure. So one may expect deposit rates to lower, but not loan rates.

Till date, for every CRR hike, banks raised the interest charged on loans to preserve their margins. Since interest rates on loans are already high, they may no longer want to increase them. Secondly, credit growth is slowing down and banks have plenty of money that they mobilised in the past year ever since rates were moving up. So this time around, they may lower the interest paid to depositors.

RBI raises reserve requirements, holds rates

The Reserve Bank of India took steps on Tuesday to drain surplus cash from the banking system stemming from strong capital inflows, knocking bonds and stocks lower, but it left its key interest rates steady, as expected.
The Reserve Bank of India (RBI), still sounding a fairly hawkish note after five rate increases since June last year, raised the proportion of cash banks have to keep with it on deposit to mop up funds that could fuel inflation.
“Monetary expansion has to be curbed,” said Saumitra Chaudhuri, economic adviser at credit rating agency ICRA.
The central bank raised banks’ cash reserve ratio (CRR) to 7% from 6.50% with effect from August 4, the fourth increase announced since early December, taking it to its highest level since November 2001.
It also scrapped a Rs30-billion ($740 million) limit on its daily money market operations to drain cash from the system, enabling banks to park more funds with it.
The yield on the 10-year government bond spiked up 12 basis points to 7.87% soon after the decision on worries these measures would leave less cash to buy bonds.
The stock market shed its 1 percent gain in a few minutes after the decision, with banks and auto stocks hit particularly hard on concern that loan growth would fall, but the market rebounded strongly in afternoon trade.
The partially convertible rupee inched towards last week’s nine-year high of 40.20 per dollar after the decision.
The RBI left its key lending rate, the repo rate, unchanged at 7.75% and its reverse repo rate, at which it absorbs excess cash from banks, steady at 6%. The bank rate, used to price long-term loans, remained at 6%.
Other Steps
India’s move came a day after China, inundated with cash from its current account surplus, raised the level of deposits banks must hold in reserve for the ninth time in 13 months.
India’s banking system has been awash with cash in recent months due to robust capital inflows into Asia’s third-largest economy, particularly into the record-breaking stock market.
“Recent financial market developments in India and potential uncertainties in global markets warrant a higher priority in the policy hierarchy for managing appropriate liquidity conditions,” the RBI said in a statement.
It scrapped one of its two daily money market operations from Aug. 6, and said it could use variable or fixed rates in repo and reverse repo auctions and conduct longer-term operations.
The central bank has been intervening to cap the rupee’s gains, buying dollars in a policy that has generated excess cash in the money market.
As a result, overnight call money rates have hovered near zero for weeks, complicating monetary policy.
HSBC economist Robert Prior-Wandesforde said intervening to suppress the rupee while fighting inflation with firm interest rates was unsustainable, and he saw another reserve requirement increase later in the year along with more rupee gains.
“If inflows continue the way they have been, we will be witnessing a similar situation a couple of months later,” he said.
The central bank said although headline inflation, which has eased below its 5% comfort ceiling, had slowed, upward pressures persisted, with risks from high and volatile crude prices, demand-supply gaps and firm food prices.
It warned banks and financial institutions to be prepared for higher volatility than before in financial markets worldwide.
But it said domestic economic activity continued strong and the base appeared to be broadening, and it retained its 8.5% growth forecast for 2007-08.

Sharekhan Investor's Eye dated May 30, 2007

Thermax
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs585
Current market price: Rs488

Price target revised to Rs585

Result highlights

• The consolidated revenues of Thermax grew by a whopping 65% year on year (yoy) to Rs856.5 crore in Q4FY2007, sharply ahead of our expectation. The revenue of the energy segment grew by a strong 74% yoy to Rs685.5 crore and that of the environment segment grew by a robust 53.7% yoy to Rs205 crore.
• The company's operating profit margin (OPM) declined by 70 basis points yoy to 12.4% in the quarter. The dip in the margin was due to a rise in the raw material prices and a change in the product mix. On a full year basis, the OPM stood at 12.4% as against 13.1% in Q4FY2006 and we expect the company to maintain the OPM in FY2008. The operating profit grew by 56% to Rs106 crore.
• The energy segment continued its robust performance with a revenue growth of 74% yoy. Although the profit before interest and tax (PBIT) margin for this segment declined by 240 basis points yoy in this quarter, yet we don't see this as a cause for concern. That's because the margin declined more because of a change in the product mix and rupee appreciation. The company has said in its conference call that it has taken adequate measures to tackle the rupee appreciation. The environment segment reported an impressive 53.7% growth in its revenue and a 230-basis-point improvement in the PBIT margin on a year-on-year (y-o-y) basis.
• The consolidated net profit grew by 66% yoy to Rs69.7 crore in Q4FY2007, in line with our expectation.
• The order backlog grew at 79% yoy to Rs3,100 crore. It is equivalent to 1.3x FY2007 consolidated revenues and order inflows during the quarter were up by 38% to Rs894 core. This imparts a very strong visibility to the revenues.
• The company has done a capital expenditure (capex) of Rs80 crore in this year and will further do a capex of around Rs150 crore in FY2008 as it is setting up a factory in Vadodara at a cost of Rs175 crore. So far it has invested Rs50 crore in this factory. The factory will start production in a phased manner. The production from the first phase of the project will commence from July this year and full production would start by March 2008.
• The company has guided for a stable to better OPM in FY2008, which, in our opinion, is indicative of the improving outlook of its business.
• In light of the continued growth traction over the last few quarters, the closure of the loss-making subsidiary ME Engineering and the revised guidance of a 40% top line growth for FY2008, we are revising our FY2008 earnings estimate upwards by 2.4%. We are also revising our one-year price target upwards to Rs585. The Rs50 per share of cash and cash equivalent on the company's books provides a margin of safety to our price target. We maintain a Buy on the stock with a revised price target of Rs585.

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SECTOR UPDATE

Banking

Possibility of another CRR hike remains alive
The continued growth momentum, easy liquidity driven by strong foreign inflows and concerns over increase in global commodity prices could prompt the Reserve Bank of India (RBI) to suck out the excess liquidity from the banking system. Expectations are building up that the RBI may be prompted to take a pre-emptive action as the system is again flush with funds and the government is all set to resume spending.

Amidst this developing situation, the comforting factors have been the moderation in inflation (down to 5.27% from 5.44%) and non-food credit growth (lower at 27.1% compared with 30.5% growth in the previous year). However, money supply growth at 20.2% (RBI's FY2008 target being 17%) is the only factor that could prompt the RBI to step in and suck out liquidity from the system to keep the money supply growth in check.

Morgan Stanley - India Financial Services - CRR Flip Flop

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India Financial Services - CRR Flip Flop

ICICIDirect - RBI policy update

In a surprise move, the RBI on Friday hiked the short term interest rate
(repo rate) and cash reserve ratio (CRR). It raised the repo rate by 25
basis points to 7.75%. The central bank also raised the CRR by half a
percentage point. The CRR will rise to 6.50% in two tranches, the first on
April 14 and the other on April 28. The CRR hike will drain Rs 15,500 crore
from the banking system. Though the move may impact banks in the short-term,
we believe it would help economic growth over a longer term.

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CRR hikes never made such a deep impact

Though no stranger to the central bank stepping in to stem inflation, the reaction of the equity market to the latest hike in the cash reserve ratio (CRR) has never been so extreme. Both, in absolute points or percentage basis, Monday’s fall of more than 600 points was the biggest-ever reaction to an increase in the CRR rate. The Sensex shed 617 points or 4.72% on Monday to end the day at 12,455.37. This was also the second-highest ever, single-day fall of the benchmark index.

Incidentally, the 50 basis points hike in the CRR announced on Friday, was the third such hike in the recent past. Earlier, on December 8, 2006 and February 13, 2007, RBI had announced a similar 50 basis points rise in the CRR.

As a result, the CRR has increased from 5.50% to 6.50% since December last year. However, if the performance of the benchmark Sensex is anything to go by, the earlier hikes did not impact the market in a way the latest one has. When the RBI announced a hike in the CRR from 5% to 5.50% on December 8, 2006, the Sensex reacted by falling by a little over 400 points. On percentage basis, it was nearly 3%. The next rise of 50 basis points that was announced on February 13, 2007, was followed by a fall of only 100 points in the Sensex.

Market experts say an inherent weakness was already visible for the past few days and this, coupled with the recent ‘surprise’ hike in CRR led to the bourses reacting in a negative manner. A moot point to note is that increasingly global central banks are expressing concern over interest rates and inflationary pressures.

“Monday’s fall needs to be looked into in the backdrop of the pace and the quantum of the recent CRR hikes,” says Jay Prakash Sinha, director & head (research), Ambit Capital. He further added that while the pace has been quick, the quantum has also been high. It clearly shows that the government is genuinely concerned about overheating and inflationary pressure build-up.

“The government wants asset prices across sectors to cool down,” said Mr Sinha.Interestingly, the RBI has announced eight CRR hikes since December 2001 and only on two occasions has the Sensex risen after the announcement. However, both rises have been marginal.

Sharekhan Investor's Eye dated April 02, 2007

South East Asia Marine Engineering & Construction
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs300
Current market price: Rs177

Annual report review

Key points

• The robust financial performance of South East Asia Marine Engineering & Construction (SEAMEC) was driven largely by higher deployment days and an increase in charter rates. The strong growth momentum in earnings and tight working capital management resulted in a significant improvement in the return ratios during CY2006.
• The outlook on charter rates continues to be bullish for the next two years. Moreover, the deployment of SEAMEC's recently acquired fourth vessel from mid-CY2007 would drive growth. It would also enable the company to more than nullify the impact of the revenue loss and expenses resulting from the planned periodic dry-docking of two vessels in the second half of CY2007.
• A sharp appreciation of the rupee and an unexpected delay in the deployment of its fourth vessel are two key risks to our earnings estimates.
• At the current market price the stock trades attractively at 7.2x CY2007 and 5x CY2008 estimated earnings. We maintain our Buy recommendation on the stock with a price target of Rs300.

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SECTOR UPDATE

Banking

CRR hike—negative for banks
The Reserve Bank of India (RBI) has surprised the market with another 50-basis-point hike in the cash reserve ratio (CRR) to 6.5% from 6.0% at present and a 25-basis-point hike in the repo rate to 7.75%. The CRR is a percentage of the net demand and time liabilities, read deposits, which the banks need to maintain in the form of cash balances with the RBI. The CRR hike would be in two stages of 25 basis points each (effective from April 14 and April 28 of this year). The hike is expected to absorb Rs15,500 crore of liquidity from the banking system. The RBI has also reduced the interest on CRR balances from 1% to 0.5%.

Automobiles

High interest rates affect two-wheeler sales
Hardening interest rates seem to be having a dampening impact on automobile sales, as the sales during March were lower than expectations despite the month containing a number of auspicious days like Gudi Padwa and Navratri. The impact seems to be more severe in the two-wheeler segment, particularly motorcycles, while four-wheelers continued to record decent growth.

Our checks also reveal that the auto finance companies have been extra careful while disbursing loans, hence the rejection rates have gone up in the past few months. To counter the effect of rising interest rates, auto-manufacturers are partnering with auto finance firms to offer loans at a lower rate to consumers. The cost of the same is being borne by the manufacturers, financers and the dealers. However, the same shall have a negative impact on the earnings of the companies.

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Indiainfoline - CRR Hike

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Merrill Lynch Reports

BHEL

Pharma

Educomp

Rate Hike

ENAM - RBI Surprise

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Citigroup - India Banks - CRR Hike

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Banks mull strategy after RBI hikes rates

A day after ICICI Bank upped its lending rates following RBI's key rate hikes, several lenders were mulling their response even as IndusInd Bank hinted at a possible rise this week.

Two private sector players - Yes Bank and ICICI Bank - hiked their prime lending rates (PLRs) over the weekend in response to RBI's move to hike repo and CRR rates on Friday.

"The days of absorbing increasing cost of funds are over. The RBI's move will definitely impact our cost of funds," IndusInd Managing Director Bhaskar Ghose told media here.

The bank will take a "balanced view" so that its business does not get affected by any sharp rise in its lending rates, he said.

"Some banks have already hiked their rates. We will see what the larger banks do," he said, adding "while we have no intention of absorbing the cost of funds, we will take our decision next week."

"You can certainly expect a minimum 0.25 per cent hike but it could go up to 0.50 per cent." IDBI Bank Deputy Managing Director Jitender Balakrishnan, while admitting that the cost of funds would go up, however, said the public sector lender would take a decision on hiking its lending rates only after "discussing the matter".

"The hike in repo and CRR will definitely impact our cost of funds. But whether we increase our lending rates or absorb the costs will be decided only at our board meet," he said.

Decisions to hike rates are taken at the Board level and IDBI Bank's Board is not scheduled to meet till end-April, he said, indicating that any possibility of an immediate response by the bank was remote.