The global financial crisis had threatened to turn the clock back on a globalising India. Instead, the hands of time have advanced and the country’s impact has increased.
Second only to China as a fast-growing large economy, unlike that export-driven giant, India emerged relatively “unscathed” by the global economic downturn, in the words of the Asian Development Bank.
If economists were surprised when the country raced away from what had been resignedly called “the Hindu rate of growth” of about 3 per cent to reach highs of 9 per cent in the mid-2000s, they have been even more impressed in past months by India’s ability to withstand falling exports and external financial shocks.
The country’s economic policymakers have received international praise for their response to the crisis. In recent weeks, projections for a speedy recovery have grown more optimistic.
Manmohan Singh, the prime minister and the man responsible for opening up the economy in the early 1990s, speaks of a return to 9-10 per cent growth in a “couple of years”. His finance minister, Pranab Mukherjee, forecasts 7.7 per cent this year, a fiscal stimulus-fuelled rise from 6.7 per cent last year.
“Underlying our system is an inherent political and economic resilience that gives our country and its institutions great strength and buoyancy,” Mr Singh reflects. “During the year gone by, the world faced an unprecedented economic and financial crisis. But the Indian economy weathered it quite well. We were affected, but not so much as many other countries.”
This was just as well. The 77-year-old Mr Singh warns that “the impatience of youth” – in a country where 70 per cent of the 1.2bn population is under 35 – will increasingly determine India’s future. He has prudently chosen education, health, infrastructure and agriculture as the top priorities after winning a second term in office last year.
He is simultaneously pushing forward the country’s interlinkages, striking free trade deals with Asean and South Korea, and negotiating another with the EU.
The resilience of the economy rests on a huge domestic market, and, unlike many Asian counterparts, a limited reliance on exports, which are less than 20 per cent of gross domestic product. While domestic demand was largely uninterrupted by the financial crisis, export sectors, such as diamond cutting and polishing, pharmaceuticals and textiles, suffered precipitous declines and are only now recovering.
Foreign capital flows and valuations on Sensex, the benchmark index on the Bombay Stock Exchange, bounced back rather quicker as investors seek returns from one of the brightest poles of economic activity.
Mergers and acquisitions activity is also set to rise. Cash-rich companies are weighing purchases in recession hit Europe, the US and other emerging markets.
A fast-growing economy, albeit with a strong internal motor, will hasten globalisation. The industrial sector is expanding at a double-digit rate, services, 55 per cent of GDP, are not far behind. Only agriculture, dented by a poor monsoon and representing 20 per cent of GDP, lags.
But there are still plenty of obstacles in the way of an open economy. “A racing car with the handbrake on,” is how one visiting politician describes the drag of over-regulation, red tape, vested interests and decrepit infrastructure.
Lee Kuan Yew, Singapore’s former prime minister, identifies failure to follow China’s focus on infrastructure as one of the biggest handicaps to India’s global integration.
The confident mood across Asia has led many international business leaders to comment on the stark contrast between the ambitions of large developing economies and the more introspective, punishing mood in the west.
Robert Zoellick, president of the World Bank, is one. “We all look to India now as a rising global economic power and in our interconnected world it has played a helpful role over the tough moments of the past year, not just during the discussions of the G20, but also in how it has steered [its] recovery,” says the former US Trade Representative, who once locked horns with India in trade talks.
International partners are beating a path to the door, lured by the promise of a drive towards manufacturing to add to the momentum achieved by a globalised services industry.
“In the caricature of the global economy,” says Lord Mandelson, the UK’s secretary for business. “China makes it, America buys it, India provides the after sales customer service and Britain does the structured finance.” That formulation is changing.
“India stands at a critical point in its transformation,” he says. “A young population is eager for change and the freedom to realise this global ambition. If India’s initial growth was driven by low-cost and low-value service provision, the next wave will be tied to rising value-added technology-driven manufacturing and services.”
This next wave has already arrived. The IT outsourcing sector – the likes of Tata Consultancy Services (TCS), Wipro and Infosys – and automotive industry – including Hero Honda, Bharat Forge and Tata Motors – are innovating and adopting technologies to create a global “footprint”.
N Chandrasekaran, the chief executive of TCS, says the downturn in the west has opened up greater opportunities in IT outsourcing and business processing.
But he lays emphasis on developing new capabilities, products and business models to remain relevant to clients and move into new countries. “When offshoring itself was first proposed, no one believed it was a business model,” he recalls.
The confidence in the growing economy has permeated other areas too. Over the past year, India has sought to play a greater leadership role in multilateral forums debating trade, climate change and reforming the global financial architecture.
Next month’s national budget will be a test of whether the Congress party-led government can make the most of the post-crisis period and a strong victory in last year's polls, by embarking on structural reform.
Business groups are lobbying for liberalisation of the defence, retail and financial services sectors, labour market reform and state disinvestments to help sustain growth projections.
The Reserve Bank of India, the central bank, meanwhile, is renewing efforts to broaden financial inclusion, and reach out to the unbanked masses.
In the shorter term, rebuilding foreign exchange reserves, allowing the rupee to appreciate to help cool inflation, while maintaining a partially open capital account are the priorities.
Some believe that the country’s economic fortitude is derived from its isolation and a protective shield of regulation, forged over decades of socialist policies and entrenched local business interests.
But the benefits of a greater share of world trade, remittance flows close to $50bn a year and the appeal of foreign capital inflows are shaping policy.
“India was less affected by the crisis than the rest of the world, not because it was isolated but because its capitalist fundamentals are strong,” argues Shashi Tharoor, the minister of state for external affairs and former United Nations official. “India will not return to the economics of nationalism which equated political independence with economic self-sufficiency.”
The embrace of the outside world, however, will be anything but rushed. On this, Mr Singh has the last word: “It is probably true that we are a slow-moving elephant but it is equally true that with each step forward we leave behind a deep imprint. There is a price that we pay in trying to carry all sections of our people along ... It is perhaps a price worth paying.”
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Wednesday, February 17, 2010
Greece loses EU voting power in blow to sovereignty
The European Union has shown its righteous wrath by stripping Greece of its vote at a crucial meeting next month, the worst humiliation ever suffered by an EU member state.
The council of EU finance ministers said Athens must comply with austerity demands by March 16 or lose control over its own tax and spend policies altogether. It if fails to do so, the EU will itself impose cuts under the draconian Article 126.9 of the Lisbon Treaty in what would amount to economic suzerainty.
While the symbolic move to suspend Greece of its voting rights at one meeting makes no practical difference, it marks a constitutional watershed and represents a crushing loss of sovereignty.
"We certainly won't let them off the hook," said Austria's finance minister, Josef Proll, echoing views shared by colleagues in Northern Europe. Some German officials have called for Greece to be denied a vote in all EU matter until it emerges from "receivership".
The EU has still refused to reveal details of how it might help Greece raise €30bn (£26bn) from global debt markets by the end of June. Investors are unsure whether this is part of Kabuki play of "constructive ambiguity" to pressure Greece and keep markets guessing, or reflects the deep reluctance by Germany to be drawn deeper in an EU fiscal union. Greek bonds sold off as ten-year yields jumped to 6.42pc, but the euro rallied to $1.3765 against the dollar as broader issues resurfaced in currency markets.
Jean-Claude Juncker, head of the Eurogroup, hinted that ministers have already agreed on a support mechanism, should it be necessary. It will most likely involve by bilateral aid by eurozone states. He said proposals for an IMF bailout - backed by Britain - were "absurd" and would shatter the credibility of monetary union.
Many Germans disagree, including Otmar Issing, once the backbone of the European Central Bank. He said an EU rescue for Greece would be fatal, arguing that unflinching rigour is the only way to hold monetary union together without political union.
Tuesday's EU verdict amounted to a thumbs down on Greece's earlier austerity efforts, viewed as too reliant on one-off measures and too light on spending cuts. Greece must reduce its deficit from 12.7pc of GDP to 3pc in three years. Greek customs officials expressed their anger by kicking off a three-day strike, the first of many stoppages set to culminate in a general strike next week.
However, premier George Papandreou has won support from key political parties and a majority of the people. Greece may yet surprise critics by mustering its Spartan Spirit.
The council of EU finance ministers said Athens must comply with austerity demands by March 16 or lose control over its own tax and spend policies altogether. It if fails to do so, the EU will itself impose cuts under the draconian Article 126.9 of the Lisbon Treaty in what would amount to economic suzerainty.
While the symbolic move to suspend Greece of its voting rights at one meeting makes no practical difference, it marks a constitutional watershed and represents a crushing loss of sovereignty.
"We certainly won't let them off the hook," said Austria's finance minister, Josef Proll, echoing views shared by colleagues in Northern Europe. Some German officials have called for Greece to be denied a vote in all EU matter until it emerges from "receivership".
The EU has still refused to reveal details of how it might help Greece raise €30bn (£26bn) from global debt markets by the end of June. Investors are unsure whether this is part of Kabuki play of "constructive ambiguity" to pressure Greece and keep markets guessing, or reflects the deep reluctance by Germany to be drawn deeper in an EU fiscal union. Greek bonds sold off as ten-year yields jumped to 6.42pc, but the euro rallied to $1.3765 against the dollar as broader issues resurfaced in currency markets.
Jean-Claude Juncker, head of the Eurogroup, hinted that ministers have already agreed on a support mechanism, should it be necessary. It will most likely involve by bilateral aid by eurozone states. He said proposals for an IMF bailout - backed by Britain - were "absurd" and would shatter the credibility of monetary union.
Many Germans disagree, including Otmar Issing, once the backbone of the European Central Bank. He said an EU rescue for Greece would be fatal, arguing that unflinching rigour is the only way to hold monetary union together without political union.
Tuesday's EU verdict amounted to a thumbs down on Greece's earlier austerity efforts, viewed as too reliant on one-off measures and too light on spending cuts. Greece must reduce its deficit from 12.7pc of GDP to 3pc in three years. Greek customs officials expressed their anger by kicking off a three-day strike, the first of many stoppages set to culminate in a general strike next week.
However, premier George Papandreou has won support from key political parties and a majority of the people. Greece may yet surprise critics by mustering its Spartan Spirit.
Japan retains title as world's second biggest economy
Japan retained its title as the world's number two economy in 2009, ahead of China, extending a recovery from a brutal recession with a robust fourth-quarter performance, data showed Monday.
But China, which grew at 8.7pc last year, came close to unseating its neighbour from the position it has held for more than 40 years.
Japan's economy grew 1.1pc in October-December from the previous quarter, for an annualised pace of 4.6pc, the government reported.
For the whole of 2009, Japan's gross domestic product (GDP) shrank 5pc as exports and factory output collapsed during the global economic downturn, the data showed.
Despite the severe contraction, Japan stayed just ahead of China as the world's second-largest economy.
Japan posted nominal GDP of about 5.08 trillion dollars last year, based on the average dollar-yen exchange rate for 2009, the data showed.
China reported last month nominal GDP of about 4.9 trillion dollars for 2009.
But with China expected to enjoy another year of strong growth in 2010, Japan risks ending this year in third place worldwide as it struggles to cope with renewed deflation and a shrinking population, analysts said.
"China's population is 10 times larger than that of Japan. It's quite natural for China to overtake Japan in the face of rapid globalisation," said Toru Shimano, economist at Okasan Securities.
In terms of per capita GDP, China - with a population of more than 1.3 billion people - trails far behind Japan, with about 128 million.
China returned to double-digit growth in the fourth quarter of 2009 with a red-hot expansion of 10.7pc.
Without China's boom, Japan's economy would be even more sluggish given that the two are major trading partners, analysts said.
Comparisons between the two countries are complicated by exchange rate fluctuations. If the yen weakens further, that could hasten China's ascent to world's number two behind the United States.
But China, which grew at 8.7pc last year, came close to unseating its neighbour from the position it has held for more than 40 years.
Japan's economy grew 1.1pc in October-December from the previous quarter, for an annualised pace of 4.6pc, the government reported.
For the whole of 2009, Japan's gross domestic product (GDP) shrank 5pc as exports and factory output collapsed during the global economic downturn, the data showed.
Despite the severe contraction, Japan stayed just ahead of China as the world's second-largest economy.
Japan posted nominal GDP of about 5.08 trillion dollars last year, based on the average dollar-yen exchange rate for 2009, the data showed.
China reported last month nominal GDP of about 4.9 trillion dollars for 2009.
But with China expected to enjoy another year of strong growth in 2010, Japan risks ending this year in third place worldwide as it struggles to cope with renewed deflation and a shrinking population, analysts said.
"China's population is 10 times larger than that of Japan. It's quite natural for China to overtake Japan in the face of rapid globalisation," said Toru Shimano, economist at Okasan Securities.
In terms of per capita GDP, China - with a population of more than 1.3 billion people - trails far behind Japan, with about 128 million.
China returned to double-digit growth in the fourth quarter of 2009 with a red-hot expansion of 10.7pc.
Without China's boom, Japan's economy would be even more sluggish given that the two are major trading partners, analysts said.
Comparisons between the two countries are complicated by exchange rate fluctuations. If the yen weakens further, that could hasten China's ascent to world's number two behind the United States.
Sir Richard Branson says Britain's deficit is a serious risk to recovery
Although the Virgin Group boss insisted he is still apolitical, his comments followed a private meeting last week with David Cameron and George Osborne in which he told the Conservative leaders that he agreed with their plans to cut the deficit immediately.
Sir Richard told The Daily Telegraph: "I believe the UK's record budget deficit does pose a serious risk to our economy's recovery – you only have to look at some other countries to see that.
"It would be deeply damaging to Britain if we lost the confidence of the global financial markets through delayed action and saw interest rates have to go up steeply.”
He added: “The next Government, whatever party that is, must set out a credible plan to reduce the bulk of the deficit over a Parliament by cutting wasteful spending and must not put off those tough decisions to next year.”
The Government has said it would not begin to pay off the deficit until 2011, arguing that withdrawing the fiscal stimulus too early would damage the recovery.
In one of the key points of difference between the two main parties in the run up to the General Election, the Conservatives have said they would hold an emergency budget within the first 50 days that would introduce spending cuts this year. However, more recently Mr Cameron said there would not be "swingeing cuts" immediately.
Sir Richard has joined other business and economic leaders in calling for even faster action on Britain’s debt problem.
At the weekend a group of 20 senior economists signed a letter saying their was "a compelling case" for the first measures to cut the deficit straight after the election.
The signatories included the former chief economist of the International Monetary Fund, a former deputy governor of the Bank of England and head of the Financial Services Authority, and a former permanent secretary to the Treasury and cabinet secretary.
The letter said: "In order to be credible, the Government's goal should be to eliminate the structural current budget deficit over the course of a parliament, and there is a compelling case, all else equal, for the first measures beginning to take effect in the 2010-11 fiscal year."
Sir Richard said that failure to act would “threaten to undermine the confidence of international and UK business, UK consumers and the global financial markets.”
He said: “As an entrepreneur I know that could cost jobs and reduce investment in Britain. We must send a clear signal that we have the issues in hand and a clear strategy for UK plc."
Sir Richard told The Daily Telegraph: "I believe the UK's record budget deficit does pose a serious risk to our economy's recovery – you only have to look at some other countries to see that.
"It would be deeply damaging to Britain if we lost the confidence of the global financial markets through delayed action and saw interest rates have to go up steeply.”
He added: “The next Government, whatever party that is, must set out a credible plan to reduce the bulk of the deficit over a Parliament by cutting wasteful spending and must not put off those tough decisions to next year.”
The Government has said it would not begin to pay off the deficit until 2011, arguing that withdrawing the fiscal stimulus too early would damage the recovery.
In one of the key points of difference between the two main parties in the run up to the General Election, the Conservatives have said they would hold an emergency budget within the first 50 days that would introduce spending cuts this year. However, more recently Mr Cameron said there would not be "swingeing cuts" immediately.
Sir Richard has joined other business and economic leaders in calling for even faster action on Britain’s debt problem.
At the weekend a group of 20 senior economists signed a letter saying their was "a compelling case" for the first measures to cut the deficit straight after the election.
The signatories included the former chief economist of the International Monetary Fund, a former deputy governor of the Bank of England and head of the Financial Services Authority, and a former permanent secretary to the Treasury and cabinet secretary.
The letter said: "In order to be credible, the Government's goal should be to eliminate the structural current budget deficit over the course of a parliament, and there is a compelling case, all else equal, for the first measures beginning to take effect in the 2010-11 fiscal year."
Sir Richard said that failure to act would “threaten to undermine the confidence of international and UK business, UK consumers and the global financial markets.”
He said: “As an entrepreneur I know that could cost jobs and reduce investment in Britain. We must send a clear signal that we have the issues in hand and a clear strategy for UK plc."
Friday, February 12, 2010
महा शिवरात्रि
Auspicious festival of Mahashivaratri falls on the 13th or the 14th night of the new moon during Krishna Paksha in the Hindu month of Phalgun. The Sanskrit term, Krishna Paksha means the period of waning moon or the dark fortnight and Phalguna corresponds to the month of February - March in English Calendar. Shivaratri Festival is celebrated on a moonless night.
According to Hindu mythology, Shivaratri or 'Shiva's Great Night' symbolizes the wedding day of Lord Shiva and Parvati. Many however, believe, Shivaratri is the night when Lord Shiva performed the Tandava Nritya - the dance of primordial creation, preservation and destruction. Celebrating the festival in a customary manner, devotees give a ritual bath to the Lingam with the panchagavya - milk, sour milk, urine, butter and dung. Celebrations of Shivaratri Festival mainly take place at night. Devotees of Lord Shiva throng Shiva temples across the country and spend ‘the Night of Lord Shiva’ by chanting verses and hymns in praise of the Lord. The festival holds special meaning for the ladies. They pray to Goddess Parvati also called 'Gaura', the giver of 'suhag' for good husbands, marital bliss and a long and prosperous married life.
According to Hindu mythology, Shivaratri or 'Shiva's Great Night' symbolizes the wedding day of Lord Shiva and Parvati. Many however, believe, Shivaratri is the night when Lord Shiva performed the Tandava Nritya - the dance of primordial creation, preservation and destruction. Celebrating the festival in a customary manner, devotees give a ritual bath to the Lingam with the panchagavya - milk, sour milk, urine, butter and dung. Celebrations of Shivaratri Festival mainly take place at night. Devotees of Lord Shiva throng Shiva temples across the country and spend ‘the Night of Lord Shiva’ by chanting verses and hymns in praise of the Lord. The festival holds special meaning for the ladies. They pray to Goddess Parvati also called 'Gaura', the giver of 'suhag' for good husbands, marital bliss and a long and prosperous married life.
Wednesday, February 10, 2010
India has got a spy in the sky
Bangalore: India is going to put up an eye in the sky to boost its military intelligence. The spycraft, called the Communication-Centric Intelligence Satellite (CCI-Sat), will be operational by 2014 and will keep a watch on the trouble spots in the neighbourhood, especially China and Pakistan.
Developed by the Defence Research and Development Organisation (DRDO), the CCI-Sat is India’s first original spy satellite. It will be launched by the Indian Space Research Organisation within the next four years.
The CCI-Sat is capable of picking images and supporting communication (conversation between two satellite phones, for instance), besides surveillance. “The satellite will orbit Earth at an altitude of 500km and will cover hostile regions in India’s neighbourhood by passing on the surveillance data to the intelligence,” said G Bhoopathy, the director of the Defence Electronic Research Laboratory (DLRL), the lab that is working on the satellite.
“The focus is now space, we have to equip ourselves for electronic warfare from space too,” he said. The satellite will be equipped with synthetic aperture radar to take high resolution images of the target regions. Pegged at Rs100 crore, the satellite design and development will be made by the ISRO while the payload will be built by the DLRL. “We are in discussions with the ISRO at the moment,” Bhoopathy said.
India, with its Technology Experiment Satellite (TES), is already among the nations that have spy satellites. These include the US, Russia and Japan.
TES, which was launched in 2001, helped the US army with high-resolution images during the 9/11 counter against the
Taliban.
Besides TES, ISRO’s Cartosat series of satellites and the Radar Imaging Satellite (Risat-2) can also be used for surveillance and espionage. But the CCI-Sat is the first 100% spy satellite of India.
“This satellite will be much better than Risat-2,” Bhoopathy said.
ISRO is also planning to launch the Gsat-7 satellite to boost communication system for the Indian Navy. This would be launched later this year.
Developed by the Defence Research and Development Organisation (DRDO), the CCI-Sat is India’s first original spy satellite. It will be launched by the Indian Space Research Organisation within the next four years.
The CCI-Sat is capable of picking images and supporting communication (conversation between two satellite phones, for instance), besides surveillance. “The satellite will orbit Earth at an altitude of 500km and will cover hostile regions in India’s neighbourhood by passing on the surveillance data to the intelligence,” said G Bhoopathy, the director of the Defence Electronic Research Laboratory (DLRL), the lab that is working on the satellite.
“The focus is now space, we have to equip ourselves for electronic warfare from space too,” he said. The satellite will be equipped with synthetic aperture radar to take high resolution images of the target regions. Pegged at Rs100 crore, the satellite design and development will be made by the ISRO while the payload will be built by the DLRL. “We are in discussions with the ISRO at the moment,” Bhoopathy said.
India, with its Technology Experiment Satellite (TES), is already among the nations that have spy satellites. These include the US, Russia and Japan.
TES, which was launched in 2001, helped the US army with high-resolution images during the 9/11 counter against the
Taliban.
Besides TES, ISRO’s Cartosat series of satellites and the Radar Imaging Satellite (Risat-2) can also be used for surveillance and espionage. But the CCI-Sat is the first 100% spy satellite of India.
“This satellite will be much better than Risat-2,” Bhoopathy said.
ISRO is also planning to launch the Gsat-7 satellite to boost communication system for the Indian Navy. This would be launched later this year.
Saturday, February 06, 2010
India's FX reserves at $280.955 bln as on Jan. 29
MUMBAI (Reuters) - India's foreign exchange reserves fell to $280.955 billion as on Jan. 29, from $282,938 billion a week earlier, the Reserve Bank of India (RBI) said in its weekly statistical supplement on Friday.
Changes in foreign currency assets, expressed in dollar terms, include the effect of appreciation or depreciation of other currencies held in its reserves such as the euro, pound sterling and yen, the central bank said.
Foreign exchange reserves include India's Reserve Tranche position in the International Monetary Fund (IMF), the Reserve Bank of India said.
Changes in foreign currency assets, expressed in dollar terms, include the effect of appreciation or depreciation of other currencies held in its reserves such as the euro, pound sterling and yen, the central bank said.
Foreign exchange reserves include India's Reserve Tranche position in the International Monetary Fund (IMF), the Reserve Bank of India said.
Friday, February 05, 2010
Trichet Struggles to Convince on Euro-Area Solidity
Feb. 5 (Bloomberg) -- European Central Bank President Jean- Claude Trichet is struggling to convince investors that the euro region shouldn’t be punished for Greece’s budget problems.
As Greece tries to control a record deficit and stem a slide in its bonds, Trichet said the economy of the 16-nation euro area is solid and its budget shortfall will probably be smaller than those of the U.S. and Japan this year. The comments yesterday didn’t stop Spanish and Portuguese stocks from dropping on concern they are in a similar predicament to Greece or the euro from tumbling to a nine-month low against the dollar.
Trichet “did not convince me,” said Stuart Thomson, who helps manage $100 billion at Ignis Asset Management in Glasgow, Scotland. “Where does he think the Greek, Spanish and Portuguese economies will be three years from now? Their austerity measures will weigh on the euro area as a whole.”
Trichet has been forced to fend off questions about the survival of the euro as investors doubt Greece’s ability to cut its deficit from 12.7 percent of gross domestic product to below the European Union’s 3 percent limit. As concern spreads to Spain and Portugal’s rising debt burdens, Trichet will try to stress the need for fiscal prudence without inflaming skepticism that it can be achieved.
“Something has to happen to turn credibility around,” said Paul Mortimer-Lee, head of Market Economics at BNP Paribas in London. “The market’s just saying it’s not believable. It might have to get worse before it gets better.”
Markets Shudder
Spanish stocks dropped the most in 15 months yesterday and Portugal led declines in government bonds. Increasing concern about sovereign creditworthiness contributed to a rout in shares that spread across the globe, with the Standard & Poor’s 500 Stock Index closing down 3.1 percent and the MSCI Asia Pacific Index losing 2.5 percent as of 1:53 p.m. Hong Kong time.
The euro fell as low as $1.3669 today and traded at $1.3706 at 2:54 p.m. in Tokyo. It has declined about 9 percent since Nov. 25.
Greek bonds have tumbled in the past two months, pushing the yield on the country’s 10-year debt above 7 percent, the highest since 1999, the year the euro was introduced. The premium investors charge to hold Greek 10-year bonds over the benchmark German bund has widened to 356 basis points, about 10 times what it was two years ago.
No Rush at ECB
The ECB yesterday left its benchmark rate at a record low of 1 percent and Trichet signaled the bank is in no rush to raise borrowing costs as the economy recovers gradually from its worst recession since World War II.
Still, Trichet said the “solidity” of the euro area “is not necessarily very well known” and its situation compares “very flatteringly with a number of other industrialized countries.”
The euro-area economy will grow 0.8 percent this year and 1.2 percent in 2011, according to the ECB’s December forecasts. It contracted 4 percent last year, the European Commission estimates.
“Trichet is still trying to persuade markets that they should be looking at the euro area as a whole, which does not look that bad, rather than at individual countries, some of which look extremely fragile,” said Marco Annunziata, chief economist at UniCredit SpA in London.
Ballooning Debt
Spain’s public debt will rise to 74 percent of GDP by 2011 from 54 percent last year, according to European Commission forecasts. Greece’s debt will increase to 135 percent of GDP from 113 percent, and Portugal’s will increase to 91 percent from 77 percent, the EU estimates.
Greece’s consolidation plans, which call for about 10 billion euros ($13.7 billion) of spending cuts and revenue increases this year, are more ambitious than any budget reduction achieved by euro-region countries since the 1970s, according to ING Group.
Papandreou told reporters today in New Delhi that Greece has no plans to put in place new measures to cut its budget deficit. He said the steps already announced are “credible,” adding that the nation has substantial funds available from the European Union.
Greece’s biggest union yesterday approved a second mass strike this month to protest the spending cuts and tax collectors began a 48-hour walkout, illustrating the difficulty Prime Minister George Papandreou faces in implementing his plan.
“We expect and we are confident that the Greek government will take all the decisions that will permit them to reach that goal,” Trichet said. Additional proposals announced by Greece this week to freeze public-sector wages and revamp the pension system “are steps in the right direction,” he said.
As Greece tries to control a record deficit and stem a slide in its bonds, Trichet said the economy of the 16-nation euro area is solid and its budget shortfall will probably be smaller than those of the U.S. and Japan this year. The comments yesterday didn’t stop Spanish and Portuguese stocks from dropping on concern they are in a similar predicament to Greece or the euro from tumbling to a nine-month low against the dollar.
Trichet “did not convince me,” said Stuart Thomson, who helps manage $100 billion at Ignis Asset Management in Glasgow, Scotland. “Where does he think the Greek, Spanish and Portuguese economies will be three years from now? Their austerity measures will weigh on the euro area as a whole.”
Trichet has been forced to fend off questions about the survival of the euro as investors doubt Greece’s ability to cut its deficit from 12.7 percent of gross domestic product to below the European Union’s 3 percent limit. As concern spreads to Spain and Portugal’s rising debt burdens, Trichet will try to stress the need for fiscal prudence without inflaming skepticism that it can be achieved.
“Something has to happen to turn credibility around,” said Paul Mortimer-Lee, head of Market Economics at BNP Paribas in London. “The market’s just saying it’s not believable. It might have to get worse before it gets better.”
Markets Shudder
Spanish stocks dropped the most in 15 months yesterday and Portugal led declines in government bonds. Increasing concern about sovereign creditworthiness contributed to a rout in shares that spread across the globe, with the Standard & Poor’s 500 Stock Index closing down 3.1 percent and the MSCI Asia Pacific Index losing 2.5 percent as of 1:53 p.m. Hong Kong time.
The euro fell as low as $1.3669 today and traded at $1.3706 at 2:54 p.m. in Tokyo. It has declined about 9 percent since Nov. 25.
Greek bonds have tumbled in the past two months, pushing the yield on the country’s 10-year debt above 7 percent, the highest since 1999, the year the euro was introduced. The premium investors charge to hold Greek 10-year bonds over the benchmark German bund has widened to 356 basis points, about 10 times what it was two years ago.
No Rush at ECB
The ECB yesterday left its benchmark rate at a record low of 1 percent and Trichet signaled the bank is in no rush to raise borrowing costs as the economy recovers gradually from its worst recession since World War II.
Still, Trichet said the “solidity” of the euro area “is not necessarily very well known” and its situation compares “very flatteringly with a number of other industrialized countries.”
The euro-area economy will grow 0.8 percent this year and 1.2 percent in 2011, according to the ECB’s December forecasts. It contracted 4 percent last year, the European Commission estimates.
“Trichet is still trying to persuade markets that they should be looking at the euro area as a whole, which does not look that bad, rather than at individual countries, some of which look extremely fragile,” said Marco Annunziata, chief economist at UniCredit SpA in London.
Ballooning Debt
Spain’s public debt will rise to 74 percent of GDP by 2011 from 54 percent last year, according to European Commission forecasts. Greece’s debt will increase to 135 percent of GDP from 113 percent, and Portugal’s will increase to 91 percent from 77 percent, the EU estimates.
Greece’s consolidation plans, which call for about 10 billion euros ($13.7 billion) of spending cuts and revenue increases this year, are more ambitious than any budget reduction achieved by euro-region countries since the 1970s, according to ING Group.
Papandreou told reporters today in New Delhi that Greece has no plans to put in place new measures to cut its budget deficit. He said the steps already announced are “credible,” adding that the nation has substantial funds available from the European Union.
Greece’s biggest union yesterday approved a second mass strike this month to protest the spending cuts and tax collectors began a 48-hour walkout, illustrating the difficulty Prime Minister George Papandreou faces in implementing his plan.
“We expect and we are confident that the Greek government will take all the decisions that will permit them to reach that goal,” Trichet said. Additional proposals announced by Greece this week to freeze public-sector wages and revamp the pension system “are steps in the right direction,” he said.
Thursday, February 04, 2010
Food inflation picks up pace; govt steps seen
NEW DELHI (Reuters) - Annual food inflation picked-up pace for the second consecutive week, strengthening the case for more fiscal steps in the federal budget to tame prices after the Reserve Bank tightened monetary policy last week.
Analysts said any hike in petrol and diesel prices as suggested by a government panel on Wednesday would further drive broader inflation.
High food prices, resulting in part from a poor harvest of summer-sown crops after the worst monsoon in nearly three decades, are spilling into broader inflation, which some economists say could reach double-digits by the end of the fiscal year in March.
"If fuel prices are freed, that will lead to increase in fuel, food and wholesale price inflation, though politically I don't see that happening as of now," said Bibek Debroy, an economist at Centre for Policy Research, a Delhi-based think tank.
The food price index rose 17.56 percent in the 12 months to Jan. 23, higher than an annual rise of 17.40 percent in the previous week, data released on Thursday showed.
The fuel index rose to an annual 5.88 percent, higher than an annual rise of 5.70 percent in the previous week.
Prime Minister Manmohan Singh, under pressure over high food prices, has scheduled a meeting of state chief ministers on Saturday to discuss steps to contain prices.
The Reserve Bank, which raised banks' cash reserve ratio by a higher-than-expected 75 basis points in its quarterly monetary review on Jan. 29, lifted its wholesale price index inflation forecast for end-March to 8.5 percent.
It also said it expected inflation to moderate starting in July, assuming a normal monsoon and global oil prices holding at current levels.
Finance Minister Pranab Mukherjee, who will present his budget for 2010/11 on Feb. 26, is expected to partially withdraw fiscal stimulus announced last year, while announcing more measures to contain food prices.
Policymakers say the government could increase fund allocation for the farm sector, rural infrastructure and tax incentives to the food processing industry to increase supplies in the market.
The finance ministry's chief economic adviser, Kaushik Basu, said last week that inflation was spreading to other sectors, but added that it would not go out of control.
India's economy is expected to expand by 7 percent in the current fiscal year to end-March, faster than 6.7 percent last year, helped by a recovering global economy and rapid expansion in domestic industrial output, a Reuters poll showed last month.
The economy grew 7.9 percent in the quarter through September, its fastest in 18 months, while industrial production grew in November at its fastest pace in more than two years at 11.7 percent.
Analysts said any hike in petrol and diesel prices as suggested by a government panel on Wednesday would further drive broader inflation.
High food prices, resulting in part from a poor harvest of summer-sown crops after the worst monsoon in nearly three decades, are spilling into broader inflation, which some economists say could reach double-digits by the end of the fiscal year in March.
"If fuel prices are freed, that will lead to increase in fuel, food and wholesale price inflation, though politically I don't see that happening as of now," said Bibek Debroy, an economist at Centre for Policy Research, a Delhi-based think tank.
The food price index rose 17.56 percent in the 12 months to Jan. 23, higher than an annual rise of 17.40 percent in the previous week, data released on Thursday showed.
The fuel index rose to an annual 5.88 percent, higher than an annual rise of 5.70 percent in the previous week.
Prime Minister Manmohan Singh, under pressure over high food prices, has scheduled a meeting of state chief ministers on Saturday to discuss steps to contain prices.
The Reserve Bank, which raised banks' cash reserve ratio by a higher-than-expected 75 basis points in its quarterly monetary review on Jan. 29, lifted its wholesale price index inflation forecast for end-March to 8.5 percent.
It also said it expected inflation to moderate starting in July, assuming a normal monsoon and global oil prices holding at current levels.
Finance Minister Pranab Mukherjee, who will present his budget for 2010/11 on Feb. 26, is expected to partially withdraw fiscal stimulus announced last year, while announcing more measures to contain food prices.
Policymakers say the government could increase fund allocation for the farm sector, rural infrastructure and tax incentives to the food processing industry to increase supplies in the market.
The finance ministry's chief economic adviser, Kaushik Basu, said last week that inflation was spreading to other sectors, but added that it would not go out of control.
India's economy is expected to expand by 7 percent in the current fiscal year to end-March, faster than 6.7 percent last year, helped by a recovering global economy and rapid expansion in domestic industrial output, a Reuters poll showed last month.
The economy grew 7.9 percent in the quarter through September, its fastest in 18 months, while industrial production grew in November at its fastest pace in more than two years at 11.7 percent.
Morgan Stanley raises India FY11 growth f'cast to 8.5 pct
MUMBAI (Reuters) - Morgan Stanley raised its forecast for India's economic growth to 8.5 percent in 2010/11 from 8 percent earlier, citing a pick-up in domestic consumption and said interest rates would climb as inflation accelerates.
"The key driver for this higher growth will be domestic demand, particularly investments," the investment bank said in a research note on Thursday.
The stronger growth will be followed by higher inflation and policy rates, it said.
It forecast the reverse repo rate, the central bank's main short-term borrowing rate, to rise by 175 basis points in calendar 2010 from its earlier projection of 150 basis points increase. The reverse repo is currently at 3.25 percent.
Last week, the Indian central bank kept key rates unchanged but raised banks' cash reserve requirement, signalling it aimed to rein in the loose monetary policy that was put in place to head off the impact from the global slowdown.
Morgan Stanley also revised its gross domestic product growth forecast for 2009/10 to 7.1 percent from 6.7 percent earlier.
The Reserve Bank of India had last week raised its 2009/10 GDP projection to 7.5 percent from 6 percent earlier.
The U.S. investment bank has raised its non-food inflation expectation to an average 5.5 percent in 2010/11 from 4.5 percent earlier on build-up of domestic demand pressures.
It projected the Indian economy to grow 8.4 percent in 2011/12 from its previous projection of 7.6 percent.
"The key driver for this higher growth will be domestic demand, particularly investments," the investment bank said in a research note on Thursday.
The stronger growth will be followed by higher inflation and policy rates, it said.
It forecast the reverse repo rate, the central bank's main short-term borrowing rate, to rise by 175 basis points in calendar 2010 from its earlier projection of 150 basis points increase. The reverse repo is currently at 3.25 percent.
Last week, the Indian central bank kept key rates unchanged but raised banks' cash reserve requirement, signalling it aimed to rein in the loose monetary policy that was put in place to head off the impact from the global slowdown.
Morgan Stanley also revised its gross domestic product growth forecast for 2009/10 to 7.1 percent from 6.7 percent earlier.
The Reserve Bank of India had last week raised its 2009/10 GDP projection to 7.5 percent from 6 percent earlier.
The U.S. investment bank has raised its non-food inflation expectation to an average 5.5 percent in 2010/11 from 4.5 percent earlier on build-up of domestic demand pressures.
It projected the Indian economy to grow 8.4 percent in 2011/12 from its previous projection of 7.6 percent.
Tuesday, February 02, 2010
China to Raise Resource Acquisitions as Car, Home Sales Jump
Feb. 2 (Bloomberg) -- China, the world’s largest metal consumer, will add to last year’s record $32 billion spending on resource acquisitions as demand for iron ore, copper and oil soars with the fastest economic growth since 2007.
Chinese companies will hunt for iron ore, coal, oil, copper and gold assets, said Jing Ulrich, the chairwoman of China equities and commodities at JPMorgan Chase & Co. in Hong Kong.
China Minmetals Corp. and China Petrochemical Corp. led an acquisition spree last year, as companies snapped up zinc mines in Australia, oil reserves in Nigeria, and gold deposits in the Philippines. Owning resources will give China more control over pricing and reduce its dependence on suppliers including BHP Billiton Ltd., the world’s largest mining company.
“There are still many opportunities for mergers and acquisitions overseas this year, even though asset valuations would be much higher,” Huang Dongmei, deputy general manager at Minmetals Exploration and Development Co., a unit of China Minmetals, said by phone from Beijing. “We’re considering several projects,” Huang said, without giving details.
Aluminum Corp. of China, the nation’s largest maker of the metal, will “utilize all its resources and energy” to speed up acquisitions this year, Chairman Xiong Weiping told staff in a speech posted on its Web site on Jan. 25.
The state-owned company was rebuffed in June by Rio Tinto Group from investing $19.5 billion in the world’s second-biggest iron ore supplier amid objections from shareholders and Australian politicians. The Beijing-based company is London- based Rio’s largest shareholder.
Record Imports
China’s imports of iron ore, copper and oil leapt to records in 2009, as demand from carmakers and builders including Volkswagen AG and China Vanke Co. expanded.
The economy grew 10.7 percent in the fourth quarter, the fastest pace since 2007, on the $586 billion stimulus spending and record lending.
“You’ll have a lot more Beijings and Shanghais coming up over the next 20 and 30 years and to feed all of that, the amount of iron and steel is huge,” said Eric Lilford, head of Australia mining at Deloitte Corporate Finance in Perth. Chinese demand “has been relatively strong even during the global financial crisis and it’s stronger now.”
China’s refined copper demand may jump 14.8 percent to 6.81 million metric tons this year, said Qu Yi, a Beijing-based analyst at CRU International Ltd. Iron ore imports may rise 27 percent to 800 million tons by 2012, up from the record last year, as steel consumption surges, researcher Umetal.com said.
Rising Investments
Before the global recession last year depressed asset prices, China’s investments in overseas resource and energy companies rose every year but one from just $578 million in 2004, according to Bloomberg data.
Yanzhou Coal Mining Co., a unit of China’s fourth- largest coal producer, bought Australia’s Felix Resources Ltd. for A$3.5 billion ($3.1 billion). China Petrochemical purchased Addax Petroleum Corp. for C$8.3 billion ($7.8 billion) last year to add oil reserves.
Minmetals, the nation’s largest metals trader, agreed in June to pay $1.4 billion for most of the assets of OZ Minerals Ltd., then the world’s second-largest zinc producer.
‘The total size of such deals is expected to reach a new record,” said Li Luhui, a Beijing-based analyst with Zero2IPO, a research company which counts China’s National Council for Social Security Fund as a client. “The Chinese government will continue to support large state-owned companies with related policies and capital to go overseas.”
Energy Targets
China may focus on energy targets in South America and Central Asia, and metals in Africa this year, Li said. Smaller companies may struggle to raise funds as the government seeks to curb lending, Li said.
China’s $300 billion sovereign wealth fund, which pumped about $10 billion into commodity-related companies in the second half of 2009, is in “early talks” for investments in Brazil, the world’s second-biggest iron ore exporter, and Mexico, Chairman Lou Jiwei said Jan. 20.
Chinese companies weren’t all successful last year, with Rio preferring to sell shares instead of taking up Aluminum Corp.’s offer. Australia also barred China Non-Ferrous Metal Mining (Group) Co. from buying a majority stake in rare-earth producer Lynas Corp.
“Since political sensitivities may complicate larger resource acquisitions, transactions involving smaller target firms may prove appealing,” JPMorgan’s Ulrich said.
Prices of copper more than doubled last year and oil surged 78 percent. Contract iron ore prices may rise 31 percent to the second-highest on record this year, according to a mean estimate of analysts surveyed by Bloomberg.
Deals this year may be harder as valuations improve with better economic conditions and prices, said Xu Zhongbo, a professor with the University of Science & Technology in Beijing.
“China will retain its policy of encouraging companies to go abroad,” said Xu.
Chinese companies will hunt for iron ore, coal, oil, copper and gold assets, said Jing Ulrich, the chairwoman of China equities and commodities at JPMorgan Chase & Co. in Hong Kong.
China Minmetals Corp. and China Petrochemical Corp. led an acquisition spree last year, as companies snapped up zinc mines in Australia, oil reserves in Nigeria, and gold deposits in the Philippines. Owning resources will give China more control over pricing and reduce its dependence on suppliers including BHP Billiton Ltd., the world’s largest mining company.
“There are still many opportunities for mergers and acquisitions overseas this year, even though asset valuations would be much higher,” Huang Dongmei, deputy general manager at Minmetals Exploration and Development Co., a unit of China Minmetals, said by phone from Beijing. “We’re considering several projects,” Huang said, without giving details.
Aluminum Corp. of China, the nation’s largest maker of the metal, will “utilize all its resources and energy” to speed up acquisitions this year, Chairman Xiong Weiping told staff in a speech posted on its Web site on Jan. 25.
The state-owned company was rebuffed in June by Rio Tinto Group from investing $19.5 billion in the world’s second-biggest iron ore supplier amid objections from shareholders and Australian politicians. The Beijing-based company is London- based Rio’s largest shareholder.
Record Imports
China’s imports of iron ore, copper and oil leapt to records in 2009, as demand from carmakers and builders including Volkswagen AG and China Vanke Co. expanded.
The economy grew 10.7 percent in the fourth quarter, the fastest pace since 2007, on the $586 billion stimulus spending and record lending.
“You’ll have a lot more Beijings and Shanghais coming up over the next 20 and 30 years and to feed all of that, the amount of iron and steel is huge,” said Eric Lilford, head of Australia mining at Deloitte Corporate Finance in Perth. Chinese demand “has been relatively strong even during the global financial crisis and it’s stronger now.”
China’s refined copper demand may jump 14.8 percent to 6.81 million metric tons this year, said Qu Yi, a Beijing-based analyst at CRU International Ltd. Iron ore imports may rise 27 percent to 800 million tons by 2012, up from the record last year, as steel consumption surges, researcher Umetal.com said.
Rising Investments
Before the global recession last year depressed asset prices, China’s investments in overseas resource and energy companies rose every year but one from just $578 million in 2004, according to Bloomberg data.
Yanzhou Coal Mining Co., a unit of China’s fourth- largest coal producer, bought Australia’s Felix Resources Ltd. for A$3.5 billion ($3.1 billion). China Petrochemical purchased Addax Petroleum Corp. for C$8.3 billion ($7.8 billion) last year to add oil reserves.
Minmetals, the nation’s largest metals trader, agreed in June to pay $1.4 billion for most of the assets of OZ Minerals Ltd., then the world’s second-largest zinc producer.
‘The total size of such deals is expected to reach a new record,” said Li Luhui, a Beijing-based analyst with Zero2IPO, a research company which counts China’s National Council for Social Security Fund as a client. “The Chinese government will continue to support large state-owned companies with related policies and capital to go overseas.”
Energy Targets
China may focus on energy targets in South America and Central Asia, and metals in Africa this year, Li said. Smaller companies may struggle to raise funds as the government seeks to curb lending, Li said.
China’s $300 billion sovereign wealth fund, which pumped about $10 billion into commodity-related companies in the second half of 2009, is in “early talks” for investments in Brazil, the world’s second-biggest iron ore exporter, and Mexico, Chairman Lou Jiwei said Jan. 20.
Chinese companies weren’t all successful last year, with Rio preferring to sell shares instead of taking up Aluminum Corp.’s offer. Australia also barred China Non-Ferrous Metal Mining (Group) Co. from buying a majority stake in rare-earth producer Lynas Corp.
“Since political sensitivities may complicate larger resource acquisitions, transactions involving smaller target firms may prove appealing,” JPMorgan’s Ulrich said.
Prices of copper more than doubled last year and oil surged 78 percent. Contract iron ore prices may rise 31 percent to the second-highest on record this year, according to a mean estimate of analysts surveyed by Bloomberg.
Deals this year may be harder as valuations improve with better economic conditions and prices, said Xu Zhongbo, a professor with the University of Science & Technology in Beijing.
“China will retain its policy of encouraging companies to go abroad,” said Xu.
Friday, January 29, 2010
RBI hikes CRR by 75 bps to 5.75%
MUMBAI: The RBI has increased cash reserve ratio by 75 bps to 5.75%, whereas key interest rates were unchanged in its third quarter review of the Annual Monetary Policy. CRR hike would suck out Rs 36,000 crore liquidity from the system. The hike would happen in two stages, the first stage of hike of 50 bps will be effective from February 13 and the next 25 bps from February 27. RBI kept the reverse repo rate unchanged at 3.25% and repo rate at 4.75%.
RBI projected the GDP growth for financial year 2009-10 at 7.5% from 6% last year. It also said that the inflation would be around 8.5% in March.
This policy is the first major move to mark the reversal of the easy money policy adopted since October 2008. A CRR hike has not come as a shocker for markets as the same has largely been factored into expectations.
Taking a cue from RBI's monetary policy stance, banks might not hike their auto, home and education loans in the near term.
Increases in CRR could push bond yields up, and weigh on shares of banks as well as sectors such as auto and property on concerns loan demand may slow.
The central bank absorbs excess funds from the banking system at the reverse repo rate, which is at 3.25 percent, and lends money to banks at the repo rate, which is 4.75 percent.
"With a stronger recovery in India, the risk of food price inflation causing generalized inflation cannot be ignored," the RBI said in a report on Thursday.
After cooling off for three consecutive weeks, food inflation was back on an upward trail. It rose to 17% on January 16 - from 16.81% a week earlier - on the back of rebounding prices of eggs and vegetables.
Food inflation had come down to 16.81% in the preceding week (January 9) after spotting the 20% mark in December, the highest in a decade.
High food prices have led to firming up of overall inflation too, which rose to 7.31% in December from 4.78% in November. Overall inflation was at sub-zero levels for 13 weeks till September last year.
Industrial output grew 11.7 per cent in November from a year earlier, as stimulus measures since October 2008 to overcome the global credit crunch supported domestic demand.
As expected this step of the Central Bank could be observed in the line of an exit from an accommodative monetary policy in its quarterly credit policy review. Analysts taking cue from last policy review had been expecting the RBI to start exiting its year-old accomodative monetary stance starting in early 2010, as signs emerge of a pick up in growth and inflationary pressures rise.
RBI projected the GDP growth for financial year 2009-10 at 7.5% from 6% last year. It also said that the inflation would be around 8.5% in March.
This policy is the first major move to mark the reversal of the easy money policy adopted since October 2008. A CRR hike has not come as a shocker for markets as the same has largely been factored into expectations.
Taking a cue from RBI's monetary policy stance, banks might not hike their auto, home and education loans in the near term.
Increases in CRR could push bond yields up, and weigh on shares of banks as well as sectors such as auto and property on concerns loan demand may slow.
The central bank absorbs excess funds from the banking system at the reverse repo rate, which is at 3.25 percent, and lends money to banks at the repo rate, which is 4.75 percent.
"With a stronger recovery in India, the risk of food price inflation causing generalized inflation cannot be ignored," the RBI said in a report on Thursday.
After cooling off for three consecutive weeks, food inflation was back on an upward trail. It rose to 17% on January 16 - from 16.81% a week earlier - on the back of rebounding prices of eggs and vegetables.
Food inflation had come down to 16.81% in the preceding week (January 9) after spotting the 20% mark in December, the highest in a decade.
High food prices have led to firming up of overall inflation too, which rose to 7.31% in December from 4.78% in November. Overall inflation was at sub-zero levels for 13 weeks till September last year.
Industrial output grew 11.7 per cent in November from a year earlier, as stimulus measures since October 2008 to overcome the global credit crunch supported domestic demand.
As expected this step of the Central Bank could be observed in the line of an exit from an accommodative monetary policy in its quarterly credit policy review. Analysts taking cue from last policy review had been expecting the RBI to start exiting its year-old accomodative monetary stance starting in early 2010, as signs emerge of a pick up in growth and inflationary pressures rise.
Banks may tweak sub-PLR if RBI raises cash reserve ratio
Banks are exploring the option of increasing the sub-prime lending rate, mainly offered to companies, while keeping the benchmark prime lending rate (BPLR) untouched.
The move comes amid growing expectations that the Reserve Bank of India (RBI) will increase the cash reserve ratio (CRR) in the third quarter review of the monetary policy in January-end.
A 50-basis-point (bps) hike in the CRR will suck out about Rs 20,000 crore from the system. However, banks are not likely to face much pressure on the liquidity front as the system is flush with around Rs 1 lakh crore surplus liquidity. Banks do not get any return on cash kept with RBI. This is currently 5 per cent of the banks’ net demand and time liabilities.
“Banks will not do anything in the fourth quarter on the interest rate front. There may be some tweaking in the sub-PLR range if the central bank decides to hike the CRR. The extent of increase in sub-PLR loans will depend on how much RBI increases the CRR,” SA Bhat, chairman and managing director of Indian Overseas Bank, told Business Standard.
Around 70 per cent bank lending happens below the BPLR, which is 11-13 per cent.
The Chennai-based bank expects to meet its targeted net interest margin (NIM) for 2009-10, projected at 2.8 per cent. Currently, the bank’s margin is 2.74 per cent.
Bankers said their NIMs might not come under pressure on a sequential basis as they were able to re-price their high-cost deposits. A faster-than-expected rise in profit was making a strong case for the central bank to suck out liquidity, analysts said. However, some bankers say that since inflation is due to supply-side bottlenecks, hiking the CRR may not solve the problem. “Raising the CRR may not bring down inflation. If RBI hikes the ration, banks will not earn any interest. To compensate, we may have to hike lending rates. But that may affect credit offtake, which is already very low,” said A C Pereira, chairman and managing director of Bank of Maharashtra. Inflation based on the wholesale price index shot up to 4.78 per cent in November as compared with 1.3 per cent in October, mainly due to a surge in food prices and a lower base last year. Rise in food prices was on the back of the worst monsoon since 1972, which was followed by floods affecting the summer crops.
According to a research report of Citigroup Global Markets, headline inflation could touch 8 per cent by March, much above the central bank’s projected rate of 6.5 per cent. “If the current sequential uptrend is maintained, the WPI appears likely to cross 8 per cent by March, with primary products and fuel prices being the key risk factors.
However, we maintain our call of 125 bps tightening in 2010 for now, given that authorities have been stressing the importance of focusing more on asset price inflation rather commodity-induced inflation,” the Citigroup report said. The government, however, feels that there is no need for an emergency action even after this week’s sudden spurt in inflation. “The fact that food inflation was high and would reflect in the WPI was known. So, this is not something that has taken us by surprise. We need to watch further and see if this is purely due to the base effect or whether this trend will continue,” Finance Secretary Ashok Chawla told reporters in New Delhi.
The move comes amid growing expectations that the Reserve Bank of India (RBI) will increase the cash reserve ratio (CRR) in the third quarter review of the monetary policy in January-end.
A 50-basis-point (bps) hike in the CRR will suck out about Rs 20,000 crore from the system. However, banks are not likely to face much pressure on the liquidity front as the system is flush with around Rs 1 lakh crore surplus liquidity. Banks do not get any return on cash kept with RBI. This is currently 5 per cent of the banks’ net demand and time liabilities.
“Banks will not do anything in the fourth quarter on the interest rate front. There may be some tweaking in the sub-PLR range if the central bank decides to hike the CRR. The extent of increase in sub-PLR loans will depend on how much RBI increases the CRR,” SA Bhat, chairman and managing director of Indian Overseas Bank, told Business Standard.
Around 70 per cent bank lending happens below the BPLR, which is 11-13 per cent.
The Chennai-based bank expects to meet its targeted net interest margin (NIM) for 2009-10, projected at 2.8 per cent. Currently, the bank’s margin is 2.74 per cent.
Bankers said their NIMs might not come under pressure on a sequential basis as they were able to re-price their high-cost deposits. A faster-than-expected rise in profit was making a strong case for the central bank to suck out liquidity, analysts said. However, some bankers say that since inflation is due to supply-side bottlenecks, hiking the CRR may not solve the problem. “Raising the CRR may not bring down inflation. If RBI hikes the ration, banks will not earn any interest. To compensate, we may have to hike lending rates. But that may affect credit offtake, which is already very low,” said A C Pereira, chairman and managing director of Bank of Maharashtra. Inflation based on the wholesale price index shot up to 4.78 per cent in November as compared with 1.3 per cent in October, mainly due to a surge in food prices and a lower base last year. Rise in food prices was on the back of the worst monsoon since 1972, which was followed by floods affecting the summer crops.
According to a research report of Citigroup Global Markets, headline inflation could touch 8 per cent by March, much above the central bank’s projected rate of 6.5 per cent. “If the current sequential uptrend is maintained, the WPI appears likely to cross 8 per cent by March, with primary products and fuel prices being the key risk factors.
However, we maintain our call of 125 bps tightening in 2010 for now, given that authorities have been stressing the importance of focusing more on asset price inflation rather commodity-induced inflation,” the Citigroup report said. The government, however, feels that there is no need for an emergency action even after this week’s sudden spurt in inflation. “The fact that food inflation was high and would reflect in the WPI was known. So, this is not something that has taken us by surprise. We need to watch further and see if this is purely due to the base effect or whether this trend will continue,” Finance Secretary Ashok Chawla told reporters in New Delhi.
Thursday, January 14, 2010
Makar Sankranti - January 14
Makar Sankranti is one of the most auspicious occasions for the Hindus, and is celebrated in almost all parts of the country in myriad cultural forms, with great devotion, fervour & gaiety. It is a harvest festival. Makar Sankranti is perhaps the only Indian festival whose date always falls on the same day every year i.e. the 14th of January.
Makar Sankranti is the day when the glorious Sun-God begins its ascendancy and entry into the Northern Hemisphere and thus it signifies an event wherein the Sun-God seems to remind their children that 'Tamaso Ma Jyotir Gamaya', may you go higher & higher, to more & more Light and never to Darkness.
To Hindus, the Sun stands for knowledge, spiritual light and wisdom. Makar Sankranti signifies that we should turn away from the darkness of delusion in which we live, and begin to enjoy a new life with bright light within us to shine brighter and brighter. We should gradually begin to grow in purity, wisdom, and knowledge, even as the Sun does from the Day of Makar Sankranti.
The festival of Makar Sankranti is highly regarded by the Hindus from North to down South. The day is known by various names and a variety of traditions are witnessed as one explores the festival in different states.
Traditions
Traditionally, this period is considered an auspicious time and the veteran Bhishma of Mahabharata chose to die during this period. Bhishma fell to the arrows of Arjuna. With his boon to choose the time of his death, he waited on a bed of arrows to depart from this world only during this period. It is believed that those who die in this period have no rebirth.
For the people in the Indo Gangetic plain, the day begins with taking dips in the Ganges and offering water to the Sun-God. The dip is said to purify the self and bestow ‘punya’. Special Puja is offered as a thanksgiving for good harvest.
Til and rice are two important ingredients of this festival. In the rice-eating belt of Bihar and eastern Uttar Pradesh, people have a special rice-centric meal on this day.
In Makar Sankranti, women prepare laddus or other sweets of Til & Gur and offer them to friends & relatives. It symbolizes a ‘Well-being Prayer for all’ gets manifested in action & deeds.
Celebrations
Makar Sankranti is observed and celebrated throughout India by all communities but with slight variations in the festivities.
Uttar Pradesh: In Uttar Pradesh, Sankranti is called ‘Khichiri’. It is an important bathing date during the famous Magh Mela and Kumbh Mela at Sangam (Prayag) in Allahabad.
West Bengal: It is known as Gangasagar Mela in Bengal and on the particular day people come from all over India for a ceremonial cleansing in the river Hooghly, near Kolkata.
Tamil Nadu:
In Tamil Nadu, Makar Sankranti is known by the name of ‘Pongal’. It is very popular particularly amongst farmers. Rice and pulses cooked together in ghee and milk is offered to the family deity after the ritual worship.
Andhra Pradesh:
In Andhra Pradesh, it is celebrated as a three-day harvest festival, known as Sankranthi.
Maharashtra:
In Maharashtra, on the Sankranti day, people exchange multi-colored tilguds made from til (sesame seeds) and sugar and til-laddus made from til and jaggery.
Assam:
Bhogali Bihu is celebrated on the day in Assam.
Punjab:
In Punjab where December and January are the coldest months of the year, huge bonfires are lit on the eve of Makar Sankranti and which is celebrated as "Lohri".
In Central India, it is known as Sankranti.
In Gujarat and Rajasthan, it is known as Uttarayan and is noted for the kite flying event.
Tuesday, January 12, 2010
November industrial output up 11.7 y/y - govt
NEW DELHI (Reuters) - India's industrial output rose at a faster-than-expected 11.7 percent in November from a year earlier, helped by stimulus measures that boosted domestic demand, data showed on Tuesday.
The median forecast in a Reuters poll was for an annual rise of 10 percent.
Manufacturing production rose 12.7 percent in November from a rise of 2.7 percent a year earlier.
The final figure for October's annual industrial growth rate was unchanged at 10.3 percent.
Industrial output rose 2.6 percent in the 2008/09 fiscal year (April-March), slower than 8.5 percent in 2007/08 as the global economic downturn hit Asia's third-largest economy.
Thursday, January 07, 2010
Iron Ore Reaches High as Goldman Sees ‘Panic Buying’
The cash price of iron ore delivered to China, the world’s biggest buyer, rose to the highest in more than a year amid what Goldman Sachs JBWere Pty said was “panic buying” by steel mills.
The cost of 62 percent iron-content ore delivered to Tianjin port increased 2.9 percent to $124.80 a metric ton yesterday, according to The Steel Index. The so-called spot price has surged 24 percent in four weeks and has more than doubled from its 2009 low on March 27.
Chinese mills have stepped up iron ore purchases to meet rising steel demand fueled by the nation’s stimulus spending. The gains boost expectations for a rise in annual contract prices, which would raise profits for Vale SA, Rio Tinto Group and BHP Billiton Ltd., the three biggest exporters.
“Spot price strength has been exacerbated by panic buying by Chinese mills increasingly concerned about availability at a time of reduced spot cargoes on offer from Australia due to contractual commitments,” Goldman Sachs JBWere analysts Malcolm Southwood and Paul Gray said in a report dated yesterday.
Fortescue Metals Group Ltd., Australia’s third-biggest exporter, advanced as much as 7.1 percent to A$5.57 on the Australian stock exchange, its highest since September 2008. It traded at A$5.24 at 2:42 p.m. Sydney time. Atlas Iron Ltd. rose 3.8 percent to A$2.21.
Demand has been spurred by buying ahead of the Lunar New Year holiday in China at the same time as non-Chinese customers boost contract purchases, Goldman’s Southwood and Gray said. The Chinese holiday starts Feb. 14 and will last for a week.
Annual Talks
“The sharp gain in prices is largely justifiable by stocking demand from Chinese traders ahead of the Chinese New Year,” Li Wei, an analyst at Shanghai-based commodities researcher CBI China Co. said today. “Yet it also has speculative elements as we’re ahead of the annual talks.”
Iron-ore suppliers hold annual talks with steelmakers to fix contract prices for the 12 months from April 1, the start of the Japanese financial year. The four-decade-old pricing system was fractured last year after Chinese mills failed to reach agreement with the three largest suppliers, boosting demand for cargoes settled on the cash market.
China’s 72 major steelmakers will probably post a 41 percent decline in their aggregate profit for 2009, the China Iron and Steel Association said Dec. 23. Steelmakers globally will suffer more losses should ore prices gain in 2010, Baoshan Iron & Steel Co., China’s largest steelmaker, said last month.
Price Forecasts
Producers last year agreed to a 33 percent cut in contract prices as the worst global recession since World War II cut demand. Macquarie Group Ltd. analysts forecast contract prices may jump 30 percent from last year’s price of about $60 a ton, according to a Dec. 15 report.
Goldman has raised its forecast for the average 2010 cash iron ore price, which includes freight costs, by 20 percent to $111 a ton, according to yesterday’s report. Its forecast for a 20 percent gain in this year’s contract price remains unchanged though the “risk remains firmly on the upside,” the analysts wrote in the report.
India, the world’s third-biggest exporter, last month introduced a levy on shipments to help secure additional supplies for its own consumption to help fuel economic growth, boosting prices. Australia is the world’s biggest exporter of iron ore.
The cost of 62 percent iron-content ore delivered to Tianjin port increased 2.9 percent to $124.80 a metric ton yesterday, according to The Steel Index. The so-called spot price has surged 24 percent in four weeks and has more than doubled from its 2009 low on March 27.
Chinese mills have stepped up iron ore purchases to meet rising steel demand fueled by the nation’s stimulus spending. The gains boost expectations for a rise in annual contract prices, which would raise profits for Vale SA, Rio Tinto Group and BHP Billiton Ltd., the three biggest exporters.
“Spot price strength has been exacerbated by panic buying by Chinese mills increasingly concerned about availability at a time of reduced spot cargoes on offer from Australia due to contractual commitments,” Goldman Sachs JBWere analysts Malcolm Southwood and Paul Gray said in a report dated yesterday.
Fortescue Metals Group Ltd., Australia’s third-biggest exporter, advanced as much as 7.1 percent to A$5.57 on the Australian stock exchange, its highest since September 2008. It traded at A$5.24 at 2:42 p.m. Sydney time. Atlas Iron Ltd. rose 3.8 percent to A$2.21.
Demand has been spurred by buying ahead of the Lunar New Year holiday in China at the same time as non-Chinese customers boost contract purchases, Goldman’s Southwood and Gray said. The Chinese holiday starts Feb. 14 and will last for a week.
Annual Talks
“The sharp gain in prices is largely justifiable by stocking demand from Chinese traders ahead of the Chinese New Year,” Li Wei, an analyst at Shanghai-based commodities researcher CBI China Co. said today. “Yet it also has speculative elements as we’re ahead of the annual talks.”
Iron-ore suppliers hold annual talks with steelmakers to fix contract prices for the 12 months from April 1, the start of the Japanese financial year. The four-decade-old pricing system was fractured last year after Chinese mills failed to reach agreement with the three largest suppliers, boosting demand for cargoes settled on the cash market.
China’s 72 major steelmakers will probably post a 41 percent decline in their aggregate profit for 2009, the China Iron and Steel Association said Dec. 23. Steelmakers globally will suffer more losses should ore prices gain in 2010, Baoshan Iron & Steel Co., China’s largest steelmaker, said last month.
Price Forecasts
Producers last year agreed to a 33 percent cut in contract prices as the worst global recession since World War II cut demand. Macquarie Group Ltd. analysts forecast contract prices may jump 30 percent from last year’s price of about $60 a ton, according to a Dec. 15 report.
Goldman has raised its forecast for the average 2010 cash iron ore price, which includes freight costs, by 20 percent to $111 a ton, according to yesterday’s report. Its forecast for a 20 percent gain in this year’s contract price remains unchanged though the “risk remains firmly on the upside,” the analysts wrote in the report.
India, the world’s third-biggest exporter, last month introduced a levy on shipments to help secure additional supplies for its own consumption to help fuel economic growth, boosting prices. Australia is the world’s biggest exporter of iron ore.
Monday, January 04, 2010
Indian Factory Output Rises Most in Seven Months
Jan. 4 (Bloomberg) -- India’s manufacturing output rose the most in seven months in December as exports rebounded and government stimulus stoked domestic demand for consumer goods.
HSBC Holdings Plc and Markit Economics’ Purchasing Managers’ Index stood at 55.6 last month compared with 53 in November, according to a report released today. That was the ninth monthly reading above 50, which indicates a gain in factory production.
Faster economic growth may enable Indian policy makers to start reversing emergency stimulus measures taken last year to prop up growth in Asia’s third-biggest economy. China’s manufacturing expanded at the fastest pace in more than five years in December, a report showed today, as Asian economies recover from the worst global recession since World War II.
“Concerns that growth in India’s manufacturing sector was taking a decisive turn for the worse should be allayed by this impressive release,” said Robert Prior-Wandesforde, senior Asia economist at HSBC Holdings in Singapore. “External demand is also playing an increasingly important role in driving output gains.”
Recent economic data indicate the recovery is gaining traction. Exports rose 18.2 percent in November to $13.2 billion, the first increase in 14 months, and industrial output growth accelerated to 10.3 percent in October.
Economic Stimulus
Prime Minister Manmohan Singh’s government and the central bank injected fiscal and monetary stimulus of more than 12 percent of gross domestic product between September 2008 and April 2009. That helped the economy grow 7.9 percent in the three months to Sept. 30, the fastest pace in more than a year.
India may grow as much as 8 percent in the year ending March 31, Finance Minister Pranab Mukherjee said on Dec. 23.
The prospect of faster economic expansion helped the Sensitive Index of stocks gain 81 percent in 2009, the biggest annual increase in 18 years. The Sensex rose 0.4 percent to 17,531.33 at 10.56 a.m. in Mumbai.
Record-low interest rates and tax cuts are reviving demand for cars made by Maruti Suzuki India Ltd. and Hyundai Motor Co.
“December data pointed to a substantial increase in new business received by Indian manufacturers,” Prior-Wandesforde said. The growth was driven by better economic conditions, business investments and promotional activities. “Demand from both domestic and foreign sources rose since November, although the home market remained the main driver of total new business expansion,” he said in the report.
HSBC Holdings Plc and Markit Economics’ Purchasing Managers’ Index stood at 55.6 last month compared with 53 in November, according to a report released today. That was the ninth monthly reading above 50, which indicates a gain in factory production.
Faster economic growth may enable Indian policy makers to start reversing emergency stimulus measures taken last year to prop up growth in Asia’s third-biggest economy. China’s manufacturing expanded at the fastest pace in more than five years in December, a report showed today, as Asian economies recover from the worst global recession since World War II.
“Concerns that growth in India’s manufacturing sector was taking a decisive turn for the worse should be allayed by this impressive release,” said Robert Prior-Wandesforde, senior Asia economist at HSBC Holdings in Singapore. “External demand is also playing an increasingly important role in driving output gains.”
Recent economic data indicate the recovery is gaining traction. Exports rose 18.2 percent in November to $13.2 billion, the first increase in 14 months, and industrial output growth accelerated to 10.3 percent in October.
Economic Stimulus
Prime Minister Manmohan Singh’s government and the central bank injected fiscal and monetary stimulus of more than 12 percent of gross domestic product between September 2008 and April 2009. That helped the economy grow 7.9 percent in the three months to Sept. 30, the fastest pace in more than a year.
India may grow as much as 8 percent in the year ending March 31, Finance Minister Pranab Mukherjee said on Dec. 23.
The prospect of faster economic expansion helped the Sensitive Index of stocks gain 81 percent in 2009, the biggest annual increase in 18 years. The Sensex rose 0.4 percent to 17,531.33 at 10.56 a.m. in Mumbai.
Record-low interest rates and tax cuts are reviving demand for cars made by Maruti Suzuki India Ltd. and Hyundai Motor Co.
“December data pointed to a substantial increase in new business received by Indian manufacturers,” Prior-Wandesforde said. The growth was driven by better economic conditions, business investments and promotional activities. “Demand from both domestic and foreign sources rose since November, although the home market remained the main driver of total new business expansion,” he said in the report.
Reliance Industries Raises $576 Million in Share Sale
Jan. 4 (Bloomberg) -- Reliance Industries Ltd., the Indian company seeking to buy LyondellBasell Industries AF, said it raised 26.8 billion rupees ($576 million) selling shares.
India’s largest company by market value sold 25.9 million shares at an average price of 1,035 rupees apiece, Reliance said in a statement to the Bombay Stock Exchange today. Life Insurance Corp. of India bought 25 million shares, a person familiar with the matter said.
The sale, the second such transaction by Reliance in less than four months, was at a 5 percent discount to the stock’s Dec. 31 closing price. Reliance’s Petroleum Trust unit raised $664 million selling shares to investors on Sept. 17.
“It is difficult to sell such large volumes of shares at market prices so the discount is not unusual,” said Apurva Shah, head of research at Prabhudas Lilladher Pvt. in Mumbai. “With a possible LyondellBasell deal around the corner, Reliance could be raising money for the purchase.”
Shares of Reliance Industries fell 1.4 percent, the most in two weeks, to 1,075.50 rupees in Mumbai trading. The benchmark Sensitive Index gained 0.5 percent. The stock rose 77 percent last year.
Lyondell Chemical Co. filed a plan to reorganize with the U.S. Bankruptcy Court last month as it evaluates an offer from Reliance, pitting the Indian company against lenders in a battle for the bankrupt chemical maker.
Reliance may pay as much as $12 billion for a controlling stake, Victor Shum, a Singapore-based senior principal at energy consultant Purvin & Gertz Inc., said in November when Reliance announced it made a non-binding all-cash bid to acquire LyondellBasell. The Mumbai-company hasn’t made details of its bid public.
Treasury Stock
Reliance created so-called treasury stock in 2002 when it merged with unit Reliance Petroleum Ltd., which constructed its first 660,000 barrel-a-day crude oil refinery at Jamnagar in Gujarat state. The company had 368 million such shares before today’s sale, K.R. Choksey Shares & Securities Pvt. said in a note.
Reliance has $4.65 billion of cash and cash equivalent and $7.9 billion in treasury stock, according to K.R. Choksey.
Life Insurance Corp. is the largest institutional shareholder in Reliance with a 6.07 percent stake as of Sept. 30, according to data compiled by Bloomberg.
Citigroup Inc. and Morgan Stanley managed the stock sale, according to Bloomberg data.
India’s largest company by market value sold 25.9 million shares at an average price of 1,035 rupees apiece, Reliance said in a statement to the Bombay Stock Exchange today. Life Insurance Corp. of India bought 25 million shares, a person familiar with the matter said.
The sale, the second such transaction by Reliance in less than four months, was at a 5 percent discount to the stock’s Dec. 31 closing price. Reliance’s Petroleum Trust unit raised $664 million selling shares to investors on Sept. 17.
“It is difficult to sell such large volumes of shares at market prices so the discount is not unusual,” said Apurva Shah, head of research at Prabhudas Lilladher Pvt. in Mumbai. “With a possible LyondellBasell deal around the corner, Reliance could be raising money for the purchase.”
Shares of Reliance Industries fell 1.4 percent, the most in two weeks, to 1,075.50 rupees in Mumbai trading. The benchmark Sensitive Index gained 0.5 percent. The stock rose 77 percent last year.
Lyondell Chemical Co. filed a plan to reorganize with the U.S. Bankruptcy Court last month as it evaluates an offer from Reliance, pitting the Indian company against lenders in a battle for the bankrupt chemical maker.
Reliance may pay as much as $12 billion for a controlling stake, Victor Shum, a Singapore-based senior principal at energy consultant Purvin & Gertz Inc., said in November when Reliance announced it made a non-binding all-cash bid to acquire LyondellBasell. The Mumbai-company hasn’t made details of its bid public.
Treasury Stock
Reliance created so-called treasury stock in 2002 when it merged with unit Reliance Petroleum Ltd., which constructed its first 660,000 barrel-a-day crude oil refinery at Jamnagar in Gujarat state. The company had 368 million such shares before today’s sale, K.R. Choksey Shares & Securities Pvt. said in a note.
Reliance has $4.65 billion of cash and cash equivalent and $7.9 billion in treasury stock, according to K.R. Choksey.
Life Insurance Corp. is the largest institutional shareholder in Reliance with a 6.07 percent stake as of Sept. 30, according to data compiled by Bloomberg.
Citigroup Inc. and Morgan Stanley managed the stock sale, according to Bloomberg data.
Saturday, January 02, 2010
Be curious about companies
Since the Satyam scam, the focus on corporate governance has increased manifold. Investors should keep a close watch on a company’s activities to ensure safety of their money.
On January 7, 2009, Satyam Computer Services’ Chairman Ramalinga Raju informed shareholders that he had “cooked” the company’s books for years. Raju’s statement opened a can of worms that had investors and fund managers questioning the veracity of several companies’ numbers who had dubious dealings in the past.
There were several calls for improving corporate governance of listed entities. In fact, the market regulator, the Securities and Exchange Board of India (Sebi), introduced peer review, whereby another auditor would scrutinise a company’s financial documents with their existing auditor.
Irrespective of the debate, corporate governance is one of the key areas that investors should look at before putting their money in stocks. Some companies, such as HDFC and Infosys, get better valuations because of transparency. If you look at most of the corporate bankruptcies globally in the last two decades, you will find that a majority of the businesses failed not because of market conditions, but due to lack of corporate governance.
While financial results, earnings per share (EPS) and operating margins show the quantitative characteristics of a company, the qualitative ones are judged by corporate governance and ethical behaviour. All these combined have a bearing on the stock prices of a company.
Simply put, corporate governance is a system of checks and balances between a company’s board, its management and investors. The system strives to create shareholder value. And scandals like Enron, Worldcom and Satyam are painful reminders that companies, which do not follow ethical values, are likely to hurt both employees and investors.
Studies have proved that good corporate governance not only increased investors’ confidence, but also brought down the cost of capital for the company. A company that is transparent has standardised accounting practices, free flow of information and clear policies. They even find it easier to sail through bad times and secure support of stakeholders in times of difficulty.
Let’s look at some of the practices companies with better corporate governance follow and how one should interpret their actions as an investor.
INTERNAL
Board-level governance: Independence of the Board and professionalism are key to corporate governance. The Board is required to discharge its fiduciary obligations. Look for companies that have proper committees to decide on remuneration, audit, nomination, investor grievances and so on.
Auditors: Auditors should keep proper checks and balances on company affairs. In case of any wrongdoing, they should report to the Board and shareholders. In case of Satyam, its auditor Pricewaterhouse faced a lot of flak.
Investor servicing: Companies with good governance adopt greater transparency in their reporting. They provide proper disclosures to their shareholders and are prompt in resolving investor grievances. Many companies’ governance is reduced to a narrative in a paragraph in the annual report or directors’ reports. This should not be the case. Corporate governance should be part of the Board’s responsibility towards shareholders.
Shareholder participation: Institutional investors have the means to play an active role in ensuring that the management doesn't go off-track. The institutional investors can demand the required changes at companies they have invested in.
For instance, just a couple of weeks before Raju admitted to fudging Satyam’s books, institutional investors blocked his proposal to buy a majority stake in his family owned Maytas Infrastructure by using the cash in the company’s balance sheet.
Forming minority shareholders' groups can also be a positive step. There are several activist minority shareholders abroad, who constantly keep a check on the company’s plans. Individual or retail shareholders should use these groups to communicate with institutional shareholders for taking up their concerns with the company's management. They can always question a company’s governance at the annual general meetings.
EXTERNAL
Rating: Rating agencies, such as CRISIL and ICRA rate companies on the basis of corporate governance. Ratings enable the stakeholders to know how much importance the company attaches to corporate governance.
Self-regulatory bodies: Industry should be encouraged to form self-regulatory bodies to look at improving governance at industry level. This can be by way of standardised disclosures, fair practices, customer care initiatives and so on. This is seen in case of banks (Indian Bankers’ Association) and automobile companies (Automobile Association of India).
While these pointers are mostly associated with good governance, there are some clear signals about misgovernance. For instance, stay away from companies which have been accused of under or over reporting of revenues and profits, misrepresentation of facts, insider trading, oppression of minority shareholders, non-payment of dividend and interest to lenders/depositors. Sometimes, companies are even debarred from raising capital from the financial markets because of the above traits. Investors need to keep an eye on such developments to separate the good from the bad.
On January 7, 2009, Satyam Computer Services’ Chairman Ramalinga Raju informed shareholders that he had “cooked” the company’s books for years. Raju’s statement opened a can of worms that had investors and fund managers questioning the veracity of several companies’ numbers who had dubious dealings in the past.
There were several calls for improving corporate governance of listed entities. In fact, the market regulator, the Securities and Exchange Board of India (Sebi), introduced peer review, whereby another auditor would scrutinise a company’s financial documents with their existing auditor.
Irrespective of the debate, corporate governance is one of the key areas that investors should look at before putting their money in stocks. Some companies, such as HDFC and Infosys, get better valuations because of transparency. If you look at most of the corporate bankruptcies globally in the last two decades, you will find that a majority of the businesses failed not because of market conditions, but due to lack of corporate governance.
While financial results, earnings per share (EPS) and operating margins show the quantitative characteristics of a company, the qualitative ones are judged by corporate governance and ethical behaviour. All these combined have a bearing on the stock prices of a company.
Simply put, corporate governance is a system of checks and balances between a company’s board, its management and investors. The system strives to create shareholder value. And scandals like Enron, Worldcom and Satyam are painful reminders that companies, which do not follow ethical values, are likely to hurt both employees and investors.
Studies have proved that good corporate governance not only increased investors’ confidence, but also brought down the cost of capital for the company. A company that is transparent has standardised accounting practices, free flow of information and clear policies. They even find it easier to sail through bad times and secure support of stakeholders in times of difficulty.
Let’s look at some of the practices companies with better corporate governance follow and how one should interpret their actions as an investor.
INTERNAL
Board-level governance: Independence of the Board and professionalism are key to corporate governance. The Board is required to discharge its fiduciary obligations. Look for companies that have proper committees to decide on remuneration, audit, nomination, investor grievances and so on.
Auditors: Auditors should keep proper checks and balances on company affairs. In case of any wrongdoing, they should report to the Board and shareholders. In case of Satyam, its auditor Pricewaterhouse faced a lot of flak.
Investor servicing: Companies with good governance adopt greater transparency in their reporting. They provide proper disclosures to their shareholders and are prompt in resolving investor grievances. Many companies’ governance is reduced to a narrative in a paragraph in the annual report or directors’ reports. This should not be the case. Corporate governance should be part of the Board’s responsibility towards shareholders.
Shareholder participation: Institutional investors have the means to play an active role in ensuring that the management doesn't go off-track. The institutional investors can demand the required changes at companies they have invested in.
For instance, just a couple of weeks before Raju admitted to fudging Satyam’s books, institutional investors blocked his proposal to buy a majority stake in his family owned Maytas Infrastructure by using the cash in the company’s balance sheet.
Forming minority shareholders' groups can also be a positive step. There are several activist minority shareholders abroad, who constantly keep a check on the company’s plans. Individual or retail shareholders should use these groups to communicate with institutional shareholders for taking up their concerns with the company's management. They can always question a company’s governance at the annual general meetings.
EXTERNAL
Rating: Rating agencies, such as CRISIL and ICRA rate companies on the basis of corporate governance. Ratings enable the stakeholders to know how much importance the company attaches to corporate governance.
Self-regulatory bodies: Industry should be encouraged to form self-regulatory bodies to look at improving governance at industry level. This can be by way of standardised disclosures, fair practices, customer care initiatives and so on. This is seen in case of banks (Indian Bankers’ Association) and automobile companies (Automobile Association of India).
While these pointers are mostly associated with good governance, there are some clear signals about misgovernance. For instance, stay away from companies which have been accused of under or over reporting of revenues and profits, misrepresentation of facts, insider trading, oppression of minority shareholders, non-payment of dividend and interest to lenders/depositors. Sometimes, companies are even debarred from raising capital from the financial markets because of the above traits. Investors need to keep an eye on such developments to separate the good from the bad.
Thursday, December 31, 2009
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