Weakening rupee may delay rate cutting cycles, says Nomura

Nomura asserts that a depreciating currency will exert inflationary pressures. A 10% depreciation of the rupee is expected to lead to a 0.6%-0.8% increase in WPI

The rupee has depreciated against the US dollar by around 9% since May, falling to an all-time low of 58.90 yesterday. Nomura’s latest “Asia Insights” report discusses the macroeconomic fallout of the weakening of the rupee and makes relevant policy recommendations.

Given that about 35% of the commodities making up the WPI basket are global commodities, Nomura asserts that a depreciating currency will exert inflationary pressures. A 10% depreciation of the rupee is expected to lead to a 0.6%-0.8% increase in WPI. However, manufacturers are expected to absorb part of the higher costs in their margins because of weak pricing power, arising from a sluggish demand.

In theory, a depreciating currency bodes well for the external sector as it encourages exports while curtailing imports. However, with India’s exports being more demand-sensitive than price-sensitive and India’s imports being largely inelastic, the rupee’s weakening is likely to increase the current account deficit by 0.4% of GDP for a 10% depreciation. Nomura estimates that depreciation by every rupee is likely to increase India’s annual oil import bill alone by Rs100 billion (0.1% of GDP).

Nomura estimates suggest that a 10% increase in depreciation will raise the fiscal deficit by about 0.2% of GDP. This is partly because the government's oil subsidy burden is likely to increase by 0.04% of GDP, for one rupee depreciation, and will also face a higher fertilizer subsidy bill. However, given the threat of a rating downgrade, Nomura believes that the government will be forced to stick to its budgeted fiscal deficit target of 4.8% of GDP in 2014, by raising more tax revenue and curtailing expenditure.

Since the rupee depreciation is largely in line with other emerging market currencies, the relative advantage of monetary conditions conducive to growth is unlikely to be significant. Asset price volatility or a slowdown in capital flows would adversely impact investment. Firms with un-hedged forex exposure are likely to face higher losses. The RBI is likely to delay the rate-cutting cycle in order to balance out the interests of growth with currency management.

Nomura recommends that the government should take measures to attract greater capital flows into India such as raising FDI limits in defense, telecom, asset reconstruction companies, private securities, commodity exchanges, etc. Non-resident bond issuance, relaxing FII debt and external commercial borrowing limits could help further. Pending legislative reforms such as in land acquisition, FDI in insurance and pension, the Companies Bill, etc could be addressed in the monsoon session of the Parliament.

Nomura expects that so long as the currency is weakening, the RBI will delay the rate-cutting cycle because financial stability concerns will overrule its business cycle response. It believes that repo rate is likely to be unchanged in June, with rate cuts resuming after the currency stabilizes and inflation and CAD are brought to moderate levels.


SEBI to get powers to summon call data, email, SMS records

SEBI’s plea for such powers has been endorsed by the finance ministry which late last month wrote to the ministry of home affairs for designating the capital market regulator as agency authorised to receive call data records

Capital market regulator Securities and Exchange Board of India (SEBI) will soon get powers to summon phone call records, emails and SMSes of persons it is probing for insider trading and other market manipulations.


With these powers, SEBI aims to prevent black money coming into the market as well as to keep an eye on insider trading.


SEBI’s plea for such powers has been endorsed by the finance ministry which late last month wrote to the ministry of home affairs for designating the capital market regulator as agency authorised to receive call data records (CDR).


Sources said Economic Affairs Secretary Arvind Mayaram late last month wrote to the Home Secretary seeking designating SEBI as agency authorised to be a recipient of CDR information related to calls, emails and SMSes under the Indian Telegraph Act, 1885.


This followed a meeting finance minister P Chidambaram took on 15th May to discuss how SEBI can be enabled to requisition and receive CDRs of calls, SMSes and emails available with telecom/other service providers.


Sources said Section 11C of the SEBI Act empowers the regulator to call for information and records from any intermediary or person in respect of any transaction in securities which it is investigating.


SEBI, as per this section, is an investigation agency for offences related to market fraud and insider trading and can thus summon CDRs.


Sources said the ministry asked MHA to operationalise an arrangement for SEBI being designated as an agency which can requisition and receive CDR information related to calls, emails and SMSes under the Indian Telegraph Act, 1885.


The market regulator has been seeking government's help in getting call data records and e-mail records from the service providers of persons being probed by SEBI in cases of insider trading and other market manipulations.


However, the regulator is not asking for powers to snoop on telephonic conversations.


CDRs generally list out the number of conversations between two or more entities and are different from phone-tapping, wherein an agency can snoop on or record the telephonic conversations of those suspected to be engaged in some wrongdoings.


Regulators in the US and some other countries have often used tapped phone conversations to prove insider trading and other charges, including in the famous Rajat Gupta case.


Currently, the phone-tapping powers are restricted to only a few agencies in India, including the CBI and the tax department.


Sources said the finance ministry is separately considering amendments to the SEBI Act, SCRA and the Depositories Act to strengthen the regulator's powers.


Credit Shopping: Is Experian buying 26% stake in High Mark?

Experian has made a bid to buy minimum 26% stake in High Mark, the debt ridden and cash strapped credit bureau in India. The question is whether RBI would allow the credit information company to buy stake in similar venture

Experian Credit Information Company of India Pvt Ltd (Experian India), one of the four credit information companies (CICs) in India licensed by the Reserve Bank of India (RBI), has made a bid to buy minimum 26% stake in troubled and cash-strapped High Mark Credit Information Services Pvt Ltd (High Mark), say our sources.


According to the sources, Experian India has quoted Rs25 per share to buy 26% stake in High Mark and has already completed due diligence. Earlier, High Mark was negotiating with Italy-based CRIF credit bureau for a bailout. High Mark was offered Rs30 per share by CRIF, which is also an existing shareholder in the credit bureau. CRIF SpA owns 9.09% stake in High Mark. We learned that CRIF executives had already met senior executives of RBI to assure them of support and continuity after takeover. However, the banking regulator, because of its reservations about CRIF’s ownership pattern, rejected the proposal.


Richard Fiddis, managing director for strategic markets at Experian PLC, however declined to comment on the stake purchase. He said, “Indeed, Experian India—our JV credit information company is going through the process of recapitalization as per our original funding plan for the business and Experian as the cornerstone investor has already contributed its share of the recapitalization funds.”


Experian India is a joint venture of UK-based Experian with Axis Bank, Federal Bank, Indian Bank, Magna Finance, Punjab National Bank, Sundaram Finance and Union Bank of India.


At present, foreign direct investment (FDI) in a credit bureau is capped at 49% and any transfer of more than 5% of shares requires approval from the RBI. Similarly, institutional investment in a credit bureau is capped at 10%.


According to sources, CRIF had offered to buy 26% stake in High Mark at Rs30 per share or about 3.4 million euro. The offer was valid only till 31 December 2012. Among the investors of High Mark are stock speculator Rakesh Jhunjhunwala (4.55%) and financial services company, Edelweiss (9.09%), apart from a host of banks and a few financial services companies. They have subscribed their shares at Rs12.25 apiece.


In addition, CRIF had said it would not block the initial public offering (IPO) of High Mark, if other shareholders also agree either to guarantee a loan, make a direct loan or invest similar amounts that of CRIF (Rs30 per share or 3.5 million euro), in case the Indian credit bureau needs funding.


CRIF is headed in India by old hand Larry Howell. In his previous innings, Howell successfully brought together TransUnion, which he was heading at that time, and Credit Information Bureau (India) Ltd (CIBIL), India's first credit bureau.


The other three RBI approved credit bureaus, CIBIL, Experian India and Equifax Credit Information Services Pvt Ltd (ECIS) have received funding of around Rs50 to Rs75 crore and have access to additional funds through promoter or parent company which are large organisations specialising in credit information business mainly in the US and UK.


Earlier, while admitting that High Mark was looking to raise funds from domestic and foreign investors, its promoter Prof Dr Anil Pandya said, “Only CIBIL has funds. The other two (Experian India and ECIS) are also in the market raising funds. Deep pockets and ample sources of funding do not help because of the regulatory constraints on capital structure of CICs.”


Prof Dr Pandya, who lives in the US, had tried to rope in a foreign rating agency to put in additional capital. However, it did not materialise. This time he was reportedly negotiating with an Indian credit bureau for the asset sale to circumvent any regulatory permissions.


High Mark was negotiating with other credit bureaus to do an asset sale including 250 million records collected from member institutions, says a complaint filed by a former employee of the credit bureau to the finance minister, RBI governor D Subbarao, secretaries from the finance ministry and financial services.


The ex-employee pointed out that due to mis-management or absence of any management, High Mark, is at a stage where its existence is at stake. “This in turn jeopardizes the valuable records of various financial institutions including public sector banks, cooperative banks, micro finance institutions, etc. This also is a gross violation of the Credit Information Companies Regulations Act, 2005 (CICRA), as the data is collected after signing individual agreements with member institutions. The asset sale is being designed in such a way so that it would not require any approval from the RBI,” the former employee said.


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