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| November 06, 2006 | Monday | Shawwal 13, 1427 |
Monetary policy: worries about inflation
THE Reserve Bank of India (RBI), like many other central banks around the globe, is constantly worried about inflationary pressures on the economy.
With consumer prices rising by seven per cent in September, and the index for industrial workers gaining by 6.3 per cent a month earlier (though the headline rate is 5.3 per cent), it was not surprising that the RBI’s busy season credit policy would be heavily influenced by it.
The markets and banks were expecting a rise in interest rates. But what took many by surprise was the fact that Dr Y.V. Reddy, the RBI governor, decided to raise its key lending rate, without touching the main borrowing rate.
Reddy decided to hike the short-term repo rate by a quarter per cent to 7.25 per cent last week, while unveiling the monetary policy. Reddy noted that the move was a signal to banks that they had to manage their cash balances better.
Reddy also said the bank had to recognise the possibility of the Indian economy over-heating and had to intervene to ensure sustainable growth. India’s GDP (gross domestic product) has gone up by a robust 8.9 per cent in the first quarter of the current fiscal (April-June).
The RBI went in for an upward revision of its GDP growth projections, estimating that the economy would expand by eight per cent (as against earlier estimates of 7.5-8 per cent). Reddy also said the bank would carefully monitor the economy to ensure that wholesale price inflation was pegged between 5-5.5 per cent.
Three months earlier, the RBI had hiked both the repo and reverse repo rates (the central bank’s short-term lending and borrowing rates) by 0.25 per cent to seven per cent and six per cent respectively, though like last week it had not touched the cash reserve ratio or the bank rate (still at six per cent).
The fourth rate hike this year comes in the wake of a sharp fall in oil prices, which are down by about $20 a barrel from its peak of $78 a barrel. But bankers and analysts expect the central bank to raise the reverse repo rate by another 25 basis points in its next quarterly review in January.
The Standard Chartered Bank noted in a report that on the back of higher manufactured product prices, the wholesale price index (WPI) inflation would cross six per cent by the end of the year. The bank expects the RBI to go in for hikes of both the repo rate (which could go up to 7.5 per cent) and the reverse repo rate (which could possibly go up to 6.5 per cent).
BESIDES the rate hike, the RBI also went in for further reforms in foreign exchange rules, which observers perceive as part of a broad policy to go in for full convertibility of the rupee.
Prime Minister Manmohan Singh had a few months earlier recommended the setting up of a committee to re-examine the question of capital account convertibility (CAC) of the rupee and to lay the roadmap. S.S. Tarapore, a deputy governor of the RBI, headed a committee, which recently gave its views.
Last week, the RBI made its first moves towards the ultimate goal of CAC. Resident individuals are now allowed to remit up to $50,000 a financial for any current or capital account transaction or a combination of both, doubling the existing limit. Foreign exchange earners have also been allowed to retain their full foreign exchange earnings in special bank accounts.
Corporates that are eligible to raise funds through external commercial borrowings (ECBs) can now borrow up to $750 million annually, as against $500 million earlier. These borrowers can also prepay ECBs up to $300 million without the RBI’s approval.
Similarly, mutual funds can now invest up to $3 billion overseas, as against the existing limit of $2 billion. Foreign institutional investors (FIIs) can invest up to $3.2 billion in government securities, an increase of $1.2 billion.
FIIs can also rebook a part of forward contracts, if they are supported by underlying exposures. Importers have been allowed to book forward contracts for the custom duty component of imports. Authorised dealer banks can issue guarantees or letters of credit for import of services up to $100,000 for securing a direct contractual liability arising out of a contract between a resident and a non-resident.
The RBI has also eliminated the lock-in period for sale proceeds of immovable property that are credited to the local accounts of Non-Resident Indians (NRIs), subject to an annual remittance ceiling of $1 million.
But corporates are still looking forward to further relaxation in the foreign exchange rules. Indian companies are on an aggressive overseas acquisition foray, gobbling up international companies. The most prominent of such acquisition was by the Tata group (turnover: $22 billion), which is buying Britain’s steel major, Corus, at a cost of $8 billion.
The Tatas have spent about $3 billion in the last three years in acquiring about 20 international firms, while other Indian business groups have invested over $10 billion in the last two years on foreign acquisitions. Even if CAC is still not a reality, Indian companies planning overseas acquisitions do not face much problems in accessing funds.
LAST week was a momentous one for the Bombay Stock Exchange (BSE), the country’s premier stock exchange. The Sensex, the benchmark index on the exchange, on Monday closed above the 13,000-mark for the first time, gaining almost 50 per cent over the last five months, and 70 per cent over the past 12 months.
The Sensex was established on April 1, 1979, with a base of 100. It took over 11 years for it to touch the 1,000-mark. In October 1999, it touched the 5,000-mark, but crossed the 10,000 mark by February this year. The last eight months have seen the Sensex flare by 3,000 points.
Foreign institutional investors (FIIs), who have been bullish on India, have invested nearly $6.82 billion in the first 10 months of the year. Last year, they invested $10.7 billion in the capital markets. In fact, in October, FIIs invested a whopping $1.74 billion, the highest in any given month this year, and the third highest monthly investment ever.
FIIs have also been rushing in, and many new ones have registered with the Securities and Exchange Board of India (SEBI), the capital markets regulator, in recent weeks. According to the SEBI, about 150 FIIs have been registered since January, and there are almost a thousand FIIs operating in India today.
Another major factor boosting the stock markets is the excellent performance churned out by India Inc. Indian companies have come out with sizzling quarterly performance, with all the leading information technology companies pulling out spectacular top-line and bottom-line growth.
A study of the second quarterly results of 435 companies indicates they have witnessed an over 32 per cent growth in net profits, and an almost similar growth in sales. About 20 banks reported a 42 per cent growth in net profit, and a 38 per cent growth in income.
Pharmaceutical companies saw a 55 per cent growth in net profits and a 21 per cent rise in sales. Industries that have seen phenomenal growth in net profits and sales included cement, electronics, hotel, media, textiles, IT, aluminium, pharma, tea, shipping, and steel.
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