Wednesday, December 23, 2009
US economy grows 2.2%
US economy grows 2.2%
The Economic Times, December 23, 2009, Page 11
Timothy R Homan WASHINGTON
THE economy in the US expanded in the third quarter at a slower pace than anticipated as companies curbed spending and cut inventories at an even faster pace, reductions that have set the stage for an acceleration in growth.
The 2.2% increase in gross domestic product from July through September compares with a 2.8% gain previously reported by the Commerce Department in Washington. Improved consumer spending combined with a record drop in stockpiles this year will promote increases in production that may keep the world’s largest economy growing well into 2010. At the same time, companies such as Dell point to gains in business investment that signal growing confidence the expansion will be sustained. “All signals point to a strong fourth quarter,” Nigel Gault, chief US economist at IHS Global Insight in Lexington, Massachusetts, said before the report. “Growth is shaping up at around 4 percent as the inventory cycle turns upward.”
The projected pace of growth was based on the median estimate of 73 economists in a Bloomberg News survey. Estimates ranged from gains of 2.5% to 3.7%. The GDP report is the third and final for the quarter. The government’s advance estimate two months ago was 3.5%.
The economy shrank 3.8% in the 12 months to June, the worst performance in seven decades. The four consecutive decreases through the second quarter mark the longest stretch of declines since quarterly records began in 1947.
This month’s revisions also showed a bigger gain in earnings than first estimated. Third-quarter corporate profits increased 10.8% rather than 10.6%, marking the biggest gain in more than five years. Productivity gains have boosted company earnings as payrolls are reduced. Labour costs fell at a 2.5% rate last quarter, capping the biggest 12-month drop in seven years, Labour Department figures showed earlier this month. Productivity, a measure of employee output per hour, surged at an 8.1% pace percent in the third quarter, the fastest pace in six years. —Reuters.
India needs long-term vision, not myopia
India needs long-term vision, not myopia
The Financial Express, December 23, 2009, Page 1
S Gopalakrishnan
In the second instalment of reflections from India Inc’s corner offices a year after the global financial crisis erupted, Infosys Technologies CEO & MD S ‘Kris’ Gopalakrishnan dwells on the country’s growth drivers for the future
The Indian economy has shown a great deal of resilience in the recent economic downturn. Defying the events of this global slump, India’s economy has grown and is poised to only develop further. The government has forecast a growth rate of over 7% for this financial year, with a medium-term objective to achieve 9%. Much of this is attributable to the three stimulus packages that the government announced over December 2008 and February 2009 and sustained government spending, as private sector spending declined.
The strengths of the Indian economy are many. It received a further boost following the recent general elections, which brought a stable government to power. This has reopened foreign investment in the economy. Our low dependence on exports (24% of GDP, according to the World Bank) has kept India’s exposure to the vagrancies of the global economy somewhat limited.
Of course, the commitment shown by the government to increase its spending by 36% for 2009-10 by investing in the country’s infrastructure and focusing on inclusiveness has provided further impetus for growth. While the economic slowdown over the past year is in a way a hiccup, the country needs to focus on sustained growth, looking at the long-term vision and not be myopic.
There are a few themes that stand out as focus areas. These include developing the country’s infrastructure, encouraging foreign investment, focusing on education and e-governance, and simplifying and clarifying existing laws to enhance the business environment in India.
The government has already planned to increase infrastructure spending to 9% of GDP by 2014. At the moment, India spends about 6% of its GDP on roads, ports, airports and similar facilities. The planned investment in infrastructure will enable and encourage the business environment further. A great stimulator in the sector can be foreign direct investment and public-private partnerships.
According to the World Investment Prospects Survey for 2009-2011 released by Unctad, India is the third-most favourable destination (a notch down from last year) for market growth, inexpensive skills and talent. For India to regain its foothold and move up the pecking order, we need to focus on developing an ideal business environment, which is, in turn, related to infrastructure and also creating the right incentives to attract investors.
Despite the credit crunch of the last year, India has seen an FDI inflow of $35 billion. The country is targeting annual FDI worth $50 billion by 2012, for which the commerce ministry is setting up a panel comprising state industrial ministers to address the procedural difficulties that investors might face while entering the Indian market. This effort should definitely help address some challenges in this sector.
Moving on to education, according to Unesco, India has the lowest public expenditure on higher education per student in the world. Renowned Indian universities such as the Indian Institute of Science, Bangalore, have a world ranking of 303-401, and the Indian Institute of Technology, Kharagpur, a world ranking of 402-501 (Academic Ranking of World Universities 2009 prepared by the Shanghai Jiao Tong University). Much remains to be done to enhance the education environment in India.
The government has clearly articulated its plans to focus on education, and the proposed investment in higher education--especially in IITs and NITs--will greatly benefit the industry in the medium and long term. In addition, opening up the education sector in India and allowing foreign investment in higher education has the potential to further develop a skilled workforce and nurture talent.
On the e-governance front, a higher allocation to such projects will help improve citizen services, streamline governance and further stimulate the domestic information technology industry. It will serve the objective of supporting and simplifying governance for all stakeholders--government, citizens and businesses.
Finally, the government of India needs to provide a stable, conducive and safe environment to encourage businesses to set up and flourish in the country. This includes simplifying processes through which companies apply for various licenses and approvals, and reducing the time and effort lost due to the regulatory environment. Specific challenges include duplication of laws, a disparate system for acquiring permissions and clearances, lack of transparency and limited information on processes, to name a few.
Column: At least we have a start on climate
Column: At least we have a start on climate
The Financial Express, December 23, 2009, Page 8
Michael Walton
Was Copenhagen a failure? The Copenhagen Accord has fine aspirations but no firm commitments, no clear plan and no governance mechanism. One activist group called it a disaster. Blame was being laid at all doors: President Obama for failing to deliver stronger US commitments; the Chinese for obduracy over emissions verification; the Europeans for not coming through; the group of African and poorer countries for holding out for even more money. Presidents Chavez and Morales blamed capitalism.
So how come the major global powers could save the world from financial catastrophe last year, but not save the globe from a potentially much larger catastrophe from global warming?
The comparison is revealing. In the case of the financial crisis, the threat was immediate, domestic action made sense on purely national grounds, redistributions were largely within countries and the interests of the big economic players—the financial institutions—were aligned with action, often controversially so.
Climate change couldn’t be more different. The threat is distant. Coordination is not an add-on, but of the essence: one nation’s action only makes sense at home if others act too—a classic problem of managing the commons. Even harder, the desirable redistributions are between countries, and intricately linked both to the management of the rise of emerging economic powers, and the need to extract resources from fiscally pressed rich countries to support adaptation in poor countries. Many established economic interests are resistant to change, including major parts of the energy lobby.
Given the sheer difficulty of the problem, the Copenhagen Accord looks better. Getting agreement in principle from the US, China and India is a big step forward. The Accord includes an important new proposal to protect forests. There is a commitment to deliver $30 billion over the next three years and $100 billion from 2020 onward to poor countries. There are surely credibility problems here, but the numbers are there to fight over.
Also valuable were new signs of coordination in the chaos. Most important was the group of Brazil, China, India and South Africa—with whom the final deal was cut with Obama, to the procedural fury of the G-77 and Europe. Also noteworthy was greater African coordination, led by Ethiopian Prime Minister Zenawi. There was an intriguing sign of China-African relations when the Africans threatened to keep their mineral resources if the Chinese did not support their case.
But better coordination is likely to be insufficient, given the sheer difficulty of the challenge. The lesson from the financial crisis is relevant: real action will come on the basis of politically salient, national self-interest. A future international agreement can be overlaid on this, but is not a substitute.
Political salience means two things: citizen support, including willingness to accept higher carbon-related prices, and alignment of domestic economic interests. Among rich countries, European citizens are essentially there, Japan is moving, and the US belatedly moving. But will business come round? There is a telling experience from the negotiation of the Montreal Protocol, the international agreement to phase out emission of chlorofluorocarbons (CFCs) that were destroying the ozone layer. The global leader in production of goods emitting CFCs was the US company Dupont. There was a point in the negotiation process in which Dupont shifted from resisting to favouring the deal. Once a deal became sufficiently likely, it was in its interests to innovate and become the market leader and standard-setter in CFC-free products.
There are signs of this occurring in carbon-saving innovation, and not just in rich countries. In the December New Yorker, Evan Osnos documents how China has been pouring resources into green, carbon-saving technology in the power sector—in some areas overtaking the US—and backing this with rises in coal prices. In future decades, innovation will be increasingly a joint activity between firms in rich countries and emerging markets, with a mutual interest in the sharing of technology. India needs to get serious on this act.
The Montreal Protocol had seven revisions in the decade after it came into force in 1989, which steadily strengthened its force and reach. Climate change is tougher, Copenhagen only delivered an Accord, and time matters. The major leaders, importantly, recognised the inadequacy of the deal. With rising citizen pressure, increasing alignment of economic interests and emerging international coordination among major players, there is real hope that Copenhagen was a genuine step to effective action on this truly momentous challenge of our times.
The author is at the Harvard Kennedy School, Institute of Social & Economic Research and the Centre for Policy Research
No man’s land | Push legislative and administrative reform to solve land problem
No man’s land Push legislative and administrative reform to solve land problem
The Financial Express, December 23, 2009, Page 8
ON Monday, Ratan Tata suggested that land reform is critical if the Indian growth N Monday, Ratan Tata suggested that land reform is critical if the Indian growth story is to power forward. He should know. Tata Motors had almost finished building its factory in Singur, when continuous protests over land acquisition forced it to abandon the project. That was in 2008. This year, an Infosys IT park faced similar troubles in Rajarhat in Bengal. Interestingly, Monday's other development was that the Bengal Assembly passed a Bill that would allow it to take bank land leased to industries that have closed. Applying to a wide range of jute, heavy engineering, hosiery, foundry and textile units that have stopped operations, the state's land & land reforms minister Abdur Mollah says that the new legislation will enable his government to take possession of land lying idle.
The problem is that this is the same minister who had recently admitted to irregularities in the land acquisition for the Vedic Village in Rajarhat. It's his government that mismanaged the Singur-Tata issue. The problem is that the Centre has been lethargic about amending a colonial-era land acquisition Act, a lethargy that in no small measure is on account of the coalition partner that helped escalate the Singur-Tata issue beyond resolution.
New legislation is urgently needed to streamline land acquisitions to facilitate industrial projects--also power plants, highways and other infrastructure projects. And this is not an agriculture vs industry issue, whatever the ideologues may bellow. As a recent agrarian relations and land reforms committee report has pointed out, 80% of the Indians engaged in agriculture own just 17% of the country's land. Locked into dismal economies of small plots, stagnating production and labour-intensive techniques, they will never become a part of any growth story unless their access to infrastructure and non-farm employment improves. This won't happen till land use is liberalised. This, in turn, means, various land banks--including those unproductively held by the government--need to become transparently available. A radical proposal in this regard is that an extensive survey be mobilised to zone the country between the most fertile and productive agricultural land and the areas that can be used for different kinds of development. Reducing the land logjam also means unproductive regulations involving land ceilings, conversions, and the like need to be pushed to the wayside. Echoing Tata, Infosys chairman Narayana Murthy referred to how India's floor-area ratio needs to improve from the current 1:1 to 1:15.
When laws unreasonably restrict the supply of land or politicise its distribution, and when such land is desperately needed to improve the lot of the common man, then the laws need to be changed. As soon as possible.
The Financial Express, December 23, 2009, Page 8
ON Monday, Ratan Tata suggested that land reform is critical if the Indian growth N Monday, Ratan Tata suggested that land reform is critical if the Indian growth story is to power forward. He should know. Tata Motors had almost finished building its factory in Singur, when continuous protests over land acquisition forced it to abandon the project. That was in 2008. This year, an Infosys IT park faced similar troubles in Rajarhat in Bengal. Interestingly, Monday's other development was that the Bengal Assembly passed a Bill that would allow it to take bank land leased to industries that have closed. Applying to a wide range of jute, heavy engineering, hosiery, foundry and textile units that have stopped operations, the state's land & land reforms minister Abdur Mollah says that the new legislation will enable his government to take possession of land lying idle.
The problem is that this is the same minister who had recently admitted to irregularities in the land acquisition for the Vedic Village in Rajarhat. It's his government that mismanaged the Singur-Tata issue. The problem is that the Centre has been lethargic about amending a colonial-era land acquisition Act, a lethargy that in no small measure is on account of the coalition partner that helped escalate the Singur-Tata issue beyond resolution.
New legislation is urgently needed to streamline land acquisitions to facilitate industrial projects--also power plants, highways and other infrastructure projects. And this is not an agriculture vs industry issue, whatever the ideologues may bellow. As a recent agrarian relations and land reforms committee report has pointed out, 80% of the Indians engaged in agriculture own just 17% of the country's land. Locked into dismal economies of small plots, stagnating production and labour-intensive techniques, they will never become a part of any growth story unless their access to infrastructure and non-farm employment improves. This won't happen till land use is liberalised. This, in turn, means, various land banks--including those unproductively held by the government--need to become transparently available. A radical proposal in this regard is that an extensive survey be mobilised to zone the country between the most fertile and productive agricultural land and the areas that can be used for different kinds of development. Reducing the land logjam also means unproductive regulations involving land ceilings, conversions, and the like need to be pushed to the wayside. Echoing Tata, Infosys chairman Narayana Murthy referred to how India's floor-area ratio needs to improve from the current 1:1 to 1:15.
When laws unreasonably restrict the supply of land or politicise its distribution, and when such land is desperately needed to improve the lot of the common man, then the laws need to be changed. As soon as possible.
Term of independent directors cannot exceed 6 years, says MCA report
Term of independent directors cannot exceed 6 years, says MCA report
The Financial Express, December 22, 2009, Page 12
fe Bureaus, New Delhi
An individual may not remain an independent director in a company for more than six years, according to the report on voluntary corporate governance guidelines, prepared by the ministry of corporate affairs. Currently, no such limit exists for independent directors under the Company's Act, 1956. The report also adds that a period of three years should elapse before such an individual is inducted in the same company in any capacity.
According to an MCA official, the ministry will bring out a mandatory corporate governance code after one year, which would be a mix of these voluntary guidelines and recommendations of India Inc. The report suggests that companies may have a nomination committee comprising independent directors, inclu- ding its chairman. The committee should consider proposals for searching, evaluating and recommending appropriate indepen- dent directors and non-executive directors.
The report further says that in order to maintain the independence of auditors with a view to look at an issue (financial or non-financial) from different perspectives, the audit partner should be rotated once every three years and audit firms should be rotated once every five years. Under the Company's Act, there is no such provision for the rotation of auditors. The corporate governance report says a cooling-off period of three years should elapse before a partner can resume the same audit assignment. In order to ensure proper and accountable audit, there should be clarity between the management and the auditors on the nature and amount of information and periodicity for supplying such information.
To prevent unfettered decision-making powers resting with a single individual, there should be a clear demarcation of the roles and responsibilities of the chairman of the board and that of the managing director or chief executive officer, according to the report. Also, in order to ensure the independence and credibility of the process of internal audit, the board may appoint an internal auditor and such an auditor should not be an employee of the company.
The companies should also ensure that the level and composition of remuneration is reasonable and sufficient to attract, retain and motivate independent directors of the quality required to run the company successfully. Companies should have the option of giving a fixed contractual remuneration, not linked to profits to NEDs. At present, the managerial remuneration for all directors cannot exceed a maximum of 11% of the net profits of the company.
Contracts for 8,000 km roads within 2009-10
Contracts for 8,000 km roads within 2009-10
Business Standard, December 23, 2009, Page 7
BS Reporter / Kolkata
The Ministry of Road Transport and Highways was in a position to bid out contracts for the construction of 8,000 km of roads within the current financial year, Planning Commission Deputy Chairman Montek Singh Ahluwalia indicated today.
The ministry, along with the Planning Commission, has reworked certain modalities of the bidding process after it failed to find private sector firms to undertake the government’s road building programme in the wake of the global financial crisis. “We got hardly any bids for road projects that were bid out. We reviewed this situation internally with the Ministry of Roads and modified certain parts of the model concession agreement,” Ahluwalia said here at a conference organised by the Confederation of Indian industry via video-conferencing from New Delhi.
“The Ministry of Roads is quite confident of bidding out 8,000 km of road construction contracts this fiscal, compared to the average of 2,000 km that were bid out in the last three years. After that, it is up to the private sector to get on with the act of building the road,” he added.
Montek hints at easing of food prices in Jan
The Planning Commission today said that escalating food prices were expected to rationalise in the coming month, but indicated that it would take more than just a re-adjusted monetary policy to keep the prices of essential food items at reasonable levels.
Business Standard, December 23, 2009, Page 7
BS Reporter / Kolkata
The Ministry of Road Transport and Highways was in a position to bid out contracts for the construction of 8,000 km of roads within the current financial year, Planning Commission Deputy Chairman Montek Singh Ahluwalia indicated today.
The ministry, along with the Planning Commission, has reworked certain modalities of the bidding process after it failed to find private sector firms to undertake the government’s road building programme in the wake of the global financial crisis. “We got hardly any bids for road projects that were bid out. We reviewed this situation internally with the Ministry of Roads and modified certain parts of the model concession agreement,” Ahluwalia said here at a conference organised by the Confederation of Indian industry via video-conferencing from New Delhi.
“The Ministry of Roads is quite confident of bidding out 8,000 km of road construction contracts this fiscal, compared to the average of 2,000 km that were bid out in the last three years. After that, it is up to the private sector to get on with the act of building the road,” he added.
Montek hints at easing of food prices in Jan
The Planning Commission today said that escalating food prices were expected to rationalise in the coming month, but indicated that it would take more than just a re-adjusted monetary policy to keep the prices of essential food items at reasonable levels.
“I am of the view that in January you will see a decline in the food prices. What we see now is a speculative build-up of prices, probably because of the consequences of the drought in the middle of this year. The fact is that the drought has been less damaging than what people thought,” Planning Commission Deputy Chairman Montek Singh Ahluwalia said.
Ahluwalia, who was speaking at a CII-organised summit via video-conferencing from New Delhi, said public stocks of cereals were adequate and their prices could be easily moderated.“But vegetables and potatoes are not things that are in the public stock,” he added.
Suggesting that the recent inordinate rise in food prices was partially caused due to inadequacies in the distribution mechanism, he said an increase had been anticipated.
Govt seeking bids for 8,000 km of highways
Govt seeking bids for 8,000 km of highways
The Hindu Business Line, December 23, 2009, Page 15
Manufacturing should post double-digit growth: Montek.
Our Bureau, Kolkata
The Ministry of Road, Transport and Highways is seeking bids for about 8,000 km of highways contracts in the current financial year against less than 2,000 km a year during the previous three years, according to Mr Montek Singh Ahluwalia, Deputy Chairman, Planning Commission.
The manufacturing sector should record double-digit growth for the country's overall GDP to grow by about nine per cent, Mr Ahluwalia said while speaking over a video conference on the second day of the National Conference on Leadership organised by the CII-Suresh Neotia Centre of Excellence for Leadership here on Tuesday.
“The Planning Commission has consistently maintained a view that India cannot have a nine per cent growth rate relying only on growth in services sector. Our medium-term projection says that manufacturing should record a double digit growth and should be above 10-11 per cent to paint a consistent picture,” he said.
Government intervention was important to help the manufacturing sector record such growth rates, he observed. Providing energy, transport and infrastructure at competitive rates was probably the single most important contribution that the Government could make.
“We need a financing mechanism for manufacturing and for that we need a well functioning private financial market, both banking and non-banking companies. It requires high quality regulation and moderating the fiscal deficit,” he said.
Building of roads was a major Government programme which was interrupted.
“We hardly got any bids for the road projects in the last quarter. We have reviewed the position internally with the Ministry of Roads,” he said and added, “One year from now, we can definitely say that development in road, power, telecom has picked up. 3G auction has let the door open to a lot of investments in telecom sector over the next 12 to 18 months.”
Mr Ahluwalia also highlighted the need for modifications in labour laws to help boost the manufacturing sector. “Indian labour laws are unduly restricted. To stimulate labour intensive manufacturing we got to have a labour environment where companies will be happy hiring 50,000 workers. Today there is huge reluctance among companies to expose themselves to such a large labour force,” he pointed out.
This was a political sensitive issue and called for Government intervention.
“The Government should engage unions in debating this matter. If I am right then unions should be in favour of that as it will lead to expansion of the organised labour force in the country.
“However, we are failing to convince the unions that a modification in labour laws is in their favour. We need to do more work on this and debate more widely as a vast majority of people are not aware that this could be an important constraint,” he added.
The Hindu Business Line, December 23, 2009, Page 15
Manufacturing should post double-digit growth: Montek.
Our Bureau, Kolkata
The Ministry of Road, Transport and Highways is seeking bids for about 8,000 km of highways contracts in the current financial year against less than 2,000 km a year during the previous three years, according to Mr Montek Singh Ahluwalia, Deputy Chairman, Planning Commission.
The manufacturing sector should record double-digit growth for the country's overall GDP to grow by about nine per cent, Mr Ahluwalia said while speaking over a video conference on the second day of the National Conference on Leadership organised by the CII-Suresh Neotia Centre of Excellence for Leadership here on Tuesday.
“The Planning Commission has consistently maintained a view that India cannot have a nine per cent growth rate relying only on growth in services sector. Our medium-term projection says that manufacturing should record a double digit growth and should be above 10-11 per cent to paint a consistent picture,” he said.
Government intervention was important to help the manufacturing sector record such growth rates, he observed. Providing energy, transport and infrastructure at competitive rates was probably the single most important contribution that the Government could make.
“We need a financing mechanism for manufacturing and for that we need a well functioning private financial market, both banking and non-banking companies. It requires high quality regulation and moderating the fiscal deficit,” he said.
Building of roads was a major Government programme which was interrupted.
“We hardly got any bids for the road projects in the last quarter. We have reviewed the position internally with the Ministry of Roads,” he said and added, “One year from now, we can definitely say that development in road, power, telecom has picked up. 3G auction has let the door open to a lot of investments in telecom sector over the next 12 to 18 months.”
Mr Ahluwalia also highlighted the need for modifications in labour laws to help boost the manufacturing sector. “Indian labour laws are unduly restricted. To stimulate labour intensive manufacturing we got to have a labour environment where companies will be happy hiring 50,000 workers. Today there is huge reluctance among companies to expose themselves to such a large labour force,” he pointed out.
This was a political sensitive issue and called for Government intervention.
“The Government should engage unions in debating this matter. If I am right then unions should be in favour of that as it will lead to expansion of the organised labour force in the country.
“However, we are failing to convince the unions that a modification in labour laws is in their favour. We need to do more work on this and debate more widely as a vast majority of people are not aware that this could be an important constraint,” he added.
Govt sets up panel of state ministers for industrial growth
Govt sets up panel of state ministers for industrial growth
Business Standard, December 23, 2009, Page 7
BS Reporter / New Delhi
In an effort to achieve the target of attracting $50 billion (nearly Rs 2,34,100 crore) foreign capital inflows into the country by 2012, the government today constituted a high-level committee of state industry ministers that would seek to create proper road maps for states and their industrial development.
This comes in the wake of a meeting held between the Ministry of Commerce and Industry and states trade ministers last month. The committee would comprise industry ministers from Assam, Andhra Pradesh, Madhya Pradesh, Maharashtra, Punjab, Rajasthan and Haryana.
The main responsibility of the committee would be to formulate a states-specific investment promotion programme. Besides, it would also create a single window mechanism for faster clearance of licence requirement and establishment.
The committee would also prepare guidelines for the creation of an industrial land bank consisting of available waste and fallow lands, while leaving aside productive agricultural land as far as possible.
Commerce and Industry Minister Anand Sharma had said that both the Centre and states should together aim at making the country investor friendly. He has set the target of achieving $50 billion foreign direct investment annually by 2012 and $100 billion by 2017.
With respect to the development of special economic zones (SEZs), he had asked the states to issue notifications for exemption of state and other local taxes. He also said that the government must take adequate steps to provide proper connectivity and infrastructure such as water and drainage connection for the SEZs.
Bulk deposit rates rise again
Bulk deposit rates rise again
Business Standard, December 23, 2009, Section II, Page 1
Manojit Saha / Mumbai
RBI is expected to increase CRR next month to signal a rate increase.
In what could be the first sign of a rise in interest rates, bulk deposit rates have started rising. At least three banks – Union Bank of India, Uco Bank and Oriental Bank of Commerce (OBC) – have increased the rate on one-year bulk deposits. According to market participants, as against 5-5.50 per cent last month, these banks have begun to offer 6.25-6.35 per cent on these deposits.
Deposits of over Rs 5 crore are usually classified as bulk deposits.
When the financial crisis intensified after the Lehman Brothers’ collapse, the Indian Banks’ Association advised banks not to quote bulk deposit rates beyond 6 per cent. In recent months, with low credit off-take and high liquidity, bulk deposit rates had dropped below those on retail deposits, which are also seen to be more sticky.
“With credit growth picking up, albeit at a slow pace, and excess liquidity coming down, we have started offering more for bulk deposits as liquidity may further tighten in January,” said the senior executive of large public sector bank. The market expects the Reserve Bank of India (RBI) to increase the cash reserve ratio (CRR), or the proportion of deposits that they set aside, next month to signal a rate increase. A higher CRR would result in liquidity tightening.
In addition to bulk deposits, even the rates on certificates of deposits have also gone up during the last fortnight.
The interest rate on certificates of deposit (CDs) of one-year duration, which were offering 5.5-5.7 per cent till the last week of November, have now moved up beyond 6 per cent.
Today, Andhra Bank raised Rs 950 crore through nine-month and one-year CDs for which it offered 5.64 per cent and 6 per cent, respectively. Similarly, Union Bank also raised one-year CDs at 6 per cent.
The upward trend is reflected in shorter maturities, too. On Monday, Uco Bank placed Rs 400 crore of three-month CDs at 4 per cent while Canara Bank placed five-month CDs at 3.92 per cent. The rate on three-month CDs has moved up to 4 per cent from 3.15-3.45 per cent at the end of November, according to dealers.
Although some bankers said the northward movement was due to the usual quarter-end rush by banks to meet their targets and improve the top line, a section of bankers believe the increase in rates may be permanent. Bankers said they did not want to be caught off guard once RBI raised rates and credit growth picked up in the next quarter. In recent weeks, CD issues have increased. Dealers said that so far in December banks had raised close to Rs 25,000 crore through the route against Rs 15,000 crore in November.
The liquidity position has changed, with the amount of surplus funds that the banks parked with RBI through the reverse repo window below the Rs 40,000 crore-mark now, as against Rs 90,000 crore a week ago.
“Rates will certainly move up in January. So it is better to hedge now against any sharp movement as a result of the central bank’s action,” said the head of liabilities at a government bank.
Business Standard, December 23, 2009, Section II, Page 1
Manojit Saha / Mumbai
RBI is expected to increase CRR next month to signal a rate increase.
In what could be the first sign of a rise in interest rates, bulk deposit rates have started rising. At least three banks – Union Bank of India, Uco Bank and Oriental Bank of Commerce (OBC) – have increased the rate on one-year bulk deposits. According to market participants, as against 5-5.50 per cent last month, these banks have begun to offer 6.25-6.35 per cent on these deposits.
Deposits of over Rs 5 crore are usually classified as bulk deposits.
When the financial crisis intensified after the Lehman Brothers’ collapse, the Indian Banks’ Association advised banks not to quote bulk deposit rates beyond 6 per cent. In recent months, with low credit off-take and high liquidity, bulk deposit rates had dropped below those on retail deposits, which are also seen to be more sticky.
“With credit growth picking up, albeit at a slow pace, and excess liquidity coming down, we have started offering more for bulk deposits as liquidity may further tighten in January,” said the senior executive of large public sector bank. The market expects the Reserve Bank of India (RBI) to increase the cash reserve ratio (CRR), or the proportion of deposits that they set aside, next month to signal a rate increase. A higher CRR would result in liquidity tightening.
In addition to bulk deposits, even the rates on certificates of deposits have also gone up during the last fortnight.
The interest rate on certificates of deposit (CDs) of one-year duration, which were offering 5.5-5.7 per cent till the last week of November, have now moved up beyond 6 per cent.
Today, Andhra Bank raised Rs 950 crore through nine-month and one-year CDs for which it offered 5.64 per cent and 6 per cent, respectively. Similarly, Union Bank also raised one-year CDs at 6 per cent.
The upward trend is reflected in shorter maturities, too. On Monday, Uco Bank placed Rs 400 crore of three-month CDs at 4 per cent while Canara Bank placed five-month CDs at 3.92 per cent. The rate on three-month CDs has moved up to 4 per cent from 3.15-3.45 per cent at the end of November, according to dealers.
Although some bankers said the northward movement was due to the usual quarter-end rush by banks to meet their targets and improve the top line, a section of bankers believe the increase in rates may be permanent. Bankers said they did not want to be caught off guard once RBI raised rates and credit growth picked up in the next quarter. In recent weeks, CD issues have increased. Dealers said that so far in December banks had raised close to Rs 25,000 crore through the route against Rs 15,000 crore in November.
The liquidity position has changed, with the amount of surplus funds that the banks parked with RBI through the reverse repo window below the Rs 40,000 crore-mark now, as against Rs 90,000 crore a week ago.
“Rates will certainly move up in January. So it is better to hedge now against any sharp movement as a result of the central bank’s action,” said the head of liabilities at a government bank.
HDFC Property holds back funds on ‘ground reality'
HDFC Property holds back funds on ‘ground reality'
The Hindu Business Line, December 23, 2009, Page 1
Cites adverse market conditions, unrealistic valuations by developers.
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Treading warily
It has refrained from funding in the last seven to eight months, though it had ploughed in $380 million (about Rs 1,800 crore) earlier.
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S. Shanker, Mumbai
HDFC Property Fund has held back from investing over 50 per cent of its $800-million (Rs 3,800 crore) corpus due to adverse market conditions as also unrealistic valuations sought by developers.
It has refrained from funding in the last seven-eight months, though it had ploughed in $380 million (about Rs 1,800 crore) earlier.
Mr K.G. Krishnamurthy, Managing Director and CEO, HDFC Property Fund, said the fund has taken a cautious approach as suddenly there was a recession-like condition and project valuations were unacceptable.
Mr Krishnamurthy said many sovereign funds from Oman, Abu Dhabi, Singapore and Malaysia were also looking to invest in Indian real estate.
However, developers were still asking for the old discounted cash flow method of valuation. If developers were willing to value their portfolio at realistic levels, there was a very good opportunity for PE funding. However, he saw a sizable opportunity emerging in the next 12 months, though the product mix had undergone a change with IT Parks and Special Economic Zones making way for commercial and residential spaces.
20% DEMAND DROP seen
Notwithstanding realty prices looking up, he felt that the real-estate demand in 2010 would drop by 20 per cent across segments.
This, he attributes to developers' focus on completing existing projects as also the way the stock market has been performing in the last six months.
Citing a positive correlation between the stock market and real estate investment, Mr Krishnamurthy said during January-March, when the markets tanked, there was a scare that some mutual funds would go bust. The middle-class then parked its money in banks.
With developers dropping prices by nearly 40 per cent, it put in the money sighting a good opportunity. Subsequently, builders raised prices and the market improved.
The middle-class had entered when the Sensex was around 18,000 to 19,000 levels and given its reservations about booking losses it would not exit at the present or even marginally higher levels. So, the wait can be longer.
This, coupled with developers scaling down operations in the last one year and the subsequent property price rise, would lead to demand dropping by 20 per cent. The "super growth" of HDFC's loan sanctions in the first quarter of this fiscal, which dropped in the second quarter, reflected the general sentiment, he said.
Mr Krishnamurthy saw a good amount of money flowing into the real-estate only when the middle class found its principal invested in the stock market protected.
While investments in the western region generally were in the stock market, people of the South put their money in mutual funds, he said, adding that the first signs of revival would come from the North, which had always been a cash market.
The Hindu Business Line, December 23, 2009, Page 1
Cites adverse market conditions, unrealistic valuations by developers.
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Treading warily
It has refrained from funding in the last seven to eight months, though it had ploughed in $380 million (about Rs 1,800 crore) earlier.
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S. Shanker, Mumbai
HDFC Property Fund has held back from investing over 50 per cent of its $800-million (Rs 3,800 crore) corpus due to adverse market conditions as also unrealistic valuations sought by developers.
It has refrained from funding in the last seven-eight months, though it had ploughed in $380 million (about Rs 1,800 crore) earlier.
Mr K.G. Krishnamurthy, Managing Director and CEO, HDFC Property Fund, said the fund has taken a cautious approach as suddenly there was a recession-like condition and project valuations were unacceptable.
Mr Krishnamurthy said many sovereign funds from Oman, Abu Dhabi, Singapore and Malaysia were also looking to invest in Indian real estate.
However, developers were still asking for the old discounted cash flow method of valuation. If developers were willing to value their portfolio at realistic levels, there was a very good opportunity for PE funding. However, he saw a sizable opportunity emerging in the next 12 months, though the product mix had undergone a change with IT Parks and Special Economic Zones making way for commercial and residential spaces.
20% DEMAND DROP seen
Notwithstanding realty prices looking up, he felt that the real-estate demand in 2010 would drop by 20 per cent across segments.
This, he attributes to developers' focus on completing existing projects as also the way the stock market has been performing in the last six months.
Citing a positive correlation between the stock market and real estate investment, Mr Krishnamurthy said during January-March, when the markets tanked, there was a scare that some mutual funds would go bust. The middle-class then parked its money in banks.
With developers dropping prices by nearly 40 per cent, it put in the money sighting a good opportunity. Subsequently, builders raised prices and the market improved.
The middle-class had entered when the Sensex was around 18,000 to 19,000 levels and given its reservations about booking losses it would not exit at the present or even marginally higher levels. So, the wait can be longer.
This, coupled with developers scaling down operations in the last one year and the subsequent property price rise, would lead to demand dropping by 20 per cent. The "super growth" of HDFC's loan sanctions in the first quarter of this fiscal, which dropped in the second quarter, reflected the general sentiment, he said.
Mr Krishnamurthy saw a good amount of money flowing into the real-estate only when the middle class found its principal invested in the stock market protected.
While investments in the western region generally were in the stock market, people of the South put their money in mutual funds, he said, adding that the first signs of revival would come from the North, which had always been a cash market.
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