In a move to ease liquidity and cool the markets, the Reserve Bank of India (RBI) announced an ad-hoc 50-basis-point reduction in the cash reserve ratio (CRR), or the proportion of deposits banks must keep with the central bank, from 9 per cent to 8.5 per cent.
The cut, the first such step by RBI Governor D Subbarao, will be effective from the fortnight starting October 11 and will release around Rs 20,000 crore into the system. This is the first CRR reduction since June 14, 2003, when it was lowered by 25 basis points to 2.50 per cent.
While bankers are not forecasting any immediate change in interest rates for borrowers, the flow of credit, which has nearly stopped in the last few weeks, is expected to improve. Deposit rates are also unlikely to fall.
“The move will release some tension in the market. But I do not expect any immediate cuts in lending rates. We will be very selective in disbursing funds. The first priority is to provide adequate resources to productive sectors, especially infrastructure and oil and fertiliser (which is more like working capital). The cut is a temporary measure and tight monetary policy is likely to continue because inflation is well above RBI’s comfort level,” said IDBI Bank Chairman & Managing Director Yogesh Agarwal.
“It’s too early to expect an impact on lending and borrowing rates,” said ICICI Bank Joint Managing Director and CFO Chanda Kochhar while adding that the bank was sanctioning and disbursing loans based on its lending parameters even during the tight liquidity situation in the last few weeks.
“It is a clear signal that the step is to cool down the market. For the last one week, nobody was extending credit for sanctioned limits and also not considering new proposals. This step should bring down rates in the inter-bank market,” added Andhra Bank Chairman and MD RS Reddy.
Reliance Capital CEO Sam Ghosh said there would be no major impact on consumers but the decision would reduce the huge blip in liquidity.
A senior State Bank of India executive said that RBI’s latest move might not ease liquidity tightness too much and another 50-basis-point reduction was expected in the monetary policy review on October 24.
“It is not enough given the huge demand for corporate credit. The move to cut CRR is more of an indication by the central bank that it will inject more liquidity to the system, if required. RBI may take more steps gradually if liquidity situation does not improve,” said Punjab National Bank Executive Director J M Garg.
“The regulators will watch every step. It is very tough to predict since the impact (of the moves) is multiple. There is an impact on inflation, liquidity and the growth rate,” added Kochhar.
Tight liquidity conditions in the market had seen banks use the liquidity adjustment facility to borrow around Rs 90,000 crore from RBI every day for the last few days. In the call money market, some banks had paid as much as 17 per cent to raise funds on Friday. Today, the rates cooled with the weighted average rate according to Clearing Corporation of India data 11.32 per cent.
Tight liquidity in the domestic and the international markets had prompted bankers to seek RBI intervention in the form of CRR reduction and a further relaxation in the statutory liquidity ratio (SLR), or the amount banks must mandatorily invest in government securities. Over the last fortnight, bankers had raised the issue with the RBI leadership at least twice.
The announcement of an ad-hoc CRR reduction follows RBI’s consultations with the government, sources said. The tight liquidity situation was one of the major issues discussed at last week’s meeting of the high-level committee on capital markets which has representatives from the central bank, the government and other financial sector regulators.
In a statement this evening, RBI said, “This measure is ad-hoc, temporary in nature and will be reviewed on a continuous basis in the light of the evolving liquidity conditions.”
On September 16, after the turmoil in the US increased, for banks in dire need of funds, RBI had announced several measures including a one percentage point relaxation in the SLR below the mandated 25 per cent level.
“Since then, there has been a sharp deterioration in the global financial environment with the number of troubled financial institutions rising, stock markets weakening and money markets strained. Central banks across the world have stepped up their liquidity operations, including coordinated actions, and some have banned/limited short selling of financial stocks. These new developments have impacted domestic money and forex markets with a marked increase in volatility and a sharp squeeze on market liquidity as reflected in the movements in overnight interest rates and the high recourse to the LAF,” RBI's statement said.
The RBI will continue with its policy of active demand management of liquidity through appropriate use of the CRR stipulations and open market operations (OMO) including the MSS and the LAF, using all the policy instruments at its disposal flexibly, as and when the situation warrants,” it added.
Tuesday, October 07, 2008
Investor's wealth plunges below Rs 40 tn mark
With domestic market buckling under deepening global financial crisis, investor's wealth on Bombay Stock Exchange plunged below the Rs 40 lakh crore mark, while the Sensex slipped under the 12,000 level for the first time in two years.
Total market capitalisation of all the listed-companies on the BSE dropped below the Rs 40 lakh crore-mark to Rs 38,22,354.61 crore today, witnessing an erosion of Rs 2.39 lakh crore in a single day.
The 30-share Sensex closed at 11,801, the lowest level seen since 2006, plunging 724 points.
However, RBI has cut the Cash Reserve Ratio by 50 basis points and market regulator SEBI has removed restrictions of 40 per cent cap on Overseas Derivative Instruments (ODI). Analysts believe the moves would help the markets recover.
Among the Sensex shares, Sterlite Industries was the biggest loser with a fall of over 15 per cent, followed by Reliance Infrastructure which dropped nearly 14 per cent and Jaiprakash Associates which fell 13.57 per cent.
Total market capitalisation of Anil Agarwal-led Sterlite Industries settled at Rs 23,756.83 crore on the bourse.
As Anil Ambani-led Reliance Infrastructure dropped 13.93 per cent to close at Rs 638, its market capitalisation also took a plunge to Rs 14,698 crore. Reliance Communications also ended 9.95 per cent down at Rs 300.05, while its M-cap stood at Rs 61,931.
Besides, the country's most valued firm Reliance Industries today dropped 6.76 per cent to close at Rs 246.45, while its market cap stood at Rs 2,38,685.26.
Further, the market capitalisation of state-run ONGC stood at Rs 2,09,630.90, followed by NTPC at Rs 139,100.98 crore, telecom major Bharti Airtel (Rs 138,491.89 crore) and SBI (Rs 91,054.48 crore).
Total market capitalisation of all the listed-companies on the BSE dropped below the Rs 40 lakh crore-mark to Rs 38,22,354.61 crore today, witnessing an erosion of Rs 2.39 lakh crore in a single day.
The 30-share Sensex closed at 11,801, the lowest level seen since 2006, plunging 724 points.
However, RBI has cut the Cash Reserve Ratio by 50 basis points and market regulator SEBI has removed restrictions of 40 per cent cap on Overseas Derivative Instruments (ODI). Analysts believe the moves would help the markets recover.
Among the Sensex shares, Sterlite Industries was the biggest loser with a fall of over 15 per cent, followed by Reliance Infrastructure which dropped nearly 14 per cent and Jaiprakash Associates which fell 13.57 per cent.
Total market capitalisation of Anil Agarwal-led Sterlite Industries settled at Rs 23,756.83 crore on the bourse.
As Anil Ambani-led Reliance Infrastructure dropped 13.93 per cent to close at Rs 638, its market capitalisation also took a plunge to Rs 14,698 crore. Reliance Communications also ended 9.95 per cent down at Rs 300.05, while its M-cap stood at Rs 61,931.
Besides, the country's most valued firm Reliance Industries today dropped 6.76 per cent to close at Rs 246.45, while its market cap stood at Rs 2,38,685.26.
Further, the market capitalisation of state-run ONGC stood at Rs 2,09,630.90, followed by NTPC at Rs 139,100.98 crore, telecom major Bharti Airtel (Rs 138,491.89 crore) and SBI (Rs 91,054.48 crore).
Easier PN rule may not lead to fresh inflows
Foreign portfolio investors, who have pulled out close to $10 billion so far this year may have reasons to be happy with the easing of the curbs imposed on their investments through P-Notes. But they do not reckon that Monday’s SEBI move will open the floodgates for portfolio investment for a while.
Labelling the decision announced by SEBI today as cosmetic in terms of a trigger to step up portfolio flows, some of the FIIs said there were enough investment vehicles to take an exposure to Indian equities. In October 2007, SEBI had banned the fresh issue of P-Notes by FIIs to rein in the massive inflow of foreign funds into the Indian stock markets. The regulator had issued restrictions on FIIs and their sub-accounts, prohibiting them from issuing or renewing PNs with underlying as derivatives and directing them to unwind their positions within 18 months.
“The SEBI directive is a healthy move in the current market climate. It may help attract investors back to India, particularly, since India has outperformed other emerging markets in this correction. Today’s decision removes an impediment to accessing this market. But how soon this stimulates capital redirection is hard to say, given the uncertain and tenuous state of investor confidence. With rescue packages and bailouts in key global financial markets, these are likely to soak up any spare liquidity. It is a welcome move regardless,” says Stuart Smythe, ED, Head equity of Macquarie Securities (India).
At the imposition of restrictions last year (October 2007) P-Note holdings were estimated at $88 billion. Markets have corrected nearly 40%, which would put current holdings at $53 billion, of which almost $10 billion has been sales, leaving an estimated $43 billion. If one were to factor in Monday’s correction, the amount would have seen a further erosion of roughly 5.5%, said a senior official at a leading foreign broking house.
“This will not impact the inflow into the country. What we are facing is a global confidence crisis and the money is flowing to safest assets the markets can identify, like the dollar. This is the time for government to implement policies in infrastructure, thereby making India less reliant on foreign savings and more reliant on domestic savings. This would effectively mean that India’s growth is on track, irrespective of global developments. Investors are looking for safe economies where earnings are not at risk,” said Amit Bhartia, Partner, GMO (Grantham, Mayo, Van Otterloo & Co.), a global institutional money management firm.
SEBI’s decision to revise the rules marks a change from last year when India was battling inflows which had pushed the rupee to a new high against the dollar since 1998 and helped power the stock market to record highs. The FM had than said India would have to moderate inflows to avoid a stock market bubble. FIIs continue to be net sellers in the Indian equities markets, having sold more than $9 billion worth shares in the past nine months.
Net foreign portfolio investments for the similar period last year were more than $14 billion.
Labelling the decision announced by SEBI today as cosmetic in terms of a trigger to step up portfolio flows, some of the FIIs said there were enough investment vehicles to take an exposure to Indian equities. In October 2007, SEBI had banned the fresh issue of P-Notes by FIIs to rein in the massive inflow of foreign funds into the Indian stock markets. The regulator had issued restrictions on FIIs and their sub-accounts, prohibiting them from issuing or renewing PNs with underlying as derivatives and directing them to unwind their positions within 18 months.
“The SEBI directive is a healthy move in the current market climate. It may help attract investors back to India, particularly, since India has outperformed other emerging markets in this correction. Today’s decision removes an impediment to accessing this market. But how soon this stimulates capital redirection is hard to say, given the uncertain and tenuous state of investor confidence. With rescue packages and bailouts in key global financial markets, these are likely to soak up any spare liquidity. It is a welcome move regardless,” says Stuart Smythe, ED, Head equity of Macquarie Securities (India).
At the imposition of restrictions last year (October 2007) P-Note holdings were estimated at $88 billion. Markets have corrected nearly 40%, which would put current holdings at $53 billion, of which almost $10 billion has been sales, leaving an estimated $43 billion. If one were to factor in Monday’s correction, the amount would have seen a further erosion of roughly 5.5%, said a senior official at a leading foreign broking house.
“This will not impact the inflow into the country. What we are facing is a global confidence crisis and the money is flowing to safest assets the markets can identify, like the dollar. This is the time for government to implement policies in infrastructure, thereby making India less reliant on foreign savings and more reliant on domestic savings. This would effectively mean that India’s growth is on track, irrespective of global developments. Investors are looking for safe economies where earnings are not at risk,” said Amit Bhartia, Partner, GMO (Grantham, Mayo, Van Otterloo & Co.), a global institutional money management firm.
SEBI’s decision to revise the rules marks a change from last year when India was battling inflows which had pushed the rupee to a new high against the dollar since 1998 and helped power the stock market to record highs. The FM had than said India would have to moderate inflows to avoid a stock market bubble. FIIs continue to be net sellers in the Indian equities markets, having sold more than $9 billion worth shares in the past nine months.
Net foreign portfolio investments for the similar period last year were more than $14 billion.
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