Tuesday 30 July 2013

RBI's Credit Policy 30th July 2013

RBI’S CREDIT POLICY – 30th July 2013…All Key rates kept unchanged
·         Cash Reserve Ratio – The cash reserve ratio (CRR) of scheduled banks has been retained unchanged at 4.0%of their net demand and time liabilities (NDTL).
·         Repo Rate – The repo rate under the liquidity adjustment facility (LAF) has been retained unchanged at 7.25%.
·         Reverse Repo, MSF rate & Bank rate – Consequently, the reverse repo rate under the LAF will remain unchanged at 6.25%, and the marginal standing facility (MSF) rate and the Bank Rate at 10.25%.
·         GDP growth projections - The growth projection for 2013-14 has been revised downwards from 5.7% to 5.5%. The RBI said – “While the onset of the monsoon and its spread have been robust, the persisting weakness in industrial activity has heightened the risks to growth. Moreover, global growth has been tepid, with some signs of loss of momentum in the US and in EDEs on top of the ongoing contraction in the euro area. This has impacted world trade with consequent adverse spillovers on India’s exports, manufacturing and services. Without policy efforts to address the deterioration in productivity and competitiveness, the pressures from wage increases and upward revisions in administered prices could weaken growth even further and exacerbate inflation pressures”.  
 
Our Take
In line with market expectations, the RBI has kept all the key rates unchanged. Commenting on inflation the RBI said –“The sharp depreciation of the rupee since mid-May is expected to pass through in the months ahead to domestic fuel inflation as well as to non-food manufactured products inflation through its import content. Keeping in view the domestic demand-supply balance, the outlook for global commodity prices, and on the expectation that spatial and temporal distribution of the monsoon during the rest of the season will be normal, the Reserve Bank will endeavor to condition the evolution of inflation to a level of 5.0 per cent by March 2014, using all instruments at its command”.
The RBI has indicated that the measures taken off-late to restore stability to the foreign exchange market will be rolled back in a calibrated manner as stability is restored to the foreign exchange market, enabling monetary policy to revert to supporting growth with continuing vigil on inflation. Going forward the RBI reinforced the need to institute structural measures to bring the CAD down to sustainable levels.
With the RBI’s monetary policy meet not throwing any negative surprise, investors will try to gauge the US Fed’s approach on tapering of QE at the FOMC meet and its likely impact on investor risk preference. RBI’s recent measures of increasing cost of incremental credit and interventions in the current market through dollar selling have just about maintained the rupee levels at a few bps below Rs 60 to the dollar and not really made a dent in reversing the trend of rupee depreciation. Thus, the combination of our structural current account deficit problems, which is not being dealt with head-on, and the lack of adequate capital inflows, let alone of stable nature, could again bring up concerns on the rupee front. Market volatility is likely to continue. We’d advise investors to continue to stick to defensives (FMCG, IT and pharma).
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Thursday 25 July 2013

Rupee Update

The second round of steps taken by the Reserve Bank of India (RBI) had its impact on Indian exporters. The appreciation seen on Wednesday in the rupee was on dollar selling, not by the central bank, but by exporters. The impression appears to have been created by the central bank that they are not going to stop at anything to ensure that the dollar doesn’t get expensive. So, if one has forward dollars, it would be good to sell it now.

That psyche was getting reflected in the way exporters behaved and sold dollars yesterday. There will be some weakness in the rupee, but exporters or banks may not want to take on the central bank in this current mood

 For July contract USD/INR has opened at 59.26 and is trading at 59.35 , Resistance for the day is 59.60 whereas support lies at 59.03 .
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What RBI has done to support the rupee this year

The Reserve Bank of India took new steps on Tuesday to support the rupee, signaling it will stay the course with its defence of the currency despite the risks to economic growth.
The central bank tightened liquidity further and made it even harder for lenders to access funds with measures including lowering the amount banks can borrow under its daily liquidity window.
Below is a list of currency-related measures from Indian policy makers this year:
July
> RBI further lowers banks' limit on borrowing under daily liquidity adjustment facility (LAF); increases banks' cash reserve ratio requirements, announces 60 billion rupees sale in cash management bills.
> RBI tightens gold imports again, making them dependent on export volumes
> RBI raises the Marginal Standing Facility rate and Bank Rate, caps banks' limit on borrowing under daily LAF and announces sale of 120 billion rupees in debt via open market operations.
> RBI extends relaxation of the all-in-cost ceiling for issuers of external commercial debt
> Regulators toughen rules for derivatives trading in currency markets
> RBI eases rules for non-bank asset finance companies to raise debt overseas
> RBI introduces provisioning, capital requirements for bank exposed to corporates with unhedged FX
June
> India further tightens gold import rules
> RBI extends buyback time period of foreign currency convertible bonds until December 31
> RBI allows telecommunications companies to refinance rupee loans until March
> RBI tightens gold lending norms for regional rural banks
> RBI eases rules for low-cost builders to access overseas loans, hedge entire borrowing
> RBI relaxes some forex option premium payment rules
> RBI asks exporters to realise dollar earnings and bring them back into the country within one year
> RBI restricts loans against gold coins by co-operative banks
> India fin min says RBI advised banks not to sell gold coins
> India raises gold duty to 8 percent
> RBI extends gold import curbs on nominated and trading agencies
May
> RBI mulls easing hedging norms for exporters, importers
> RBI cuts timeframe for exporters to repatriate earnings
March
> RBI relaxes collateral rules for foreign investors in futures and options in stock exchanges
> RBI eases overseas borrowing norms for firms under investigation
> RBI removes restrictions on open position limits for rupee currency pairs
January
> RBI eases rules for exporters to access FX markets
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Wednesday 24 July 2013

RBI tightens daily borrowing norms to douse rupee fire - Moneycontrol

RBI tightens daily borrowing norms to douse rupee fire
Just a week ahead of its first quarter monetary policy, the central bank tweaked some borrowing measures by banks, which is likely to make money costlier by raising demand for rupee.
Firing on all cylinders, the Reserve Bank of India (RBI) on Tuesday came out with yet another set of measures to squeeze liquidity in a move to halt the Indian rupee's free fall against the US dollar. Just a week ahead of its first quarter monetary policy review, the central bank tweaked some borrowing measures by banks, which is likely to make money costlier by raising demand for the rupee.
Measure One: The apex bank restricted the limit of individual bank borrowing to 0.50 percent of its total deposits (or net demand and time liability as it is known in banking parlance) outstanding as on the last Friday of the second preceding fortnight from the RBI's daily borrowing window called Liquidity Adjustment Facility (LAF) in banking parlance.
At the same time it scrapped its earlier measure that had limited the total LAF borrowings to the tune of 1 percent of total deposits or Rs 75,000 crore. It was effective from July 17, 2013.
What is LAF? - LAF is the combination of two auction routes: repo and reverse repo. While banks borrow from repo currently at 7.25 percent, they park their excess liquidity via reverse repo rate at 6.25 percent.

The role of Marginal Standing Facility : Last week, RBI had raised the interest rate of Marginal Standing Facility (MSF) by 100 bps to 10.25 percent as against 9.25 percent previously. Banks can borrow money pledging their excess SLR (Statutory Liquidity Ratio in excess of mandated 23 percent) bonds in the MSF auction window. Interestingly, not a single bank bid for the MSF auction conducted on Tuesday.
 
Measure Two: Cash reserve ratio (CRR) or the portion of deposits banks keep with the RBI, stands at 4 percent. Banks generally maintain a minimum 70 percent of total CRR obligation on an average daily basis during a fortnight. However, it needs to be adjusted by the end of a fortnight to maintain 100 percent. In a fresh move, RBI increased the daily average requirement from 70 percent to 99 percent.
"Effective from the first day of the next reporting fortnight i.e., from July 27, 2013, banks will be required to maintain a minimum daily CRR balance of 99 per cent of the requirement," RBI said in a notification.
 
Impact of measures : While short-term interest rates are likely to increase, the foreign exchange market should get a positive sentiment. Banks are expected to rush to MSF window to raise overnight money at 10.25 percent.
"Prima facie, there will be re-rating of short-term rates," Ananth Narayan, Co-Head of Wholesale Banking, South Asia, Standard Chartered Bank told moneycontrol.com.
"The overnight interest rates including in treasury bills, certificate of deposits, commercial papers and short-term (within one month maturity) deposit rates will rise immediately. Shorter term bond yields would rise while the impact will be less for longer term bond yields. At least, the RBI is demonstrating true intent sending strong message to the markets. The rupee should rise on the back of a positive sentiment, at least for the time being," he said.
According to N S Venkatesh, head - treasury at IDBI Bank , post the measures the exchange rate volatility could reduce with some signs of stability.
"After the earlier liquidity measures (last week), the rupee has stabilized and the volatility has reduced to a one month low. The latest measure should help sustain the rupee-dollar exchange rate in the short range of 59-59.50 levels. the stability of the rupee will be maintained," he said.
 
Purpose : Those moves in turn, should resist further decline of the Indian rupee against the US dollar curbing the exchange rate volatility. All such liquidity tightening measures are seen as an alternative way to hike interest rates. Higher rates are expected attract overseas funds.
 
Rupee move : Since May 02, the local currency dropped more than 11 percent till the close of July 19 at Rs 59.80/USD. On Tuesday, the rupee closed at 59.76 against the greenback compared with 59.72 on Monday.
Based on a review of the measures, and an assessment of the liquidity and overall market conditions going forward, it has been decided to modify the liquidity tightening measures, RBI said.

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Friday 19 July 2013

Why rupee, Sensex have plunged on Fed's comments

Why rupee, Sensex have plunged on Fed's comments

 The Indian rupee hit a record low of 59.94 on Thursday, June 20, 2013, while the BSE Sensex plunged over 400 points after U.S. Federal Reserve Chairman Ben Bernanke confirmed that the Fed would begin reducing its stimulus spending later this year. Fed's overnight comments were a confirmation of what markets feared since May 22, when Mr Bernanke first signalled that the Fed may cut the pace of bond purchases at the next few meetings.

 Here's why markets are nervous:
 Overnight interest rates in the U.S. have been near zero since December 2008 when the Fed initiated its bond buying programme. As a result of this ultra-low interest rate regime and abundant liquidity, money has flown out from the U.S. to emerging countries like India, where interest rates are comparatively higher. Foreign institutional investors (FIIs) have pumped almost $14 billion into India so far this year and $22.2 billion last year.
    The Fed is now contemplating to reverse its policy because the U.S. economy seems to be coming back on tracks. Any tapering of bond-buying by the Fed could mean interest rates in the U.S. could start rising and money will flow back to government debt bonds in the U.S.
    Fearing a reversal in the Fed policy, FIIs have turned sellers. FIIs have sold equities totalling over Rs. 4,000 crore over the last seven sessions. FIIs have sold Indian debt totalling $4.7 billion in 18 consecutive sessions.
    A reversal of portfolio flows results in falling equity prices. Since May 22, the BSE Sensex is down nearly 6 per cent, while the Nifty has broken the 5,700 mark.
    The withdrawal of funds has hit the rupee hardest because India runs a large current account deficit (the difference between inflows and outflows). Conversely, a weak rupee makes investment in Indian stocks unattractive.
    Corporates with unhedged forex exposure could suffer increased losses as the rupee inches lower. This will further weaken investor sentiments.
    Outflows from equity and debt markets raise concerns about financing of the current account deficit. An estimated $90 billion is required to fund the gap in India's balance of payments (export minus imports) in the current financial year.
    Asset price volatility and a slowdown in capital inflows would hurt investment, as uncertainty further delays a revival of the capex cycle, global investment bank Nomura says.
    The Reserve Bank of India, which has warned of upward risks to inflation on account of the rupee weakness, may be forced to hold on to its rates. This will further hurt stock markets. All this would delay India's GDP growth, which hit a decade low in the last fiscal.
  The only positive from the Fed's reversal will be a fall in commodity prices, including gold, which will also help bring down high current account deficit.
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Tuesday 16 July 2013

Note - RBI takes steps to curb rupee volatility (Negative for NBFCs & Banks)

RBI takes steps to curb rupee volatility - Rate cut hopes dashed, steps would translate into higher cost of borrowings, Negative for NBFCs & Banks (especially wholesale banks like Axis Bank, Yes Bank, Canara, OBC, etc and banks with high duration AFS portfolio like PNB, BOI, etc.)
Measures announced
·         The RBI has put a limit on overall overnight borrowing under liquidity adjustment facility (LAF) to Rs 750 bn, which is 1% of NDTL, from July 17. The allocation to individual banks will be made in proportion to their bids.
·         The Marginal Standing Facility (MSF) and the Bank rate have been increased by 200 bps to 10.25% with immediate effect. The MSF is a window that banks resort to when they fall short of the mandatory Statutory Liquidity Ratio (SLR) of 23% to borrow funds from the repo window.
·         Sell government bonds worth Rs 120 bn via open market operations (OMOs) on July 18 to suck out liquidity.
Impact - We believe the capping of LAF at Rs 750 bn in addition to sale of Government bonds via OMO to suck up Rs 120 bn from the system is likely to translate into higher short term rates for borrowers. These measures will force banks to seek funds from markets and offer higher rates to depositors. As a result, interest rates on short-term borrowings, commercial papers & deposit rates may go up in the short term impacting the NBFCs & wholesale funded banks (with lower CASA) the most. If the banks choose to pass on the increased cost by hiking their lending rates, it will raise fresh concerns on growth slowdown & asset quality of the banks. Besides this, spike in Gsec yields, if sustained for a longer time period would result in MTM losses for Banks especially PSU banks who are sitting on excess SLR and have a high duration AFS bond portfolio. The worst affected would be PNB, Canara Bank, BOI, etc.
Overall we believe, NBFCs & Banks (especially wholesale funded like Axis Bank, Yes Bank, Canara Bank, OBC, etc) are likely to remain under pressure in the short term. Comparatively, private banks with strong liability franchise (higher CASA) like HDFC Bank, etc are better placed in the current environment.
FII Flows - Effectively, RBI has raised interest rates without touching the policy rates. The rate cut hopes by the RBI in the near future have been completely dashed. This is likely to re-establish interest rate differential between the US bond yields and Indian bond yields, fueling FII flows in the debt market.
On the flip side, with concerns on growth slowdown likely to get reinforced in the light of further tightening of liquidity & interest rates, the equity markets could see reversals which might pose a bigger challenge for the government with the planned divestment, an urgent need of the hour, to achieve fiscal target.  
Rupee outlook - On the rupee outlook, we believe, while in the short term the Rupee may stabilize on account of various steps taken by the RBI, however, in the long term we need urgent structural changes on the policy front to boost manufacturing sector, simplify exports and make investor friendly policies to attract FDI. Otherwise we will continue to grapple with the problem from time to time.

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22 banks slapped with a fine!

The Reserve Bank of India has imposed monetary penalty on these banks for violating customer identification rules and anti money laundering.
(Source: Reserve Bank of India)


1. Andhra Bank
Penalty amount: Rs 2.50 crore

2. Bank of Baroda
Penalty amount: Rs 3.00 crore

3. Bank of India
Penalty amount: Rs 3.00 crore

4. Canara Bank
Penalty amount: Rs 3.001 crore

5. Central Bank of India
Penalty amount: Rs 3.00 crore

6. Deutsche Bank A.G.
Penalty amount: Rs 1.00 crore

7. Development Credit Bank
Penalty amount: Rs 1.00 crore

8. Dhanlaxmi Bank
Penalty amount: Rs 2.00 crore

9. Indian Overseas Bank
Penalty amount: Rs 3.002 crore

10.ING Vysya Bank
Penalty amount: Rs 1.50 crore

11. Jammu & Kashmir Bank
Penalty amount: Rs 2.501 crore

12. Kotak Mahindra Bank
Penalty amount: Rs 1.501 crore

13. Oriental Bank of Commerce
Penalty amount: Rs 2.00 crore

14. Punjab and Sind Bank
Penalty amount: Rs 2.50 crore

15. Punjab National Bank
Penalty amount: Rs 2.50 crore

16. State Bank of India
Penalty amount: Rs 3.00 crore

17. The Federal Bank
Penalty amount: Rs 3.00 crore

18. The Lakshmi Vilas Bank
Penalty amount: Rs 2.50 crore

19. The Ratnakar Bank
Penalty amount: Rs 0.50 crore

20. United Bank of India
Penalty amount: Rs 2.50 crore

21. Vijaya Bank
Penalty amount: Rs 2.00 crore

22. Yes Bank
Penalty amount: Rs 2.00 crore

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