RBI mulling merits of FII limits in govt bonds

 
New Delhi: The Reserve Bank of India is examining the pros and cons of relaxing limits for foreign institutional investors (FII) in government bonds, a senior finance ministry official said on Wednesday.

The comment by Arvind Mayaram, the economic affairs secretary at the finance ministry, came in response to a question from reporters about whether India was considering lifting FII limits in order to qualify for inclusion into benchmark global bond indices.

India will also consider allowing local companies to issue rupee-denominated bonds abroad, marking a new step in the internationalisation of the rupee. International Finance Corp, the private sector arm of the World Bank, last month launched a $1 billion rupee-linked bond.

RBI Governor Raghuram Rajan had earlier said that Indian official are speaking to the index compilers about potential inclusion of domestic debt.

RBI permits foreign banks' subsidiary to acquire pvt banks

Mumbai: In a bid to regulate and avoid 2008- type crisis, RBI on Wednesday said foreign banks with complex structures and which do not provide adequate disclosure would have to operate in India only through wholly-owned subsidiaries (WOS).

However, it permitted WOS of overseas banks to acquire private sector banks.

The framework for setting up of WOS by foreign banks in India, released by the Reserve Bank Wednesday night, also allowed foreign banks' subsidiaries to list on local stock exchanges. The initial minimum paid-up equity capital or net worth for a WOS would be Rs 500 crore.

"Banks with complex structures, banks which do not provide adequate disclosure in their home jurisdiction, banks which are not widely held, banks from jurisdictions having legislation giving a preferential claim to depositors of home country in a winding up proceedings, etc, would be mandated entry into India only in the WOS mode," it said.

Foreign banks operating in India before August 2010 have the option to continue their operations in branch model.

The RBI further said foreign bank subsidiary will not be allowed to hold more than 74 percent, the sectoral cap for overall foreign investment, in private banks they may acquire.

"As a locally incorporated bank, the WOSs will be given near national treatment which will enable them to open branches anywhere in the country at par with Indian banks," the RBI guidelines said.

There were 43 foreign banks in India with a network of 333 branches as of March 2013. At present, foreign banks have presence in India only through branches.

The guidelines come against the backdrop of the 2008 global financial crisis, which the RBI said has shown that growing complexity and inter-connectedness of financial institutions have compromised the ability of home and host authorities to cope with the failure of big banks.

"The lessons learn during the crisis lean in favour of domestic incorporation of foreign banks," it said.

Spelling out reasons for subsidiarisation, it said this will create separete legal entities having their own capital base and local board of directors, which will help in better regulatory control.

Also, it would ensure that there is a clear delineation between the assets and liabilities of the domestic bank and those of its foreign parent and clearly provides for ring fenced capital and assets within the host country, RBI said.

Standard Chartered, the largest foreign bank by branch presence in India, has its depository shares trading on the domestic bourses, although it hasn't adopted a subsidiary route here.

Only multinational banks Standard Chartered, HSBC and Citi have more than 30 branches in the country. Although the Royal Bank of Scotland has 31 branches, it is winding down local retail operations.

The RBI's framework, aimed at safe guarding the Indian banking system, comes in the backdrop of collapse of several banks in advanced countries during 2008 global financial crisis.

"The issue of permitting WOS to enter into merger and acquisition transactions with any private sector bank in India subject to the overall investment limit of 74 percent would be considered after a review is made with regard to the extent of penetration of foreign investment in Indian banks and functioning of foreign banks (branch mode and WOS)," it said.

To provide safeguards against the possibility of the Indian banking system being dominated by foreign banks, it said, the framework has certain measures to contain their expansion if the share of foreign banks exceeds a critical size.

RBI will put a stop on further entry of new WOSs of foreign banks or capital infusion, when the capital and reserves of all foreign banks in India exceed 20 percent of the capital and reserves of the entire banking system.

CAD widens to 4.9 per cent of GDP in Q1 on high gold, oil imports PTI

High imports of gold and oil pushed current account deficit (CAD) to 4.9 per cent of gross domestic product (GDP) to $21.8 billion in the April-June quarter of the current financial year.

CAD is the difference between inflow and outflow of foreign exchange.

The deficit had declined to 3.6 per cent in the January-March quarter after touching a record high of 6.5 per cent in the October-December quarter. It was 4.4 per cent (or $16.9 billion) in Q1 2012-13.

"The trade deficit, coupled with a slow recovery in net invisibles (income and services), led to widening of CAD to $21.8 billion in Q1 of 2013-14 from $16.9 billion in Q1 of 2012-13," the Reserve Bank of India (RBI) said in its Balance of Payments statement.

Gold imports increased by $7.3 billion in the first quarter of the current financial year. The imports stood at about 335 tonnes in the April-June quarter.

"Excluding the increase in gold imports of $7.3 billion in Q1 of 2013-14 over the corresponding quarter of the preceding year, CAD would work out to $14.5 billion, which translates into 3.2 per cent of GDP," the central bank said.

RBI said there was a small draw down on country's foreign exchange reserves to finance the CAD.

"On BoP basis, there was a slight draw down in foreign exchange reserves of $0.3 billion in Q1 of 2013-14 as against an accretion of $0.5 billion in Q1 of 2012-13," it said.

During the quarter, while exports declined by 1.5 per cent, imports recorded an increase of 4.7 per cent. The trade deficit widened further to $50.5 billion in Q1 of 2013-14, from $43.8 billion a year ago, RBI said.

The government plans to bring down CAD to 3.7 per cent, or $70 billion, in 2013-14 from 4.8 per cent, or $88.2 billion, in 2012-13.

he RBI cracked down on offshore foreign exchange trading by Indians through online trading websites, asking banks to report any such remittances to the regulator.

In a circular issued late on Tuesday, the Reserve Bank of India (RBI) asked banks to advice customers not to undertake forex trading on foreign websites that offer currency contracts by accepting margins through credit card and online money transfer mechanisms.

The RBI also asked banks to close the credit card or online bank account of a customer that is found to be in violation of the rule.

The rupee has been hard hit in this summer's rout of emerging currencies, losing around 20 percent of its value against the dollar at one point, and significantly increasing the burden of Indian companies' dollar debt.

The central bank has been trying to curb the offshore rupee market by asking banks to cut down on overnight positions as well as asking foreign institutional investors to produce documentation from clients in order to hedge their currency risk in the onshore forward markets.

The central bank has already reduced the limit for remittances made by residents to $75,000 from $200,000 per financial year.

Sign in | Create a Rediffmail account Rediff.com » Business » Rajan meets PM, FM ahead of monetary review Rajan meets PM, FM ahead of monetary review

Days before his first monetary policy review, Reserve Bank of India (RBI) Governor Raghuram Rajan met Prime Minister Manmohan Singh and Finance Minister P Chidambaram on Tuesday. 
The meeting also comes at a time when the US Federal Reserve is expected to take a call on tapering of the bond-buying programme known as quantitative easing.
“RBI has constant consultations with the finance ministry. This meeting was part of that. We discussed a whole gamut of issues,” Rajan told reporters on Tuesday after meeting Chidambaram.
Later, during the day, the government hiked import duty on gold jewellery to 15 per cent from the existing 10 per cent in an effort to curb the spiralling current account deficit (CAD) that touched an all-time high of 4.8 per cent of the GDP in FY13.
A six-month high inflation in August has already made things tough for Rajan at a time when industry is demanding cut in the policy rate to boost growth.
Inflation rose 6.1 per cent in August from 5.8 per cent in July, driven by expensive food items, particularly onions, which saw the rate of price rise skyrocketing to 244.6 per cent from an already high 119.4 per cent.
According to a report by Dun and Bradstreet, RBI is expected to maintain a status quo on the policy rate. Ironically, onion prices can’t be brought down by interest rate policy.
However, that may desist Rajan from easing the central bank’s monetary stance in the mid-quarter review on the 20th of this month, economists said.
India’s economic growth crashed to a four-year low of 4.4 per cent in the first quarter of 2013-14.
On the other hand, inflation in manufactured products further fell to 1.9 per cent from 2.81 per cent, despite depreciation of the rupee, increasing imported inflation. This showed that demand in the Indian and global economy remained subdued.
Usually, it is manufactured product inflation on which RBI focuses its attention; it is core inflation within manufactured item inflation that RBI is usually concerned.
The core inflation relates to manufactured items sans food articles. It fell further to 1.9 per cent in August from 2.3 per cent.
The low rate of price rise in manufactured items and core inflation should have been ideal conditions for RBI to cut rates, but the party is being spoilt by food articles.

'RBI unlikely to reverse liquidity tightening steps on Sep 20'

 
Mumbai: Reserve Bank's new Governor Raghuram Rajan may wait for signs of a sustained stability in the rupee and is unlikely to reverse the liquidity tightening steps at Friday's mid-quarter review, Standard Chartered Bank said Tuesday.

"While the rupee's 7.6 percent appreciation (against dollar) from September 3-16 is encouraging, the RBI might prefer to wait longer for confirmation of sustained currency stability - a key determinant of such a reversal," it said in a report here.

"A complete reversal of liquidity tightening measures on September 20 looks unlikely to us," it added.

In order to arrest rupee's fall, Rajan's predecessor D Subbarao in July had announced liquidity tightening measures, including a cap on banks' overnight borrowings which increased the short-term rates in the system.

The RBI reduced the banks' liquidity adjustment facility (LAF) borrowing limit from 1 percent of the total deposits to 0.5 percent and also asked banks to maintain higher average CRR (cash reserve ratio) of 99 percent of the requirement on daily basis.

The StanChart report, however, said the RBI might recalibrate some of its liquidity-tightening measures in the mid-quarter monetary policy review on September 20 to reassure the market that the steps announced are temporary.

According to the report, RBI Governor could reduce the daily minimum CRR balance from 99 percent, or marginally increase the LAF borrowing limit from 0.5 percent of net demand and time liabilities (NDTLs).

"These changes are unlikely to reduce the call rate substantially below the MSF rate which is at 10.25 percent, but we believe they would offer some comfort to the markets, with the hope of further easing later," it said.

StanChart expects the RBI Governor to stay hawkish on inflation front as August CPI inflation remained elevated, and moreover, WPI inflation accelerated to 6.1 percent. "The headline number is likely to keep the RBI cautious."
The report said the RBI may adopt a wait-and-see stance on September 20 given that the government is yet to announce measures to contain the fiscal deficit at 4.8 percent of GDP.

In the first four months of FY'14, the fiscal deficit reached a level equivalent to 60 percent of the budgeted target. StanChart expects the US Fed to taper its quantitative easing by USD 10 billion per month and maintain a relatively dovish policy tone.

"If the RBI only fine tunes the existing liquidity framework and reiterates its intent to gradually exit the tight liquidity regime, then we expect a limited market response," the report said.

"The markets will then watch closely for signals from the new Governor on the timeline and possible preconditions for a roll-back of liquidity-tightening measures," it said.

The report said given the uncertainty over the RBI's potential monetary policy responses, it remains neutral on government securities duration.

Rate cuts may be delayed with RBI focus on rupee: Barclays

New Delhi: With the Reserve Bank's policy focus geared towards supporting the rupee, the central bank may delay easing rates to between December and April 2014, a Barclays report says.

According to the global brokerage firm, the RBI is likely to remain focused on supporting the rupee, which has depreciated by more than 13 percent since May and crossed the psychological level of 62 against the dollar last week.

"As such, while the focus is on the INR, we think monetary policy calibration will eventually be biased towards further easing, rather than tightening. However, we think further policy easing will likely be delayed," Barclays said in a research note.

The financial services major believes key policy rates would be eased by as much as 75 basis points in this fiscal but it would be a "delayed" affair.

"We still expect 75 bp of repo rate cuts, but now we expect them to take place between December 2013 and April 2014, rather than our initial expectation of September -December 2013," Barclays said.

The industry has been demanding a cut in key policy rate to boost economic activities. Industrial output contracted for the second consecutive month in June.

Moreover, inflation rose for the second consecutive month and shot up to 5.79 percent in July, driven largely by double-digit rise in prices of food articles, including vegetables and onions.

The RBI, in its First Quarter Review of Monetary Policy on July 30, left all key interest rates unchanged.

The repo rate, at which the RBI lends to the system, was kept at 7.25 percent and the cash reserve ratio, the amount of deposits banks park with it, was unchanged at 4 percent.

The RBI is scheduled to hold its next mid?quarter review of policy on September 18.

Rupee fall has forex reserves plunging $16.5 bn since April

Mumbai: RBI's fight to prop the tottering rupee has contributed substantially to forex reserves dipping by a hefty USD 16.554 billion or 6 percent to a low of USD 275.49 billion since the beginning of this fiscal.

According to marketmen, a large part of this has been used to save the bleeding rupee, which went on a downward spiral after May 22 when Ben Bernanke of the US Fed had hinted at turning his easy money policy much earlier than previously hinted.

According to the latest Reserve Bank data, forex reserves plunged to USD 275.491 billion to the week ending August 30, which is a near 6 percent fall from USD 292.646 billion as of March 29.

The rupee opened the fiscal at 54.25 to the US dollar but fell to a life-time low of 68.86 on August 28, losing nearly a third of its value. However, since the new RBI Governor Raghuram Govind Rajan took over the affairs of the Mint Street on September 4, the rupee has been on a winning streak, and closed the last trade on Friday at 65.24 to the dollar.

On a weekly basis, the reserves dropped by USD 2.2 billion as of August 30, marking a three-year low, the RBI data showed.

Overall, the foreign currency assets have fallen more to the tune of USD 3.08 billion to USD 247.40 billion in the week ended August 30.

The Reserve Bank was net seller of the dollar twice this year in May and June, according to its monthly data.

In June this year, RBI sold USD 2.252 billion net of the US currency, while in May it sold USD 107 million dollars.

Looking at the steep fall in the overall numbers, marketmen said, it could be surmised that the central bank has intervened in a much more heavier and frequent manner in the forex market in July and August, as these two months saw the rupee plunging to new lows.

According to forex dealers, RBI not only intervened in May and June, but was present in the market all through July and August when rupee was touching new lows.

The rupee has been in free-fall territory since May 22 when the US Federal Reserve said it would slow and finally taper of its monthly USD 85 billion buyback of government debt or withdraw its easy money policy called quantitative easing.

The announcement led to a massive selling by the overseas investors in the country's debt and equity markets, to the tune of nearly USD 15 billion, mostly from the debt market.

To save the rupee, the central bank had announced various liquidity tightening measures starting July 15, including steeply hiking call money rates and partly bringing back capital control.

New RBI chief Rajan raises hopes with action plan

Mumbai: New Reserve Bank of India (RBI) chief Raghuram Rajan kicked-off his term with a bang, announcing a spate of measures to support the embattled rupee and unveiling a raft of steps to liberalise financial markets and the banking sector.

In an unexpectedly detailed and wide-ranging briefing, Rajan outlined plans to attract more funds from overseas by subsidising hedging costs for banks and making it easier for importers and exporters to hedge currency risk.

He made clear his intention to liberalise markets, including pushing for more rupee trade settlement, introducing new financial products such as overnight interest rate swaps and removing curbs on opening new branches by Indian banks.

"Some of the actions I take will not be popular," said Rajan, who famously predicted the global financial crisis and took over at the central bank in Mumbai on Wednesday after nearly a year as chief economic advisor in the finance ministry in New Delhi.

His forceful debut, which contrasted with more circumspect public comments in recent months, drew rave reviews from central-bank watchers.

A. Prasanna, economist at ICICI Securities Primary Dealership, said he expects bonds, the rupee and Indian stocks, especially those of banks, to react positively on Thursday.

"Overall, the way and kind of steps he has announced will instill confidence in the market, which was in short supply."

A prominent former International Monetary Fund chief economist, Rajan, 50, succeeds Duvvuri Subbarao at the helm of the Reserve Bank of India. He enters office in the eye of a financial storm as the country grapples with its worst economic crisis since 1991, which has sent the rupee skidding by some 20 percent this year.

"The governorship of the central bank is not meant to win one votes or Facebook 'likes'. But I hope to do the right thing, no matter what the criticism, even while looking to learn from the criticism," he told reporters.

Many critics and investors have complained about what they viewed as inconsistent communication and insufficient action from policymakers as economic growth has crumbled to a four-year-low of 4.4 percent in the June quarter and as the rupee last week hit a record low.

"Expectations were quite high from him and he has gone far beyond expectations on day 1," said Barclays economist Siddhartha Sanyal. "The fact that he has come with such pointed steps in mind shows that we will see more concrete steps very soon."

Earlier on Wednesday, the rupee rallied after suspected dollar sales by the central bank and after Reuters exclusively reported that the RBI was considering a plan that would help lenders raise money from expatriate Indians. Rajan, in his remarks, outlined the plan to attract more funds from non-resident Indians (NRIs) as part of a broader push to lure inflows.

The rupee recovered sharply from a day's low of 68.62 per dollar to close at 67.065.

Under the plan, the central bank will offer a swap window to banks for fresh dollar deposits mobilised from non-resident Indians. India has the world's second-biggest diaspora, according to the Ministry of Overseas India Affairs, and the country has turned to overseas Indians for help in past financial crises.

The central bank will also offer forex swap into rupees at a concessional rate below market levels for banks who raise dollar funds through overseas borrowings.

HIGH EXPECTATIONS

Rajan's arrival has been welcomed by some traders, who hope for a fresh approach to the RBI's controversial bid to defend the rupee by tightening cash conditions and raising short-term interest rates. Those measures have pushed up borrowing costs even as economic growth sputters and have shown little success to date in braking the rupee's descent.

Among Rajan's measures, he said banks should gradually be allowed to decrease their mandatory holdings of government securities, which would free up capital for lending.

He also said new bank licences should be awarded on an ongoing basis. The central bank is now in the process of awarding the first new bank licences in a decade.

Rajan also proposed the issue of inflation-indexed bonds linked to the consumer price index, an indication that the central bank may soon shift its inflation benchmark from the wholesale price index.

"He didn't take cover saying that he will first overcome the current problems and then take steps. He thinks both can be done simultaneously," Prasanna if ICICI Securities said.

Rajan also pushed back the date of the RBI's next monetary policy review by two days to September 20. That will give the central bank more time to consider the outcome of what is expected to be a pivotal two-day meeting of the US Federal Reserve, ending on September 18.

The prospect that the Fed will soon unveil a plan to start winding down its monetary stimulus is weighing on emerging markets, with India faring worse than most because of a lack of confidence it can address its hefty fiscal deficit and its record current account deficit.

In a reminder of the uphill task Rajan faces, a report on Wednesday showed that activity in India's services sector shrank in August for the second straight month for its lowest reading in four years, the latest indication that growth in Asia's third-largest economy is still slowing.

"The biggest positive in this entire speech is the confidence. I think there will be decisiveness in the way things move, which will spread to the markets as well," said Ananth Narayan G., co-head of wholesale banking for South Asia at Standard Chartered Bank.

Rajan effect: Rupee climbs 138 paise against dollar

The rupee on Thursday strengthened by hefty 138 paise to trade at 65.69 against the dollar at the Interbank Foreign Exchange market after fresh measures by the Reserve Bank of India to stem the currency's slide.

The rupee had settled at 67.07 against the dollar on Wednesday, up by 56 paise over the previous day's close.

Traders said dollar selling by exporters and banks and fresh measures announced by new RBI Governor Raghuram Rajan to curb the rupee's slide helped domestic currency recover.

The dollar's weakness against other currencies overseas also supported the rupee's sentiment, they said.

Meanwhile, stock markets were up by over 2 per cent in early trade.

The BSE benchmark index soared by 488 points to 19,055.74, while National Stock Exchange's Nifty rose by 153 points to 5,601.90 in opening trade.

The new RBI governor on Wednesday announced measures, such as liberalisation of the financial market by enhancing the limits for exporters to re-book cancelled forward exchange contracts and opening a special concessional window for swapping foreign currency non-resident deposits and dollar funds, to support the rupee.

Markets bounce back, Sensex ends up 405 points

Markets ended higher on Thursday, following the expiry of August derivative, tracking a rebound in the rupee after the Reserve Bank of India decided to provide dollars directly to oil companies.

The ones leading the gains in Thursday's trade were oil & gas major Reliance Industries along with HDFC, ITC, TCS and HDFC Bank.

The Bombay Stock Exchange’s 30-share Sensex closed at 18,401 up 405 points. The National Stock Exchange’s 50-share S&P CNX Nifty closed at 5,409 up 124 points.

In the broader markets, the midcap index advanced 1.5% and the smallcap index gained 0.7%, both underperforming as compared to the 2.2% gain see on the BSE benchmark index.

Global Markets

Asian shares recouped some of the two previous sessions' steep losses on Thursday as fears abated that US-led forces would soon launch a military strike on Syria, and oil prices retreated from a six-month peak.

Emerging market currencies stabilised after their recent battering, with the Indian rupee coming off a record low after the central bank moved to provide dollars directly to oil companies, offering the currency some relief.

MSCI's broadest index of Asia-Pacific shares outside Japan was up 1% after falling 2.2% in the previous two sessions.

Japan's Nikkei share average advanced 0.8% in light trade, helped by the safe-haven yen giving up some of the recent gains that had taken it to a three-week high against the dollar.

European shares too started trading in the green ahead of consumer price data. FTSE 100, CAC and DAX were up 0.1-0.4%.

Rupee

The rupee gained against the dollar today after the Reserve Bank of India announced measures late Wednesday to curb rupee fall through dollar flows.

At 1600 hrs, the partially convertible rupee was trading at 67.31 per dollar against the Wednesday’s close of 68.80/81, when it hit a record low of 68.85.

Sectors & Stocks

All the sectoral indices closed in the green with gains of atleast 0.4%. Oil & Gas, Metal, FMCG, Capital Goods and Auto indices added 2-3% and were the top sectoral gainers.

Power, Bankex, Health Care, Teck, Consumer Durables and PSU indices, too were up 1-1.8%.

The only losers among the Sensex-30 were Coal India down 1.6% along with SBI, Tata Power, Tata Steel, Infosys and Cipla which lost 0.3-0.6%.

Metal names like Sesa Goa, Hindalco and Jindal Steel were up 2-13.5%.

From the financial space, HDFC, HDFC Bank and ICICI Bank gained 1.3-5.7%.

Reliance Industries up 4.2% was top gainer from the Oil & Gas pocket along with Gail India and ONGC up 2% each.

FMCG heavyweights, ITC and HUL were also up 2% each.

Tata Motors, Mahindra & Mahindra, Maruti Suzuki, Hero MotoCorp and Bajaj Auto were the movers in the auto segment, adding 0.6-2.6%.

Bharti Airtel, Dr Reddys Lab, NTPC, BHEL and L&T which added 2.5-4% were the other notable gainers.

The market breadth was very positive owing to the strength in broader markets. 1,275 stocks advanced while 989 stocks declined on the BSE. Jinsy Mathew in Mumbai

Rupee could touch 75/USD: BofA-ML

The Reserve Bank of India (RBI) will have to take far more pro-active steps to rebuild forex reserves, because if the status quo remains, rupee could touch 75 per US dollar by the end of 2014, Bank of America Merrill Lynch said in a report. According to the global financial services firm, the collapse of rupee is likely "overdone" but that said "INR expectations are racing to Rs 70/USD (and now, even Rs 75/USD)." If the status quo remains, BofA-ML said  "a conservative estimate is USD/INR goes to 70 year-end and 75 by-end 2014 based on NDF forward pricing." NDF deals are forward transactions settled in dollars because the rupee, being a non-convertible currency, cannot be 'delivered' outside India.
The rupee on Wednesday had collapsed to a lifetime low of 68.85 against the dollar and closed at 68.80, registering its biggest single-day loss of 256 paise, as global oil prices jumped, deepening concerns about the current account deficit and capital outflows.
The rupee today however, recovered from its all-time low by rising 170 paise to 67.10 against the dollar in early trade on fresh selling of the US currency by exporters and banks amid fresh measures announced by the RBI to check free-fall of the currency.
RBI on Wednesday opened a special window to help the three state-owned oil marketing companies needing about $8.5 billion every month meet their daily foreign exchange requirement in a bid to check the rupee's free fall.
"We welcome yesterday's initiatives to provide RBI swaps to fund oil imports and seek swap lines against trade arrangements as short-term relief. Yet, to stabilise INR expectations, we believe that the Reserve Bank of India (RBI) will have to take far more pro-active steps to rebuild FX reserves," the report said.
The RBI should launch a scheme to attract significant forex inflows where the INR risk would be borne by the RBI to comfort investor confidence like issue of NRI or sovereign bonds or reviving FCNRA deposits.

"We ourselves estimate that the RBI would be hard pressed to sell $25 billion, and every US Dollar sold will likely only raise further questions about the adequacy of forex reserves," the report noted.