Oil Firms set to Lead in Q4

Oil Firms set to Lead in Q4
The Financial Express, India Inc, April 23, 2009, Page I

Viveat Susan Pinto

This results season is likely to be a trial by fire for corporate India. The question is: can companies keep their heads above water when recession is threatening to eat into quarterly numbers? Signs suggest that it is likely to be a tough battle for most this season.

Traditionally, fourth quarter results have been the better of the lot in a financial year. That’s primarily because the Jan-Feb-March quarter is the early part of the calendar year and companies land up with fresh orders from customers on the back of an aggressive push in products and services by them. Consumer sentiment also tends to be high around this time, so the propensity to spend is more, which means that demand is also high. Companies obviously stand to gain from this.

But the fourth quarter of the financial year 2008-09 may see none of this because it was the first full quarter that bore the brunt of the economic slowdown triggered by the financial meltdown in September 2008. It is believed that many companies are unlikely to announce their audited results for the financial year anytime soon because of the painful quarter.

Fast moving consumer goods, oil marketing companies, telecom and cement etc are likely to post decent numbers, on the other hand. “Overall,” says Manish Sonthalia, fund manager at Mumbai-based Motilal Oswal Securities Ltd, “there is likely to be an earnings’ degrowth on a year-on-year as well as quarter-on-quarter basis for the benchmark BSE-Sensex companies. These companies are drawn from a number of industries. The decline in net profit in my view could be as steep as 15% year-on-year for these players. But I do see a divergence in results across companies and sectors.”

Sectors such as metals, real estate, auto components, retail, gems & jewellery etc are likely to feel the pressure considerably in the fourth quarter.

* Oil & Gas

Oil marketing companies are expected to show a stellar performance in the fourth quarter because of falling crude price globally, which has declined significantly from $140 per barrel in June to around $35 per barrel in December last year and remained at around $40 a barrel in January-February 2009. Under recoveries of oil companies have come down significantly and cost of petrol and diesel was lowered by Rs 2 and Rs 5 respectively in the domestic market. In fact, gross refining margin had softened during the September-December 2008 quarter and it has witnessed marginal improvements. For public sector oil companies, inventory loss was a major reason for weakening numbers in quarter ended December 2008, but that has been minimised in the quarter ended March 2009.

* Cement

Cement companies are likely to gain this quarter on the back of increased demand coming from the infrastructure sector.

Projects are normally pushed aggressively in this period, resulting in a higher offtake of cement at this time, says Rajan Kumar, a cement analyst at Centrum Broking in Mumbai. Dispatches, for instance, are likely to grow by about 10% this quarter. Production, on the other hand, could grow by 10.7%, he says. Most of the cement companies, for the record, have also managed to increase their price by 1.5-1.7% this quarter, implying better realisations for these players.

* Steel

Steel companies, like cement players, are likely to do well on the back of robust demand in the Jan-Feb-March quarter from sectors such as infrastructure and automobiles. At times, during the quarter, say analysts, companies such as Tata Steel and Ispat Industries have even attempted to realign production to the prevailing demand, thereby attempting to bring down mismatches in supply and demand. Volume growth, say analysts, is likely to be over 40% for these companies. Earnings growth is also likely to be high.

* Telecom

This sector, say analysts, is likely to post good numbers on account of new subscriber additions to the tune of about 15 million in the fourth quarter. When most players were scaling back on expansion, telecom operators were actively launching services, in contrast. Reliance, for instance, launched its GSM services in 14 circles this quarter. Clearly, telecom is an active sector. But the increased competition is likely to keep average revenues per user (ARPU) under pressure for companies. By some accounts, ARPUs are likely to decline by 6-10% quarter-on-quarter for most companies.

* FMCG

A defensive sector, FMCG is likely to register good growth on the back of sustained consumer demand. Prices, for instance, were dropped by about 10-15% in the fourth quarter. This is likely to impact margins, say analysts. But decent volume growth in the range of about 7.5-8% during the quarter, savings on account of lower input prices and the duty cuts announced by the government during its various stimulus packages is likely to mitigate the pressure on margins to a certain extent. “FMCG is one sector that remains relatively unaffected during a downturn. That works for it,” says Amitabh Chakraborty, president, equity, Religare Hitchens Harrison.

* Capital goods & engineering

This sector is likely to see moderate growth despite the fact that industrial production has actually shrunk in the last few months. A key reason for this is the buoyancy in the production of capital goods. Output of capital goods, for instance, increased by 10.4% in the month of February, when industrial production actually came down by 1.2%. In January, industrial production was marginally up by 0.5%.

Year-on-year, say analysts, topline growth for companies in the sector is likely to be about 10-15%. Bottomline, on the other hand, is likely to grow by about 5-6% only.

Companies such as Bharat Heavy Electricals Ltd and Larsen & Toubro may show an above-average performance on the back of good order books. But since the times are rather tough, analysts are wondering whether these players will be able to sustain the momentum going forward.

Companies such as Suzlon, Siemens and Crompton Greaves, for instance, have seen their order books stagnate over the last few months. The fourth quarter is not likely to be any different for these companies. In fact, analysts fear that increased competition between players for orders could put pressure on margins. There is also a danger that existing project pricing could be renegotiated by customers putting further pressure on margins.

* Information technology

IT bellwether Infosys set the ball rolling for this sector with the announcement of its Q4 results on April 15. The company registered a decent 24% and 29% growth in topline and bottomline year-on-year. Net profit, interestingly, was higher than analysts’ estimates, who had pegged it to be in the region of about 25-26%. Topline estimates were also similar. Infosys therefore seemed to have performed marginally below analysts’ expectations on the parameter of net revenue at least. Sequentially, the IT major had nothing much to show predictably. This, in fact, is likely to be the trend for most companies this quarter. As the economic slowdown weighs down on companies, most will not have much to show sequentially.

For instance, archrival TCS could post a decline of about 2-3% in net profit sequentially. Wipro, on the other hand, may see a decline of about 1-2% in net profit quarter-on-quarter, while HCL Technologies may post a decline of about 12-13% respectively.

On the metric of operating profit margin, companies are likely to show a decline of 1-3%, say analysts. This could have been worse, if companies had not initiated cost-cutting measures in earnest. Most were quick to react to the financial crisis at the start of the third quarter by trimming wage bills and improving operational efficiency. Lateral inductions have come down though companies such Infosys have stuck to their commitments on campus recruitment.

* Pharmaceuticals

Sales growth in the pharmaceutical sector during the quarter ended March was driven by strong performance in mid-cap generic companies, though some companies would face MTM losses on outstanding foreign currency loans and hedges. Analysts are expecting sales growth at Q4 around 20% YoY because of strong demand and revenue growth from companies in mid-generic and contract research and manufacturing services. The 3% depreciation of the rupee against the dollar in the quarter is likely to push up topline growth of pharma companies. Analysts expect that in the long-run, the sector is likely to face some headwinds as the pipeline for development of blockbuster drugs is drying up and the generics market is facing extreme competition. In the domestic pharma market, analysts say there are chances of consolidation as there were reports that Glaxosmithkline Pharma and Sanofi Aventis were interested in acquiring a stake in Piramal Healthcare in spite of strong management denial.

* Auto

In auto, two-wheeler and passenger-vehicle manufacturers are likely to gain from a pick-up in demand in the fourth quarter, thanks to a drop in product prices as well as a drop in interest rates by banks. All of this came about following the stimulus packages of the government between December ’08 to February '09 when monetary and fiscal measures such as a 4% cut in excise duty, cut in bank rates etc were announced. This, say analysts, was successful in brining consumers to the marketplace, who were deferring purchases otherwise.

Commercial-vehicle makers, in contrast, especially, medium and heavy-commercial vehicle manufacturers, are not likely to gain much in the quarter ending March on account of the economic slowdown that has brought down transportation of goods. Besides, non-banking finance companies are also facing a fund crunch at the same time. By some accounts, almost 90-95% of the purchase of a commercial vehicle is externally financed, primarily by NBFCs. With a credit crunch, sales of commercial vehicles have obviously suffered, say analysts.

* Banking

This sector, say analysts, is likely to underperform quarter-on-quarter mainly on account of a marginal growth in credit in the Jan-Feb-March months. Year-to-date credit growth up to March 13, 2009, for instance, was merely 14.8% as against a stated target of 24% by the Reserve Bank of India. This is likely to pull down both topline and bottomline of banks, say analysts. Topline, they say, is likely to be flat this quarter, while net profit could decline by about 10-12%. Says Chakraborty of Religare, “Banks are likely to make a higher provision for non-performing assets (NPAs) as well as mark-to-market losses on investments this quarter. This is likely to eat into their profits.”

* Metals (non-ferrous)

Demand hasn’t been very firm for allied metals in the fourth quarter. This is likely to put pressure on both topline and bottomline of firms. The price of base metals has also fallen at the same time by over 10-20%, say analysts. This is likely to exert even more pressure. Metal companies, they say, are likely to see an earnings degrowth of over 60% this quarter. This hardly makes the picture rosy for these companies.

* Textiles

This sector like most export-oriented industries has suffered enormously in the wake of the financial meltdown. The October to March period is generally considered to be a hectic one for textile companies. But the financial meltdown has resulted in a worldwide contraction of demand. As a result, the third quarter as well as fourth quarter has been a bad one for these firms. It doesn’t help that the minimum support price of cotton has increased by over 30-40% in the period making Indian cotton steeper by over 15-20% to international cotton. This has put added pressure on company margins. Year-on-year and quarter-on-quarter margins, for the record, could decline by over 40-50%, say analysts.

Tougher steps needed to spur recovery: IMF

Tougher steps needed to spur recovery: IMF
The Financial Express, April 23, 2009, Page 1

Economy Bureau, New Delhi

Notwithstanding determined and concerted policy action by central banks and governments around the world, global GDP is now projected to decline by 1.3% in 2009, according to the World Economic Outlook of the International Monetary Fund. A January update had projected more optimistic 0.5% growth. However, the report now expects the downtrend to bottom out only by the end of this calendar year, although unemployment will take longer to turn around.

The report, released on Wednesday, expects growth to recover by 2010 to a positive 1.9%. “World growth can turn positive by the end of this year, and unemployment can start decreasing by the end of next year,” said IMF chief economist Olivier Blanchard.

Projections show that India’s growth will slip to 4.5% in calendar 2009 and recover to 6.5% next year. China will see expansion dropping sharply 6.5% this year and then rebounding to 7.5% in 2010. On Tuesday, the annual policy statement issued by RBI forecast India’s GDP growth in 2009-10 at 6%. Speaking to FE recently, HDFC chairman Deepak Parekh said the IMF projections are “unacceptably low”.

The forecast by IMF remains especially bleak for advanced economies, where output is projected to contract by 3.8% in 2009, against 0.9% growth in 2008. Rates will stabilise at near zero only in 2010, it said. Worst hit in 2009 will be Japan (6.2%), Germany (5.6%), Italy (4.4%), France (3%) and the US (2.8%). This means sectors that depend on exports to Europe and the US can expect very little recovery this year.

The IMF has cautioned that economies would need wide-ranging efforts to deal with the financial strains. In emerging economies, the corporate sector is at considerable risk, the report says. It therefore suggested direct government support for corporate borrowing. India, for instance, has extended sops to exporters for their bank debt. The report says measures to help trade finance through various facilities would keep trade flowing and limit damage to the real economy.

The report notes that though India is less exposed to the decline in global demand as, compared to China, the economy has been hit by difficult external financing for both firms and banks. India’s slowdown is primarily due to weaker investment reflecting tighter financing conditions and a turn in the domestic credit cycle. Pointing out that policy rates remain high in real terms, the IMF argues that further rate cuts would help bolster credit growth. But India’s room to manoeuvre on the fiscal front is limited because of large debts.

However, a significant gain for India would be the steady deceleration in consumer price increases, from 8.3% in 2008 to 6.3% in 2009 and further to 4% in 2010.

However, the current account deficit will remain on the high side, moving from 2.8% of GDP in 2008 to 2.5% in 2009 and then to 2.6% in 2010.

Despite India and China, aggregate growth in emerging and developing economies will slip from 6.1% in 2008 to 1.6% in 2009 then recover to 4% by 2010. But the IMF has acknowledged that these are still solid rates of growth. It says China is better placed, as there were some signs of a turnaround in the first quarter of 2009. Among major developing countries, the worst affected would be Russia and Brazil, with their output shrinking by 6% and 1.3%, respectively in 2009.

The World Economic Outlook’s dismal projections are based on the assumption that financial market stabilisation will take longer than previously envisaged, even with strong efforts by policymakers. Thus, financial strains in the mature markets are projected to remain heavy until well into 2010, improving only slowly as greater clarity over losses on bad assets and injections of public capital reduce insolvency concerns, lower counter-party risks and market volatility, and restore more liquid market conditions.

Fiscal deficits are expected to widen sharply in both advanced and emerging economies, as governments are assumed to implement fiscal stimulus plans in G20 countries amounting to 2% of GDP in 2009 and 1.5% of GDP in 2010. The projections also assume that commodity prices remain close to current levels in 2009 and rise only modestly in 2010, consistent with forward market pricing

Hard times till 2011

Hard times till 2011
The Financial Express, April 23, 2009, Page 7

Net private flows to emerging markets peaked at 5% of emerging market GDP in 2007. However, the credit crunch in mature markets will likely cause significant outflows by banks in the coming years, as cross-border lending comes to a halt and a number of parent banks may begin curtailing financing to emerging market subsidiaries. An econometric analysis suggests outflows by banks could reach 5% of GDP in many emerging European countries, where cross-border bank inflows soared to unsustainable levels in recent years. Such outflows would not be without precedent.

Banking outflows of this magnitude were seen in some countries during the Latin American debt crisis in the early 1980s and again during the Asian financial crisis in 1997-98.

Emerging markets experienced large portfolio outflows at the end of 2008, and outflows are likely to continue over the coming years, given continued pressures for leveraged investors to shed assets, the risk of further redemptions from emerging market funds and crowding out from government guaranteed mature market bonds. We project annual portfolio outflows of around 1% of emerging market GDP over the next few years. Foreign direct investment in emerging markets is set to slow significantly, given diminished appetite from private equity firms, the lack of credit available to finance acquisitions, and sharply deteriorating cyclical growth prospects in emerging markets.

On balance, emerging markets will likely see net private capital outflows in 2009, with slim chances of a recovery in 2010 and 2011.

Moreover, risks to these projections appear to be to the downside, given how protracted the current global crisis is likely to be.

The global credit crunch has reduced the investor base for emerging market assets Emerging market assets under management by hedge funds have dropped by about half from their peak in early 2008 as these funds have faced severe redemption pressures, exacerbated by negative performance, and reduced leverage. In the fourth quarter of 2008, withdrawals accounted for nearly one-third of the total $23 billion decline in assets under management. Retail investors have also withdrawn, with dedicated emerging market bond and equity funds experiencing substantial outflows, losing several years worth of inflows in the second half of 2008—a magnitude similar to the outflows seen in 1998.

Surveys suggest crossover investors have shifted heavily away from emerging markets into mature market corporate bonds, including government-guaranteed debt, amid a reevaluation of the diversification benefits from emerging markets as theories of “decoupling” proved wrong. Over the longer term, market participants believe emerging markets will retain a core of institutional investors committed to strategic allocations. The reduction in the number of investors, however, combined with the disappearance of some broker-dealers, is likely to impair the liquidity of emerging market assets for several years to come.

And when the crisis engulfed emerging markets...

Pressures on emerging markets intensified in September 2008, following the collapse of Lehman Brothers, as counterparty risks rose and as the credit crunch’s impact on economic activity became indisputable. A large set of interlinked risks has already pushed some emerging markets into crisis, and threatens many more, particularly in emerging central and eastern Europe.

The severity of the crisis in emerging markets and the risks of spillovers call for a strong and coordinated response from policymakers at a global level to ensure that adequate liquidity is available. The decision taken at the recent G-20 summit to increase the resources available to the IMF can serve as an example in this respect.

Policies should also be aimed at keeping mature market financial institutions engaged, through close cooperation between home and host authorities. Emerging market policymakers, in turn, need to strengthen their financial systems and policies for the more challenging global economic environment.

Crisis risks in emerging Europe have increased sharply...

Emerging Europe has been hit hard by global deleveraging. The impact has flowed through the same financial linkages with mature markets that previously allowed the region to build up a high degree of leverage through rapid foreign-financed credit growth being disrupted as the banking crisis in western Europe intensifies. Growth in credit to the private sector is falling rapidly, intensifying the vicious circle between output declines and deteriorating asset quality.

As a result, external debt spreads have risen sharply, stock markets have collapsed, and currencies have come under pressure, especially in those countries with large domestic and external imbalances. In countries with tightly managed exchange rate regimes, the fear of currency and stock market collapse also risks capital flight, such as that experienced in Russia and Ukraine.

...and financial interconnectedness within Europe increases the risk of adverse feedback loops.

Most emerging European countries are highly dependent on western European banks, which own the majority of banking systems in these countries. Cross-border funding risks are somewhat less acute in Asia and Latin America, given that countries in these regions entered the crisis with generally stronger external balances, larger international reserves, and deeper local funding markets. Still, Asian and Latin American asset prices have fallen substantially over the past three quarters.

The Asian corporate sector looks likely to be hit hard by extremely large drops in trade volumes. Sharp drops in export revenues are leading some companies to burn through cash reserves rapidly, implying that financing needs will pick up. However, foreign financing is increasingly scarce.

Hedge funds that had been a major source of capital for Asia’s corporate expansion are now mostly trying to sell their largely illiquid assets, while foreign banks are deleveraging. Banks in Asia and Latin America are less impacted by the crisis than in emerging Europe, as they are mostly still well-capitalised and locally funded with low loan-to-deposit ratios, but are increasingly concerned about the quality of their loan books and are scaling back working capital financing to corporates.A concern is that funding of bigger corporates will squeeze out small and medium-sized enterprises and new entrants.

The abrupt fall in trade volumes in recent months appears to have been worsened by the disruption in the provision of finance for working capital, including trade finance. The cost of trade finance has increased significantly and its modalities have changed, returning from open-account trade financing to more traditional structures. Many exporters have restricted the credit they are willing to provide their customers as a result of reduced access to capital and heightened concerns about customer credit-worthiness. To address these concerns, the March 2009 G-20 summit committed up to $250 billion to support trade financing through export credit and investment agencies, and through multilateral development banks.

—Excerpted from the Global Financial Stability Report, IMF, April 2009

M&S plans revenue share model with developers

M&S plans revenue share model with developers
The Hindu Business Line, April 23, 2009, Page 17

Amit Mitra, Mumbai

Marks & Spencer Reliance India (MSRI), which plans to roll out 50 retail outlets in the next five years, is experimenting with a new economic model of revenue sharing between the retailer and developer of the outlet.

MSRI, which is 51-per cent owned by leading UK retailer Marks & Spencer and 49 per cent by Reliance Retail, a subsidiary of Reliance Industries, has already sealed such revenue-sharing deals with developers for its next four to five outlets.

“The model has been successful in the UK and we do not see any reason why it should not be successful here. The developer develops the mall and advertisers to attract customers. So the extra revenue earned by retailers should he shared as an incentive to the developers. The entry costs can also be brought down through this model,” Mr Mark Ashman, MSRI’s Chief Executive Officer, told Business Line on the sidelines of the launch of its new store in Mumbai.

The joint venture plans to invest about Rs 230 crore to open 50 new stores with a total capacity of 1 million sq ft in the next five years. “We will be trying out the revenue sharing model with as many of these proposed new outlets as possible,” Mr Ashman said.

The company has concluded deals with developers to set up outlets in Delhi, Bangalore, Hyderabad and Chennai.

While Marks & Spencer is providing the retail services and building the retail brand, Reliance is primarily providing back-end services, such as identifying developers, warehousing and logistics.

Localisation

The company intends to further localise the brand, with plans to hand over the operations to an Indian management team and increase local sourcing for its apparel products over a period of time. Presently, the management team consists of three expats from UK, including Mr Ashman and Mr Spenser Sheen, Head of Retail Operations and three officials from India, including one from Reliance.

Pegging it down

MSRI’s first task on hand is to get prices of its products in India on par with the prices in the UK. Marks & Spencer’s erstwhile franchise partner in India had initially pegged a 25 per cent premium on the products sold through the local outlets.

“We have now lowered prices and will continue to do so. But, one thing, we are not going to be the cheapest in town,” Mr Ashman said.

Firstly, in each category of its products, the retailer has broadened its opening price points, which helped the pricing in India to come closer to that in the UK. The company intends to source 70 per cent of its volumes locally to be sold in India, over the next five years, to become further price competitive.

Introducing products

MSRI has not yet introduced Marks & Spencer’s footwear products in India due to steep import duties. “But we are looking for local suppliers (in the footwear category). We are open to introducing this category in India,” the CEO said.

As for Marks & Spencer’s food products, which are sold under the brand Simply Food in UK, MRSI will have to approach the Indian Government for a fresh permission. So for the time being, the company may not look to bring its food products in the Indian circuit.

The Mumbai outlet has about 3,000 products stacked across three floors, involving 1,500 sq ft —the products are the same that the retailer sells in the UK, Singapore or Hong Kong.

Real Estate Intelligence Report, Wednesday, April 22, 2009

Policy statement is set in context of economic slump’

Policy statement is set in context of economic slump’
The Financial Express, April 22, 2009, Page 5

This morning, I had a meeting with the chiefs of major banks where we announced the annual policy of the Reserve Bank for 2009-10. The meeting also provided a valuable opportunity for the Reserve Bank and the commercial banks to understand and appreciate each others’ perspectives.

The annual policy statement for 2009-10 is set in the context of a deep global economic slump and financial market turmoil. Governments and central banks around the world have responded to the crisis through both conventional and unconventional fiscal and monetary measures. And there is unprecedented co-ordinated policy action globally.

The Crisis and India

Like all emerging economies, India too has been impacted by the crisis, and much more than was expected earlier. GDP growth has moderated reflecting lower industrial production, negative exports, deceleration in services activities, dented corporate margins and diminished business confidence. There are some comforting factors — well-functioning financial markets, robust rural demand, lower headline inflation and comfortable foreign exchange reserves — which buffered us from the worst impact of the crisis. The fiscal stimulus packages of the Government and monetary easing and regulatory action of the Reserve Bank have helped to arrest the moderation in growth and keep our financial markets functioning normally.

Monetary Policy Action

Consistent with the current assessment of macroeconomic and monetary conditions, the Reserve Bank has decided to:

* reduce the repo rate under the LAF by 25 basis points from 5.0% to 4.75% with immediate effect.

* reduce the reverse repo rate under the LAF by 25 basis points from 3.5% to 3.25% with immediate effect.

* keep the CRR unchanged at 5.0% of net demand and time liabilities (NDTL).

Reserve Bank’s Policy Thrust

The thrust of the Reserve Bank's policy stance since mid-September 2008 has been aimed at providing ample rupee liquidity, ensuring comfortable dollar liquidity and maintaining continued credit flow to productive sectors. Taken together, the policy measures of the Reserve Bank have ensured that the Indian financial markets continue to function in an orderly manner. These measures have augmented actual/potential liquidity in the financial system by over Rs.420,000 crore. This should assure financial markets that the Reserve Bank will continue to maintain comfortable liquidity.

Interest Rate Response from Banks

Banks have told us of the constraints they face in further downward adjustment of deposit and lending rates, and these are discussed in the policy statement. Some of the banks’ apprehensions are valid and some not. Within the policy rate adjustment already effected by the Reserve Bank, there is scope for banks to further reduce lending rates so as to ensure credit flow for all productive economic activity. We hope and expect that banks will play their part in the economic adjustment process by passing on the benefits of lower interest rates to their customers.

Government Borrowing

Government borrowing increased substantially in 2008-09. As you will note from the numbers in the policy statement, net borrowing by the Central Government in 2008-09 was nearly three times that in 2007-08. As per estimates in the interim budget, net borrowing in the current year, 2009-10, will also be at this elevated level. Even as the increase in borrowing was large and abrupt in the fourth quarter of 2008-09, we managed that in a non-disruptive manner through a combination of measures such as unwinding of the MSS securities, open market operations and monetary easing. Admittedly, yields had increased. However, it is important to reckon with the counterfactual. But for the offsetting liquidity easing done by the Reserve Bank, yields would have increased even more. We will manage the borrowing in 2009-10 in a similarly non-disruptive manner. An effort in this regard is the planned OMO purchases and MSS unwinding in the first half of 2009/10 that will add primary liquidity of about Rs.120,000 crore, the monetary impact of which is equivalent to CRR reduction by 3 percentage points.

Growth Outlook

Let me now turn to the growth prospects. In the January 2009 policy review, we projected growth for 2008-09 of 7.0% with a downward bias. The downside risks have since materialised, and GDP growth for 2008-09 is now projected to turn out to be in the range of 6.5-6.7%. Going forward, the fiscal and monetary stimulus measures initiated during 2008-09 coupled with lower commodity prices will cushion the downturn by stabilising domestic economic activity. On balance, with the assumption of a normal monsoon, for policy purpose real GDP growth for 2009-10 is placed at around 6.0%.

Inflation Outlook

Keeping in view the global trend in commodity prices and domestic demand-supply balance, we project WPI inflation at around 4.0% by end-March 2010. Headline WPI inflation decelerated sharply after August 2008 reflecting the fall in global commodity prices. CPI inflation continues to be at near double-digit level but is expected to moderate in the coming months. WPI inflation, however, is expected to be in the negative territory in the early part of 2009-10 which is only of statistical significance and is not a reflection of demand contraction as is the case in advanced economies.

Money Supply

Money supply (M3) growth for 2009-10 is placed at 17.0%. Consistent with this, the aggregate deposits of commercial banks are projected to grow by 18.0%. The growth in adjusted non-food credit, including investment in bonds/debentures/ shares of public sector undertakings and private corporate sector and CPs, is placed at 20.0%. As always, these numbers are indicative projections and not targets.

Challenges on the way forward

There are several immediate challenges facing the economy. These include: (a) supporting the drivers of aggregate demand to enable the economy to return to its high growth path; (b) boosting the flow of credit to all productive sectors of the economy; (c) managing the large government borrowing programme in 2009-10 in a non-disruptive manner; (d) restoring the fiscal consolidation process; (e) ensuring an orderly withdrawal of the large liquidity injected in the system since September 2008 by the Reserve Bank to support the economy's productive requirements; and (f) the continued challenge of preserving the stability of our financial system drawing from the lesson of the global crisis.

Finally, the overarching challenge is to ensure an interest rate environment that supports revival of investment demand. Since October 2008, as the inflation rate has decelerated and the policy rates have been cut, market interest rates have also come down. But the reduction in interest rates across the term structure and across markets has not been uniform. Let me therefore reiterate that there is scope for the overall interest rate structure to adjust downwards. Indeed, the further policy rate cuts effected as part of this policy should be a definitive signal for reducing lending rates.

Monetary Policy Stance

On the basis of this overall assessment, the stance of monetary policy in 2009-10 will broadly be as follows:

* Ensure a policy regime that will enable credit expansion at viable rates while preserving credit quality so as to support the return of the economy to a high growth path.

* Continuously monitor the global and domestic conditions and respond swiftly and effectively through policy adjustments as warranted so as to minimise the impact of adverse developments and reinforce the impact of positive developments.

* Maintain a monetary and interest rate regime supportive of price stability and financial stability taking into account the emerging lessons of the global financial crisis.

Developmental and Regulatory Issues

Let me now turn to development and regulatory issues. In tailoring these policies, we have been mindful of the lessons of the global financial crisis as they apply to India. The policy statement has a detailed listing and explanation. I will only highlight a few.

Our banking system remains inherently sound and the financial markets are functioning normally. In the wake of the global financial crisis, however, several initiatives have been taken in an unprecedented coordinated manner at the global level with a view to resolving the crisis and strengthening the international financial architecture. India has been a part of the various global initiatives. A comprehensive assessment of the Indian financial sector was undertaken by the Committee on Financial Sector Assessment which found India’s financial sector to be broadly sound and resilient, identified some concerns and made several recommendations. The Reserve Bank proposes to set up a Task Force with regard to the G-20 Working Groups; Working Group to implement the recommendations of the CFSA; and Financial Stability Unit in the Reserve Bank.

Policy measures relating to interest rate include constitution of a Working Group to review the present BPLR system to make credit pricing more transparent; and payment of interest on savings bank accounts on a daily product basis with effect from April 1, 2010.

Measures relating to financial markets include:

* Further liberalisation of the FCCBs buyback policy;

* Extension of the relaxation on the all-in-cost ceilings for ECBs up to December 31, 2009;

* Extension of the special refinance facility and term repo facility and increased limit for export credit refinance for banks up to March 31, 2010;

* Introduction of STRIPS to aid the development of a sovereign zero-coupon yield curve; and

* Revise the issuance structure of floating rate bonds, among others.

* Policy measures relating to credit delivery mechanism and banking services include:

* Issuing guidelines to banks on rehabilitation of sick SMEs;

* Phased introduction of capital to risk-weighted asset ratio (CRAR) for regional rural banks (RRBs);

* A non-disruptive roadmap to ensure that only banks with licence operate in the co-operative space by 2012; and

* Setting up banking facilities at commercially unviable centres in the North-Eastern region.

The major prudential measures include allowing scheduled commercial banks to set up offsite ATMs without prior approval subject to reporting, lay down the norms for capital adequacy treatment of exposures of banks to central counterparties, prescribe a minimum lock-in-period and minimum retention criteria for securitising the loans, increase the maximum distance criterion for business correspondent for deeper penetration of banking services.

In view of the current global financial market turmoil, it has also been decided to continue, for the time being, with the current policy and procedures governing the presence of foreign banks in India. The review proposed as part of the 2005 policy on the subject will be taken up after due consultation with all stakeholders once there is greater clarity regarding the stability of the global financial system and a shared understanding on the regulatory and supervisory architecture around the world.

The measures relating to institutional developments include:

* Permit eligible SCBs to issue all categories of pre-paid payment instruments;

* Permit eligible non-bank entities, including NBFCs, to issue semi-closed instruments;

* Permit extension of area of operation of Tier II urban co-operative banks (UCBs) in Grade I to the entire State of registration;

* Guidelines to UCBs on internal controls, risk management systems, ALM and disclosure norms;

* Apply capital charge for market risks in respect of large UCBs; and

* Defer the implementation of CRAR for NBFCs-ND-SI by one year.”

No rate cut: HDFC

No rate cut: HDFC
The Financial Express, April 22, 2009, Money & Funds, P II

Home loans lender HDFC has no plans to lower its interest rates as of now, its top executive said. "We have no plans to lower our interest rates as of now," HDFC's Chairman, Deepak Parekh, told reporters on the sidelines of a function here today.

He said that the GDP groth in FY 10 was likely to be around 6.605 per cent which willl be in line with 6 per cent pegged by the Reserve Bank. On inflation, Parekh said that the wholesale price index (WPI) was low whereas the consumer price index (CPI) was still high. “The aim should be to bring down CPI which is till on the higher side,” he said.

ICICI Bank cuts rates, others to follow

ICICI Bank cuts rates, others to follow
The Financial Express, April 22, 2009, Money & Funds, P II

Agencies, fe Bureau, Mumbai

The country's largest private sector lender ICICI Bank was the first to cut interest rates on Tuesday after the RBI lowered its short-term lending and borrowing rates, but housing loan major HDFC said it has no plans to cut the rates now. In fact, it was private sector banks which were reluctant to cut lending rates earlier when the RBI had eased money supply through a series of rate cuts.

ICICI Bank cut both lending and deposit rates by up to 50 basis points. Describing the RBI's stance as an "innovative and far-reaching policy," ICICI Bank's managing director & CEO, KV Kamath, said it would have a significant impact (on spurring economic growth).

HDFC's chairman Deepak Parekh said, "We have no plans to lower our interest rates as of now".

However, other bankers said they would slash lending rates in the coming days taking cues from RBI cutting key rates by 25 bps. “It (the RBI rate cuts) is a very clear-cut signal that interest rates should ease,” SBI chairman OP Bhatt said.

“As far as my bank (UCO Bank) is concerned, we are going to reduce our BPLR by 0.25%,” UCO Bank chairman and managing director SK Goel said after meeting with RBI governor D Subbarao.

The Kolkata-based bank will be holding its board meeting in the next 10-15 days and a decision on a rate cut would be taken then, he said.

Meanwhile, RBI governor in his customary press meet said, “Indeed, the further policy rate cuts effective as a part of this policy should be a definitive signal for reducing lending rates.” The governor noted that the reduction in interest rates by banks across the term structure and across markets has not been uniform. “Let me therefore reiterate that there is scope for the overall interest rate structure to adjust downwards.”

Canara Bank and Central Bank are planning to hold ALCO meeting in the coming days to review interest rate scenario post annual policy announcement. “We will take a view on interest rates in ALCO,” Canara Bank CMD AC Mahajan said. Acknowledging that banks did not respond swiftly to policy rate cut, RBI said the adjustment in market interest rates in response to changes in policy rates gets reflecte with some lag. However, transmission to the credit market is somewhat slow on account of several structural rigidities, it said.

RBI has reduced repo rate from 9% in October 2008 to 4.75% now, while it brought down reverse repo rate from 6% in October last year to 3.25% at present. In response, most of banks reduced the lending rate by 200 basis points in the same period.

ABN Amro interim country executive Madan Menon said rate cut would induce some more downward adjustment in banks' cost of funds and lending rates. “A 25 bps cut in the policy rates is along anticipated trends. We expect that RBI could now move gradually on the policy rates front, given that liquidity in the system is comfortable, overall monetary conditions are significantly easy and bank lending rates have trended lower.”

Public sector banks to cut rates soon

Public sector banks to cut rates soon
The Times of India, April 22, 2009, Page 24

Along with ICICI Bank, Yes Bank, also cut its PLR by 50 basis points shortly after after the RBI announcement. Public sector banks are also likely to cut their prime lending rates soon.

This is the seventh time the RBI has cut rates since the global financial turmoil erupted in September 2008. In this period, the central bank has reduced the repo rate from 9% to 4.75% and the reverse repo rate from 6% to 3.25%. Besides, the RBI also took a number of measures to infuse liquidity in the banking system. Subbarao said RBI has so far injected Rs 4,20,000 crore into the system since October 2008 and would continue to maintain comfortable liquidity.

Public sector banks like State Bank of India, Punjab National Bank, UCO Bank, Bank of Baroda, Canara Bank, Central Bank, Bank of Baroda, Indian Bank and Oriental Bank of Commerce, among others, said they were likely to cut interest rates. UCO Bank chairman SK Goel said his bank would cut the BPLR by 25 basis points.

SBI chairman O P Bhatt said SBI’s asset liability committee (ALCO) will soon meet to decide on the rate cut. SBI has already cut its BPLR by 1.5 percentage points since October to 12.25%. Similarly, chairmen of other banks also said their respective ALCOs would meet soon to decide on rate cuts. Cuts in lending rates will be accompanied by reduction in deposit rates. IDBI Bank’s CMD Yogesh Agarwal said the cut in policy rates by RBI was aimed at easing the liquidity situation, but the bank would watch the market conditions before revising its rate-structure.

Bankers raised apprehension over the huge government borrowing, which might push the demand of funds and so drive up lending rates. At the same time, on the cost of funds, bankers also pointed out their inability in cutting the deposits rates below the small savings rates, like post office deposits at 8%. Bankers said that unless the deposits rates are brought down, the lending rates could not be cut.

RBI governor Subbarao allayed any fear of crowding out of funds due to huge government borrowings. He said RBI was taking enough measures like purchasing of government securities from the market and unwinding of securities bought by government under market stabilization scheme

Meltdown to create new avenues for IT’

Meltdown to create new avenues for IT’
The Times of India, April 22, 2009, Page 24

TIMES NEWS NETWORK, Chennai

The global meltdown might have slowed the growth of the Indian IT industry, but Nasscom predicts that several changes in economic, business, social megatrends will create new opportunities for the sector in 12 years time.

These new opportunities will lead to export revenues growing to the tune of $175 billion in 2020 from a target of $50 billion by 2010. The domestic IT market could also see a four fold increase in revenues to $50 billion by 2020 from $12 billion in 2008, a report by Nasscom-McKinsey & Co predicted.

By 2020, India will emerge as a top three global innovation hub for clinical research, mobile applications and energy efficiency/climate change solutions, leading to transformational opportunities for the technology and business services industry, the report says. “In addition, harnessing information communication technology-based solutions will help drive inclusive growth by uplifting 30 million citizens each year.”

About 80% of the incremental revenue growth by 2020 will be driven by opportunities outside of the current core markets, verticals and customer segments and the industry needs to redefine its value proposition to capture these, Nasscom president Som Mittal said.

Despite current slowdown, the core markets for banking, financial service, insurance, telecom, retail, pharma and travel in the US, EU and Japan will expand upto 1.5 times and reach an addressable market size of $700-$750 billion by 2020 from $500 billion. Untapped customer segments like public sector, healthcare, media and utilities could also contribute about 70% of the opportunity estimated at $190-$220 billion by 2020.

Small businesses alone will contribute $250 billion of the addressable opportunity.