Wednesday, February 11, 2009
Govt to borrow Rs 46k cr more to perk economy up
Govt to borrow Rs 46k cr more to perk economy up
The Financial Express, February 11, 2009, Page 1
Economy Bureau
New Delhi
Faced with a surging expenditure bill and dwindling tax revenue, the Centre announced a massive dose of additional borrowing of Rs 46,000 crore from the market, to be completed in two months. The additional funds for 2008-09 will be raised in four tranches through the sale of dated securities between February 20 and March 20 to finance the slew of stimulus measures announced over the past two months to prop up the growth rate in the economy that has dipped to 7.1%- a five-year low.
But government managers were quick to point out this will not stifle the demand from companies for additional funds. Planning Commission deputy chairman Montek Singh Ahluwalia said, “There will be no difficulty in accommodating the government borrowings. There will be no liquidity crisis.”
He was referring to the trend for banks across Asia which have found government debt as a safer avenue to invest as risk levels have increased in all economies, that, in turn, has exacerbated the crisis. An ADB report on Tuesday said, ‘Private companies in Asia were being crowded out of debt markets this year as governments in the region boost bond sales to fund economic stimulus measures.’ The flood of government bonds has reduced the prices of GOI paper, making it the worst performer among 10 Asian economies, a Bloomberg report said.
With the additioanl borrowing, the government will raise Rs 1,16,000 crore of extra funds from the markets in 2008-09, above the gross budget estimate of Rs 1,45,000 crore. The government has also doled out as tax concession Rs 50,000 crore to the industry.
“We had discussions with the Reserve Bank of India. The extra borrowing between February 20 and March 20 is going to be Rs 46,000 crore”, Ashok Chawla, secretary in the department of economic affairs said on Tuesday after a meeting with RBI deputy governor Shyamala Gopinath.
“RBI will release details about the government’s extra borrowing programme and ensure it is conducted without disrupting the market,” RBI governor Duvvuri Subbarao said later. He said there are no plans for a private placement of government bonds with the central bank.
Former RBI governor C Rangarajan, now a member of the Rajya Sabha, indicated that RBI still had room for a rate cut. “The stance of the monetary policy should be to stimulate growth. With prices on the downswing, RBI has room to manoeuvre with rates in the monetary policy,” he said.
Bankers said that the additional borrowing was anticipated and was already getting priced in 10-year bond yields. “With the government having an expected deficit of anywhere between Rs 1,50,000 crore and Rs 1,80,000 crore, this additional borrowing was expected. But liquidity is comfortable, especially since credit demand is falling, and so there should not be an increase in interest rates,” Abheek Barua, chief economist at HDFC Bank, said.
Bond yields rose after the government’s announcement — the yield on the 8.24% note due in April 2018 rose by as much as 13 basis points to 6.43%. It had stood at 6.30% before the announcement.
As a result of the borrowing, the fiscal deficit could touch 6% of GDP. “This represents a massive slippage in fiscal policy, especially as most of it will be used for revenue expenditure. But at this time, when an economic stimulus is needed, this was unavoidable,” DK Srivastava, director, Madras School of Economics, said.
The Financial Express, February 11, 2009, Page 1
Economy Bureau
New Delhi
Faced with a surging expenditure bill and dwindling tax revenue, the Centre announced a massive dose of additional borrowing of Rs 46,000 crore from the market, to be completed in two months. The additional funds for 2008-09 will be raised in four tranches through the sale of dated securities between February 20 and March 20 to finance the slew of stimulus measures announced over the past two months to prop up the growth rate in the economy that has dipped to 7.1%- a five-year low.
But government managers were quick to point out this will not stifle the demand from companies for additional funds. Planning Commission deputy chairman Montek Singh Ahluwalia said, “There will be no difficulty in accommodating the government borrowings. There will be no liquidity crisis.”
He was referring to the trend for banks across Asia which have found government debt as a safer avenue to invest as risk levels have increased in all economies, that, in turn, has exacerbated the crisis. An ADB report on Tuesday said, ‘Private companies in Asia were being crowded out of debt markets this year as governments in the region boost bond sales to fund economic stimulus measures.’ The flood of government bonds has reduced the prices of GOI paper, making it the worst performer among 10 Asian economies, a Bloomberg report said.
With the additioanl borrowing, the government will raise Rs 1,16,000 crore of extra funds from the markets in 2008-09, above the gross budget estimate of Rs 1,45,000 crore. The government has also doled out as tax concession Rs 50,000 crore to the industry.
“We had discussions with the Reserve Bank of India. The extra borrowing between February 20 and March 20 is going to be Rs 46,000 crore”, Ashok Chawla, secretary in the department of economic affairs said on Tuesday after a meeting with RBI deputy governor Shyamala Gopinath.
“RBI will release details about the government’s extra borrowing programme and ensure it is conducted without disrupting the market,” RBI governor Duvvuri Subbarao said later. He said there are no plans for a private placement of government bonds with the central bank.
Former RBI governor C Rangarajan, now a member of the Rajya Sabha, indicated that RBI still had room for a rate cut. “The stance of the monetary policy should be to stimulate growth. With prices on the downswing, RBI has room to manoeuvre with rates in the monetary policy,” he said.
Bankers said that the additional borrowing was anticipated and was already getting priced in 10-year bond yields. “With the government having an expected deficit of anywhere between Rs 1,50,000 crore and Rs 1,80,000 crore, this additional borrowing was expected. But liquidity is comfortable, especially since credit demand is falling, and so there should not be an increase in interest rates,” Abheek Barua, chief economist at HDFC Bank, said.
Bond yields rose after the government’s announcement — the yield on the 8.24% note due in April 2018 rose by as much as 13 basis points to 6.43%. It had stood at 6.30% before the announcement.
As a result of the borrowing, the fiscal deficit could touch 6% of GDP. “This represents a massive slippage in fiscal policy, especially as most of it will be used for revenue expenditure. But at this time, when an economic stimulus is needed, this was unavoidable,” DK Srivastava, director, Madras School of Economics, said.
Did we become too gloomy?
Did we become too gloomy?
The Financial Express, February 11, 2009, Page 6
Mahesh Vyas
According to the Central Statistical Organisation’s advance estimates, India’s GDP would grow by 7.1% in 2008-09. This is higher than expectations. Most agencies had predicted a severe slowdown in growth this year, compared to the average growth of 9% recorded in the preceding three years. The median forecast of real GDP growth in 2008-09 according to the RBI’s Survey of Professional Forecasters was 6.8%. The lowest forecast of 6.3% is by the World Bank. More generally, there have been low expectations reflecting a sense of pessimism amongst commentators in the media and in business. CSO’s 7.1% growth estimate is reassuring compared to these gloomy prognostications.
An interesting statistical observation of the CSO’s advance estimates (AE) is that at least since 2001-02, in all but one year, these have been lower than the quick estimates (QE). Quick estimates are generated about ten months after the year is over and in many ways give the first estimate of growth based on reasonably sufficient data. And, they almost always show a higher estimate of GDP growth than the AE. The QE for 2007-08, released by the CSO a few days earlier was 9%, which was higher than the AE estimated earlier at 8.7%. If this recent past is any indication, then it is likely that the QE for 2008-09 would turn out to be higher than the 7.1% estimated in the CSO’s AE.
The AE has underestimated growth in 2008-09 because it was compelled to use an outdated index of industrial production. The IIP is based on a basket of products and weights that reflect the country’s industrial setting in 1993-94. We have changed dramatically since then. But, the IIP does not reflect this. As a result, it systematically underestimates growth. The degree of this underestimation keeps increasing as the years go by. The quarterly financial results of listed companies provide evidence that this underestimation is not small.
There are efforts underway to upgrade the IIP to a base year that is more recent. When these get reflected into a new series of the IIP, the GDP estimates for 2008-09 and the earlier years would look much better than they seem now.
2008-09 has been a challenging year to forecast. Growth forecasts have been revised downwards systematically during the year. The median forecast of the Professional Forecasters published by the RBI was 8.1% in April 2008. This declined to 7.9% in July and then to 7.7% in October 2008 before it came down to 6.8% in January 2009. The Economic Advisory Council of the Prime Minister had predicted a growth of 8.5% in January 2008. This was revised down to 7.7% in July 2008 and then to 7.1% in January 2009. Most forecasters feared high interest rates, high inflation and the RBI’s policy to suck out liquidity from the system. Additional fears were the extraordinary rise in crude oil prices and the slowing global economy.
The Indian economy survived high interest rates, high inflation and high crude oil prices well. It also survived RBI’s enthusiasm to rein in a misunderstood indicator for inflation—the wholesale price index, when they should have been targeting the consumer price index. Real GDP grew by a handsome 7.8% in the first half of the year. Growth could have been higher if RBI had been less enthusiastic. And, growth could have continued at a robust pace but for the extraordinary global liquidity crisis of September-October 2008.
We will have a measure of the damage that the global liquidity crisis inflicted on India when the CSO releases estimates of GDP growth in the October-December 2008 quarter. I expect it to be closer to 4.5%. But the economy will recover from this trough in the next quarter. Early indications are promising.
The area sown under rabi crops is up 4.1%. Maruti Suzuki and Tata Motors have reported a higher growth in sales in January 2009 compared to a year ago. So has TVS and Hero Honda in respect of two wheelers. Cement consumption continues to grow at a healthy pace. Production data had started to improve in December itself. Infrastructure sectors such as railways and ports that had recorded a steep fall in October and November recovered in December. Growth in consumption of petroleum products accelerated to 4.6% in December compared to 2.9% in November and 0.9% in October.
The CSO’s 7.1% growth for 2008-09 as a whole and its 7.8% growth estimate for the first half implies a sharp fall in the growth rate to 6.5% in the second half of the year. The industry-wise break-up of the CSO implies that the fall would be the sharpest in the construction sector—from 10.5% in the first half to 2.8%. However, given the continued increase in cement consumption, this estimate may have to be revised upwards.
While the economy did suffer a hit from the global liquidity crisis, its impact was neither as severe nor as long-lasting as most commentators would have had us believe. A good part of the credit for this recovery goes to the quick response to the crisis by the government and RBI. The damage is also limited because our growth trends are not really as “coupled” with the West as many have assumed.
The author heads the Centre for Monitoring Indian Economy
The Financial Express, February 11, 2009, Page 6
Mahesh Vyas
According to the Central Statistical Organisation’s advance estimates, India’s GDP would grow by 7.1% in 2008-09. This is higher than expectations. Most agencies had predicted a severe slowdown in growth this year, compared to the average growth of 9% recorded in the preceding three years. The median forecast of real GDP growth in 2008-09 according to the RBI’s Survey of Professional Forecasters was 6.8%. The lowest forecast of 6.3% is by the World Bank. More generally, there have been low expectations reflecting a sense of pessimism amongst commentators in the media and in business. CSO’s 7.1% growth estimate is reassuring compared to these gloomy prognostications.
An interesting statistical observation of the CSO’s advance estimates (AE) is that at least since 2001-02, in all but one year, these have been lower than the quick estimates (QE). Quick estimates are generated about ten months after the year is over and in many ways give the first estimate of growth based on reasonably sufficient data. And, they almost always show a higher estimate of GDP growth than the AE. The QE for 2007-08, released by the CSO a few days earlier was 9%, which was higher than the AE estimated earlier at 8.7%. If this recent past is any indication, then it is likely that the QE for 2008-09 would turn out to be higher than the 7.1% estimated in the CSO’s AE.
The AE has underestimated growth in 2008-09 because it was compelled to use an outdated index of industrial production. The IIP is based on a basket of products and weights that reflect the country’s industrial setting in 1993-94. We have changed dramatically since then. But, the IIP does not reflect this. As a result, it systematically underestimates growth. The degree of this underestimation keeps increasing as the years go by. The quarterly financial results of listed companies provide evidence that this underestimation is not small.
There are efforts underway to upgrade the IIP to a base year that is more recent. When these get reflected into a new series of the IIP, the GDP estimates for 2008-09 and the earlier years would look much better than they seem now.
2008-09 has been a challenging year to forecast. Growth forecasts have been revised downwards systematically during the year. The median forecast of the Professional Forecasters published by the RBI was 8.1% in April 2008. This declined to 7.9% in July and then to 7.7% in October 2008 before it came down to 6.8% in January 2009. The Economic Advisory Council of the Prime Minister had predicted a growth of 8.5% in January 2008. This was revised down to 7.7% in July 2008 and then to 7.1% in January 2009. Most forecasters feared high interest rates, high inflation and the RBI’s policy to suck out liquidity from the system. Additional fears were the extraordinary rise in crude oil prices and the slowing global economy.
The Indian economy survived high interest rates, high inflation and high crude oil prices well. It also survived RBI’s enthusiasm to rein in a misunderstood indicator for inflation—the wholesale price index, when they should have been targeting the consumer price index. Real GDP grew by a handsome 7.8% in the first half of the year. Growth could have been higher if RBI had been less enthusiastic. And, growth could have continued at a robust pace but for the extraordinary global liquidity crisis of September-October 2008.
We will have a measure of the damage that the global liquidity crisis inflicted on India when the CSO releases estimates of GDP growth in the October-December 2008 quarter. I expect it to be closer to 4.5%. But the economy will recover from this trough in the next quarter. Early indications are promising.
The area sown under rabi crops is up 4.1%. Maruti Suzuki and Tata Motors have reported a higher growth in sales in January 2009 compared to a year ago. So has TVS and Hero Honda in respect of two wheelers. Cement consumption continues to grow at a healthy pace. Production data had started to improve in December itself. Infrastructure sectors such as railways and ports that had recorded a steep fall in October and November recovered in December. Growth in consumption of petroleum products accelerated to 4.6% in December compared to 2.9% in November and 0.9% in October.
The CSO’s 7.1% growth for 2008-09 as a whole and its 7.8% growth estimate for the first half implies a sharp fall in the growth rate to 6.5% in the second half of the year. The industry-wise break-up of the CSO implies that the fall would be the sharpest in the construction sector—from 10.5% in the first half to 2.8%. However, given the continued increase in cement consumption, this estimate may have to be revised upwards.
While the economy did suffer a hit from the global liquidity crisis, its impact was neither as severe nor as long-lasting as most commentators would have had us believe. A good part of the credit for this recovery goes to the quick response to the crisis by the government and RBI. The damage is also limited because our growth trends are not really as “coupled” with the West as many have assumed.
The author heads the Centre for Monitoring Indian Economy
Debt funds have high exposure to real estate firms, NBFCs
Debt funds have high exposure to real estate firms, NBFCs
Business Standard, February 11, 2009, Section II, Page 1
VANDANA Mumbai, 10 February
Debt mutual funds continue to have high exposures to realty and non-banking financial companies (NBFCs).
Sample this: LIC Mutual Fund’s Liquid Scheme has invested around 13.5 per cent (Rs 1,650 crore) of its portfolio in just two NBFCs — Reliance Capital and Indiabulls Financial Services.
ING Mutual Fund’s longterm fixed maturity scheme (FMP) 1 has 84.6 per cent of its portfolio in just one company — Unitech. Another of ING’s schemes, FMP series 53, has invested 100 per cent in the short-term debt of Reliance Capital, according to data from Value Research, a mutual fund tracking agency.
Others like Escorts Income Bond and Fortis FTP series 10 plan F have invested 56 per cent and 18.43 per cent respectively in Unitech. Even SBI Mutual Funds Short Horizon Liquid-Plus Fund has invested 3.72 per cent, or Rs 207.39 crore, in DLF.
Nikhil Johri, managing director, Fortis Mutual Fund, said, "We had communicated to investors at the time of the launch that though returns are much higher in these schemes, credit rating is lower. There were heavy redemptions during the September-October period in these schemes.” Recently, Crisil, in one of its reports titled, ‘Small debt funds face concentration risk’ said that a majority of schemes have single industry concentration and many small schemes have single company concentration. “Funds with large and illiquid single-company exposures could be affected by redemption pressure,” the Crisil report said.
The high exposures continued despite the overall concern over the last six to nine months that these sectors may be unable to service their loans because of tight liquidity conditions.
Unitech, Indias second largest real estate player, is overburdened with short-term loans and is struggling to repay its debts. At present, the total debt of the company is Rs 8,000 crore. Out of this, Rs 2,500 crore has to be repaid by March 31 and another Rs 2,500 crore later in the year. According to a fund manager, the total industry’s exposure to Unitech is Rs 2,500 crore.
Parijaat Agarwal, head (fixed income), SBI Mutual Fund, said, “We have not made any fresh investments. Since the assets under management have come down, the percentage of net assets has become higher." There could be a few reasons for the existing high exposure, one of them being inter-scheme transfers. That is, funds could have moved their exposure from say, a liquid fund to FMP or from an equity scheme to liquid fund.
Another explanation could be that because of redemption pressures, the exposures have gone up. In some cases, schemes would have attracted very little money to diversify.
What makes the scenario complicated is both DLF and Unitech’s debt has been downgraded by credit rating agency Fitch. And even, NBFCs are not being viewed too favourably.
Last October, there were redemptions to the tune of Rs 97,000 crore leading to a liquidity crisis in the industry. A lot of securities were either sold at a discount or transferred to other schemes to meet the redemption pressure. In some cases, promoters stepped in to purchase these papers.
OVER-DEPENDENCE
Scheme Company Exposure*
LIC MFliquid Reliance Capital 845.28
LICMF Liquid Indiabulls 805.23
SBI Short Horizon Liquid Plus Reliance Capital 213.08
SBI Short Horizon Liquid Plus DLF 207.39
Magnum InstaCash Reliance Capital 182.49
Fortis Money Plus Reg Indiabulls 158.88
*Exposure of schemes over 100 crore
Banks’ risk aversion slowing down credit growth, says RBI
Banks’ risk aversion slowing down credit growth, says RBI
Business Standard, February 11, 2009, Section II, Page 2
PRESS TRUST OF INDIA New Delhi, 10 February
Acknowledging that the credit growth has moderated in a couple of months, Reserve Bank Deputy Governor Rakesh Mohan today attributed the trend to risk aversion of the private and foreign banks.
The credit growth has slowed down in couple of months, but that of public sector banks was about 28 per cent year-on-year. Overall it was around 22 per cent, Mohan said at a seminar here.
“What has happened very interestingly in terms of risk aversion. It’s private sector and foreign banks whose credit growth is very very low,” he said. Noting that all Indian banks have capital adequacy far in excess of regulatory requirement, he said it is a fact so far that banks remain profitable without exception.
Growth in advances by the public sector banks are high as these entities are subject to government’s exhortation. Besides, the effect of monetary policy is higher on these entities, he said. “So the credit growth so far has been relatively healthy but it is correct to say you have to watch how much risk aversion would be observed and how much it (risk aversion) is rational,” he said.
“What is it we should be doing from policy point of view to preserve the financial systems’ health while helping the real economy not to go down,” he added.
Mohan said even in the backdrop of the Lehman crisis money markets in the country are behaving normally in terms of volume.
During September and October (2008), the daily market volume were not different from any other month when global markets were undergoing worst volatile phase, he said.
Speaking about the impact of global financial crisis on the Indian economy, the RBI Deputy Governor said “on the one hand we have the cushion of the agricultural economy and also the rural non-farm economy.”
Business Standard, February 11, 2009, Section II, Page 2
PRESS TRUST OF INDIA New Delhi, 10 February
Acknowledging that the credit growth has moderated in a couple of months, Reserve Bank Deputy Governor Rakesh Mohan today attributed the trend to risk aversion of the private and foreign banks.
The credit growth has slowed down in couple of months, but that of public sector banks was about 28 per cent year-on-year. Overall it was around 22 per cent, Mohan said at a seminar here.
“What has happened very interestingly in terms of risk aversion. It’s private sector and foreign banks whose credit growth is very very low,” he said. Noting that all Indian banks have capital adequacy far in excess of regulatory requirement, he said it is a fact so far that banks remain profitable without exception.
Growth in advances by the public sector banks are high as these entities are subject to government’s exhortation. Besides, the effect of monetary policy is higher on these entities, he said. “So the credit growth so far has been relatively healthy but it is correct to say you have to watch how much risk aversion would be observed and how much it (risk aversion) is rational,” he said.
“What is it we should be doing from policy point of view to preserve the financial systems’ health while helping the real economy not to go down,” he added.
Mohan said even in the backdrop of the Lehman crisis money markets in the country are behaving normally in terms of volume.
During September and October (2008), the daily market volume were not different from any other month when global markets were undergoing worst volatile phase, he said.
Speaking about the impact of global financial crisis on the Indian economy, the RBI Deputy Governor said “on the one hand we have the cushion of the agricultural economy and also the rural non-farm economy.”
The rural economy by and large remains unaffected by the global economic downturn.
Third, Mohan said, the cushion available is the financial system and the central bank’s operations themselves and fourth is the fiscal stimulus for private expenditure.
According to the Central Statistical Organisation estimates India’s economy is expected to expand by 7.1 per cent in 2008-09 despite global slowdown.
Farm sector output is projected to grow by 2.6 per cent in FY09, slower than last year’s 4.9 per cent, manufacturing by 4.1 per cent, down from 8.2 per cent, construction by 6.5 per cent against last year’s 10.1 per cent and financing, insurance, real estate, business services by 8.6 per cent against 11.7 per cent.
The estimates match the one projected by the Prime Minister’s Economic Advisory Council and are a tad higher than what the Reserve Bank has estimated.
Third, Mohan said, the cushion available is the financial system and the central bank’s operations themselves and fourth is the fiscal stimulus for private expenditure.
According to the Central Statistical Organisation estimates India’s economy is expected to expand by 7.1 per cent in 2008-09 despite global slowdown.
Farm sector output is projected to grow by 2.6 per cent in FY09, slower than last year’s 4.9 per cent, manufacturing by 4.1 per cent, down from 8.2 per cent, construction by 6.5 per cent against last year’s 10.1 per cent and financing, insurance, real estate, business services by 8.6 per cent against 11.7 per cent.
The estimates match the one projected by the Prime Minister’s Economic Advisory Council and are a tad higher than what the Reserve Bank has estimated.
IN THE DOWNTURN
Bank group-wise credit growth
Growth in % As on Jan 4, 2008 As on Jan 2, 2009
Public Sector Banks 19.8 28.6
Foreign Banks 30.7 16.9
Privae Sector Banks 24.2 11.8
Scheduled Commercial Banks* 21.4 24
*includes regional rural banks (RRBs)
Source: RBI
Subscribe to:
Posts (Atom)
Posts
