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No beating about the bush.
ML: Now that the economy is showing signs of revival, Dr Manmohan Singh has indicated that he may look at withdrawing stimulus measures. Where do you see the economy going forward?
RVS: We should surely see a growth of more than 6-6.25%. The challenge is whether we can continue in this manner. The signals that we are receiving from the global economy are not encouraging. But we are also getting signals that other economies are stabilising. So we can easily maintain our growth rates and then, through local investments, especially through infrastructure, we can grow further. Hopefully, agriculture will start reviving during this rabi season and if next monsoon could be better, we can look for growth rates of more than 7% in the next financial year. Whether it would be 8%-9% is a bit too early to judge given that uncertainties in the global economy have actually worsened in the last few months. The relative contribution of exports to GDP is quite significant. Especially in case of software services and textiles, this impact is quite heavy. The other uncertainty is related to the domestic market. For instance, the prime minister has mentioned that the stimulus may be removed next year because it puts a great deal of pressure on the fiscal (position) of the country. In that sense the government may decide to remove the stimulus altogether or reduce the size. These are two important determinants. We have achieved stabilisation, but now we are talking about 7%-7.5% growth. So we have now already seen the dip; today we are seeing the correction to take us beyond the dip.
ML: With huge government borrowings, there is a lot of pressure on interest rates. Although the RBI didn’t make any changes in the key rates, they have indicated they would gradually hike rates.
RVS: The RBI has taken the first step. They have removed various measures given earlier. For instance, previously, reduction of SLR meant that a great deal of liquidity was released into the system. Similarly, they had provided certain refinance facility to banks and provided leeway under the export refinance scheme. I think they were also looking at certain measures on provisioning and capital requirements. Now they have got back into action and have increased the provisioning norms. So the RBI has already embarked on the first leg of the journey, by withdrawing these monetary measures. They have increased SLR from 24% to 25%. So slowly they are trying to ensure that the balance sheet strength of the banks is protected and enhanced. Banks in the economy have to be strong to withstand the volatility that comes in from time to time in the asset markets or in the overall economy. In the last year they had deliberately taken a low stance. Now, the focus is on higher capitalisation of banks and enhanced capacity to sustain credit-related losses through higher provisioning. Even though we don’t treat a hike in SLR as a rate hike, it is in a broad sense, a rate hike. Even though the overall banking system holds around 27% in SLR, not every bank holds that much. There are many banks which hold lower than the standard SLR requirement, who are permitted to meet it in various other forms. So for such banks, the deficit has actually increased by another percent. These banks will be forced to cut the deficit to the extent of 1%. For others who are holding a surplus, the quantity of surplus has reduced. So I do not think we should look at this hike in a narrow perspective in terms of current SLR holding versus actual requirement. The excess securities that banks hold enable them to borrow funds from the collateralised market or through the RBI window. They could go to the CBLO platform from CCIL, an anonymous terminal where a bank can give its G-Secs and borrow funds against them. So to the extent that banks are surplus, this is actually collateralisable and funds can be drawn against it. The moment this threshold goes from 24% to 25%, the ability to borrow also reduces to that extent. So, this is a backdoor way of establishing a rate hike. The fact is that it is as good as a CRR hike in that sense. So, that 1% hike does have an impact on the liquidity in the system. Similarly, earlier banks could raise export refinance to the extent of 50%. It has now been brought back to 15%, which existed prior to 2008. To that extent, there is a sucking away of some liquidity. So my sense is that the measure has been very cleverly put into the policy, so that people don’t panic.
— Sanket Dhanorkar [email protected]
The strong recovery by the mutual fund industry is reflected in the growth in assets under management (AUM) of debt schemes which have more than doubled within a year to Rs5.68 trillion.
Ratings agency CRISIL said improvement in liquidity conditions in the Indian financial market along with revival in investor confidence has helped the Indian mutual fund industry tide over the aftermath of the liquidity crisis faced by the financial market during the third quarter of 2008-09.
“CRISIL has also witnessed an increased preference by mutual funds for lower credit risk with a preference towards government securities and AAA or P1+ rated instruments,” said Pawan Agrawal, director, CRISIL Ratings.
The strong recovery by the industry is reflected in the growth in assets under management (AUM) of debt schemes which have more than doubled over the past year to Rs5.68 trillion as on 31 October 2009. CRISIL said it has also observed a shift in investor preference towards relatively shorter-term schemes, increased investment in higher-rated credits and high demand for debt instruments issued by banks.
While improvement in liquidity contributed to increased demand for debt schemes, introduction of new guidelines issued by the Securities and Exchange Board of India (SEBI), capping the maturity of investments in liquid schemes, resulted in increased preference for ultra short-term funds. The share of liquid schemes has come down to 27% from 49% of AUM, the ratings agency said.
CRISIL, a unit of Standard & Poor's, said financial sector entities, especially banks, continue to dominate the portfolio constituting two-thirds of the AUM. However, within the financial sector, there is a clear shift towards investments in instruments issued by banks as compared to that of non-banking financial companies (NBFCs).
While the overall exposure to the financial sector remained stable, mutual funds’ exposure to banks has increased to over 50% from 43.3% as on 31 August 2008. On the other hand, exposure to NBFCs has come down to just above 8% from almost 18% as on August 2008, it said.
"Exposure to pass-through-certificates (PTCs) and real estate sector has also come down sharply because of the illiquid nature of the instruments and their increased credit risk” added Mr Agrawal.
– Yogesh Sapkale [email protected]
The price of turmeric between 1 October 2009 and 15 October 2009 shot up from around Rs8,000 to Rs8,900 due to lower arrivals and strong demand. Emergence of export demand from the Middle East is also supporting the gain in prices. Turmeric stocks were already lower by seven lakh bags compared to last year and the recent floods and heavy rains have further increased the gap to about eight lakh bags. Post-Diwali, prices are expected to touch Rs7,800 to Rs8,000 levels as some profit-booking would be seen in the markets.
Recent floods in the southern states of Andhra Pradesh and Karnataka have affected the corn-producing belt. This will keep corn prices high, since nearly one-fifth of the crop in Karnataka and AP has been wiped out. Karnataka and AP account for 10% and 20% of corn output respectively.
Copper remains a base metal with strong fundamentals. Chinese demand has begun to normalise; demand for copper remains fairly robust while scrap supply remains steady too. However, fears that all is not well with the supply scenario have resurfaced due to strikes in key producing areas. The rich countries are likely to join the emerging world in global economic recovery in 2010 resulting in a rise in the copper demand in the first quarter of 2010. Copper prices are expected to move above $6,700 in the next three-four months.