REUTERS FORECAST: A majority of economists expect the Reserve Bank of India (RBI) to raise key interest rates by 25 basis points in its quarterly review on July 27 and tighten policy further in coming quarters, a new Reuters poll showed.
While headline inflation has been in double-digits for five months running and economic growth is expected to reach 8.5 percent this year, tight liquidity and continued uncertainty about global recovery are expected to prevent the Reserve Bank of India (RBI) from tightening policy more aggressively.
The RBI has raised rates three times this year by 25 basis points each, most recently in an unexpected move on July 2.
"My sense is unless we see a strong pick up in domestic demand both for credit, investment and for the economic activity in general, we might see a little bit of a softer approach towards policy tightening than initially thought," said Saugata Bhattacharya, an economist with Axis Bank in Mumbai.
Most economists have not changed their expectations from a Reuters poll on July 5 that the RBI would raise the repo rate, at which it lends to banks, by another 50 basis points to 6.0 percent by end of December.
They expect the RBI to raise the reverse repo rate, at which it absorbs excess cash from the banking system, by 50 basis points by end-December.
Tight liquidity since early June has led economists to expect no change in the cash reserve ratio (CRR), the percentage of cash banks must keep in reserve with the RBI by end-December, compared with a 50 basis point rise expected in the July 5 poll.
Of 12 economists in the new survey who were also part of the previous poll, two have lowered their expectations on rate increases for the rest of the year, while three expect the RBI to tighten more aggressively than earlier forecast.
Twelve economists said the RBI's policy tightening in recent quarters was appropriate, while four said the RBI should tighten more aggressively.
Most economists polled expect the repo rate to remain the RBI's operative rate by the end of September, a sign that they expect tight cash conditions to persist. The RBI has allowed cash conditions to remain tight in recent weeks, which helps dampen inflation expectations.
Economists were almost evenly split on whether the repo or reverse repo would be the operative rate by the end of December.
REPO:
Seventeen of 20 economists expect the RBI to raise the repo rate in the July 27 policy review by a quarter-point to 5.75 percent. By the end of December, 10 economists expect a total of 50 basis points in increases in the repo rate and five expect 75 basis points of increase.
By the end of the fiscal year in March, nine economists predict a 75 basis point rise in the repo rate, five expect a 100 basis point increase, two expect 50 basis points and one expects 150 basis points of increase.
REVERSE REPO:
Eighteen of 20 economists expect the RBI to raise the reverse repo rate on July 27, with a median forecast of 4.25 percent, in line with the July 5 poll, from 4 percent. Ten economists expect the rate to be 4.50 percent at the end of December, and five expect the rate to reach 4.75 percent at the end of 2010.
By the end of the fiscal year in March 2011, nine respondents see a 75 basis point increase in the reverse repo rate, and five see a 100 basis point rise.
CASH RESERVE RATIO:
None of the 17 economists foresee a change in the CRR in the July 27 review, in line with the last poll.
The median forecast for the end of December is 6.0 percent, the same level it has held since April 24, compared with 6.5 percent in the July 5 poll. However, none of those who participated in both surveys changed their forecast.
By the end of March, nine economists expects no change in CRR, and three expect a 50 basis point rise.
FACTORS TO WATCH:
-- Wholesale prices in June rose 10.55 percent from a year earlier, marginally below the median forecast for a 10.8 percent rise in a Reuters survey and compared with May's pace of 10.16 percent.
-- The fuel price index rose 14.27 percent in the year to July 3, compared with the previous week's 18.02 percent, while food price index rose an annual 12.81 percent, from 12.63 percent reading in the previous week.
-- Industrial output in May grew at a slower-than-expected 11.5 percent from a year earlier, helped by robust domestic consumer demand, expanding exports, and higher infrastructure spending.
MARKET IMPACT: Traders have discounted a 25 basis point increase in interest rates by the RBI in the July review, but traders said a 50 basis point rise could see the benchmark 10-year bond rise to 7.80 percent, from 7.65 percent now.
A half percentage point increase in policy rates may also push up the one-year overnight indexed swap to 6.20 percent, from 5.86 percent now.
Sunday, July 25, 2010
India develops world's cheapest "laptop" at $35
(Reuters) - India has come up with the world's cheapest "laptop," a touch-screen computing device that costs $35.
India's Human Resource Development Minister Kapil Sibal this week unveiled the low-cost computing device that is designed for students, saying his department had started talks with global manufacturers to start mass production.
"We have reached a (developmental) stage that today, the motherboard, its chip, the processing, connectivity, all of them cumulatively cost around $35, including memory, display, everything," he told a news conference.
He said the touchscreen gadget was packed with Internet browsers, PDF reader and video conferencing facilities but its hardware was created with sufficient flexibility to incorporate new components according to user requirement.
Sibal said the Linux based computing device was expected to be introduced to higher education institutions from 2011 but the aim was to drop the price further to $20 and ultimately to $10.
The device was developed by research teams at India's premier technological institutes, the Indian Institute of Technology and the Indian Institute of Science.
India spends about three percent of its annual budget on school education and has improved its literacy rates to over 64 percent of its 1.2 billion population but studies have shown many students can barely read or write and most state-run schools have inadequate facilities.
India's Human Resource Development Minister Kapil Sibal this week unveiled the low-cost computing device that is designed for students, saying his department had started talks with global manufacturers to start mass production.
"We have reached a (developmental) stage that today, the motherboard, its chip, the processing, connectivity, all of them cumulatively cost around $35, including memory, display, everything," he told a news conference.
He said the touchscreen gadget was packed with Internet browsers, PDF reader and video conferencing facilities but its hardware was created with sufficient flexibility to incorporate new components according to user requirement.
Sibal said the Linux based computing device was expected to be introduced to higher education institutions from 2011 but the aim was to drop the price further to $20 and ultimately to $10.
The device was developed by research teams at India's premier technological institutes, the Indian Institute of Technology and the Indian Institute of Science.
India spends about three percent of its annual budget on school education and has improved its literacy rates to over 64 percent of its 1.2 billion population but studies have shown many students can barely read or write and most state-run schools have inadequate facilities.
JFE plans $1bn Indian steelmaker stake
JFE Holdings, the Japanese steelmaker, plans to invest about $1bn in India’s JSW Steel for a minority stake, according to two people close to the matter.
The deal is expected to be announced on July 27 when JSW, which has a market value of $4.8bn, reports first-quarter results.
An investment by JFE, the world’s sixth-largest steel producer, is the latest in a string of Japanese companies investing in fast-growing emerging markets to offset anaemic growth at home and an expected slowdown in Europe.
Last week, the Japanese carmakers Toyota and Nissan announced a combined $1.2bn of investments to bolster their presence in Latin America. Earlier this month, Sumitomo, the large trading house, signed a $1.9bn deal in Brazil for a stake in an iron ore mining venture.
The overall value of merger and acquisitions in emerging markets by Japanese companies so far this year has risen to $8.58bn, exceeding 2009’s total of $7.9bn, according to Dealogic.
JFE and JSW had been discussing plans to deepen ties since November, when they agreed to cooperate on boosting steel production to meet India’s voracious demand for the metal, said a person close to the matter.
Japanese carmakers such as Toyota and Nissan have a large manufacturing presence in India, the second-fastest growing auto market after China, and JFE aims to target their increasing demand for steel there.
For JSW, analysts in Mumbai said that JFE’s investment would help the highly indebted Indian steelmaker ease its debt exposure.
It would enable the steelmaker “to create more high-value products that JSW had in the pipeline but couldn’t develop due to its debt constraints,” said Sanjay Jain, a steel analyst at Motial Oswal.
India’s steel market is growing at about 10 per cent annually and per capita steel consumption is about 40kg a year compared with the global average of 150kg a year.
The deal is expected to be announced on July 27 when JSW, which has a market value of $4.8bn, reports first-quarter results.
An investment by JFE, the world’s sixth-largest steel producer, is the latest in a string of Japanese companies investing in fast-growing emerging markets to offset anaemic growth at home and an expected slowdown in Europe.
Last week, the Japanese carmakers Toyota and Nissan announced a combined $1.2bn of investments to bolster their presence in Latin America. Earlier this month, Sumitomo, the large trading house, signed a $1.9bn deal in Brazil for a stake in an iron ore mining venture.
The overall value of merger and acquisitions in emerging markets by Japanese companies so far this year has risen to $8.58bn, exceeding 2009’s total of $7.9bn, according to Dealogic.
JFE and JSW had been discussing plans to deepen ties since November, when they agreed to cooperate on boosting steel production to meet India’s voracious demand for the metal, said a person close to the matter.
Japanese carmakers such as Toyota and Nissan have a large manufacturing presence in India, the second-fastest growing auto market after China, and JFE aims to target their increasing demand for steel there.
For JSW, analysts in Mumbai said that JFE’s investment would help the highly indebted Indian steelmaker ease its debt exposure.
It would enable the steelmaker “to create more high-value products that JSW had in the pipeline but couldn’t develop due to its debt constraints,” said Sanjay Jain, a steel analyst at Motial Oswal.
India’s steel market is growing at about 10 per cent annually and per capita steel consumption is about 40kg a year compared with the global average of 150kg a year.
Seven banks fail EU stress tests
Europe took a further step towards restoring confidence in its banking system on Friday as it published the results of stress tests into the region’s leading financial institutions, showing that only seven of 91 banks failed to meet its capital requirements.
However, investors signalled their distrust of the assumptions underlying the tests and the surprisingly small number of banks to fail the tests.
Five of the seven were cajas, Spanish savings banks, sparking nervousness that the pan-European exercise that Madrid had championed might backfire.
The Bank of Spain on Friday indicated that it had sufficient contingent liquidity measures in place to reassure caja customers and counter any threat of a run on these banks.
The Committee of European Banking Supervisors, which oversaw the tests, identified a capital shortfall of €3.5bn at the seven banks that failed to reach the pass mark of a 6 per cent tier one capital ratio.
The test involved modelling macroeconomic and sovereign debt stresses over 2010 and 2011, applied to end-2009 capital levels.
Germany’s Hypo Real Estate and Greece’s ATEbank were the only non-Spanish institutions to fail.
Among the near-fails, which analysts say could come under pressure to raise capital soon, were Italy’s Monte dei Paschi, on 6.2 per cent, Allied Irish Banks, on 6.5 per cent, and Germany’s Postbank, on 6.6 per cent.
A handful of some of Europe’s most-stretched banks announced a combined €1.3bn of capital raisings on Friday, just hours before regulators divulged the results of the test, although two of them – National Bank of Greece and Slovenia’s NLB – both passed.
The third, Cívica, a caja based in northern Spain that failed the test, secured €450m of convertible bond finance from JC Flowers, the US buy-out firm that has a record of investing in troubled banks.
That marked the first time a caja had sought outside capital, following a liberalisation of the law governing the public sector institutions.
Among the top-rated banks in the tests was Barclays, the UK bank whose baseline tier one ratio of 13 per cent at the end of last year, rises under the stress scenario to 13.7 per cent by end-2011.
The two-month long test exercise has been closely scrutinised by investors, with growing scepticism in the markets that the parameters of the stress scenarios were insufficiently tough.
Germany also upset the pan-European exercise at the last minute by saying its banks would be disclosing the full details of sovereign debt holdings – an adjunct to the stress tests that all banks had been expected to comply with – only on a voluntary basis.
At least six German banks – including Deutsche Bank, Postbank, HRE and DZ Bank – did not publish sovereign holdings on Friday night.
“Arguably the failure here is not the banks concerned but the test itself,” said Richard Cranfield, chairman of the global corporate group at Allen & Overy, the law firm.
“There is little evidence that the tests have been applied consistently and there is a distinct lack of credibility, making this a wasted opportunity.
“One assumes those banks that have failed will be rescued or recapitalised. However, the banks that have scraped through may have more of a challenge on their hands and they may be the ones the market focuses on,” he said.
But European regulators hailed the results of the tests – which they said were three times as tough as last year’s US ones – as proof of the strength of the industry.
“The US did its tests before all its banks had recapitalised,” said Christian Noyer, governor of the Banque de France.
“European banks have now been through recapitalisations, restructurings, cleaning out of their portfolios. We’re arriving after the battle. A few years ago it would have been different,” he said.
However, investors signalled their distrust of the assumptions underlying the tests and the surprisingly small number of banks to fail the tests.
Five of the seven were cajas, Spanish savings banks, sparking nervousness that the pan-European exercise that Madrid had championed might backfire.
The Bank of Spain on Friday indicated that it had sufficient contingent liquidity measures in place to reassure caja customers and counter any threat of a run on these banks.
The Committee of European Banking Supervisors, which oversaw the tests, identified a capital shortfall of €3.5bn at the seven banks that failed to reach the pass mark of a 6 per cent tier one capital ratio.
The test involved modelling macroeconomic and sovereign debt stresses over 2010 and 2011, applied to end-2009 capital levels.
Germany’s Hypo Real Estate and Greece’s ATEbank were the only non-Spanish institutions to fail.
Among the near-fails, which analysts say could come under pressure to raise capital soon, were Italy’s Monte dei Paschi, on 6.2 per cent, Allied Irish Banks, on 6.5 per cent, and Germany’s Postbank, on 6.6 per cent.
A handful of some of Europe’s most-stretched banks announced a combined €1.3bn of capital raisings on Friday, just hours before regulators divulged the results of the test, although two of them – National Bank of Greece and Slovenia’s NLB – both passed.
The third, Cívica, a caja based in northern Spain that failed the test, secured €450m of convertible bond finance from JC Flowers, the US buy-out firm that has a record of investing in troubled banks.
That marked the first time a caja had sought outside capital, following a liberalisation of the law governing the public sector institutions.
Among the top-rated banks in the tests was Barclays, the UK bank whose baseline tier one ratio of 13 per cent at the end of last year, rises under the stress scenario to 13.7 per cent by end-2011.
The two-month long test exercise has been closely scrutinised by investors, with growing scepticism in the markets that the parameters of the stress scenarios were insufficiently tough.
Germany also upset the pan-European exercise at the last minute by saying its banks would be disclosing the full details of sovereign debt holdings – an adjunct to the stress tests that all banks had been expected to comply with – only on a voluntary basis.
At least six German banks – including Deutsche Bank, Postbank, HRE and DZ Bank – did not publish sovereign holdings on Friday night.
“Arguably the failure here is not the banks concerned but the test itself,” said Richard Cranfield, chairman of the global corporate group at Allen & Overy, the law firm.
“There is little evidence that the tests have been applied consistently and there is a distinct lack of credibility, making this a wasted opportunity.
“One assumes those banks that have failed will be rescued or recapitalised. However, the banks that have scraped through may have more of a challenge on their hands and they may be the ones the market focuses on,” he said.
But European regulators hailed the results of the tests – which they said were three times as tough as last year’s US ones – as proof of the strength of the industry.
“The US did its tests before all its banks had recapitalised,” said Christian Noyer, governor of the Banque de France.
“European banks have now been through recapitalisations, restructurings, cleaning out of their portfolios. We’re arriving after the battle. A few years ago it would have been different,” he said.
EU Bank Stress Tests Fail to Reassure Investors Wary of Capital Criteria
European regulators found that seven banks need to raise a combined 3.5 billion euros ($4.5 billion) of capital, underwhelming analysts who said the stress tests may not have been strict enough.
“The amount of capital needed is much lower than the market expected,” said Mike Lenhoff, chief strategist at London-based Brewin Dolphin Securities Ltd., which oversees $33 billion. “It seems quite trivial considering the concerns about losses from the sovereign crisis.”
Germany’s Hypo Real Estate Holding AG, Agricultural Bank of Greece SA and five Spanish savings banks didn’t have adequate reserves to maintain a Tier 1 capital ratio of at least 6 percent in the event of a recession and sovereign-debt crisis, lenders and regulators said yesterday. The banks that failed the stress tests are in “close contact” with national authorities over how they will raise capital, said the Committee of European Banking Supervisors, which ran the assessments of 91 lenders.
European governments are using their first coordinated stress tests to reassure investors about the health of financial institutions after the debt crisis pummeled the bonds of Greece, Spain and Portugal. Rising budget deficits in those countries raised concern that they won’t be able to pay their debts.
“This is not reassuring at all,” said Komal Sri-Kumar, who helps manage $118 billion as chief global strategist at TCW Group Inc. in Los Angeles. “These tests were set in such a way that most of them would pass. That doesn’t say to me that the banking system is stable.”
‘Not Very Rigorous’
Before the results were published yesterday, analysts at Goldman Sachs Group Inc. estimated that lenders would need to raise 38 billion euros and Barclays Capital said they would require as much as 85 billion euros. Tests carried out in the U.S. last year found that 10 lenders, including Bank of America Corp. and Citigroup Inc., needed $74.6 billion.
“I don’t think the market is so stupid as to think that they were so wrong,” said Jason Brady, a managing director at Thornburg Investment Management in Santa Fe, New Mexico, which oversees about $57 billion. “The right explanation here is that the testing was not very rigorous.”
European banks have already raised 220 billion euros in the past 18 months, Credit Suisse Group AG analysts said in a report this week. With that amount already raised, it was likely that most European banks would pass the tests, the analysts said.
Trading Books
Analysts and investors said the European tests may not have been strict enough because they ignored the majority of banks’ holdings of sovereign debt. The evaluations took into account potential losses only on government bonds the banks trade, rather than those they are holding until maturity, CEBS said.
Lenders hold about 90 percent of their Greek government bonds in their banking book and 10 percent in their trading book, according to a survey by Morgan Stanley analysts led by Huw van Steenis. They have to write down the value of bonds in their banking book only if there is serious doubt about a state’s ability to repay in full or make interest payments.
“The long-awaited stress tests do not seem to have been that stressful,” Gary Jenkins, an analyst at Evolution Securities Ltd. in London, wrote in a note to clients. “The majority of these bonds are held on the banking books.”
The European Central Bank said banks that failed the stress tests should seek to raise capital from investors before turning to national governments. Spain and Greece both moved to support their lenders that require capital.
Greek Rights Offering
“The ECB welcomes the commitment made by national authorities with regard to back-stop facilities to recapitalize the institutions that may have fallen below the minimum threshold of 6 percent,” the ECB said in a statement.
Agricultural Bank of Greece, the only one of the nation’s lenders to flunk, said it’s preparing a rights offering after posting a shortfall of 242.6 million euros. The government, which owns 77 percent of the bank, said it will take part in the share sale.
Hypo Real Estate, the German commercial-property lender rescued by the government during the financial crisis, had a capital shortfall of about 1.25 billion euros. An “immediate need for capital would arise only if the hypothetical stress scenario actually did materialize,” the Bundesbank and financial regulator BaFin said.
Spanish savings banks CajaSur; a group led by Caixa Catalunya; a group led by Caixa Sabadell; Caja Duero-Caja Espana; and Banca Civica all, posting a combined capital shortfall of 2 billion euros.
Stocks Little Changed
Bank of Spain Governor Miguel Angel Fernandez Ordonez said the central bank will set a deadline for the banks to raise capital privately before turning to public funds. Civica said yesterday it would raise 450 million euros by selling a convertible bond to U.S. leveraged buyout firm J.C. Flowers & Co.
The results of the U.S tests helped the Standard & Poor’s Financials Index jump 36 percent in the following seven months. The 54-member Bloomberg Europe Banks and Financial Services Index rose 0.1 percent yesterday.
“The seven that failed the tests were already banks that had failed or were in the watch list, and that says to me that these tests are not telling us anything we don’t already know,” Sri-Kumar said. “I don’t think the markets will buy it. We’ll have to wait until the Europe markets open on Monday.”
“The amount of capital needed is much lower than the market expected,” said Mike Lenhoff, chief strategist at London-based Brewin Dolphin Securities Ltd., which oversees $33 billion. “It seems quite trivial considering the concerns about losses from the sovereign crisis.”
Germany’s Hypo Real Estate Holding AG, Agricultural Bank of Greece SA and five Spanish savings banks didn’t have adequate reserves to maintain a Tier 1 capital ratio of at least 6 percent in the event of a recession and sovereign-debt crisis, lenders and regulators said yesterday. The banks that failed the stress tests are in “close contact” with national authorities over how they will raise capital, said the Committee of European Banking Supervisors, which ran the assessments of 91 lenders.
European governments are using their first coordinated stress tests to reassure investors about the health of financial institutions after the debt crisis pummeled the bonds of Greece, Spain and Portugal. Rising budget deficits in those countries raised concern that they won’t be able to pay their debts.
“This is not reassuring at all,” said Komal Sri-Kumar, who helps manage $118 billion as chief global strategist at TCW Group Inc. in Los Angeles. “These tests were set in such a way that most of them would pass. That doesn’t say to me that the banking system is stable.”
‘Not Very Rigorous’
Before the results were published yesterday, analysts at Goldman Sachs Group Inc. estimated that lenders would need to raise 38 billion euros and Barclays Capital said they would require as much as 85 billion euros. Tests carried out in the U.S. last year found that 10 lenders, including Bank of America Corp. and Citigroup Inc., needed $74.6 billion.
“I don’t think the market is so stupid as to think that they were so wrong,” said Jason Brady, a managing director at Thornburg Investment Management in Santa Fe, New Mexico, which oversees about $57 billion. “The right explanation here is that the testing was not very rigorous.”
European banks have already raised 220 billion euros in the past 18 months, Credit Suisse Group AG analysts said in a report this week. With that amount already raised, it was likely that most European banks would pass the tests, the analysts said.
Trading Books
Analysts and investors said the European tests may not have been strict enough because they ignored the majority of banks’ holdings of sovereign debt. The evaluations took into account potential losses only on government bonds the banks trade, rather than those they are holding until maturity, CEBS said.
Lenders hold about 90 percent of their Greek government bonds in their banking book and 10 percent in their trading book, according to a survey by Morgan Stanley analysts led by Huw van Steenis. They have to write down the value of bonds in their banking book only if there is serious doubt about a state’s ability to repay in full or make interest payments.
“The long-awaited stress tests do not seem to have been that stressful,” Gary Jenkins, an analyst at Evolution Securities Ltd. in London, wrote in a note to clients. “The majority of these bonds are held on the banking books.”
The European Central Bank said banks that failed the stress tests should seek to raise capital from investors before turning to national governments. Spain and Greece both moved to support their lenders that require capital.
Greek Rights Offering
“The ECB welcomes the commitment made by national authorities with regard to back-stop facilities to recapitalize the institutions that may have fallen below the minimum threshold of 6 percent,” the ECB said in a statement.
Agricultural Bank of Greece, the only one of the nation’s lenders to flunk, said it’s preparing a rights offering after posting a shortfall of 242.6 million euros. The government, which owns 77 percent of the bank, said it will take part in the share sale.
Hypo Real Estate, the German commercial-property lender rescued by the government during the financial crisis, had a capital shortfall of about 1.25 billion euros. An “immediate need for capital would arise only if the hypothetical stress scenario actually did materialize,” the Bundesbank and financial regulator BaFin said.
Spanish savings banks CajaSur; a group led by Caixa Catalunya; a group led by Caixa Sabadell; Caja Duero-Caja Espana; and Banca Civica all, posting a combined capital shortfall of 2 billion euros.
Stocks Little Changed
Bank of Spain Governor Miguel Angel Fernandez Ordonez said the central bank will set a deadline for the banks to raise capital privately before turning to public funds. Civica said yesterday it would raise 450 million euros by selling a convertible bond to U.S. leveraged buyout firm J.C. Flowers & Co.
The results of the U.S tests helped the Standard & Poor’s Financials Index jump 36 percent in the following seven months. The 54-member Bloomberg Europe Banks and Financial Services Index rose 0.1 percent yesterday.
“The seven that failed the tests were already banks that had failed or were in the watch list, and that says to me that these tests are not telling us anything we don’t already know,” Sri-Kumar said. “I don’t think the markets will buy it. We’ll have to wait until the Europe markets open on Monday.”
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