RBI hikes repo rate by 50 bps, CRR up by 25 bps

News updates on Indian business and economy

RBI’s raised repo rate will reduce demand. It is expected to limit manufacturers' ability to pass on higher fuel and raw material costs to consumers. The long-term impact would be to keep inflation expectations in check, which should promote growth in the long run. It is also likely to cool house prices and make them more affordable.

- Chillibreeze Business Research Team

Government Policy & Infrastructure

Economy

Sector Specific – Telecom

Banking & Finance

Power

Steel

Cement

Agriculture

Government policy & Infrastructure

RBI to review monetary policy Tuesday

RBI will review its monetary policy for this fiscal Tuesday, against the backdrop of the country's annual rate of inflation jumping to a 13-year high and industry worried over the prospect of another interest rate hike.

Reserve Bank of India (RBI) Governor Y.V. Reddy will conduct the first quarter review after hiking interest rates more than a dozen times since 2004 and asking banks to keep more money against deposits to curb liquidity and inflation which is now at 11.91 per cent.

Industry has already expressed worries that a further squeeze in liquidity and hike in interest rates could retard growth, play havoc with corporate profits and cause job loss.

"Rise in interest rates would further push costs of production in the short run, leading to higher inflation," warned the Associated Chambers of Commerce and Industry (Assocham), ahead of the review.

"Present interest rates are at a peak and any further rise in the rates would hamper growth as well as the employment outlook for the economy," the chamber said after a meeting among its 150 managing committee members here.

July 28th, 2008
Source: Economic Times

Govt to keep controls on sugar industry

Food and farm minister Akhilesh Prasad Singh on Friday said the government had no immediate plans to remove its controls on the sugar industry.

"There is no proposal to de-control the industry now," he told reporters in Hindi.

Currently sugar mills are forced to sell 10 per cent of their output at cheap rates to the government for subsidised sales to the poor.

Authorities also decide how much sugar can be sold in the open market, so they can keep prices stable.

July 25th, 2008
Source: Economic Times

Economy

India's share in global service exports to rise to 6pc by 2012

Despite a stagnant global trend, India's share in global service exports is set to more than double from 2.7 to 6 per cent by 2012, an economic think-tank has said. "Currently, the country's share in worldwide service exports is 2.7 per cent, and it would increase to six per cent by 2012," the National Council of Applied Economic Research (NCAER) said in its latest macro track report.

The country's exports of services, powered by the booming software, consultancy, engineering and tourism sectors, was expected to touch $319 billion by 2011-12, the report said. The country's services exports, in the past-decade-and a-half, have increased fifteen-fold, from around $5 billion in 1990 to nearly $74 billion in 2006, the report said.

"Today, more than one-third of the country's aggregate exports are services, an exceptionally high share unmatched by any large developing country and only a handful of advanced countries," NCAER said in the report. Besides exports, the country's imports of services have also grown at an impressive rate, the report said.

"Against the world average of 10 per cent, the country's services imports grew by a hefty 40 per cent in 2006, while exports jumped by 34 per cent," NCAER said. NCAER, in its report, further said that India needed to make tremendous efforts to maintain the growth trend in the services sector.

"For maintaining high growth of its service exports, India would need to push for effective market access for its service sectors, both under the bilateral and regional trading agreements and WTO framework," the NCAER report said.

Today, as industries have started feeling the shortage of skilled manpower, the country needs to pay attention to general and technical training, the report said. "India would also have to invest heavily on both general and technical education, and vocational training or otherwise it would lose the momentum in services sector growth," the NCAER report said.

July 28th, 2008
Source: Economic Times

Rupee in depreciation mode: RBI

The Indian currency has generally depreciated so far up to July 23, RBI said in its Macroeconomic and Monetary Developments review released here on Monday.

The rupee has moved in the range of Rs 39.89 to Rs 43.16 per US dollar during the first quarter, the review said.

It depreciated during Q4 of 2007-08 up to mid-March but thereafter appreciated till end-March this year, reflecting strong FDI inflows.

After trading in the range of Rs 39.89-40.02 per US dollar till April 22, the rupee broke above the value of Rs 40 per US dollar on April 24, the review said.

Thereafter, the rupee depreciated continuously, reflecting large capital outflows by FIIs estimated at $ 5.2 billion during Q1 FY 2009.

The rupee also depreciated because of increased demand for dollars by oil companies and bearish stock-market conditions, the review said.

As on July 23, the exchange rate of the rupee was Rs 42.33 per US dollar and at this level, it had depreciated by 5.5 per cent over its level on March 31, 2008.

Over the same period, the rupee depreciated by 5.7 per cent against the Pound Sterling, 5.5 per cent against the Euro and 8.2 per cent against Chinese Yuan, while it appreciated by 1.8 per cent against the Japanese Yen, the review said.

Forward premia increased during Q1 FY 2009, reflecting the rising interest rate differentials on account of higher domestic interest rates and CRR hikes.

The average daily turnover in the foreign exchange market increased to $ 49.1 billion during April-June 2008 from $ 39.2-billion in the year-ago period.

While the inter-bank turnover increased from $ 28.5 billion to $ 35.6 billion, the merchant turnover increased from $ 10.8 billion to $ 13.6 billion.

July 28th, 2008
Source: Economic Times

Sector Specific

Telecom

3G policy likely to hit CDMA players

The upcoming third generation (3G) policy, which the government is slated to announce shortly, is likely to leave CDMA operators in the lurch. The policy will state that CDMA majors like Reliance Communications and Tata Teleservices can offer 3G services in the 450 MHz, 800 MHz and 1900 MHz frequency bands, but with a rider — ‘as and when these frequencies become available’. Put simply, there will be no auction of spectrum in these frequency bands during the 3G auctions.

“At most, the government may manage to free up one slot in the 800 MHz band and 450 MHz band. But, this is unlikely. The 1900 MHz band is ruled out for the considerable future. This means, CDMA players will have to bid for 3G spectrum in the 2.1 GHz band which favours GSM operators,” explained an industry source.

Telecom regulator TRAI in its recommendations for CDMA operators for 3G services had asked the government to set aside radio frequencies in the 450 MHz and also two additional carriers the 800 Mhz, which they already use for providing 2G services—the mobile technology used at present. However, with the Department of Telecom issuing new licenses with CDMA technology, it has allotted frequencies in the 800 MHz to these new entrants for 2G services. This implies, spectrum in the 800 MHz is unlikely to be available during the upcoming 3G auctions.

The DoT has also decided against allocating the 450 MHz frequency for two reasons — this band is currently occupied by state agencies, and internationally, this has not been allotted for 3G services.

CDMA operators therefore say that the 3G policy would discriminate against them because they do not have network equipment in 2.1 GHz and handsets which will work with the present 800 MHz (where they currently offer 2G services).

With regard to the 1900 MHz frequency band, TRAI had said that the DoT should “verify technical feasibility of coexistence of mixed band allocation, and if this was found feasible, this should be reframed for allocation to telecom service operators with CDMA technology’. Last year, AUSPI had completed field trails to establish that coexistence is possible with GSM players.

July 29th, 2008
Source: Economic Times

Banking & Finance

Macro economic environment putting pressure on Indian banks

A worsening macro economic environment and deteriorating asset quality are both putting pressure on Indian banks although declining credit profiles are a bigger issue for private lenders, Morgan Stanley said in a note.

The US investment bank recommended investors buy credit default swaps (CDS) on ICICI Bank, the nation's No 2 lender, and fund it by selling CDS on State Bank of India, the biggest lender in the country.

Morgan Stanley names India's high inflation, oil deficit and resulting fiscal pressures as some of the elements of the current weak macro economic landscape.

It also suggested buying CDS - insurance-like contracts that protect against defaults and restructuring - on India's two biggest banks by funding it via the sale of iTraxx investment grade series 9.

Indian banks are faced with a looming asset quality problem as a result of excessively rapid credit growth, lax underwriting procedures and moving down the credit curve, Morgan Stanley said. It said CDS spreads in the Indian banking sector had factored in macro economic and sovereign risks and that asset quality deterioration had not been sufficiently priced in.

July 29th, 2008
Source: Economic Times

Power

ONGC to foray into uranium miningRESULT ROSTER

State-owned Oil and Natural Gas Corporation Limited, which posted a 44 per cent jump in profit in the first quarter of the current fiscal, plans to foray into uranium mining to take advantage of opportunities arising from the India-US civilian nuclear deal.

The company’s net profit rose to Rs. 6,636 crore in the first quarter of 2008-09 from Rs. 4,611 crore a year ago. The company had to bear a subsidy payout of Rs. 9,811 crore, almost a three-fold increase from Rs. 3,649 crore during the April-June quarter last year.

Gross realisation on crude oil was $125.85 per barrel but net realisation stood at $69.14 per barrel after taking into account the subsidy payout.

ONGC has earmarked Rs 18,000 crore in the current financial year to increase its capacity and meet the energy needs of the country, company chairman R.S. Sharma said.

The board has approved the proposed memorandum of understanding with Uranium Corporation of India Ltd (UCIL) for the exploration of the mineral in India and abroad. The collaboration will leverage ONGC’s expertise in the exploration of hydrocarbons.

July 28th, 2008
Source: The Telegraph

Steel

Govt to take steps to ensure no increase in steel prices

Amid indications from steel companies that they might increase prices from the second week of August, the government on Sunday said that it would take steps to ensure that prices of steel do not rise further.

The Minister of State for Steel Jitin Prasada told that all possibilities for development in the steel sector would be kept in mind and "efforts would be made to ensure that its prices do not go up".

Meanwhile, according to sources, the government had asked the Steel Authority of India (SAIL) and some private companies not to increase prices of steel for some more time so that inflation can be controlled.

Inflation has already touched 11.89 per cent, which is the highest in the last 13 years.

This comes in the wake of reports that primary steel producing companies are planning to increase prices due to a rise in price of raw material and transportation. The companies had not increased prices since May 7.

Sources said that the government did not want any hike in the steel prices as this can stoke inflation further.
Concerned over the increase in prices, the government had imposed a 15 per cent duty on exports but later on the demand of the industry it was withdrawn from flat products.

July 27th, 2008
Source: Economic Times

SAIL: Difficult times ahead

The Rs. 45,242 crore SAIL maintained the momentum in its top line, posting a growth of 37 per cent y-o-y in the June 2008-09 quarter.

However, the steel-maker's operating margins were down 450 basis points at 25 per cent since it had to set aside a higher sum for wages, freight and ferro-alloys. Thus, net profit rose just a shade above 20 per cent to Rs 1,835 crore, disappointing the Street.

With SAIL renewing the annual contracts for the purchase of coking coal — a key input — at prices that are about 200 per cent higher than last year, margins could be impacted in the coming quarters.

The company imports about 70 per cent of its requirement of coking coal. A double whammy for the steel maker is that it is unlikely to be able to raise prices in the near term given that inflation is now in double digits.

The June quarter saw SAIL's products fetching better realisations, up 29 per cent on an average compared with Q1FY08. Apart from the price increase taken in the March quarter, the company also sold a higher proportion of value-added products.

Prices were last increased in March this year but due to government intervention, the steel maker has not benefited from booming international steel prices. Currently, prices in the domestic market are at least Rs 4,500 per tonne lower than the international price.

The stock has yielded significant ground since the start of the year and at the current price of Rs 146, it trades at 7.4 times estimated FY09 earnings.

July 24th, 2008
Source: Business Standard

Cement

Bulk cement prices slide as new capacity boosts supply

A string of new capacities, which came on-stream in recent months, has started impacting cement prices. Prices of bulk cement — bought by construction companies in large quantities directly from cement makers — have come down by at least Rs. 100 per tonne.

“There is surplus cement in the market leading to a decline in bulk cement rates,” says Shree Cement MD and Cement Manufacturers Association president HM Bangur. The contribution of bulk cement in overall sales for other cement makers varies between 10-50%.

The cement industry added around 20 million tonne of capacity in the first half of calendar year 2008, leading to a demand-supply mismatch. The industry’s installed capacity is around 203 million tonne per annum currently. Bulk cement usually comes at around 10% discount to retail cement, as the former doesn’t incur additional cost of packaging, warehousing and dealers’ margins. Says a DLF executive, “We have seen a decline of around Rs 100-200 per tonne in prices in the past six months.” He says the company also imports cement from Pakistan and Sri Lanka at a cheaper rate and uses the threat of import to extract a favourable price from domestic cement makers.

The government had waived all duties on the import of cement last year in order to check rising domestic cement prices, much to the dislike of domestic cement makers. Following the new capacity additions, cement makers are now demanding a roll back of import incentives.

With the Indian economy slowing down, the consumption of cement has also fallen. Cement production grew 8% last year to 168 million tonne. The growth in the first quarter of current fiscal has declined to 6% and industry leaders and analysts feel the growth for the full year 2008-09 will remain around 6%.

“There is a distinct slowdown in construction activity forcing cement makers to lower rates,” says cement analyst Rupesh Sankhe. Retail cement rates, however, haven’t come down. “There is inflationary pressure and the cost of transportation as well as dealers’ margins have gone up keeping retail prices intact,” says Mr Bangur of Shree Cement. But analysts feel retail prices too may see a decline soon.

July 28th, 2008
Source: Economic Times

Agriculture

Fears of major crop damage recede as met predicts revival of monsoon

The monsoon, which had played truant in southern and western India after early enthusiasm, is likely to revive soon, abating fears of a major drop in production of oil seeds, pulses and rice in large parts of the country.

According to the India Meteorological Department (IMD), the rains are likely to gather momentum around Sunday. In fact, breaking a disconcertingly long dry spell, it’s been raining in most parts of Maharashtra, including Mumbai, for the past couple of days.

“Rainfall activity is likely to increase considerably over central and adjoining peninsular India, particularly over Andhra Pradesh and Maharashtra... it is also likely to increase along the west coast and Gujarat, with the possibility of heavy to very heavy rainfall,” the agency maintained. The turnaround, if it happens, should be a welcome relief for the government, which is battling double-digit inflation and does not want scanty rains to hit crop production.

Rains have been scanty in 15 out of the country’s 36 meteorological sub-divisions. Since the beginning of the monsoon on June 1 till July 23, rainfall across the country has been 2% short of the long period average (LPA) of 89 cm. For July 17-23, the deficit was 33%. Northwest India has seen bounteous rains since June 1 — 43% more than the LPA — while central India and the southern peninsula witnessed shortfalls of 15% and 32%, respectively.

The marked rainfall deficit till the crucial sowing month of July has already impacted prices of commodities, including pulses, oilseeds (groundnut and soyabean), sugar, maize and even rice, threatening high retail prices as tight output fears loom.

July 26th, 2008
Source: Economic times

Fertiliser shortage haunts farmers

The coming monsoon could well be sparse and if farmers are also deprived of access to fertilisers, then there is no reason to believe that the somewhat satisfactory farm sector growth we saw last fiscal would recur, leave alone improve, this year.

One reason for the fertiliser shortage is the fact that the current subsidy-cum-distribution policy does not give any incentive for the fertiliser companies to deliver their products in areas difficult to reach. While the expedient measures that the government is taking to augment supplies are welcome, the long-term solution to the problem is of course to devise a policy that would encourage equitable pan-India distribution of fertilisers. This will supplement other measures the government is contemplating, such as import-linked pricing of urea and DAP and the nutrient-based subsidy regime.

July 25th, 2008
Source: Economic times