RBI Responding To The Economic Downturn, Cut Repo Rate And Reverse Repo Rate.

Day after day, we are witnessing the bad news coming from across the world. In the Year 2009, day by day, the condition of the global economy is deteriorating as the financial crisis has spilled over from a single continent to the across the globe. The effect of the global downturn can be felt in India too to a certain extent, perhaps the Indian authorities are responding on a timely basis to weather this horrific economic catastrophe. In response to that, India’s central bank – Reserve Bank of India (RBI) has further eases the monetary policy on Wed, Mar 4, 2009 by slashing policy rates by 50 bps with immediate effect.

RBI has reduced the Repo rate by 50 bps to 5.0% from 5.5% while there is also a reduction of 50 bps on reverse repo front by 50 bps to 3.5% from 4.0%. However the CRR remained untouched. According to the RBI, there is no need to reduce the Cash Reserve ratio as of now, but will be considered if needed. Since the Oct, 2008 RBI has reduced the policy rates, CRR and SLR by number of times in order to maintain the flexibility in the banking system and the functioning of the Financial Markets in an orderly manner.

VMW Definitions:

  • Repo Rate: is a rate at which, RBI repurchases Govt Securities from the commercial banks to expand the money supply in exchange of cash.
  • Reverse Repo Rate: Vice versa of Repo rate means to sell Gov’t bonds in exchange of cash.
  • CRR: is a Cash Reserve Ratio. Banks kept some portion of their deposits with the RBI at a prescribed reserve rate.
  • SLR: is the Statutory Liquidity Ratio at which banks need to kept short term securities such as Cash, Gov’t Securities, Precious Metals like Gold and Silver and other short term securities.
  • BPS: is Basis Points which should be defined by One Hundredth of a one percentage point (1/100th of 1%). It is commonly used in expressing differences of interest rates.

If you need further clarification on these Finance terms, send an email at contact@vishalmishra.com

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(SA) Interim Budget 2009 Review: Fiscal Deficit Swells to 8% to the GDP.

Please Read the latest report on India Budget 2009.
India’s Fiscal Deficit swells to 8 per cent of the annual gross domestic product, govt spending likely to rise and tax rate cut are less likely. However, Govt has reduced Excise Duty and Service Tax to shore-up the economy.
 
 
Pranab Mukherjee

India's External Affairs Minister (Foreign Minister)

 

Then Minister of External Affairs – Mr Pranab Mukherjee, who was in charge for Finance Ministry also for a while, has announced the Pre-Election Interim Budget 2009 for the Fiscal 2009-10. Markets and the corporate world has anticipated lot of changes and reframing of policies to weather the current global economic downturn however, the Interim Budget has banished all the factors to support the Indian economy. Interestingly, he has pointed out that the major policy announcement would take place post election in the Regular announcement of the General Budget which was held in May, 2009. 

In his budget speech, he merely stressed upon the Rural Development by expanding the Rural Infrastructure Development Fund (RIDF) from Rs. 5,500 Crores ($1.13 Billion) for the year 2003-04 to Rs. 14,000 Crores ($2.87 Billion) for the year 2008-09. Apart from that, he has discussed, exactly what the UPA Govt have did in the last 5 years of their tenure. On the most important Financial and Tax reforms front, he has left this portion for the Regular Budget announcement. He said the, tax rates must fall in these stressful economic times, while the majority of industry has expected positive changes on the tax front and the ailing Real Estate and Infrastructure sectors had anticipated for support from the Government. Now, the RBI is the final ray of hope until the General Elections in a way of reduction in policy rates by at least 100 bps. 

India’s Finances 

Since the last Year’s Budget announcement, the Indian Govt’s finances have totally shaken up. Three major developments like provision for pay revision (Sixth Pay Commission), loan waiver and finally National Rural Employment Guarantee Act (NREGA) and various other subsidies has led to significant intensification of the India’s Fiscal Deficit. Initially, Govt had pegged it at 2.1% of the India’s GDP. This Fiscal Deficit has to be rise for sure as the Govt has announced two different Stimulus Packages in the last couple of months to stimulate the economy and the domestic demand, extra spending under NREGA, Subsidy on Oil and Fertilisers and most importantly the lower revenue/receipt from Taxes. Government is also expecting lower tax revenue in this fiscal year due to global economic downturn. The abstract of “Demand for Grant” is given below:  

  • Pay & Pension Revision: Rs. 28,505 Crores ($5.85 Billion)
  • Oil Subsidy (Oil Bonds): Rs. 65,942 Crores ($13.54 Billion)
  • Fertilizer Subsidy (incl Bonds): Rs. 64,866 Crores ($13.32 Billion)
  • Food Subsidy: Rs. 11471 Crores ($2.36 Billion)
  • NREGA: Rs. 25,000 Crores ($5.13 Billion)
  • Farmer’s Debt Relief: Rs. 15,000 Crores($3.08 Billion)
  • Transfer to States: Rs. 12,741 Crores ($2.61 Billion)

The total cost of those subsidies (including bonds) and other packages is Rs. 223,525 Crores ($45.9 Billion) which means, the it works out to 4.4% of the India’s GDP. If the Govt adds the reduction in tax collections, it could cost 1 per cent of GDP. According to the Economic Advisory Council (EAC), the Fiscal Deficit in the Union Budget had been placed at 2.5% to which, the addition of 4.4% and 1% to this number would definitely raise the total to nearly 8% of the GDP. Credit Rating agencies like Standard & Poor’s (S&P), Moody’s and Fitch are closely watching the India’s fiscal shortfall and this would definitely force them to downgrade the India’s Sovereign Debt rating. On Tue, Feb 24, 2009 S&P has reaffirmed the India’s rating to BBB-, means downgrading India from “Stable” to “Negative” outlook. 

What would happen, if the Fiscal Deficit rises? It means, that the Government will borrow extra to finance their expenditures (planned or non-planned). We won’t evade the higher monetary inflation. If the Government borrows extra for its spending, then the level of money supply will rise because it will force the Reserve Bank of India (RBI) to print more money – which would lead to the higher inflation at least in the medium term. Currently, the India’s national debt is 59% of the annual gross domestic product (Central and State Government combined). At VMW, we have earlier discussed about the deflation in the Developed Economy, however we’ve ruled out the Headline Deflation in India. Maybe the short term, Government borrowing will prevent the further fall in inflation. There is also a possibility of higher interest rates in the long run. 

As a result, there is a limited room for the Government to ramp up the spending without causing the structural harm to the economy. That’s why the Government is reluctant to cut tax rates and in the near future, Government may also consider reducing subsidy burden on Oil and Fertiliser by 1.6% of the GDP and this Interim Budget proves merely a performance review of the Government. 

Please Note: All figures in US Dollar (USD) terms are converted at Indian Rupee (INR) 48.70 aganist the USD. 

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RBI Cuts Policy Rates And CRR To Enable Banks To Provide Credit At Cheaper Rates Meanwhile, Govt Announced The 2nd Stimulus Package.

RBI cut Repo rate, Reverse Repo by 100 bps to 5.5% and 4% respectively on the other side, there is reduction of 50 bps on CRR to 5%. CRR cut to release Rs. 20,000.00 Crores ($4.08 billion) on the other side, Govt has announced the second stimulus package to defend the economy from the global downturn. Click here to read the latest RBI Action on Policy Rates.

Reserve Bank of IndiaAs the global financial situation is continue to exacerbate and the official announcement of Recession by the advanced economies like the United States, Japan and the Euro Zone; the Reserve Bank of India (India’s Central Bank) is aggressively responding to the crisis to maintain the sound banking system via adequate amount of liquidity and sustainable economic growth to achieve targets. on 2nd Jan 2009, RBI has cut Repo rate and Reverse Repo rate by 1 percentage point to 5.5% and 4% respectively and Cash Reserve Ratio (CRR) by 50 bps to 5%. Now, its assume that the reduction in policy rates and CRR of central bank would make possible for the banks to cut their lending rates in order to provide cheaper credit.  On the same day, Deputy Chairman of Planning Commission, Mr. Montek Singh Ahluwalia has also announced the second stimulus package to the Indian Economy to weather the global financial crises with success. The second stimulus package would allow the companies to borrow more from abroad through ECB and FIIs to invest more in the country. This package also gave attention to the Housing sector and Infrastructure sector by providing liquidity of Rs. 25,000.00 Crores ($5.21 billion) through investment grade papers. In order to encourage infrastructure projects in the country, Govt has allowed the India Infrastructure Finance Company (IIFC) to raise upto Rs. 10,000.00 Crores ($2.08 billion) through tax free bonds for refinancing the bank lending of longer maturity to eligible infrastructure bid based Public Private Partnership (PPP) projects. This will mainly enables to fund the projects like Highway and Port projects.

Apart from that, to protect the Micro, Small and Medium Entreprises (MSME) from the economic downturn, guarantee cover under Credit Guarantee Scheme have been extended from Rs. 50 Lakhs to Rs. 1 Crores with a guarantee cover of 50%.

VMW Definitions:

  • Repo Rate: is a rate at which, RBI repurchases Govt Securities from the commercial banks to expand the money supply in exchange of cash.
  • Reverse Repo Rate: Vice versa of Repo rate means to sell Gov’t bonds in exchange of cash.
  • CRR: is a Cash Reserve Ratio. Banks kept some portion of their deposits with the RBI at a prescribed reserve rate.
  • SLR: is the Statutory Liquidity Ratio at which banks need to kept short term securities such as Cash, Gov’t Securities, Precious Metals like Gold and Silver and other short term securities.
  • BPS: is Basis Points which should be define by One Hundredth of a one percentage point (1/100th of 1%). It is commonly used in expressing differences of interest rates.

If you need further clarifications on these Finance terms, send an email at contact@vishalmishra.com

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(SA) Economy In Crisis: What The Year 2009 Holds For India?

    

The Global Recession 2009.The Year 2008 was dreadful for the Global Economy. It started small in the mid of 2007 and then it went global. This Economic crisis which some Economists observing it analogous to the “Great Depression in 1930s”. This crisis has affected all of us by number of ways. hundreds of thousands of jobs has been lost so far and still counting. The deteriorating US, Japan and the Euro Zone Economy impelling the Indian economy on the downside. The other developing economies are also not immune to this global downturn. Fastest developing nation – China fears, their economic growth should fall to even below 6% from 11.4% in 2007. Global equity markets also fell heavily due to major slump in the financial sector. Indian Equity markets have lost half of its total value since Jan, 2008 peak while the other major markets fell between 35% and 72% and still there is no signs of recovery in the global financial markets as the economic situation is continue to worsen. The recent Macro economic data from the United States shows the further deepening of Recession. Falling demand for crude oil lead to steepest fall and now trading at 4 year lowest levels.   

India’s Economic Story   

Inflation Rate in 2008

General Trend: Inflation Rate in 2008

Developing economies like Brazil, Russia, India and China (BRIC) are emerging as an economic powerhouse.  Since the year 2002, Indian Economy grew at an average rate of over 8%. The recent Financial Tsunami which led to the severe recession are also affecting the developing nations. Some of the major economic factors are now in favor of the Indian Economy. One of the vital positive changes are cooling inflation (see the picture on the left side, showing the Inflation trend), commodity prices, Crude oil prices, falling interest rates. RBI still have a lot of room to ease its policy rates further when the inflation below 1%. In the Year 2008, RBI had revised its key rates several times to maintain the liquidity in the banking system. The lower interest rates will allow the banks to cut their benchmark lending rates, though the deposits will also see the reduction in interest rates. Lower commodity prices and crude oil prices is driving the Inflation on a downside.  Lower inflation means, lower cost of credit, which drives the economy on the upside, however in first half of 2009 (H1-09), growth will slow significantly as Industrial production suffers from lower exports. (see the given below picture showing the IIP trend in FY2008).   

IIP Growth in FY2008-09

General Trend: IIP Growth in FY2008-09

The recent economic indicators – Index of Industrial Production (IIP) data showed the negative growth of the economy, the another negative point for the Indian economy is rising fiscal deficit. Fiscal deficit estimated at over 8% of the India’s annual gross domestic product (GDP) (see our latest Post: “Interim Budget 2009 Review” for more information) and 3rd Quarter Advance Tax data which is fell by 22% over the corresponding year. It shows that the profitability of the Indian corporate is lessening. The fact is, “we’re now in the middle of the Global Recession” and we’ll see some more drastic changes in the global economy. Besides these factors, other important factors are falling demand for Indian exports and depreciating Rupee which will widen the Current Account deficit is another cause of concern. India’s largest import product is Crude Oil and weaker domestic currency would make imports dearer, however the weaker currency will lead to higher demand for India’s exports, but as mentioned earlier, the global recession have a drastic impact on India too.   

What To Watch Out For   

  • Headline Inflation will continue to fall and some economies (particularly developed one) will see short period of Headline Deflation in H1 of 2009. Reason: rapidly falling inflation, asset prices, and credit crisis. 
  • Central banks in across the world will continue to ease their monetary policy in the next three to six months to impede the deeper downturn and the risk deflation outcome.
  • FY09 earnings in India and 1st quarter earnings in the US and Europe. Bank’s result would be the top priority for the global investors as their positive corporate earnings might be an advance indicator for an improvement in the credit market and whole banking system which has a lead role to damage the global economy.

In the coming three to six months, the economies are expected to continue to contract as the negative impact from the credit crisis, a further deepening of the housing slowdown, a backlash in Emerging Markets. The 1st Half of year 2009 is very crucial and by mid-2009, economies are expected to return to positive growth rates and a subsequent slow recovery will materialize during H2 next year. The US would be the first to recover followed by Asia. The positive effects from falling energy prices, monetary policy easing, and fiscal stimuli will definitely work.   

The Reason For Recovery In H2 2009    

  • First of all, the falling Crude Oil prices from almost $150 a barrel to below $50 a barrel. Higher commodity prices were the main driver for the economic downturn last year. Food and raw material prices followed suit push the inflation on the downside. The lower inflation will act as a tax relief significantly supporting consumer purchasing power during the coming months.
  • Further widespread easing of Monetary Policy. US Central Banker, Federal Reserve will implement the Zero Interest Rate Policy (ZIRP) in its Jan, 2009 meeting. European Central Bank (ECB), the central bank of Euro Zone will likely to cut aggressively. This will lead to fade in credit crisis and the economy will start to recover.

Forecast For India   

VMW expects, India to grow at 6.2% in FY09 and 6.1% in FY10. On the RBI policy front, RBI should cut interest rates further to fuel the economic growth; however the robust Foreign Exchange Reserves and the strong domestic demand will protect the Indian Economy from sharp downfall.   

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This VMW Research is Marked as “Superannuated” by the VMW Research Team and the content of this research is no longer in use in today’s economic context, however certain references and inferences in this research can be use.

Banks Cutting Interest Rates in order to make Cheaper Home Loans.

However, banks are only announcing the rate cut on loan upto Rs. 2.0 million. ($42,000). No relief for the existing borrowers.  
A Construction site in New Delhi.

A Construction site in New Delhi.

Subsequent to the recent RBI’s rate cut announcement, the banks are responding and cutting down the interest rates on home loans by 50 bps to 100 bps.The interest rates are vary from bank to bank. If the borrower seeking for the home loan of Rs 2,000,000.00 (Rs. 2 million) or below, then the banks are offering loan at the rate between 9.5% and 13% on floating rate and fixed rate respectively. However, the above rates are only applicable on new home loan application for the loan of upto Rs. 2 million. (Rs. 20 lacs).

Since the property prices in Tier 1 cities are not available in the range of Rs. 2 million or so, the rate cut announcement by the banks are inappropriate and specially for the existing borrowers. Banks are only giving lower interest rates on cheap home loan and only to the new customers. The existing customers are still unhappy and didn’t get any benefit from the RBI’s Repo rate cut and Reverse repo cut. That’s why, the developers are morose too with the Indian banking Association’s (IBA) move. Many developers are against with the banks’ decision to not allowing the cheaper loan on more than Rs. 2 million.

The big question arises that, Why banks are averse to offer cheaper home loan across the board? When the interest rates went up in the last few months, then banks have raised the rates on all type of loans, whatever the loan size, it doesn’t matter. Now the RBI is cutting its benchmark interest rates, banks are not doing so. Why?

Many Banks have argued that the deposit rates are above the RBI’s benchmark interest rates and they cannot cut the borrowing cost unless the deposit rate soften. That is the reason the banks aren’t cutting down the interest rates. According to the PSU banks’ balance sheet, over 80% of home loan assets comprise the loan portfolio of Rs. 2,000,000.00. In order to cut Prime Lending Rate (PLR, the rate at which banks lend to their best customer), the banks need to cut down their deposit rates, so that the lower cost of credit will available to everyone. RBI had cut the Cash Reserve Requirement (CRR) by 350 bps in the last 3 months to improve the liquidity in the system however, the banks’ main source of liquidity is from the deposit from the customers and they cannot cut deposit rate as they don’t have enough liquidity. Main sectors are also suffering from the higher interest rates. In addition to the real estate sector, SMEs are also facing the burden of higher interest rates. Recently the World Bank have agreed to lend upto $14 billion (Rs. 67,000 Crores) in the next three years, which would help to recapitalize the state run banks. As the liquidity dried up, the banks are unable to access long term financing in order to focus on Real Estate, Small and Medium Scale Entreprises (SMEs) and infrastructure.