Pressure points
MID-TERM MONETARY POLICY 2008-09
Liquidity
Call rates crossing 20 per cent in the second half of September does not surprise many bankers. After all, there was a time not so long ago, when the rates were further up, said the head of a large private bank. But this year, when rates went up, almost every banker took notice.
High call rates slowed down the credit flow and led to a situation, where banks were not releasing money even for sanctioned projects. While the second instalment of advance tax payment drained out liquidity from the system, the repeated RBI intervention in the forex market and heavy borrowing by oil and fertiliser companies, which were not reimbursed their subsidy bill, added to the pressure.
In addition, the global financial turmoil has meant that the flow of funds to help banks and their Indian clients has virtually dried up.
While RBI has stepped in with a series of measures over the last few weeks, bankers are still keeping their fingers crossed since there may be more surprises in store.
(Call rates since September 15, 2008)
FII flows
If 2007 was a year where the policy-makers had to deal with a problem of plenty, the year so far has been marked by a shortage.
According to the latest data on the Securities and Exchange Board of India (Sebi) website, foreign institutional investors (FIIs) have been net sellers to the tune of $12.2 billion in the Indian stock markets since January 2008 compared with purchases of over $17 billion in 2007.
The first signs of FIIs turning reluctant buyers emerged around October 2007, when Sebi imposed curbs on participatory notes (P-notes), which are overseas derivatives instruments used by overseas investors not registered with the Indian regulator. In addition, the subprime problem had just surfaced in the home markets.
The problem of FII sales has been accentuated in the last few weeks as investors pulled out money to meet their fund requirement in their home countries.
While Sebi and the government have responded with measures, such as a reversal of the P-note curbs imposed last year, the situation has not changed much so far.
Rupee
In 2008, the rupee has depreciated over 11 per cent against the US dollar. First, it was high crude oil prices, which resulted in heavy buying by local oil marketing companies that pulled down the Indian currency against the greenback. Then came the global financial turmoil, which saw the US dollar appreciating against most currencies. In addition, it has resulted in a heavy sell-off by foreign institutional investors, who have so far sold over $12.2 billion in the stock markets.
Though the Korean won and the Pakistani rupee have seen higher depreciation than the Indian currency, it has seen the steepest fall in nearly two decades.
The continuous decline has prompted the Reserve Bank of India (RBI) to intervene heavily in the market to check the slide. Though the RBI move has had a limited impact on the currency, foreign exchange reserves have fallen by $18 billion in the last fortnight and $35.72 billion this financial year.
Delinquency
Banks, which were on an overdrive, doling out credit cards and personal, housing and auto loans, have suddenly lost their appetite for pushing retail credit in recent months.
Though bankers say high interest rates have been deterring many borrowers and compelling them to defer spending decisions, a rise in delinquency rates has prompted many to exit certain segments of the market and get back to the basics of banking. So, an individual’s EMI (equated monthly instalment) liability and his paying ability are something that banks are now insisting on while sanctioning loans.
In the last one month, the prospect of defaults rising is not something that is confined to the retail segment alone. Bankers are suddenly doing a reality check on their corporate borrowers too, especially in real estate, textiles, aviation and non-banking finance companies.
After all, the domestic demand has slowed down in many sectors and, with lower demand in the US and Europe, thanks to the slowdown, exporters too are under scrutiny.
With default prospects rising, asset reconstruction companies, which deal in bad debt, are mushrooming.
Inflation
The Reserve Bank of India (RBI), which has recently cut the lending rate to commercial banks by one percentage point, has indicated that commodity prices still remain a concern even after a sharp fall in metal, food and crude oil prices.
A cut in the repurchase (repo) rate, effective from Monday this week, was seen by economists as a signal from India’s central bank that it has now turned its focus away from inflation targeting to promoting growth.
However, in its mid-term review of macro-economic and monetary developments, the central bank has said that while global commodity prices have eased somewhat during the second quarter of 2008-09, they still “remain at elevated levels”.
The central bank has reiterated that the overall stance of the monetary policy will continue to accord a high priority to price stability, and orderly conditions in financial markets, while being conducive to continuation of the growth momentum.
Manufactured products were the major drivers of the Wholesale Price ndex-based (WPI) inflation that was at 11.07 per cent as on October 11, 2008, as against 3.07 per cent a year ago. RBI said manufactured products, including metals, cement, machine tools, among others, contributed about 47.1 per cent to the overall WPI inflation.
The next major contributor was the fuel, power, light and lubricants group, with a 27.4 per cent contribution. Primary articles, which included food articles, raw cotton, oilseeds,sugarcane and minerals, contributed 25.3 per cent to the WPI inflation. According to the latest data released by the government this afternoon, inflation was estimated at 11.07 per cent for the week ended October 11, with the three major categories -- primary articles, fuel and manufactured goods -- showing a decline.
The oil economy
Crude oil prices, though 50 per cent lower than the level three months ago, continue to be an area of concern in fiscal, monetary and exchange rate management.
On the inflation front, the softening of crude oil prices has provided RBI room to lower the repo rate by one percentage point. But inflation is still not in the comfort zone and no one quite knows how long oil prices will stay at these levels.
In 2008-09, government finances too will be hit as the oil subsidy burden alone is estimated at around Rs 73,500 crore.
On the exchange rate management front, demand for dollars by oil marketing companies has been cited as one reason for the rupee losing value against the dollar. It is estimated that state-run oil companies demand around $4.5 billion every month to purchase oil from international markets.
Finally, the impact on bank credit. It is estimated that three state-run oil marketing companies have borrowed in excess of Rs 1,10,000 crore as on September 2008. However, with around Rs 66,000 crore worth of oil bonds sanctioned by Parliament this week, the pressure on bank credit is likely to ease.