Leo Chemo Plast Blog

MUMBAI: The National Stock Exchange’s Nifty closed below psychological level of 4700 for the first time since November 2009 as institutional investors sold shares across the board after the Reserve Bank of India policy review failed to boost sentiments.

The RBI in its much awaited meet kept the key interest rates unchanged. Repo rate is at 8.5 per cent, reverse repo rate continues to be 7.5 per cent and CRR unchanged at 6 per cent.

Commenting on rate cuts, RBI Governor D Subbrao said he cannot speculate when the cuts will begin and added that “rate cut is an event some way ahead.”

Reacting to RBI’s move, Finance Minister Pranab Mukherjee said the decision would improve business sentiment and recover the growth momentum.

The Nifty closed at 4654.75, down 91.60 points or 1.93 per cent. The broader index touched a high of 4818.85 and low of 4653.50 in trade so far.

The Bombay Stock Exchange’s Sensex ended at 15491.79, down 344.68 points or 2.18 per cent. The 30-share index touched intraday low of 15425.20 and high of 16068.90.

BSE Capital Goods Index fell 4.51 per cent, BSE Realty Index declined 3.53 per cent and BSE Bankex moved 3.21 per cent lower.

he following is the full text of the mid-quarter monetary policy review statement issued by the Reserve Bank of India on Friday. It is also available on the RBI’s website www.rbi.org.in Monetary Measures On the basis of the current macroeconomic assessment, it has been decided to:

Keep the cash reserve ratio (CRR) unchanged at 6 per cent; and * keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 8.5 per cent. Consequently, the reverse repo rate under the LAF will remain unchanged at 7.5 per cent and the marginal standing facility (MSF) rate at 9.5 per cent.

Introduction Since the Reserve Bank’s Second Quarter Review (SQR) of October 25, 2011, the global economic outlook has worsened significantly. The recent European Union (EU) summit agreement did not assuage negative market sentiments, thereby increasing the likelihood of persistent financial turbulence as well as a recession in Europe. Both factors pose threats to emerging market economies (EMEs), including India. Significantly, despite these developments, crude oil prices remain elevated.

On the domestic front, growth is clearly decelerating. This reflects the combined impact of several factors: the uncertain global environment, the cumulative impact of past monetary policy tightening and domestic policy uncertainties.

Both inflation and inflation expectations are currently above the comfort level of the Reserve Bank. However, reassuringly, inflationary pressures are expected to abate in the coming months despite high crude oil prices and rupee depreciation. The growth deceleration is contributing to a decline in inflation momentum, which is also being helped by softening food inflation.

Global Economy The global economic situation continues to be fragile with no credible solution as yet to the immediate euro area sovereign debt problem. At the EU summit on December 8-9, the European leaders agreed on a new fiscal compact, involving stronger coordination of economic policies to strengthen fiscal discipline. While the agreement is necessary for medium and long-term sustainability of the euro area, its ability to resolve short-term funding pressures was questioned by markets.

Q3 euro area growth, at 0.8 per cent, was anaemic and 2012 growth is now expected to be weaker than earlier projected. Reflecting these projections, the European Central Bank (ECB) cut its policy rate twice in the last two months, and also implemented some non-standard measures. By contrast, growth in the US in Q3 of 2011 was better than in Q2, although still substantially below trend.

MUMBAI: Concerned over economic slowdown, the Reserve Bank today kept interest rates unchanged and indicated that it could cut key policy rates from now onwards to arrest falling growth while keeping a close vigil on inflation.

“While inflation remains on its projected trajectory, downside risks to growth have clearly increased… Further rates hike may not be warranted,” the Reserve Bank of India (RBI) said in it its mid-quarter review of monetary policy.

The economic growth has come down to 6.9 per cent in the second quarter of the current fiscal from 8.1 per cent in the corresponding quarter in the previous financial year even as inflation remains close to the double-digit mark. The industrial growth registering a negative growth of 5.1 per cent in October too may have prompted RBI to maintain the status quo.

The central bank maintained repo (rate at which banks borrow from RBI) at 8.5 per cent, reverse repo (rate at which the RBI borrows from banks) at 7.5 per cent.

The halt in rate increase comes after 13 hikes since March 2010.

The RBI has also decided to retain the cash reserve ratio (CRR), the amount banks need to park with the RBI, at six per cent. The industry was expecting a marginal cut in the CRR to induce liquidity in the system to promote investments.

“I cannot really speculate on when we might start cutting rates, but certainly that is an event, that an action that is on the way forward…,” RBI Governor D Subbarao said on the sidelines of an event.

The RBI will make an assessment of its growth and inflation projections for 2011-12 in the third quarter review next month, the policy statement said.

Immediate action was required by the Reserve Bank of India in this policy review as India’s growth rate has already plummeted to sub 7% levels. If RBI had not halted the rate hike regime, experts feel the growth rate would have slipped to even lower levels.

The government’s focus needs to shift back to growth concerns in view of weakening growth and market sentiments, finance minister Pranab Mukherjee said on Thursday.

“The present indicators show that both private consumption and investment sentiments have weakened and it is this weakening of sentiments that makes it necessary to shift some of our focus back to near term issues,” he said during the Delhi economics conclave on Thursday.

Commenting on the RBI’s move to keep policy rates unchanged, C Rangarajan, Chairman of PMEAC said that the pause in the rate hike was an appropriate thing to do and that headline inflation would come down in the future.

It is necessary in this context for policymakers to send clear signals, mindful of the fact that our options today are much more limited. “India cannot afford to relax on its efforts to promote growth,” Mukherjee said.

Last month, data released by government indicated India’s economy grew at its slowest pace in more than two years in the July-September quarter to 6.9%.

Economists said they were reviewing their GDP growth estimates for the current fiscal and expected growth to moderate further against the backdrop of a slowing global economy and policy delays.

“Growth in India, Asia’s third-largest economy, is expected to accelerate mildly to 7.4% in the fiscal year starting April 1, 2012, from 7.0% in the current financial year,” according to a report by Standard Chartered.

Earlier, ratings agency Fitch revised its growth projection for the Indian economy in 2011-12 downward to 7 per cent from the earlier estimate of 7.5 per cent on account of sustained inflation, global slowdown and high domestic interest rates.

Inflation overhang:

Food inflation dropped to its lowest in nearly four years as prices of vegetables, fruit and pulses softened further, providing some relief to a beleaguered government, but economists warned against premature celebrations, warning food inflation may rise again after winter.

Food inflation touched 4.35% for the week ending December 3 against 6.6% the previous week, data released showed.

NEW DELHI: Ahead of the BRICS ( Brazil, Russia, India, China and South Africa) summit New Delhi will host next year, Prime Minister Manmohan Singh has said emerging economies can play a significant role in global financial stability against the backdrop of the eurozone recession.

“At a time of economic uncertainty, especially in the Eurozone, growth and prosperity in the BRICS economies can play a significant role in ensuring economic and financial stability at a global level,” Manmohan Singh told Russian journalists ahead of his visit to Moscow on a three-day visit.

The prime minister stressed that the relevance of the BRICS to the international order has increased over time.

These countries share similar positions on issues such as the reforms of the Bretton Woods Institutions, trade protectionism and the Doha Development Round, achievement of the Millennium Development Goals and support for a multi-polar, equitable and democratic world order, he said.

India will host the next BRICS summit in March next year, the first time New Delhi will do so after Russia hosted the maiden BRIC summit in Yekaterinburg in 2009.

“The agenda of BRICS has gone beyond the purely economic to include issues such as international terrorism, climate change and food and energy security. The world is also witnessing political and security challenges, especially in West Asia,” said Manmohan Singh.

The prime minister stressed that against the backdrop of these global challenges, it was “all the more essential for BRICS countries to closely consult with each other at this time”.

Ways to enhance cooperation within the BRICS are expected to figure in discussions between Manmohan Singh and Russian President Dmitry Medvedev in Moscow Friday.

NEW DELHI: Industrial production dipping into the negative and growth slowing down will play a major role in the Reserve Bank of India’s decision on key interest rates and India Inc. hopes the central bank will not play spoil sport this time.

The RBI will conduct the mid-quarter review of the monetary policy on Friday.

The central bank has hiked rates 13 times since early 2010 to tame inflation. That objective is closer to realisation, according to latest official figures. Food inflation has dipped to 4.35 percent for the week ended Dec 3, while headline inflation – though still above 9 percent – has shown some signs of decline.

Industrial production, however, has taken a beating in the past four months. High interest rates have deterred investments.

IIP for October was logged at (-) 5.1 percent.

“With growth slowing more than expected and likelihood that headline inflation could cool to 7 percent by March, the central bank is likely to build in a dovish rhetoric in its monetary stance leaving door open for a possible CRR cut in January and a repo rate cut in first quarter of FY13..

The markets, however, looked like bracing for another rate hike with some sections feeling the RBI could once again tighten policy rates to ensure inflation comes down to below 7 percent by March.

The 30-scrip sensitive index of the Bombay Stock Exchange was trading 130 points lower 0.82 percent at 15,750.27 points. It fell to an intra-day low of 15,596.22 points.

Another major worry for the RBI in the short-term would be the sharp depreciation in the rupee. The Indian currency hit another new low Thursday at 54.30 a dollar. It has been consistently falling to new lows for the past four days and has lost over 20 percent to the dollar in just four months.

A falling rupee makes imports costlier, especially those of petroleum products, putting pressure on oil marketing companies to raise prices of de-regulated fuels like petrol. While the government would fend off an increase in diesel, kerosene and cooking gas, it can do so only for a limited time.

All this will add to inflationary pressures again.

The RBI should reduce interest rates to gradually reverse the impact of the 13 interest rate hikes it has undertaken over the last two years.

RBI should also implement measures to contain the sharp decline in the value of the rupee as this would exacerbate inflationary pressures and take away any gains from the moderation in global commodity prices.

The foreseeable future is slightly longer and in the short term at least, the market would continue to be governed both by the local and the global factors. On the global factors, I know that there is something that was attempted over the weekend in the EU Summit but a sustainable resolution on that side would take much longer. On the other hand, in the domestic side, you have a situation now where growth is clearly slowing down. There are concerns on the asset quality of the banks and there are concerns that even the interest rate cuts that the market have been hoping for, maybe pushed slightly backwards, even though there have been some sliver linings.

For example we have had inflation numbers that came out most recently last week, they have been better than expected. But there is now a clear growth slowdown that is seen in the economy and It would not be a surprise even if we get a few negative prints on the industrial production growth numbers possibly in December and January. So, in the near term those could come as a negative surprise to the market. In the very near term the market would continue to trade at most sideways, possibly slightly downwards from here. Currently the valuations are about 12.5 times one year forward or so. It is difficult to lay finger on exactly where it could settle but as we have pointed out earlier, the worst case for the market seems to be somewhere around 14000-14500 on the Sensex.

The Opposition has backed Anna Hazare’s demands for the inclusion of Prime Minister, lower bureaucracy and citizen’s charter within the ambit of the proposed Lokpal. However, it urged his team to exhibit flexibility and leave the nitty-gritty of the law to Parliament.
On the eve of day-long fast to protest against the Parliamentary Standing Committee report on lokpal bill, Anna Hazare said government has “cheated” the entire country and that he will carry on his campaign till next Lok Sabha elections to create awareness against UPA.

The social activist said he suspected that Congress general secretary Rahul Gandhi was behind Standing Committee rejecting even Prime Minister Manmohan Singh’s promise to include the Citizen’s charter, lower bureaucracy and establishment of Lok Ayuktas in the states.

“They have cheated the whole country. The Prime Minister had given in writing that these three issues would be brought under the Lokpal Bill…The Prime Minister’s letter was thrown into the dustbin. Why this volte face? Is Singhvi’s post higher than that of the Prime Minister,” Hazare told reporters here.
“There is somebody behind… Who is bigger than the Prime Minister?… We suspect Rahul Gandhi could be behind this… Who else can dare to challenge the Prime Minister? That is why there are these problems,” Hazare said, alleging that their intentions are “not good”.

He was referring to Standing Committee headed by Abhishek Singhvi which has disfavoured inclusion of Group C and D employees and kept out Citizen’s Charter and Lokayukta.

Costlier imports to hurt profit margins of cos; consumer may have to pay more

Falling Rupee, high interest rates bring home a flurry of Dollars

Vijay Mallya, chairman of the UB Group, which runs Kingfisher Airlines, had said on Tuesday that it had sought the Directorate General Of Foreign Trade’s permission for the airline to directly import fuel to save on sales tax, which varies from 4% to 30% across the country. if Gov. is satisfied that the restriction was causing “genuine hardship”.
Oil companies have laughed off the idea saying it was akin to someone doing an MBBS course to avoid paying consultation fee to a doctor.