‘RBI will have to gradually start to hike rates’
 
ML: At what stage would inflation and higher interest rates be worrying factors given the higher high liquidity in the system, rising prices and huge government borrowing?
VS: On inflation the RBI has already started to move the coin around. When he spoke in July, the governor talked about how the primary agenda is growth and we (the RBI) will not do anything until we are sure that growth is well-entrenched. Now he says that we might have to exit our accommodation ahead of the rest of the world because there could be inflationary pressures mainly because we remain supply-constrained. RBI will have to gradually start to hike rates and it could be as early as the current quarter. There could be some non-interest related measures of tightening in this quarter and then the more classic bank rate, repo rate in the first quarter of calendar year 2010.
 
ML: On the other hand, there could be a lot of money coming from PSU disinvestment and maybe there would be no need to raise rates?
VS: It certainly helps to ease the problem but what I hear we will take the middle-of-the-road approach of raising $4billion-$5 billion a year. But the government can do what China has done in the last five years, which is to think big and act big. I would actually recommend that if you want to raise a big chunk of money, disinvest stakes in Coal India and LIC. When you do that you will be surprised with the kind of appetite. Local retail has always had a strong following of all these PSU offerings as long as they are reasonably priced. But it would be a significant matter for foreign money as well. Forget $4billion-5 billion, we could raise $10 billion or $15 billion in one very large size disinvestment. If we do it in big chunks, we would be surprised with the kind of money flows.
 
ML: With the markets back in full swing, IPOs are back in vogue. A big burst of IPOs is usually is a contrarian indicator. What is your sense?
VS: Going by the number of pre-IPO research reports which have been flooding into the office in the last one month, it obviously signifies that the trend is picking up. Lot of these are the usual suspects who got left out in the fund-raising last time around are coming now. Most of them are real estate companies who couldn’t raise the money in 2007-08. I think they might find it a little challenging. We don’t lack diversity in terms of the number of listed real estate companies. Now you have got 10 more real estate companies wanting to raise money. I don’t think it is going to be so easy. The PSU offerings, if they are large-sized and reasonably priced will have a large following because there have been reasonably large number of people over the years who have made money by investing in these government offerings. I think there will be an active calendar of offering from the government, which the market can absorb. If we see a lot of these real estate IPOs meet with an extravagant response, then I would start to think about it in terms of being a contrarian indicator.
 
ML: What is the direction of the market over the short-term, medium-term and long-term?
VS: I think from a medium-long term point of view we are definitely positive. The only issue I see is that the scope for returns have been reduced by the fact that the valuations have already run up quite a bit. Historically, Indian market returns on a rolling basis is 15-16%, which are a shade above the kind of nominal growth rates that we have in line with profit growth. But when you have already run up to a PE multiple of close to 20, you need not just a 15% profit growth, but you also need the PE multiple to remain unchanged over the medium term to realise that 15% CAGR. My sense is that the medium-long term prospects are still good but medium term returns are being compromised by this level of valuation. In the short term our sense is that the market is outside our comfort zone in terms of valuation. It is vulnerable. What will cause it to come down is hard to say. For example, we have seen China fall off almost 20-25% from the peak in August and September for a variety of factors. So it could be anything that could cause a significant pullback.
 
 

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SBI may hike home loan rates from November
The honeymoon seems to be nearly over for the Indian consumers who were once spoilt for choice with cheaper housing loans offered by PSU banks like SBI for last couple of months. Now consumers may well have to gear up for higher interest rates after 7th November, said a top brass of a PSU bank.
 
SBI’s decision to extend the special offer for home loans till end of this festive season (7th November) is to cash in on the 50 lakh central government employees who have recently received 21% hike in their overall salary structure, thanks to the Sixth Pay Commission.
 
There is every indication that home loan rates are going to rise because of rise in inflation, poor agricultural output, rising international crude oil prices and huge government borrowings. Hence the regime of low interest rates is bound to change.
 
There is no doubt that the government will try to keep the rates lower. But the system is not geared to deliver that. “Rollback in home loan interest rates is inevitable keeping in mind the health of the bank(s) after November,” said the top official.
 
SBI’s low interest rate regime was earlier valid till the end of April. The bank had then frozen the interest rate on new home loans at 8% for the first year. The interest rate was expected to be revised as per the prevailing rates. 
 
A top SBI official reiterated that the special low interest rates were aimed at stimulating demand during the current economic slowdown boosting the laggard real estate sector.
 
Said a top official of SBI, “With the central government employees now flush with money which they received as per the Sixth Pay Commission recommendations, we are quite confident to increase our home loan portfolio by targeting them. This is also because the government employees have got additional purchasing power. Our dedicated marketing teams spread across the country have already started targeting the government employees wanting to buy homes.”
 
Thanks to the combined impact of low interest rates and pay commission money, SBI is expecting to increase twofold its home loan disbursals in the current fiscal. The bank has already disbursed Rs6,500 crore between April-August period of 2009 under its special home loan package as against Rs9,300 crore during the whole of the previous fiscal 2008-2009.
Vidyut Kumar Ta [email protected]
 
 
 

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Cost pressure on fertiliser companies to increase if natural gas is not made available to them

Fertiliser companies are staring at heavy losses if they are denied natural gas from Reliance Industries. RIL is producing 40 million metric cubic metres per day (MMCMD) of natural gas. Anil Ambani has also made a claim of 28 MMCMD per day. NTPC has also claimed 12 MMCMD to run its 4,000 MW power project. That will leave fertiliser companies with no input from Reliance Industries.

Fertiliser companies having annual capacity of 7.5 million tonnes based on natural gas could be hit by a major crisis if they are not given natural gas, which is used as a fuel and raw material. On an average, about 950 to 1,000 cubic metres of gas is used for each tonne of fertiliser. Around 20% of natural gas is used as feedstock and 80% is used as a fuel. 

In fact, the Government of India, in its policy decision, insists that fertiliser industry is the first priority for natural gas industry. According to Rashtriya Chemicals & Fertilisers (RCF), Mumbai, public sector fertiliser companies use 20 MMCMD of natural gas. On the question of what impact would be there if RCF is not given any gas allotment, RCF CEO, US Jha, refused to make any comment as this matter will be discussed in the Supreme Court.
 
Already eight fertiliser units are closed in Barauni, Sindri, Haldia, Gorakhpur, Talchar, Ramgundm, Korba and Durgapur. If gas is not made available to fertiliser companies, more units may see closure and that may in turn see sharp rise in fertiliser subsidies. Fertiliser subsidies were around Rs 46,000 crore in 2007-08 and are likely to cross Rs 1,00,000 crore this year.
 
In addition to natural gas, fertilisers can be made from heavy oil and coal. Heavy oil and coal options are very expensive as compared to natural gas. Heavy oil conversion to fertiliser plant will consume 30% more energy and coal conversion to fertiliser plant will consume 70% more energy. Investment cost in heavy oil and coal plants are also very expensive. Heavy oil plant is 40% more expensive and coal based plant is 140% more costly. Production cost as compared to the cost of natural gas is also very high. Heavy oil plant production cost of fertiliser is 20% more and for coal it is 70% .  So if natural gas is not made available to fertiliser plants, cost pressure on other options will create huge losses to the country. 
 

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