Reserve Bank of India cuts short-term rates

The Reserve Bank of India has acknowledged that GDP growth for 2009-10 would be a disappointing 6% unless banks substantially increase their lending to industry and the retail sector. For this, banks need to reduce interest rates on loans, it said.

In RBI’s annual policy statement announced on Tuesday, governor D Subbarao therefore slashed by 25 basis points the repo (the rate at which banks borrow from RBI) to 4.75% and reverse repo (the rate at which they park funds with RBI) to 3.25% with immediate effect.

However, even though the country’s second-largest bank, ICICI Bank, responded by lowering its floating reference rate by 50 basis points to 13.25 % from Wednesday

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Pranab unveils third package

Announcing the third stimulus package in as many months to boost flagging demand,the UPA government on Tuesday announced fiscal sops amounting to Rs 30,000 crore, the most significant being an across-the-board 2% cut in central excise duty and service tax.

Though industry chambers hailed the incumbent administration’s farewell gifts, they stressed that an interest rate cut by RBI was imperative to spur investment,consumption and reduce pressure on bond yields due to increased government borrowings.

While central excise duty has been slashed to 8% from theearlier10%,service tax will be levied at 10% from the previous 12%. As a further sweetener to corporate India, the 4% excise duty cut announced under the first stimulus package in December has been extended beyond March 31,2009.

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Foreign reserves drop $15.5 billion in steepest ever fall

India’s foreign exchange reserves for the last fortnight have dropped by more than $10 billion each week. For the week ended October 24, RBI data shows that reserves slipped $15.5 billion, or 5.65%—the largest drop ever—to $258.4 billion.

The decline was a result of major intervention by RBI in forex markets and a fall in the valuation of reserves as the euro slipped against the dollar. Due to the RBI measures, on Friday the rupee closed at 49.44/6 against the dollar, an improvement of 23 basis points. Last Friday, the euro fell to its lowest level in two years against the dollar, while the UK pound traded at a five-year low.

“The change in foreign currency assets is partly because of changes in the value of the dollar against the euro, yen and other currencies during the period,” RBI’s weekly statistical supplement noted. In the first three weeks of October, India’s foreign exchange reserves dipped $32.50 billion, on top of a fall of around $5.4 billion in September.

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Retail loans become cheaper

As the festive season nears, banks are not only offering higher deposit rates but also reducing rates for their retail loans. This is despite a tight monetary policy.

Two major state-owned banks--Bank of Baroda and Union Bank of India---have decided to slash rates by 25 basis points on their home loan rates. They are keen to continue with the lower rates even after the festive season if the Reserve Bank of India (RBI) announces cuts in repo rate and the statutory liquidity rate (SLR) in its forthcoming credit policy on October 24.

MD Mallya, chairman & managing director, Bank of Baroda, confirmed that his bank would charge 0.25% less on the interest rates for housing and vehicle loans on account of the festive season. The scheme, which began on October 1, will continue until the end of the month.

“We find it a good opportunity as it helps us make our relationship stronger with our customers. But we are not offering any high interest rates on any of the term deposits,'' he said.

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Rupee slide persists

The rupee fell the sharpest in a decade on speculation that the trouble on Wall Street would lead to emerging-market asset sell-offs by jittery global investors.The currency hit its lowest level against the dollar in more than two years. The Sensex also fell for a sixth day in tandem with equity markets world wide. It lost a marginal 12.47 points to end at 13,518.80, heading for its first annual loss since 2001.

The rupee may come under more intense pressure as FIIs continue to hawk Indian equities. The Indian currency ended at 46.89/90 against the dollar, off a trough of 46.99-its lowest since July 24, 2006-as banks arbitraged with a weaker overseas market. Dealers suspected RBI intervened to halt the slide just short of 47 against the greenback. JPM organ forecasts the rupee to drop to 47 by the end of the year. The rupee was the second biggest loser among the ten most active currencies in Asia outside Japan on Tuesday.

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Banks need Rs 5.7 lakh crore more within 5 years: report

The Reserve Bank of India, in its ‘Report on Currency and Finance 2006-08', said as banks will have to maintain capital for operational risks, overall capital requirements are likely to go up even if there is an expected decline in the capital required on account of credit risk.

Since most of the banks in India are at present operating at capital adequacy ratios higher than the prescribed level, meeting the Basel II requirements is not an issue in the immediate future. In the medium to long-term, however, banks would need to raise capital resources to keep pace with the expansion of their business. An assessment made in the report suggests that the total capital requirements in the five years 200708 to 2011-12 are projected to go up by about Rs 5,70,000 crore assuming that banks maintain CRAR at 12%, while the total capital requirements by public sector banks are projected to go up by about Rs 3,70,000 crore.

As regards the various options available to banks, more than 85% of the capital requirements in the past were met by banks through internally-generated resources. Apart from internal resources, banks have also headroom available to raise Tier 1 capital under innovative perpetual debt instruments (IPDI) and perpetual non-cumulative preference shares (PNCPS).

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Cash Reserve Ratio caught in Reserve Bank of India crosshairs again

The Reserve Bank of India (RBI) on Tuesday made it clear that its priority would be to rein in inflation. The central bank did this by hiking the cash reserve ratio (CRR) the funds banks have to keep with RBI by another 25 basis points, to 8.25%,sucking out around Rs 9,000 crore from the system.

While this may not immediately prod banks to hike lending or deposit rates, banks may review their liquidity positions later and hike rates, if necessary.

In the Annual Policy Statement for 2008-09, RBI governor Yaga Venugopal Reddy, however, kept the other two key rates the repo rate (the rate at which banks borrow from RBI) and the reverse repo rate (the rate at which banks park short-term funds with RBI) unchanged at 7.75% and 6%, respectively.

RBI had, on April 17, hiked CRR by a hefty 50 bps to suck out excess liquidity and cool inflationary expectations.

The CRR hike aims to make liquidity scarce for banks.This may eventually force banks to realign their lending and deposit rate store flect the higher cost of funds. But bankers say this may not be immediate, or across the board, and would be selective. Since funds parked as CRR don't earn interest, the banks' earnings would be reduced to that extent.

RBI has made some concessions on home loans. It has hiked the limit of housing loans,to individuals,having a lower risk weight of 50% to Rs 30 lakh from Rs 20 lakh. This is good news for households since 75-80% of all home loans belong to the Rs 30 lakh or under segment. Interest rates on home loans will remain stable, or even head lower, reckon experts. This could spur demand for real estate.

According to Reddy: "High priority has been accorded to price stability, well-anchored inflation expectations and orderly conditions in financial markets, while sustaining the growth momentum."

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Rs 10k-Crore Farmers Debt Fund Set Up

The UPA government on Wednesday set up a Rs 10,000 crore Farmers' Debt Relief Fund as the first allocation to its debt waiver scheme. The sum was part of the Rs 43,059-crore cash expenditure of the government in the third supplementary budget for 2007-08, tabled in Parliament by finance minister P Chidambaram.

A banking industry official involved in the policy told FE that farmers who repaid their outstanding agriculture loans in January and February this year would also be eligible under the Rs 60,000-crore debt relief programme. They will be clubbed with farmers that have taken loans before March 31, 2007 but were defaulters as on December 31, 2007 and continue to remain so.

However, farmers who repaid their outstandings prior to December 31, 2007 would not qualify for any refund or incentive. But sections of bankers have urged the government to offer incentives to those who have repaid their debts.

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M&As abroad may get boost

In a move that would facilitate big-ticket Indian M&As abroad, the government is likely to remove the cap on the investments that a domestic company can make overseas.

According to current regulations, an Indian company is allowedtoinvestonlyupto300%of its net worth a year overseas to acquire assets.This has led to Indian companies falling out of contention for several major international M&A deals.

In addition, the regulations also forced Indian companies to structure deals through complex routes and investments arms abroad to route funds for investment over and above the permis sible limit.

"Now any investment above the limit requires multiple permissions, leading to delays in finalising deals and companies from other countries gaining a lead over Indian companies. In addition, Indian companies are now in a position to raise funds easily to finance acquisitions and mergers abroad. Any sort of cap on investments abroad will only be counter productive," admitted a senior government official.

Besides,partnership firms registered under the provisions of the Indian Partnership Act, 1932, are currently permitted overseas investmentsnotexceeding200%of their net worth. Sources said that the government is likely to raise this limit to 300% of net worth.

According to analysts, with Indian companies looking acquire overseas ventures to spread their global footprint, such a move would come as a major boost.However, the government is likely to ask companies to furnish details off unding if the investment is over a certain limit. "RBI will set a threshold limit. Any investment beyond the threshold limit will be examined,"said officials.

The proposal to lift the overseas investment capisonly the latest in a string of measures taken by the government to free up rules governing such investments by Indian companies. It has recently hiked the limit on overseas portfolio investment by Indian companies from 35% of net worth to 50% of net worth. It has also allowed mutual funds to make aggregate investments of

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