Bonds, Currencies & Commodities
Pranab’s rupee booster measure backfires but FIIs jump into stocks and rupee strengthens nevertheless!

Measures to woo FIIs to buy government securities to strengthen the rupee have misfired. But FIIs have in fact made the rupee stronger—by pouring money into the equity market


The government’s landmark $10 billion auction of government securities (G-Secs) turned out to be a flop, despite strategic measures taken by the Reserve Bank of India (RBI) and the finance ministry to woo foreign investors. It is reported that the Securities Exchange Board of India (SEBI), which conducted the auction, saw investors buy government bonds worth only Rs20,469 crore, or 72% of the total offer of Rs28,496 crore. Volumes in corporate bonds were worse, where only Rs19,777 crore worth of bond permits were picked up, while Rs31,387 crore worth of bond permits were on offer.

The bond offer was designed to get FII money into India in order to strengthen the rupee which had hit a recent low of Rs57.135 against the US dollar.

However, the rupee has become stronger nevertheless and the reason for this is the sudden FII interest in Indian stocks. Following last Friday’s resolution of the European Union and the government making compromises on the General Anti-Avoidance Rules (GAAR), it renewed optimism and gave reasons for FIIs to relook at investing in India. The impact of the recent agreement to bail out troubled Spanish Cajas was hailed, but some FIIs saw that the deal was lacking in clarity and hence stayed away from European markets. Some even expect European markets to go down, hence were looking for alternative places to park their money. With the Indian government agreeing to relook into the GAAR provisions, FIIs welcomed the government intentions, after deferring it by a year. This renewed their hopes that the final outcome would be investor friendly. This made India an attractive destination vis-a-vis other economies, especially developed ones.

According to Bombay Stock Exchange (BSE) data, over the last five days, there has been a net inflow of Rs 4,895.95 crore into the Indian stock markets.

As for the bond market, rules were tightened with respect to the G-Secs being auctioned off. It is believed that this batch G-Secs, which are being auctioned, once purchased cannot be reinvested, posing a dilemma for investors interested in the bond buying programme. In earlier programmes the bonds could be reinvested, but not this time. With macro-economic risks prevailing, the FIIs weren’t interested in being locked and unable to sell if things go bad.

Last month, Pranab Mukherjee, just before resigning to become a presidential candidate, in conjunction with the RBI, raised the limit for investment by FIIs in government securities (G-Secs) by $5 billion to $20 billion, hoping that FIIs would bite the bait and buy its higher yielding bonds, which offer higher returns than most developed and emerging markets, including the US. The government, especially the RBI, also hoped that this would help the floundering rupee and stabilise it.

In a press release, RBI said that, “Existing limit for investment by foreign institutional investors in G-Secs has been enhanced by $5 billion. This would take the overall limit for FII investment in G-Secs from $15 billion to $20 billion. The sub-limit of $10 billion (existing $5 billion with residual maturity of five years and additional limit of $5 billion) would have the residual maturity of three years.”

At time of writing this article, the US$-Re was seen at the Rs55/$ threshold. While the auction hasn’t worked as planned, which was to resurrect the rupee, equities came to the fore and supported the currency. Talk of unintended consequences. If only Mr Mukherjee made some sensible noises about reforms, he would not have to come with the G-Sec plan.



Anil Agashe

4 years ago

I think it is better that the money has come to stock markets and not in G Secs. In any case inflows have increased and the Rupee has come to Rs 55. More reforms may strengthen it further and that is crucial as Oil prices have started firming up again.

Western Ghats: Challenges of sustainable development

The World Heritage status could have implications on development in and around the 39 sites from the Western Ghat as UNESCO prescribes creation of additional buffer zones around the natural world heritage sites

UNESCO's World Heritage Committee inscribed the Western Ghats of India as a world heritage site on 1st July. The tag came at the 36th session of the World Heritage Committee (WHC) in St Petersburg in Russia. Altogether 39 sites that dot the Western Ghats landscape will be part of the region that has been designated as WHS. Kerala leads with 20 sites being inscribed in the heritage list followed by Karnataka with 10, Tamil Nadu five and Maharashtra four (see Table 1).

Table 1: List of Western Ghats World Heritage clusters in Maharashtra, Karnataka, Kerala and Tamil Nadu

While environmentalists are rejoicing that constant international scrutiny will curb amassment of forest wealth by vested interests, the state governments have given a guarded reaction. Sceptics are of the view that the tag will make little difference to many ecologically destructive projects that have been implemented or are proposed in the Western Ghats.

Recognition comes after rejection
The world heritage tag for the Western Ghats has come after many glitches. The proposal for including 39 sites in the Western Ghats as world heritage was rejected by the World Heritage Committee in its 35th meeting last year. When the proposal was re-submitted for consideration this year, it was once again on the verge of getting rejected. The International Union for Conservation of Nature (IUCN), suggested that India should review and refine the proposal to redefine the boundaries of the proposed sites to maintain the contiguity of the forests. The Indian delegation in St Petersburg, however, managed to convince the World Heritage Committee on the merits of India's proposal and also discussed the issue with 21 members of the committee. The intense lobbying paid off, as the Russian delegation moved a proposal which was backed by several Asian and African nations.

Importance of Western Ghats

Older than the Himalayas, the Western Ghats are the treasure trove of bio-diversity. In fact they are recognized as one of the eight global hot-spots harbouring a wealth of flora and fauna. The Western Ghats which begin at the Dangs in Gujarat, run through the western parts of Maharashtra, the tiny state of Goa, the Malnad region of Karnataka and the highlands of Kerala and Tamil Nadu, before ending near Kanyakumari.


The Ghats are currently known to have more than 5,000 plant and 140 mammal species, 16 of which are endemic, i.e. species found in that area alone. Notably among these being the lion-tailed macaque and the Nilgiri tahr. Out of the 179 species of amphibians found in the Western Ghats, 138 are endemic to the region. It has 508 bird species, 16 of which are endemic, including the Nilgiri flycatcher and the Malabar parakeet.



The Western Ghats are considered an ecologically sensitive region with nearly 52 species moving one step closer to extinction. Habitat change, over-exploitation, pollution and climate change are the principle pressures causing bio-diversity loss.


The need to protect the ecology of the Western Ghats can hardly be over-emphasized.

The UNESCO Mandate
The UNESCO has noted with appreciation India's ongoing commitment to conserving high bio-diversity values of the Western Ghats, but has clearly underlined that more needs to be done. The World Heritage Committee has suggested to the Indian government to take into account the recommendations of the Western Ghats Ecology Expert Panel. It has also asked the government to strengthen buffer zones to provide increased protection within the nominated sites. The UN body also wants to promote participatory governance approaches through community participation to ensure equitable sharing of benefits. The panel has said that no industrial activity should be allowed without the consent of the locals.

The Western Ghats Ecology Expert Panel was constituted by the ministry of environment & forests in February 2010 under the chairmanship of noted environmental expert Professor Madhav Gadgil. The panel has identified several eco-sensitive zones in the region and recommended that they should be declared no-go areas. Among its recommendations, the panel has also called for scrapping of Karnataka's Gundia and Kerala's Athirapally hydro-projects, and gradual phasing out of mining activities in ecologically highly-sensitive areas of Goa by 2016. It has also suggested setting up of a Western Ghats Ecology Authority (WGEA), as a statutory authority appointed by the ministry of environment and forests, with the powers under Section 3 of the Environment (Protection) Act, 1986. The 24-member body is to have ecologists, scientists, representatives of civil society, as well as tribal groups, officials from the Union environment ministry, Planning Commission, National Biodiversity Authority, Central Pollution Control Board, and representatives of the state government as its members.
Both the Karnataka and Kerala governments have been opposed to the recommendation to scrap the hydro-projects in their respective regions. The Karnataka government had also been opposing the World Heritage tag citing regulatory hurdles in the development of places falling under these regions. Goa's lackadaisical attitude in conserving the Western Ghats has resulted in the state not getting any site in the list of 39. Maharashtra government has welcomed the World Heritage Status to Western Ghats, but that is unlikely to change the state's present stance of not imposing a complete ban on mining and industries, except in the core areas. The state, nevertheless is encouraging green fuel movement in the villages of Western Ghats by way of up to 75% subsidy on biogas and 50% subsidy on shift to low yielding cattle, which rely on domestic fodder instead of open grazing.
Impact of UNESCO World Heritage Site
The World Heritage status could have implications on development in and around these sites as UNESCO prescribes creation of additional buffer zones around the natural world heritage sites and putting in place an overarching management authority for conservation of the selected 39 serial sites. Conservationists also fear a mad-rush to these sensitive areas in the guise of eco-tourism. "This might trigger commercial activities in the Western Ghats, followed by construction activities like building roads, structures, power lines and other infrastructure, which will defeat the purpose of protecting the green cover and habitat protection," says an activist associated with the Kudremukh Wildlife Foundation in Karnataka.

The Western Ghats expert Prof Madhav Gadgil has welcomed the UNESCO gesture saying, "It will hopefully strengthen the Acts like Biological Diversity Act of 2002, which empowers the local bodies like panchayats to take appropriate steps for conservation." The participation of locals is going to be crucial in determining the success of conservation efforts and promising sustainable development.

All along the Western Ghats in five states, there are lakhs of tribal people who have made their homes in the Ghats. The Thodas of Nilgiris, Soligas of BR Hills, Malekudiyas of Belthangady, Halakki Vokkals of Uttara Kannada, the Sidhis of Kumta, Paniyas of Waynad, Kattunayakans of Malabar and many others in Goa and Maharashtra are some of them. The Perspective Plan for Protection of Biodiversity 2001-16 states that "tribal communities are part of the biodiversity and the state governments should not take them out of their natural surroundings, but empower them democratically and let the government facilities go to them."
The ground situation for people's participation in development is conducive in most parts of the Western Ghats. The region has some of the highest levels of literacy in the country, and a high level of environmental awareness. The democratic institutions are well entrenched, and Kerala leads the country in capacity building and empowering of Panchayat Raj institutions. Goa has recently concluded a very interesting exercise, Regional Plan 2021, of taking inputs from Gram Sabhas in deciding on the land use policies. Evidently, Western Ghats are an appropriate region of the country to attempt to make the transition towards an inclusive, caring and environment friendly mode of development.

(Manish Desai is director-media, Press Information Bureau, Mumbai)




Kotak fears bad loans may put pressure on bank margins

HDFC Bank, ICICI Bank and IndusInd Bank are expected to be among the better performing banks in the private sector, and SBI, Bank of India and IOB among PSU banks, according research by Kotak Institutional Equities

A recent report released by Kotak Institutional Equities (Kotak) has highlighted that the performance of the Indian banking sector this quarter would largely depend on banks ability to restructure loans. The report said, "Large-ticket restructuring (primarily of SEB loans) will be the key highlight of the quarter for public banks. Recovery trends for banks are likely to be mixed. Overall earnings growth is likely to be driven by State Bank of India and large private banks." It expects HDFC Bank, ICICI Bank and IndusInd Bank to be among the better performing banks in the private sector, and SBI, Bank of India and India Overseas Bank among Public Sector Unit (PSU) banks. It expects private banks' earnings to grow by 23% year-on-year (yoy)

One of the key issues that banks face today is the quantum of toxic loans that they are sitting on, especially the PSU banks. It has been a recurring issue for quite some time, but now the problem has grown by leaps and bounds. One area of particular concern is the inability of State Electricity Boards (SEBs) to pay off their debts. It is reported that they're sitting on Rs300 thousand crore of losses and bad loans combined - not a small number by any means. It is also a big number for banks to start pulling up their socks. According to the report, "We expect banks, specifically PSU banks, to report higher restructured loans as they complete select SEBs that were pending to be restructured (only 35% of the overall SEB exposure was restructured in 4QFY12). Select mid-corporate restructuring is likely to continue, as corporate balance sheets continue to remain under stress." However, it is a different story for private sector banks as their exposure to SEBs is minimal though their exposure to retail assets is significant.

One of the more important metrics for banks is net interest margins, which is an indicator of profitability and health of the banks. Ability to maintain NIM at these levels is becoming difficult for banks as downward re-pricing of loans has begun while the same is yet to begin for retail deposits, said the report. In other words, as banks restructure their loans (i.e. make it easier for SEBs or potential defaulters to settle loans) their income get revised downwards in form of lower interest rates charged for restructured loan. When the Reserve Bank of India (RBI) cut interest rates, so too will deposit rates go down. However, there is a time lag before deposit rates reflect underlying interest rates. Thus in the interim, which is to say the current quarter, the banks are likely to face margin squeeze. Even more so, it is learnt that banks are resorting to short-term borrowings, or repo, to manage the shortfall between deposits and loans, wherein the latter is more than the former. This increases the costs of funds and results in higher cost, but not much. Nevertheless, Kotak expect net interest margins to remain stable.

A weak economy has taken a toll on banks' fee income, which is their core business. The report said, "We expect overall non-interest income to grow 20% yoy (14% qoq decline) primarily on the back of higher contribution from treasury income. Core fee income growth would be muted primarily due to weak business activity."

The infrastructure vertical, as expected, has taken a hit due to policy paralysis, red tape and poor implementation. The report stated, We note that there is a visible slowdown in the growth to the infrastructure vertical. As of May 2012, overall loans to infrastructure grew 13% yoy as compared to overall loan growth at 17-18% yoy". The bottom-line is that it will be tough for banks to make good profits for a sustained period of time. Unless there is a fillip to economic activity and a consolidation in the banking sector, it will be difficult to play the sector for the medium term.


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