Sun, 28th May 2017

Anirudh Sethi Report


Archives of “rbi” Tag

Emerging Markets-An Update

1) Brazil’s central bank is not tapering its FX intervention plan

2) The Philippine central bank outlined the tools it will use to counter Fed tapering
3) The RBI is taking further steps to improve the liquidity situation and help stabilized capital markets
4) There were some notable trade data surprises out of Asia
5) Israel central bank delivered a dovish surprise rate cut
1) Brazil’s central bank is not tapering its FX intervention plan. Central bank president Tombini assured markets that the $60 bln intervention plan is not about to change. Given the positive performance of the BRL and the Bovespa, many had started to speculate that officials would soon start to get concerned again about excessive currency strength, especially after USD/BRL broke below the 2.20 level. The real should continue to trade on the strong side for now, but we would soon start to look for opportunities to take the other side, especially against the Mexican peso.
2) The Philippine central bank outlined the tools it will use to counter Fed tapering. The bank is sounding very confident about its ability to deal with further volatility in the PHP – and we mostly agree, at least compared with many other EM countries. According to Deputy Governor Guinigundo, “We can ride out any turbulence, as we have policy tools in our hand that we can deploy anytime.” He also said the measures include boosting dollar and peso liquidity, careful surveillance of risk, use of forward guidance, tapping currency swap agreements, and possible tightening of monetary policy. Read More 

Trade Credits for Import into India- RBI (Full Text )

 As per the extant guidelines, AD Category – I banks may approve availing of trade credit not exceeding USD 20 million up to a maximum period of five years (from the date of shipment) for companies in the infrastructure sector, subject to certain terms and conditions stipulated therein. It is also stipulated that AD Category – I banks are not permitted to issue Letters of Credit/guarantees/Letter of Undertaking (LoU) /Letter of Comfort (LoC) in favour of overseas supplier, bank and financial institution for the extended period beyond three years. No roll-over/extension is permitted beyond the permissible period.

3. On a review, it has been decided to allow companies in all sectors to avail of trade credit not exceeding USD 20 million up to a maximum period of five years for import of capital goods as classified by Director General of Foreign Trade (DGFT). It has also been decided to relax the ab-initio contract period of 15 (fifteen) months for all trade credits to 6 (six) months.

4. AD Category – I banks are, however, not permitted to issue Letters of Credit/guarantees/Letter of Undertaking (LoU) /Letter of Comfort (LoC) in favour of overseas supplier, bank and financial institution for the extended period beyond three years.

5. All other aspects of Trade Credit policy will remain unchanged and should be complied with. The amended Trade Credit policy will come into force with immediate effect and is subject to review based on the experience gained in this regard.

6. The directions contained in this circular have been issued under Sections 10(4) and 11(1) of the Foreign Exchange Management Act, 1999 (42 of 1999) and are without prejudice to permissions / approvals required, if any, under any other law.

IIP likely to be 1-2 % in August: Dun & Bradstreet

Factory output is likely to be in the range of 1-2 per cent in August and industrial performance will remain a concern for the next few months due to a slew of reasons like low demand, high interest rates and pessimistic investment scenario, says a report by Dun & Bradstreet.

According to the global research firm, the index of industrial production (IIP) is expected to remain subdued for the next few months, except for the festive months during which demand usually uplifts industrial production.

“Going ahead, IIP is expected to remain in the range of 1.0 per cent—2.0 per cent during August 2013,” the report said.

Industrial production grew 2.6 per cent in July, expanding for the first time in three months, on improved performances in the manufacturing and power sectors, raising hopes of a recovery and expectations the RBI will cut interest rates to boost consumer demand. Read More 

North Block in favour of fresh dose of liquidity

The finance ministry wants the Reserve Bank of India to inject liquidity into the economy by cutting the daily cash reserve ratio (CRR), while keeping the key rates unchanged.

The North Block’s expectations come on the back of a surprise breather given by the US Federal Reserve to emerging economies by deciding not to withdraw its bond buying programme.

CRR is the amount of money banks have to compulsorily hold with the RBI on a daily basis.

The RBI had asked banks to maintain an average cash reserve of 99 per cent of their requirements on a daily basis from 70 per cent to check the volatility in the rupee.

With the rupee appreciating from its all-time low of Rs 68.8 to the dollar on August 28 to Rs 61.77 today, economists with the government feel there is a scope for a CRR cut.

However, top finance ministry officials said the RBI might want to hold on to key policy rates as inflation continued to be a concern, especially because crude oil prices might go up now after the US Fed’s decision.

The officials also pointed out that the Fed might start tapering its stimulus later this year or early next year. Hence, there was a need to continue the curbs on imports along with the search for new markets and moves to buy foreign oil assets at reasonable prices. Read More 

India’s feedback loops and the divisive Mr Modi

eagleOr, the line between a pretty standard EM problem and those of a uniquely enormous democracy heading into an election which happens to suffer from many of those standard EM issues.

First, the negative loopiness from Goldman’s Tushar Poddar:

Contextualizing the channels of transmission in India’s case—its large current account deficit and external funding needs have led to the INR depreciating by 18% against the USD since early May as capital inflows have slowed. This induced the RBI to raise short-end rates by 300bp on July 15. The increase in short-end rates is impacting the banking sector—both in terms of higher costs of funding and losses on their investment portfolios. Banks may reduce credit to the private sector as a result.

The corporate sector, which had already scaled back on investment activity, may retrench further. GDP growth slowed to 4.4% in Q2 2013, and we see risks that it could slow further as a result. A slowdown in growth is already affecting India’s economy through multiple channels. It is leading to weaker tax revenue growth—which fell to 6.5% yoy in April-July compared to 21% yoy over the same period in FY13. A slowdown can also lead to a rise in non-performing loans in the banking system. Our India Banks team expects impaired assets to rise by 30% in FY14E from the current level of 9.1% of total loans at end-March 2013. In a scenario that assumes a very aggressive 50% write-off of impaired assets, with the latter reaching 12% of total loans, the fiscal costs of recapitalization could be 3% of GDP. Finally, the weaker growth could lead to a further slowdown in capital inflows and affect funding available to Indian companies. This may be an area of concern as short-term borrowings by companies, largely trade-related credit, stood at US$87bn as of March 2013, while the total external debt of companies was US$145bn. Read More 

India’s waiting game

The Reserve Bank of India’s first policy update under governor Raghuram Rajan this Friday is unlikely to inject much optimism into the economy.

The global backdrop has improved since its last meeting in July — particularly with upbeat data in China — but India’s own situation has worsened. Growth is slowing, high inflation is proving to be sticky, and measures to bolster the rupee from record-lows are likely to slow growth even further.

HSBC’s chief economist for the region, Leif Eskesen, calls it “global strengthening, local weakening.”

The heightened macroeconomic uncertainty prevailing because of the pressures on the currency are making consumers and businesses more cautious about spending. Capital outflows, falling equity prices and rising yields are also hurting the investment cycle.

The government, meanwhile, isn’t in any position to stimulate — instead it must rein it spending, focus on trimming one of the widest current account deficits in the emerging world, and fend off rating agencies from cutting its credit status into junk territory.

There’s little the RBI can do about this. Read More 

Too early to celebrate on rupee, current account deficit

The kind of commentary that has greeted the arrival of Raghuram Rajan at the Reserve Bank of India (RBI) betrays the absence of serious thinking in the country. He might have warned of financial sector imbalances in the world but I do not think he would have predicted that India would greet his arrival with commentary that is blatantly sexist. Imagine the reaction that would have awaited male journalists writing about a good-looking lady governor at the central bank. There is far too much of escapism and denial on display. That is why most commentary has jumped from being despondent to euphoric on a fortnight of relief rally in Indian stocks and the currency. Market prices often overshoot on either side before settling down in the middle.

For example, the government reported that the Index of Industrial Production (IIP) rose in July by 2.6% year-on-year and the decline in June was revised down to -1.8% from the previously reported -2.2%. In terms of sectors, manufacturing and electricity output went up in July while mining output contracted. According to use-based classification, capital goods led the output improvement in July with a gain of 15.6%. This was due to a category called “Electrical Machinery and apparatus” that has a weight of about 2% in the overall IIP. It jumped to 573.9 from 312.5 in July last year! One of the products that made a specific contribution to this category is “Insulated Rubber Cables”. The production of this item jumped 336% year-on-year. Production of ayurvedic medicaments and vitamins jumped on an annual basis. Certainly, none of these are signs of sustainable turnaround in industrial production, in areas where they matter. Read More 

Crisil sees banks’ restructured assets at Rs 4 Lakh Crore by FY14-end

warningSounding an alarm of the detoriating asset quality of banks, ratings agency CrisilBSE -0.49 % has said gross non-performing assets will touch 4.4 per cent and the restructured book will balloon to Rs 4 lakh crore by the end of this fiscal. 

“Gross NPAs (non-performing assets) were at 3.3 per cent in March 2013 and grew to 3.7 per cent by the June quarter. We feel they will grow to 4.4 per cent by March 2014,” CRISIL Managing Director and Chief Executive Roopa Kudva said here over the weekend. 

An NPA is a debt obligation where the borrower has not paid the interest and principal repayments to the lender for an extended period of time. Corporate Debt Restructuring (CDR) allows the reorganisation of a company’s outstanding obligations. 

Kudva said restructured assets, under which an account’s repayment period is extended or interest payment delayed without classifying it as an NPA, will touch Rs 4 lakh crore this fiscal, up from the Rs 3.1 lakh crore in March, 2013. 

“The system will add up to Rs 1 trillion (lakh crore) of restructured assets during the fiscal and considering some assets will be reclassified during the fiscal, we feel the total component will touch Rs 4 trillion by March 2014,” Kudva said.  Read More 

RBI sold $6 bn in July, highest since Jan 2012

The Reserve Bank of India (RBI) had sold a massive $ 5.9 billion in the spot segment of the foreign exchange market in July to stem the fall in the rupee. This was the highest intervention by the central bank since January 2012 when it sold $7.3 billion in the foreign exchange market, latest data released by the central bank showed on Tuesday. In June, RBI had sold $2.2 billion.

RBI’s intervention had yielded the desired results as the rupee weakened only about 1.65 per cent in that month. Till about two weeks back, the rupee lost about 23 per cent against the dollar this financial year as it touched an all time closing low of 68.83 on August 28. In the forward market, RBI sold $4.7 billion in July.

RBI has taken a cautious policy regarding selling its foreign exchange reserves, as those could only cover about six months of import. According to analysts, an import cover of eight-10 months is seen as providing comfort to a currency’s strength.

The country’s foreign exchange (forex) reserves fell to a 39-month low as on August 30. Read More 

No Proposal to convert Idle Gold into Bullion: RBI clarifies

NO BUYING AT ALLThere have been some news stories in the media in the last couple of days about the Reserve Bank of India discussing/considering various options of converting idle gold, including that available with temple trusts, into bullion.

The Reserve Bank clarifies that no such proposal is under its consideration at this juncture.