Showing posts with label RBI. Show all posts
Showing posts with label RBI. Show all posts

Tuesday, October 30, 2012

Past quarter were simply, just numbers...

Both public and private banks are facing a similar predicament today – the lying mirror! manish k. pandey discusses the dangers ahead, and how strong numbers during the past quarter were simply, just numbers...

A small data crunching allows us to easily figure out that the net repo volumes (funds kept by banks in aggregate with RBI at a paltry rate of 3.25%), at present stand at a staggering Rs.1.68 trillion. In fact, the situation seems to be touching alarming proportions when one considers how the amount parked under this window is more than double the new incremental deposits (about Rs.620 billion) brought in by the banking system during the year. “Banks fear a rise in non-performing assets (NPAs), so much that they are willing to sacrifice the [negative] differential in deposit rates offered to customers and the interest earned from RBI at reverse repo rates,” says Ashok Jainani, VP, Khandwala Securities. The average rate offered on one-year fixed deposits is about 7.25% currently, while the reverse repo rate is 3.25%! It clearly shows that banks are suffering a killing margin loss of almost 4% for every rupee being kept with RBI; a trend which, if it continues into the next quarter, has the potential to wipe out clean the past year’s profits of many banks within one quarter.

Even if one looks at the broader picture, one can easily figure out that NIMs have been on a declining mode for the last three quarters now. Amit Saxena, CEO, Planman Financial says that there’s worse in the banquet hall – the Incremental LDR (Loan-Deposit Ratio) has already fallen to an eight-year low of 14%. Evidently, the outstanding credit-deposit (CD) ratio of scheduled commercial banks has dropped below 70% for the first time in almost three years (The CD ratio currently stands at 69.01%, the lowest since May 2006 when it stood at 69.89%). Add to this the fact that the credit off-take growth too has come down to 16% – as compared to 25% a year back – and you start wondering whether the house that actually collapsed was insured or not.


Source : IIPM Editorial, 2012.

For More IIPM Info, Visit below mentioned IIPM articles.
 
IIPM : The B-School with a Human Face
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Thursday, September 06, 2012

EXCLUSIVE INTERVIEWS WITH:CEOS AND TOP MANAGEMENT OF INDIA’S LUXURY AUTO GIANTS

The Indian Luxury car market is on the verge of exploding, led by the increasing affluent class. this has catapulted Germany’s big 3 into an internecine and long drawn war. Is their any winner in sight yet? B&E’s Sanchit Verma Gives an incisive sectoral update on the current relative sales figures, positioning issues, production plans...

The scenario is similar with Audi. The more technology oriented German player revised its 2010 targets to 2700 (from 2300), having exceeded expectations by clocking 63% growth with 2178 cars sold in Jan-Sep 2010. This was the best sales performance for Audi ever in India, which shows how it is also gradually climbing the sales ladder. In fact, Audi India’s countrywide vehicle sales in September 2010 grew to 292 cars as compared to 205 units sold in September 2009. If one were to see the Jan-Sep 2010 period, Audi sold 323 units of its Q7 and A8 branded cars during this period; these brands stand at par with the Mercedes-Benz S-class & SL Roadster, which clocked 343 and 421 units respectively in the same period. “We are confident that we will achieve annual sales of 3000 cars, which is more than our revised target of 2700 cars,” said Michael Perschke, Head, India Operations, Audi.

In all, these three have posted total sales of 7178 units between them in the April-September 2010 period, a phenomenal growth of 84% yoy. But the reality is that going forward, all these luxury car makers are now attempting unique strategies that are brilliantly differentiated on one hand and classically positioned on the other.

Pricing and financing differentiation: Pricing matters in India! If you’re selling in India, the faster you understand the concept of value for money, the better for your sales. Take BMW for instance. On October 5, 2010, BMW launched BMW Financial Services as a new business entity in India; this firm is a 100% subsidiary of the BMW Group and will operate as a Non-Banking Finance Company (NBFC) as per the Reserve Bank of India (RBI) norms. In 2010, we’re informed that the BMW Group will invest $50 million (Rs.2.3 billion) in this arm. The reasons are quite obvious. The financing arm is to make the product more accessible to a wider audience. Look at how superbly BMW’s positioning has changed in recent times to accommodate the lower-upper class of Indian society. BMW’s recent advertisements are already offering the 3-Series at an attractive EMI of Rs.19,999 a month. Imagine the potential such a move holds, where hundreds of thousands of well earning middle management in as many Indian companies suddenly become potential customers. K. Kumar, India Manufacturing Head, Deloitte India, echoes this view to B&E, “The most important factor to expand this segment would be to put these cars within the reach of the upper middle class consumer.” Mirroring BMW’s strategic move, Daimler (the parent company of Mercedes-Benz) also announced that their financial services arm will start supporting India sales.

But BMW already has the first mover’s advantage, because while BMW’s financial arm is ready and active as of right now – and the festive season is the most critical of all times – Mercedes’ financial services are likely to be available only by next year. Audi still hasn’t expressed any views towards launching any financial services arm, as their current strategy encompasses significant investments in branding and marketing, exclusive dealerships and after sales service for the upcoming year. Evidently, this financing round is being won by BMW hands down.


Source : IIPM Editorial, 2012.
For More IIPM Info, Visit below mentioned IIPM articles.
 
IIPM : The B-School with a Human Face
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Thursday, July 19, 2012

Investing in India in The Short-Term

Goldman Sachs Economists have cautioned The World against investing in India in The Short-Term. With high Inflation and Record current account Deficit, has Indian Economy Deteriorated so much? 

After raising the repo and reverse repo rates by 25 basis points (bps) for 6 times in 2010, in its first policy meeting for this year, the apex bank has splendiferously again added another 25 bps to the existing rates. However, so far, these measures have delivered negligible results demanding stricter action. Although from outside the country, RBI’s moves seem right (George Worthington, Chief Economist-Asia-Pacific, Thomson Reuters, tells B&E, “Given these structural factors, the RBI will need to bump rates up considerably, or institute other curbs on liquidity, to rein in inflation this year.”), in reality, even school level economists within the country would be able to tell that the RBI has gotten it horribly wrong – the basic inflation increase is more because of supply side constraints rather than because of excess demand; even the visiting World Bank chief Robert Zoellick was quite taken aback at RBI’s monetary policy and refusal to address the supply side issues. In other words, the RBI should have actually decreased corporate loan rates (and kept retail loan rates unchanged).

But on the other hand, the government looks more focused on maintaining a high GDP growth rate. For that matter, in Q3 itself, our GDP grew at 8.9% y-o-y, the fastest for the country since the second half of 2007. As a result, while IMF now expects India to end up achieving 8.75% GDP growth in 2010-11, Moody’s Analytics has given a growth forecast of 8.5% to 9.5% over the next few years. But at what cost? The government’s die-hard attempts to keep its GDP growth afloat have now started taking its toll on the country’s current account. From 1.5% of GDP in Q1 FY2010, India’s current account deficit (CAD) climbed up to 4.1% of the GDP at the end of Q2 FY2011. Historically, India’s CAD has been financed by capital inflows, FDI and FII, with the former being the stable source of the two. But the clear and present danger for India at present is that while deficit is inching towards a record high, 95% of the same is financed by short-term portfolio inflows (which can reverse anytime if investor sentiment goes negative; and Goldman has already beaten the dead horse into life) in the second quarter. In a precursor, FDI inflow dropped a shocking 36% to $12.6 billion in H2 of the current fiscal as compared to H1 FY2010. In fact, India only received $2.5 billion as FDI in the second quarter. And this is at a time when the government is targeting to attract $100 billion as FDI by 2017.

While the CAD is deteriorating in an imbalanced and distressed manner, rising global fuel prices and higher imports by India to support rising demand (to cover up domestic supplyside failures) has started accumulating in the form of India’s external debt stock, which jumped around 12.5% in the first half of this fiscal to $295.8 billion as on September 30, 2010 (whereas the country’s total forex reserves stood at only $294.2 billion on the same date). Moreover, as the deficit rises, a sudden rise or fall in capital flow (which keeps happening on a regular basis depending on the market conditions) will tend to have a magnified impact on Indian economy making the situation unexpectedly bad.

With the Union Budget round the corner, this is certainly the time when Finance Minister Pranab Mukherjee needs to resort to some tough calls to administer the situation (read our ‘alternative budget’ in the next issue for details). With the US struggling with weak labour and housing markets, with fiscal deficit projected at 10.75% in 2011 (more than double that in the euro area), and gross government debt projected to exceed 110% of GDP in 2016 is taking a breather, this should have been the best chance for BRIC economies to corner all global investment. But strangely, and suddenly, comes the anti-BRIC Goldman advice right out of the blue... Now who was telling us the other day that Goldman does everything these days according to how the US government demands?


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Wednesday, July 18, 2012

The Finance Ministry took Micro and Macro Economics Revision Lessons from us

A Blanket Interest rate Hike will have The Worst Economic Impact in order to Curb Supply-side Inflation. It’s time The Finance Ministry took Micro and Macro Economics Revision Lessons from us
 
The second problem is RBI’s fetish for contractionary policies. As is well accepted globally, contractionary policies can work only when the inflation is a demand pull inflation (as raising interest rates and reducing money supply results in consumers having less disposable income, and taking lesser loans to purchase, say, houses). Unfortunately, food items in India are not of the luxuriant variety, which can undergo price jumps so suddenly and so uncontrollably simply because people have as suddenly and as uncontrollably started eating more – unless of course, as even World Bank head Robert Zoellick accepted this week, the inflation in India was much more due to supply side constraints. In such a case, tightening of monetary policy would end up destroying supply even further as businesses would stop investing.

So what should RBI do? Immediately initiate the practice of differential interest rates while providing money to borrowing banks, which would broadly mean three different interest rate slabs when the borrowing bank takes money – one, when the bank borrows money from RBI for providing loans to the agriculture sector, one for corporate sector and one for retail/end consumers. RBI should provide money to banks at lower rates (expansionary monetary policy) in case the banks are taking finances for subsequently providing loans to the agriculture or industrial sector. This will motivate supply growth. RBI should provide money to banks at higher or unchanged rates in case the banks are taking finances for providing loans to end consumers. This will proactively motivate savings and demotivate an increase in retail demand. At the same time, banks should be prohibited from charging increased interest rates from end consumers who have taken past loans. Protectionist surely; but when it is a question of the economy collapsing due to inflation rate jumps, a protectionist policy is any day more welcome than a contractionary one. Dada, try us out – one call and we’ll be at your service! And no, we’ll charge no interest for that.



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Hire us Please, Pranabda

A Blanket Interest rate Hike will have The Worst Economic Impact in order to Curb Supply-side Inflation. It’s time The Finance Ministry took Micro and Macro Economics Revision Lessons from us

Honest! Perhaps there’s no other leader we appreciate more for energy filled speeches and excitement laden activities than Pranabda. From spunky bridge-building exercises with opposition parties to spinning off cocky rib-tickling humour at just the right moment, the dada from the Sabha has more energy jam-packed in him than a man doing triple doses of the thirty-plus concoction. But given that Pranabda has been excruciatingly busy fire-fighting all the ills that his party had conveniently refused to acknowledge for such a long time – from the telecom tangle to the Commonwealth calumny – his focus has clearly reduced on what the RBI is conjuring up quarter after quarter as an alleged solution for solving and resolving the inflation issue! Dada, it’s time you hired us, as what the RBI is peddling as the solution for inflation could surely be the final nail in the coffin for the party.

But more of that later; first, the facts. The overall inflation rate has fluctuated wildly in the last three months of 2010 at rates of 8.58%, 7.48% and 8.43% respectively. Food inflation reached 18.32% in December and 18.91% during the first week of January, 2011. While inflation in the manufacturing sector came down from 4.56% to 4.46% in December, prices of vegetables rose by 22.90% in December over the previous month. Onions became more expensive by 34.86% and potatoes became dearer by 16.29%. Fuel and power inflation, in turn, rose by 11.19%. And how has the RBI handled such stubborn price increases? Through an evidently contractionary monetary policy – RBI raised the interest rates (the repo – rate at which banks borrow from RBI – being key; currently at 6.25%) by six times last year. It plans to hike the rates further on January 25, 2011 (possibly by 25 basis points).

It’s clear that RBI, in its love for capitalist theory and ways American, continues toeing the exact line that drove US into an economic disaster. US has gone through inflation many times. Excessive government expenditure, oil price shock, and a contractionary monetary policy followed by Bernanke in the mid 2000s pushed the world into recession.

Coming back to India, the problem starts with the RBI data itself. Our country still considers the Wholesale Price Index (WPI) instead of the Consumer Price Index (CPI) to calculate the overall inflation rate. This means that inflation doesn’t reflect the consumer price of commodities at market rates. In essence, the general use of WPI is to measure the impact of price on businesses; yet, India uses the same to calculate the impact of prices on consumers. Also, WPI incorporates about 435 commodities with different individual weights, out of which many (like coarse grains) are not of much daily use today. Consider this: while general inflation rate was around 8%, food inflation touched 18% in December.


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