Economy Round Up – August 04 to 08, 2014

India Infoline News Service | Mumbai |

The Reserve Bank of India, in its third bi-monthly monetary review for 2014-15 held, kept the repo rate unchanged at 8%, while the reverse repo rate was remained stable at 7%. The central bank has however cut the SLR by 50 bps (basis points) to 22%.

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RBI cuts SLR by 50 bps, leaves Repo, CRR unchanged

The Reserve Bank of India, in its third bi-monthly monetary review for 2014-15 held, kept the repo rate unchanged at 8%, while the reverse repo rate was remained stable at 7%. The central bank has however cut the SLR by 50 bps (basis points) to 22%.

RBI governor Dr Raghuram Rajan said on the basis of an assessment of the current and evolving macroeconomic situation, it has decided to:

  • Keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 8%;
  • Keep the cash reserve ratio (CRR) of scheduled banks unchanged at 4% of net demand and time liabilities (NDTL);
  • Reduce the statutory liquidity ratio (SLR) of scheduled commercial banks by 50 basis points from 22.5% to 22% of their NDTL with effect from August 9, 2014; and
  • Continue to provide liquidity under overnight repos at 0.25% of bank-wise NDTL and liquidity under 7-day and 14-day term repos of up to 0.75% of NDTL of the banking system.

Consequently, the reverse repo rate under the LAF will remain unchanged at 7%, and the marginal standing facility (MSF) rate and the Bank Rate at 9%. Repo is the rate at which the RBI lends money to banks. A reduction in the repo rate helps banks get money at a cheaper rate and vice versa. CRR is the amount of funds that the banks have to park with the RBI, which should not be less than 4%. If the central bank decides to increase the CRR, the available amount with the banks comes down. The RBI uses the CRR to drain out excess money from the system. The repo rate also refers to the interest rate, which borrowers pay to the banks, when they take loan from them. The banks charges interest that is higher than the existing repo rate. Hence, lower repo rates could induce banks to lower their interest rates which they charge to their home or auto loan borrowers—thereby making loans more affordable. The country's key inflation based on the Wholesale Price Index (WPI) was recorded at 6.01% in May.

Data released by the Central Statistics Office (CSO), showed that retail inflation based on Consumer Price Index (CPI) declined to 7.31% in June from 8.28% in the previous month. In the last policy review in June, the RBI retained the policy rate, making it the second consecutive time that Governor Raghuram Rajan kept interest rates unchanged. The cash reserve ratio (CRR) was also kept unchanged at 4%. The statutory liquidity ratio (SLR), the mandatory amount of bonds lenders must keep with the RBI, was cut by 0.5% to 22.5% of their net demand and time liabilities (NDTL) with effect from June 14.

Expert Views on RBI cuts SLR, leaves repo, CRR unchanged

The Reserve Bank of India, in its third bi-monthly monetary review for 2014-15, kept the repo rate unchanged at 8%, while the reverse repo rate remained stable at 7%.   The bi-monthly monetary policy of RBI came in-line with market's expectations as most analysts expected the central bank to hold the key rates due to the weak monsoon and geopolitical tensions that pressurize global crude oil prices. Interestingly, statutory liquidity ratio (SLR) for bank reduced to 22% of their NDTL. Given the government’s fiscal consolidation road map, it means more money/ liquidity for corporate sector, which is looking to turn around. There has been a cut of HTM ceiling to 24%, which implies banks have reduced margin to keep securities under HTM bucket, as result, they have to value the securities at regular intervals and take a hit (MtM) if there are any adverse movement in valuations. Overall, the policy continues government’s stance on targeting inflation rate to a comfort level and then gradually easing the interest rate.

In line with the street estimate, the RBI kept the benchmark interest rate (repo rate) unchanged at 8%. All other key policy rates, barring SLR, also remain unchanged. The RBI kept the cash reserve ratio (CRR) of scheduled banks unchanged at 4% of net demand and time liabilities (NDTL). Consequently, the reverse repo rate under the LAF will remain unchanged at 7%, and the marginal standing facility (MSF) rate and the Bank Rate at 9%. The statutory liquidity ratio (SLR) of scheduled commercial banks has been reduced by 50 basis points from 22.5% to 22%, thereby increasing funds available with banks for lending to the private sector...Read More

RBI: History of the Monetary Policy in India and what happened

History of the Monetary Policy in India

Infographic: RBI Monetary Policy

RBI does not manage liquidity through forex markets: Rajan

RBI credit policy is a pragmatic policy: ICICI Bank

RBI has given Banks greater Leeway to Lend: Ministry of Finance

Analysis of Monetary Policy Statement of RBI: CARE Ratings

We welcome RBI’s focus on banking sector reforms: Muthoot Finance

RBI policy remains cautious on inflation: PNB

RBI remains cautious on inflation: LVB

Lotus Greens Developers comments on RBI policy

RBI would continue to focus on inflation: ICRA

Cut in SLR will strengthen credit facilitation: PHD Chamber

Expect no rate cut in 2014-15: Crisil

There is a need to increase liquidity with banks: JLL India

RBI rightly kept policy rates unchanged: Yes Bank

RBI policy on expected lines: KPMG

RBI on hold, but sees upside risks on inflation: HSBC Global

Third Bi-Monthly Monetary Policy Statement 2014-15: More hawkish than what meets the eye

Policy rate unchanged; another 50bps SLR reduction

As expected, the repo rate and CRR were left unchanged at 8% and 4% respectively. Following 50bps reduction in the June policy, RBI announced another 50bps cut in SLR requirement for banks to 22% of NDTL. With the banking system SLR holdings at 4-6% higher than statutory requirements, announced SLR reductions are unlikely to benefit banks until credit demand picks-up vigorously and excess SLR comes-offs. Further, to enhance liquidity in the money and debt markets, RBI lowered the SLR investments ceiling within HTM category by 50bps to 24.5% of NDTL. Banks will now have to mark-to-market the released portfolio.

Risks to 8% CPI January 2015 target seems more balanced

The central bank expects sustained deceleration in CPI in the very near term on account of fall in crude prices, benign outlook on non-oil commodity prices and still muted corporate pricing power. However, it assigns credible probability to retail inflation clawing back towards 8% by January 2015 due to upside risks from pass-through of administered price increases, sub-par performance of monsoon, geo-political concerns impacting oil prices and currency and stronger-than-expected growth revival in the face of continuing supply constraints.

… but risks to 6% CPI January 2016 target remain high

As per RBI, the balance of risks around the medium-term inflation path is still on the upside and government’s action on improving food supply and accelerating project execution and completion would be critical to offset pressure from strengthening of aggregate demand on the back of a pick-up in consumer and business confidence.

Pause to be more prolonged; expect no rate cut in FY15

Less perturbed about achieving its January 2015 inflation target of 8%, RBI is now staunchly focused on guiding inflation towards 6% by January 2016. With singular aim ofs ensuring sustained disinflation over the medium term, the central bank is likely to hold rates through the remainder of the fiscal. Further, the timing of initiating rate easing in FY16 would be contingent on evolution of a lower risks scenario to its stated inflation target.

Third Bi-Monthly Monetary Policy Statement, 2014-15

On the basis of an assessment of the current and evolving macroeconomic situation, it has been decided to:

  • Keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 8.0%;
  • Keep the cash reserve ratio (CRR) of scheduled banks unchanged at 4.0% of net demand and time liabilities (NDTL);
  • Reduce the statutory liquidity ratio (SLR) of scheduled commercial banks by 50 basis points from 22.5% to 22.0% of their NDTL with effect from the fortnight beginning August 9, 2014; and
  • Continue to provide liquidity under overnight repos at 0.25% of bank-wise NDTL and liquidity under 7-day and 14-day term repos of up to 0.75% of NDTL of the banking system.
  • Consequently, the reverse repo rate under the LAF will remain unchanged at 7.0%, and the marginal standing facility (MSF) rate and the Bank Rate at 9.0%.

Assessment

Since the second bi-monthly monetary policy statement of June 2014, global economic activity has been picking up at a modest space from a sharp slowdown in Q1. Investor risk appetite has buoyed financial markets, partly drawing strength from assurances of continuing monetary policy support in industrial countries. Portfolio flows to emerging market economies (EMEs) have risen strongly. This implies, however, that EMEs remain vulnerable to changes in investor risk appetite driven by any reassessment of the future path of US monetary policy or possible escalation of geopolitical tensions...Read More

Obama authorizes air strike in Iraq

U.S. President Barack Obama reportedly that he’s authorized "targeted airstrikes" in Iraq to protect American personnel.

"We do whatever is necessary to protect our people," Obama said.

Obama said that he’d directed the military to take targeted strikes against Islamist militants "should they move towards the city."

Obama acknowledged that many Americans are concerned about military action in Iraq, says report.

Earlier on Thursday, The UN Security Council condemned attacks by the Islamic State group and called for international support for Iraq after the 15-member body held an emergency meeting on the situation, report says.

Domestic car sales up 5.04% in July: SIAM

SIAM reportedly said that the domestic passenger car sales grew 5.04% to 1,37,873 units in July this year.

The motorcycle sales last month grew 6.17% to 8,59,290 units from 8,09,386 units, says SIAM.

The total two-wheeler sales in July 2014 was up 13.73% to 12,87,462 units, reports SIAM.

Total sales of commercial vehicles were down by 13.64 per cent to 47,765 units from 55,310 units in the year-ago period, SIAM said.

Sugato Sen, deputy director-general, Siam, reportedly said the July numbers would have been better, but for panic buying in June on fears of an excise duty increase.

Sen said that the new government has given all the right signals so far, report says.

India's July services activity grows at slower clip: HSBC PMI

The headline HSBC Composite Output Index posted 53.0 in July, down from June's 16-month high of 53.8.  The latest figure was indicative of a solid expansion in private sector activity, and was the second highest reading since February 2013. Output growth accelerated to a 17-month peak in the manufacturing sector, while activity rose for a third consecutive month at services companies. Adjusted for seasonal factors, the HSBC Services Business Activity Index stood at 52.2 in July, down from June?s 17-month peak of 54.4. The latest reading indicated a third successive monthly expansion and was consistent with a modest rise in business activity. However, the pace of output growth slowed from June and was below the long-run series average. A number of panellists associated rises in activity with improving demand. Among the six monitored sub-sectors, only Hotels & Restaurants and Transport & Storage companies registered reductions in activity.

Mercedes S 500 L: One knows you have arrived!

Among all the luxury cars that one can see in India, it is unmistakably Mercedes that has the highest recall value. And the S-class is the jewel in the crown for the three-pointed star from Stuttgart – their flagship luxury saloon, and a car that showcases the latest in technology that Mercedes has to offer in road-going cars. The S-class had lost a bit of sheen over the past few years with the advent of sportier (and more contemporary looking) models from the competition (especially BMW and Audi), and the 2014-launched W222 base S 500 L is Mercedes’ attempt at setting the record straight.

Combined with the recent launch of the India-assembled S350, Mercedes aims to regain the marquee status among those who have the money to splurge on such luxury, and would like to indulge in this luxury while being chauffeured around. The new S 500 has a dual task of keeping the S-class flag flying high and taking the legend to a whole new benchmark, while also ensuring that the now-mothballed Maybach brand is not missed by moneybags. And Mercedes is now extending the S-Class range into an extra-long super-luxurious model to protect its image as a brand for the elite...Read More

Union cabinet approves FDI in defence, railways

The Union Cabinet approves proposal to set the composite cap for foreign investment in the defence sector at 49%, compared with the current 26% foreign direct investment (FDI) ceiling. Report said that some railway operations and projects were allowed to receive up to 100% FDI.

This move came after the Cabinet approved similar proposal to set the composite foreign investment cap for private insurance firms at 49%.

Following the cabinet plan to raise the amount of FDI in defence and railways industries, stocks associated with defence and railways will be on investors’ radar.

Lok Sabha passes Securities Laws Amendment Bill, 2014

News Infocus

Plan the perfect home loan

Getting the best deal possible is a result of good planning rather than luck. A home loan creates a long term relationship between the lender and borrower. To make this relationship most rewarding you must invest some time and effort to get the best possible terms for your home loan. In Indian culture, owning a house is considered to be the ultimate asset. Most young couple will strive at investing in property. Just like most people who are about to get married, Avinash Raniwal was pleased to have a secure job after doing his MBA and now was looking forward to getting married. But first, he wanted to invest in some an apartment for his future family. Avinash wanted to make sure that his loan application went through without hitch. As he spoke to friend and family he realised that to take a favourable home loan means he needs to pre-plan for it months before...Read More

Three reasons to Consider Index Funds

Indexing is an investment approach which simply tracks an index to provide exposure to a market or segment of a market. For the three reasons listed below, it may be a viable complement or substitute to actively managed investments. Firstly, indices outperform the majority of actively managed funds. The SPIVA Australia Scorecard, which is published twice a year, tracks the number of actively managed Australian mutual funds that were outperformed by their comparable benchmarks over different timeframes. The year end 2013 SPIVA Australia Scorecard showed that benchmark indices outperformed the majority of their comparable actively managed funds over three- and five-year horizons. Similar findings are also observed in the U.S., Canada and Europe SPIVA Scorecards...Read More

Why so many worry about inflation

Inflation fears are everywhere except in the data. While the Fed keeps reminding us that the inflation rate is below their 2% target, analysts keep arguing that the Fed will be miss signs of inflation. Any hint of rising prices anywhere – from the CPI to oil to the money supply – is highlighted while reports of little change are ignored. Is there actually less threat of inflation than most perceive? Why do so many investors expect inflation to appear any moment? The numbers: The latest figures for the CPI and the Core (excluding food & energy) CPI are 2.1% and 1.9% in the 12 months ended in June. The Fed uses the personal consumption expenditure (PCE) and Core PCE deflators which show slightly lower 12 month numbers of 1.6% and 1.5%, also as of June. The chart shows all four series over the last five years, there isn’t much of a trend either up or down. Whatever the numbers show, some will point out that we’re looking at the past and what matters is the future. True, but the key factors that drive inflation don’t give any reason for worry. Wages, salaries and benefit costs are one inflation factor – if employment costs rise, businesses will try to recover their costs in price increases. However, the government’s Employment Cost Index for total compensation doesn’t give any hints of impending inflation. Since 2010 it has averaged 1.9%, the last figure was 2.1%, the same pace reported in third quarter of 2010 and the second quarter of 2011. The price of oil is another key determinant of inflation. While oil prices are volatile, they don’t show massive inflation dangers. Prices recently at a bit below $100 per barrel for WTI have ranged between $95 and $113 since August 2010...Read More

Does active management work in Europe?

Academic arguments may well have "proven" the theoretical advantages of passive investing. But theory is nothing without experiment; a comprehensive and impartial assessment of where and when active managers have delivered the promised "alpha" – or not – is a necessary and critical component of the debate.

Our S&P Index Versus Active scorecard and associated Persistence reports have – for twelve years – quantitatively examined the performance of active mutual funds in the U.S. versus their relevant benchmarks. Yet many questions regarding the global picture have so far been left unanswered, and the publication last week of the first SPIVA scorecard dedicated to the performance of the European fund industry is accordingly of great interest.

The overall conclusion for Europe is entirely familiar: broadly speaking, the majority of funds fail to beat their benchmarks...Read More

Affordable Housing: A second look at Budget 2014

Over the past decade, the construction industry has been hit hard by economic slowdowns and extreme market fluctuations. Construction and infrastructure play a significant role in a country’s economy, but rigid contractual policies and very high construction costs (among other factors) have been constricting the growth of this sector in India. Needless to say, growth in construction in infrastructure will not only result in more connected, streamlined and future-ready cities - it also means the creation of millions of new jobs and overall growth of the economy. The new government did attempt to provide increased impetus to the construction and infrastructure sectors with additional allocation to infrastructure projects in the recent budget. However, sizeable budgetary allocations are nothing new in the Indian context. Everything looks good on paper until the funds for large projects hit bureaucratic hurdles on the road to implementation. Considering its complexity, clearing the opaque jungle of red tape that has been created in India over the decades is in any case not an easy task even for the most determined government.

If viewed from a market-level perspective, Budget 2014 has in fact not delivered any tangible means to reduce construction costs. The cost of construction materials has been increasing at a rate of 15-16% over the past three years, and this has seriously impeded developers’ ability to generate sufficient profits to launch new projects. While this does not significantly impact larger developers who tend to launch residential projects for the mid-income and high-income segments of buyers, it is a challenge to smaller developers who typically cater to the needs of home buyers with smaller budgets. In other words, the high cost of construction remains a serious challenge to the affordable housing sector...Read More

The rise of the dual homes concept

Dual Homes are a lifestyle. In a modern global economy, work, entertainment, family, and leisure are reasons that take people from one place to another. In recent years, more and more people work in a certain place and have family in another. More than one place has become home for many of us. In this day and age, the new age home is no longer one home. Many of us have more than one home, we have homes. Dual homes are equally operational and have now become a part and parcel of people working in metro cities and having homes in other cities. This concept has helped people to get more of ‘me’ time and attain a better Work Life balance.

And some of us are constantly living the dual home lifestyle.

Lifestyle

People living close to the metros and capital cities are examples of the dual home lifestyle. Entrepreneurs or business owners often have a head office and an operations office based out of two cities. And both cities become home, thus making it more convenient and easier

Destinations

Dual homes require a sibling connection with two cities. Routes where people travel at large and juggle between two homes are Delhi- Chandigarh, Delhi- Sonipat, Delhi- Dehradun, Delhi- Aligarh, Delhi- Lucknow, Delhi- Kanpur, Delhi- Allahabad etc...Read More

Demand for engineers remains high but employers struggle to find staff

Demand for engineers remains high but more than half of employers are having difficulties recruiting the staff they need for their businesses to expand. Half (51%) of employers said they were recruiting engineering staff this year and of those, more are finding it difficult to recruit the people they need compared to 2013. The findings are revealed in the Institution of Engineering and Technology’s (IET) ninth annual Engineering and Technology: Skills & Demand in Industry report.

The proportion of engineers who are female has not significantly improved since 2008 and currently stands at just 6% of the workforce. Despite this poor record, the survey suggests that 43% of employers are not taking any specific action to improve workplace diversity.

Other findings include:

  • 59% of companies indicated concerns that a shortage of engineers would be a threat to their businesses
  • 53% of employers believe they should get more involved with schools, colleges and universities to help change the perception of engineering among young people
  • 44% of engineering, IT and technical recruits do not meet the employer’s expected levels of skills
  • 52% of organisations anticipate employing more apprentices in 4 to 5 years’ time
  • Since 2013, the number of Intermediate Apprenticeships (Level 2) offered by employers has more than doubled but the number of Higher Apprenticeships (Level 4) has remained static...Read More

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