Companies & Sectors
Weak rupee to wipe gains from easing crude oil prices, says report

A depreciating rupee is pushing import costs further, raising inflation in domestic fuel prices which are linked to international prices. Inflation, now at 9.7%, remains higher than RBI’s comfort zone for the past 18 months

Inflation remained stubborn at 9.7% in September 2011, compared to 9.8% in August. There are little signs of a decline in core (non-food manufacturing) inflation, which at 7.6% in September has now remained above the RBI’s (Reserve Bank of India) comfort zone of 4.5%-5%, for the past 18 months. As a result, there might be another 25 basis points (bps) hike in the RBI’s mid-year monetary policy review on 25th October, says a recent CRISIL report. For any gains from the recent decline in international crude oil prices to reflect in lower inflation, the rupee will have to appreciate to 47 per $1 by December 2011. These are the observations the CRISIL report.

Inflation in the fiscal year so far (April to September 2011) stands at 9.6% compared to 9.9% during the same period of 2010—indicating few signs of moderation. Inflation for July 2011 has also been revised upwards to 9.4% from 9.2% reported earlier.

Food inflation stood at 8.8% in September 2011 compared to 9.1% in August. Despite good rains, there might not be much downside to food inflation due to substantial rise (in the range of 7% to 14%) in minimum support prices of principal food-grain commodities in 2011-12, which set the floor for market prices.

Primary articles’ inflation declined to 11.8% in September, compared to 12.6% in August. This was enabled by a sharper decline in non-food articles, namely fibres and oil seeds. Fuel inflation rose to 14.1% in September, from 12.8% in August, reflecting the impact of petrol price hike during the month as well as higher prices of aviation turbine fuel, bitumen, furnace oil and other lubricants.

Despite some softening of global crude oil prices in recent months, crude oil prices in September 2011 continued to be higher than a year ago. In addition, a depreciating rupee is pushing import costs further, raising inflation in domestic fuel prices which are linked to international prices. If the international oil price remains at the current level of around $85 per barrel till December, which represents around 5% annual decline in price, then the rupee will have to appreciate to 47.0 per $1 in order to reflect gains from lower oil prices into inflation.

Core (non-food manufacturing) inflation remained worrisome at 7.6% in September 2011 compared to 7.7% in the previous month. Given that core inflation remains much higher than RBI’s comfort zone of 4.5 to 5%, CRISIL expects a 25bps hike in the mid-year monetary policy review on 25 October 2011.

Despite a fall in crude oil prices since April 2011, they continue to remain higher than a year ago. In addition, the rupee has sharply fallen against the dollar, by 16%, compared to a year ago. Although this is currently adding upward pressure on the imported component of inflation, it is expected to be a transient phenomenon—the impact of which is unlikely to sustain until March 2012.

The second-round pass-through of exchange rate depreciation into retail prices would be limited as firms would find it difficult to raise prices because of slowing private consumption growth.

For 2011-12, minimum support price (MSP) for paddy has been hiked by 8%, for jowar by 11.4% and for arhar, moong and urad by 6.7%, 10.4% and 13.8% respectively. This, in conjunction with relatively low growth in production, especially of pulses, will put upward pressure on market prices, going forward. First advance estimates of food-grain production for 2011-12 have placed production growth for paddy at 7%, for jowar at 0.9% and arhar and urad at 0.3% and 0.6% respectively. Production of moong is expected to decline by 30.2% in 2011-12.

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India Inc may reduce overseas borrowing

Amid the sovereign debt crisis in euro zone economies, domestic companies are finding it difficult to raise money overseas. The risk of rupee depreciation and the lack of a natural hedge are other factors restricting corporates, Indian Overseas Bank CMD M Narendra said

Mumbai: Indian corporate houses are less likely to raise funds through the external commercial borrowing (ECB) route in coming days, despite the Reserve Bank of India (RBI) relaxing overseas borrowing norms, as Western banks are less willing to taking positions in emerging markets, reports PTI.

The falling rupee has reduced the appetite of corporates for ECBs, as they fear a higher repayment burden. ECBs are already in tight supply, with swap rates pegged at London Interbank Offered Rate (Libor) plus 4%.

RBI data shows that external commercial borrowings by Indian corporates dipped to $3.71 billion in August from $4.16 billion in the previous month.

The trend is in sharp contrast to the first quarter, when domestic firms borrowed $8 billion compared to $5.3 billion in the year-ago period, on the back of the low interest rates then prevailing in European economies.

“In the light of the lingering euro zone debt crisis, all European banks have less surpluses to lend to overseas corporate houses. Also, the spread has widened in the recent times, making fund-raising more expensive,” Indian Overseas Bank chairman and managing director M Narendra told PTI.

At present, the going rate for ECBs is the Libor—which is the international benchmark rate for loans—plus 4%.

Some experts feel that risk aversion is another factor that will lead to a decline in ECB borrowing.

“In uncertain environments, European banks are risk- averse. So, they are less likely to take exposures to corporates in emerging markets, making it difficult for Indian industry to raise money through foreign banks," Crisil chief economist Dharmakirti Joshi said.

He added that the recent relaxation of the ECB norms may help the situation to an extent. “The easing... will help in repayment of overseas borrowing obligations like foreign currency convertible bonds (FCCBs) and hordes of small savings that are due for redemption. But how it is going to help overseas borrowing will depend on the external environment, particularly in Europe.”

Another reason for the falling appetite for ECBs is the cash pile that leading corporates are sitting on.

“A lot of people have enough cash, so they are not in a borrowing mood,” Axis Bank president for corporate banking Nilesh Shah said.

Last month, the RBI increased the ECB limit under the automatic route by 50% to $750 million per year from $500 million earlier.

However, amid the sovereign debt crisis in euro zone economies, domestic companies are finding it difficult to raise money overseas.

The risk of rupee depreciation and the lack of a natural hedge are other factors restricting corporates, Mr Narendra added.

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SEBI shakes up key advisory panels

The panel restructuring drive is also being seen as part of a process that began with change in the top leadership position earlier this year

New Delhi: The Securities and Exchange Board of India (SEBI) has embarked on a restructuring drive for the various advisory panels that help it frame new regulations in different capital market segments, such as IPOs, mutual funds and secondary market trading, reports PTI.

The capital market regulator reconstituted its Primary Market Advisory Committee (PMAC) last week and is currently in the process of restructuring some of the other existing panels and might also look at setting up some new committees.

A senior official said that a few other panels have also been restructured in the recent past, partly due to certain vacancies that arose in the old panels and partly for bringing in a more diversified representation from various segments.

The official said that the panel restructuring drive is also being seen as part of a process that began with change in the top leadership position earlier this year.

UK Sinha took over as the new SEBI chairman in February this year, while there have also been many changes in senior positions like executive directors and SEBI whole-time members, as also that of the nominated members since then.

As many as six panels have been either constituted or restructured since Mr Sinha took over as SEBI chairman from his predecessor CB Bhave.

These include advisory panels on primary markets, mutual funds, secondary markets, corporate bonds and securitization, consent orders and compounding of offences and the SEBI Committee on Disclosures and Accounting Standards (SCODA).

The new Primary Market Advisory Committee would be chaired by TV Mohandas Pai, formerly with IT giant Infosys and currently chairman director at Manipal Universal Learning.

Besides the panel would have members from stock exchanges, investor associations, corporates and other financial institutions among others.

The panel would advise SEBI on issues related to regulation and development of primary market, on legal steps required to introduce simplification and transparency in systems and procedures and on regulation of intermediaries for ensuring investor protection.

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