EGoM fails to decide on ONGC, BHEL stake sale; to meet again

While the EGOM is slated to meet again to finalise the ONGC stake sale plan, heavy industries minister Praful Patel said that the BHEL disinvestment may happen in the next fiscal

New Delhi: With just one-and-half months left to meet the Rs40,000 crore disinvestment target for this fiscal, a panel of ministers today failed to take a decision on stake sale of blue chip oil major ONGC and engineering giant BHEL and decided to meet again to take a final call, reports PTI.

“(The government is) considering auction route for ONGC (disinvestment). No time line fixed as yet. Empowered Group of Ministers (EGoM) to meet again shortly”, petroleum and natural gas minister, S Jaipal Reddy, told reporters after the meeting of the EGoM here.

As regards BHEL, heavy industries and public enterprises minister Praful Patel said, “no decision on BHEL disinvestment...May happen next fiscal”.

The EGoM, which met under the chairmanship of finance minister Pranab Mukherjee, was slated to take a call on stake sale in the two major PSUs with a view to garnering about Rs14,500 crore in the current fiscal itself.

The government in the budget for 2011-12 had envisaged to raise Rs40,000 crore through PSU disinvestment, but in over 10 months it could mop up only Rs1,145 crore from stake sale in the Power Finance Corporation (PFC).

The target of Rs40,000 crore, according to disinvestment secretary Mohammad Haleem Khan, “is now almost impossible (to meet)”.

He further said that a final picture with regard to raising funds from disinvestment in the current fiscal would emerge after the next meeting of the EGoM.

The government is, however, hopeful that NBCC disinvestment might go ahead in the current fiscal, but that would only fetch Rs250 crore.

The government has been considering selling 5% government stake in ONGC to raise about Rs12,000 crore through the auction route.

It owns 74.14% stake in ONGC and proposed to offload 427.77 million shares or 5% equity.

In case of BHEL, the proposal is to offload 10% government stake in the state-owned company with a view to mopping up around Rs2,500 crore.

The auction route, which is being considered by the EGoM for stake sale, is aimed at allowing the government to complete the disinvestment process quickly and raise funds within the current fiscal which ends on 31st March.

The Securities and Exchange Board of India (SEBI) has already issued norms allowing promoters to sell stake by way of auction, through a separate window on the BSE and the NSE, which has to be completed within a day.

The share price of ONGC rose 1.78% to Rs280.90 during the mid-day trade on BSE, while BHEL shares were up 2.45% at Rs 271.45.


RBI cuts CRR by 50 bps; keeps other rates unchanged

The central bank has also revised its growth estimate for the current fiscal at 7% from the earlier figure of 7.6%. It has projected inflation at 7% by the end of March, but added that fiscal slippages are a “significant threat” to the economy

The Reserve Bank of India (RBI) in its quarterly review of the monetary policy, cut the cash reserve ratio (CRR)—the amount of deposits banks keep with the central bank—by 50 basis points (bps) to 5.50% from 6%. The central bank kept other rates like repo and reverse repo rates unchanged due to high core inflation in December.

The cut in CRR will ease liquidity problems faced by banks and is expected to spur growth, the RBI said. The move will lead to an infusion of Rs32,000 crore into the system. With additional liquidity by CRR cut, there is a possibility that banks may reduce the interest rate to attract borrowers.

According to Goldman Sachs, there were strong reasons for enacting the CRR cut. “First, system liquidity is extremely tight. The average daily borrowing at the repo window was Rs1.5 trillion (about $30 billion) in the week of 16th January. This is significantly above the historic borrowing, and the RBI’s preferred system deficit of (+/-) 1% of net demand and time liabilities of banks, which is roughly Rs600 billion (about $12 billion). As a result, the overnight call money rate has shot up significantly above the repo rate and is complicating monetary transmission. Indeed, the liquidity tightness is acting as an increase in the repo rate beyond the 8.50% level the RBI has raised it to. Second, the open market operations done so far have not prevented an inversion of the yield curve, and other liquidity tools are necessary. Third, with the long lags in the system, there is a need to start the easing process early to help investor and corporate confidence to kick-start the recovery in second half of 2012, in our view,” said Tushar Poddar, chief economist, India, Goldman Sachs.

The RBI retained the repo or the short-term lending rate at 8.5% while making it clear that any cut in it will only happen after moderation in inflation. Projecting a lower growth of 7% for 2011-12, the central bank said the policy actions are meant to “mitigate downside risks to growth” and anchor inflationary expectations.

“Based on the current inflation trajectory, including consideration of suppressed inflation, it is premature to begin reducing the policy rate,” RBI governor D Subbarao said while unveiling the third quarterly monetary policy review.

He said, “Even as inflation remains elevated, despite moderation, downside risks to growth have increased. The growth-inflation balance of the monetary policy stance has now shifted to growth”.

He further said slippage on fiscal deficit, crude prices and rupee depreciation are key challenges for inflation, which after remaining near double digit for almost two-years, came down to 7.5% in December 2011.

The chairman of Prime Minister’s Economic Advisory Panel, C Rangarajan, said RBI has taken a “wise decision” and it would lead to softening of interest rate.

“The improvement in liquidity condition will automatically have effect on interest rate. Improvement in liquidity condition will lead to softening of interest rate,” he said.

According to Barclays Capital, the monetary policy is gearing more towards supporting growth despite continued upside inflation risks. "We continue to see risks of a repo rate cut of 25bps in the March mid quarter policy review, while maintaining our base case of start of the rate cut cycle from the April credit policy review. Even with the cut in the CRR, the RBI has flagged that non-food manufacturing inflation remains elevated, and has not seen sufficient softening to justify policy rate reductions as of now," it said in a report.

The RBI has commenced easing cycle with the 50bps cut in CRR. However the monetary policy has put the onus of easing on fiscal and structural policy. Rohini Malkani, economist, Citi India, said, "Given that the growth-inflation balance has shifted to growth, we maintain our view of a minimum 100bps cut in the repo rate in 2012. However, it is worth noting that the RBI has said the timing and quantum would be contingent on policy measures to induce investments and steps towards fiscal consolidation".

The BSE benchmark Sensex rallied by over 186 points in late morning trade soon after RBI announced a cut in cash reserve ratio (CRR) in its monetary policy review.

After rising over 83 points in early trade, the 30-share index rallied further to trade 285 points, or over 1.7% higher, at 17,037.11 at 1323 hrs.

The broad-based National Stock Exchange index Nifty regained 5,100-point level by rising 90 points, or 1.8%, to 5,136.75.


Capital Flight: An Economic Indicator

If the locals are getting out, it is probably not a good idea for foreigners to get in. Capital flight, like bad debts, is also one of the principal indications of the end of a credit bubble

At first hunters rarely actually spot their quarry. They usually track them following various other signs, like disturbed underbrush or the animal’s spoor. To determine the health and safety of any given market investors have literally hundreds of economic indicators. Part of the problem with these statistics is that they are usually compiled by some branch of the government. Their accuracy varies widely from country to country. Then, interpreting these statistics can be a challenge. Different economists and analysts can read totally divergent meanings into the same numbers.
Perhaps a better alternative would be to consult local investors. Wealthy people from any given country usually have an excellent pulse on the local economy. Either they actually run businesses or they have connections. In either case they have specific relevant information that will never be available to foreign investors. Much of this information will never be known, because the locals have absolutely no wish to make their activities known to the authorities. But they do leave tracks.
One of the most interesting indications has to do with capital flight. If the locals are getting out, it is probably not a good idea for foreigners to get in. Capital flight, like bad debts, is also one of the principal indications of the end of a credit bubble.
Sometimes the signs of capital flight are quite predictable and obvious. With the default of Greek sovereign debt and its membership in the Euro probably only a matter of time, it is hardly a surprise that money is flowing out of that country to safer havens. According to the most recent statistics, Greek banks have seen deposit outflows of about 65 billion euro, or about one-third of the total, over the past two years.
Nor would it be a surprise that certain unstable Latin American countries are haemorrhaging money. In Argentina capital flight is estimated to be at about $3 billion in recent months. This has led the government to institute ever more stringent controls. Citizens must now justify every purchase of foreign currency.
Hugo Chavez’s policies in Venezuela have nationalized hundreds of companies, which has slashed non oil exports. The capital flight is estimated at $28 billion a month. The cost of this capital flight together with $11 billion in debt service and $100 billion worth of imports has made it difficult for Venezuela to service its debts unless oil remains high.
One would think that with the price of oil relatively high—Russia—a BRIC country might be a good place to invest. Not so according to the flight capital statistics. Capital flight in 2011 totalled $84 billion, two-and-a-half times the money that left in 2010. Even with the high price of oil, the rouble has weakened by 5%. According to one of the local billionaires, Mikhail Fridman, Russia’s poor investment climate and lack of protection of investor rights has made the developed world, specifically the US, a much better place to invest.
Brazil, until recently was considered a good place to invest money, but things have changed. Brazilians and other Latin America nationals have helped put a floor under the high-end condo market in Miami. The price per square foot bottomed at $200 and thanks to flight capital it has risen to $300. The sellers in Miami are particularly pleased to see the foreign buyers, because 85% of the Brazilians pay in cash.
Earlier this week markets improved substantially because of what was considered positive numbers coming out of China. The Chinese GDP grew at 8.9%, which was widely interpreted as evidence that China was slowing gradually and that the Chinese authorities had engineered a soft landing for their booming economy. The gaming tables of Macau tell a different story.
Many wealthy Chinese cannot directly move money out of the country or change their yuan into another currency, so they use other methods. The success of the former Portuguese colony of Macau is built not on the love of gambling, but upon the flood of nervous money leaving China. Macau is already four times bigger than its closest competitor, Las Vegas. More than 13.2 million mainlanders visited Macau in the first ten months of 2011. Awaiting them were many different ways to launder money, according to a local professor, “more than we can think of”.
It is not only gambling. In November Chinese purchases of gold increased by 20%. Analysts suggested the increase was due to the slight fall in price or that jewellery consumption had risen in expectation of gifts for the New Year celebrations. But the real explanation might have been protection from a failing economy.
In each of these markets it is important to consider the economic indicators, but the best one might simply be to see how the locals vote with their feet.

(William Gamble is president of Emerging Market Strategies. An international lawyer and economist, he developed his theories beginning with his first hand experience and business dealings in the Russia starting in 1993. Mr Gamble holds two graduate law degrees. He was educated at Institute D'Etudes Politique, Trinity College, University of Miami School of Law, and University of Virginia Darden Graduate School of Business Administration. He was a member of the bar in three states, over four different federal courts and has spoken four languages. Mr Gamble can be contacted at or


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