ECB norms relaxed, limit raised

As borrowings cost higher in domestic markets, firms allowed to raise cheaper funds to refinance rupee loans.

With interest rates in the country ruling high, the finance ministry on Thursday allowed Indian companies to raise cheaper funds overseas to refinance their rupee loans. For the first time, it allowed China’s Renminbi as an acceptable currency — under external commercial borrowings with an overall ceiling of $1 billion.

A high-level committee on external commercial borrowings (ECB) also decided to increase the overall limit for these borrowings under the ‘automatic’ route to $750 million from the current $500 million. Such ECBs, where a corporate can raise money without seeking regulator’s approval, would have a maturity of above five years. The overall ECB limit of $30 billion was left unchanged, as only about $15.13 billion from it has been used so far this year.

DECISIONS AT A GLANCE

* Automatic approval limit increased to $750 mn from $500 mn

* $30 billion overall ceiling can be increased later, if needed

* Refinancing of rupee loans allowed though ECB

* ECB can be raised in Chinese currency Renminbi

* Refinance of buyer’s/ supplier’s credit permitted through ECB

* Interest during construction under ECB permitted

* Allowed availing of ECB denominated in rupee

* High networth individuals can invest in infra debt fund

* Inclusion of infra finance companies as eligible issuers for FII’s debt limit

* Tax exemption on interest on withholding tax to be taken up with revenue dept

“This is not going to be something cast in stone,” economic affairs secretary R Gopalan said. “If there is a requirement of additional ECB for infrastructure we will positively consider revising this limit,” he told reporters after the meeting that was attended by officials from the Reserve Bank of India (RBI).

The companies will now be allowed to use 25 per cent of the ECB to pay off their rupee debt. The remaining 75 per cent will have to be used for new projects. Under the existing ECB policy, the government does not allow any corporate to refinance its existing rupee loan through ECB. Finance ministry officials said refinance of rupee debt of all maturities would “hugely benefit” the corporate sector, especially infrastructure companies buying capital goods, as it would incentivise further investment. As the money raised through ECB is cheaper given near-zero interest rates in the US and Europe, Indian companies can repay their existing expensive loans from that.

The ministry has not put any ceiling on individual companies for using renminbi as currency for ECB. Even though the overall limit for permitting it under ECB is only $1 billion, the officials denied possibilities of a single

ECB norms relaxed, limit raised Cont.....

e company using the entire amount as it would come under ‘approval’ route. India currently allows ECBs in US dollar, euro, British pound and Japanese yen.

“The cost of borrowing in Renminbi is far less,” said a finance ministry official. “Companies go for it as it is on easier terms. We are getting their (China’s) money cheap.”

The limit for automatic approval has also been increased from $100 million to $200 million for the services sector (hospitals, tourism) and from $5 million to $10 million for non-government organisations and microfinance institutions. The decisions will come into effect through a notification by RBI.

The relaxation came in the wake of high interest rates in India and rising global uncertainty. Finance ministry officials said more than 90 per cent of the decisions were based on the industry’s suggestions at a meeting with finance minister Pranab Mukherjee last month.

Among other key decisions, the ministry allowed high networth individuals for investment in infra debt fund, included infrastructure finance companies as eligible issuers for FII’s debt limit for infrastructure, permitted refinance of buyer’s/suppliers credit through ECB, okayed interest during construction under ECB, gave a nod to availing of ECB denominated in rupee since the borrower is insulated from the exchange rate risk, and provided clarity on definition of equity for ECB from foreign equity holders.

On the issue of exempting withholding tax on interest payable on ECBs of maturity of five or more years, an official said it would be “taken up strongly” with the department of revenue.

Monetary Policy sep 2011

Fiscal Conditions

The central government’s fiscal imbalances widened during April-July of 2011 reflecting, primarily, the impact of decline in revenue receipts coupled with pressures from non-plan revenue expenditures on account of higher petroleum and fertiliser subsidies. Fiscal deficit at 55.4 per cent of the budget estimates in the first four months of the current fiscal was significantly higher than that of 42.5 per cent during the corresponding period last year (when adjusted for the more than budgeted spectrum proceeds).

Summing Up

To sum up, developments in the global economy over the past few weeks are a matter of serious concern. Growth momentum is weakening in the advanced economies amidst heightened concerns that recovery may take longer than expected earlier. Although India's exports have performed extremely well in the recent period, this trend is unlikely to be sustained in the face of weakening global demand. This, combined with the slowing down of domestic demand, to which the monetary policy stance is also contributing, suggests that risks to the growth projection for 2011-12 made in the July Review are on the downside.

Meanwhile, inflation remains high, generalised and much above the comfort zone of the Reserve Bank. After slight moderation in July, non-food manufactured products inflation rose again in August, suggesting continuing demand pressures.  Global crude oil prices have remained elevated despite weakening of global recovery. Moreover, there is still an element of suppressed inflation. Though global oil prices have moderated, the pass-through to domestic prices remains incomplete. Also, current administered electricity prices are yet to reflect increase in input prices, even as many states have initiated increases. Food inflation is at near-double digit levels, despite normal monsoons, underlining the fact that it is being driven by structural demand-supply imbalances and cannot be dismissed as a temporary phenomenon. The inflation momentum, reflected in the de-seasonalised sequential monthly data, persists.

Expected Outcome

The policy action in this Review is expected to:

• reinforce the impact of past policy actions to contain inflation and anchor inflationary expectations.

Guidance

The monetary tightening effected so far by the Reserve Bank has helped in containing inflation and anchoring inflationary expectations, though both remain at levels beyond the Reserve Bank’s comfort zone.  As monetary policy operates with a lag, the cumulative impact of policy actions should now be increasingly felt in further moderation in demand and reversal of the inflation trajectory towards the later part of 2011-12.  As such, a premature change in the policy stance could harden inflationary expectations, thereby diluting the impact of past policy actions. It is, therefore, imperative to persist with the current anti-inflationary stance. Going forward, the stance will be influenced by signs of downward movement in the inflation trajectory, to which the moderation in demand is expected to contribute, and the implications of global developments.

Cont Monetary Policy

Domestic Economy

Growth

GDP growth decelerated to 7.7 per cent in Q1 of 2011-12 from 7.8 per cent in the previous quarter and 8.8 per cent in the corresponding quarter a year ago. Agricultural growth has accelerated, but industry and services have decelerated. The index of industrial production (IIP) slowed from 8.8 per cent year-on-year in June  to 3.3 per cent in July. However, excluding capital goods, the growth of IIP was higher at 6.7 per cent in July  as  compared with 4.4 per cent in June. Cumulatively, the IIP increased by 5.8 per cent during April-July 2011, compared with an increase of 9.7 per cent in the corresponding period of the previous year.

The HSBC Purchasing Managers' Index for the manufacturing sector also suggested moderation. Corporate margins in Q1 of 2011-12 moderated across several sectors compared to their levels in Q4 of 2010-11. However, barring a few sectors, significant pass-through of rising input costs is still visible.

Monsoon rains so far have been normal. The first advance estimates for the 2011-12 kharif season point to a record production of rice, oilseeds and cotton, while the output of pulses may decline.

Inflation

Headline year-on-year wholesale price index (WPI) inflation rose from 9.2 per cent in July to 9.8 per cent in August 2011.  Inflation in respect of primary articles and fuel groups edged up in August. Year-on-year non-food manufactured products inflation rose from  7.5 per cent in July  to 7.7 per cent in August 2011 suggesting as yet persistent demand pressures. The oil marketing companies raised the price of petrol by ` 3.14 per litre with effect from September 16, 2011. This will have a direct impact of  7 basis points to WPI inflation, in addition to indirect impact with a lag. The new combined (rural and urban) consumer price index (base: 2010=100) rose to 110.4 in July from 108.8 in June. Other consumer price indices registered inflation rates in the range of 8.4 to 9.0 per cent in July.

Monetary, Credit and Liquidity Conditions

Year-on-year money supply (M₃) growth at 16.7 per cent in August was higher than the projection of 15.5 per cent for the year reflecting higher growth in term deposits and moderation in currency growth.  Similarly, year-on-year non-food credit growth at 20.1 per cent in August 2011 was above the indicative projection of 18 per cent set out in the July Review.

Liquidity has remained in deficit, consistent with the stance of monetary policy. The daily average borrowings under the liquidity adjustment facility (LAF) were around ` 40,000 crore in September (up to September 15, 2011). Money and the government securities markets have remained orderly. In recent weeks, as a result of global risk aversion, the rupee has depreciated, which may have adverse implications for inflation.

Monetary transmission strengthened further with 45 scheduled commercial banks raising their Base Rates by 25-100 basis points after the July Review. Consequently, the modal base rate of banks rose to 10.75 per cent in August from 10.25 per cent in July.

Monetary Policy Sep 2011

Monetary Measures

On the basis of the current macroeconomic assessment, it has been decided to:

• Increase the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 8.0 per cent to 8.25 per cent with immediate effect.

Consequent to the above increase in the repo rate, the reverse repo rate under the LAF will stand automatically adjusted to 7.25 per cent and the marginal standing facility (MSF) rate to 9.25 per cent with immediate effect.

Introduction

Since the Reserve Bank’s First Quarter Review of July 26, the global macroeconomic outlook has worsened. There is growing consensus that sluggishness will persist longer than earlier expected. Concerns over the sovereign debt problem in the euro area have added further uncertainty to the prospects of recovery.

Domestically, even as many indicators point to moderating growth, both headline and non-food manufactured products inflation are at uncomfortably high levels. Crude oil prices remain high. Food price inflation persists notwithstanding a normal monsoon.

Inflationary pressures are expected to ease towards the later part of 2011-12. Stabilisation of energy prices and moderating domestic demand should facilitate this process.  However, in the current scenario, with the likelihood of inflation remaining high for the next few months, rising inflationary expectations remain a key risk. This makes it imperative to persevere with the current anti-inflationary stance.

Global Economy

The global economy slowed in Q2 (April-June) of 2011.  Lead indicators such as purchasing managers’ indices (PMIs) suggest a further moderation in economic activity in Q3, with the global manufacturing PMI approaching the neutral level of 50. In recent weeks, global financial markets have been rattled by perceptions of  inadequate solutions to the euro area sovereign debt problem, exposure of banks to euro area sovereign debt and renewed fears of recession. Global recovery will also be affected by fiscal consolidation measures in some of the advanced economies.

In the US, apart from fiscal concerns, stubbornly high unemployment and weak housing markets continued to weigh on consumer confidence and private consumption. In response to the weakening of economic activity, the US Federal Open Market Committee, in its 9th August meeting, indicated that it would keep the federal funds rate near zero at least through mid-2013.

Economic activity in the euro area decelerated significantly during Q2 of 2011 reflecting decline in both private and government consumption expenditures as well as deceleration in capital formation. Economic activity contracted in Japan reflecting the impact of the earthquake/tsunami.

In contrast to advanced economies, growth remained relatively resilient in emerging and developing economies, notwithstanding some moderation in response to monetary tightening to contain inflation.

Cromton Greaves Ltd

We had cautioned all the investors not to buy in the co where the co has seen a tremendous beating in the capital goods space,  the CMP is 157 we will recommend to buy at around Rs 150 where the markets are very volatile and in the recent downfall of the market the promoters have increased their holding in the co where that will boost the confidence of the investors ,  the co has seen all the negative news flows in the recent past where this would just give a little support to the investors to cheer and remain invested in the co. Where for next 3 months target would be Rs 165-170 if the markets are good.

Southern Petrochemical Industries Corporation

SPIC(Southern PetroChemicals Industries Corporation)  approves stake sale of Phosphatic biz

The company has approved stake sale of Phosphatic business for Rs 300 crores.

Period	Price	Latest Price	Gain/Loss (Rs.)	% Gain/Loss
3-Days	27.60	28.90	1.30	4.71
5-Days	29.45	28.90	-0.55	-1.87
7-Days	29.95	28.90	-1.05	-3.51
15-Days	28.65	28.90	0.25	0.87
1-Month	27.85	28.90	1.05	3.77
3-Month	30.15	28.90	-1.25	-4.15
6-Month	16.95	28.90	11.95	70.50
9-Month	24.70	28.90	4.20	17.00
1-Year	23.40	28.90	5.50	23.50

Where we are still bullish on this co where the growth prospect of the co is very bright and in near future there is going to be revenue generated from the business, and since then there has been more than 7% return in the stock .

CENTURY TEXTILES INDUSTRIES LTD

Referring to the previous article on Century Textile & Industries Ltd there has a been a resistance seen at Rs 290 odd levels it is not moving above that .With the advance tax numbers from the internal sources the numbers is almost similar to the previous advance tax no which is not a good sign and there has not been any growth in the co. Where the co has recently posted the Q1 result where the profit had slipped 3/4^th of the previous yr same Q1 .The stock price of the co can slip further down to around Rs 260 odd levels where Rs 270 is the main level if it breaks then. Where the co is operating cement division where the outlook of the cement division in near future is not bright where infra space for almost more than one and a half year has been bleak where the price of the cement has been continuously rising .Where there is serious actions taken up by the CCI on the cement companies.