Economy
RBI: Rates, Banks and Inflation
There could not have been a more opportune time for me to write this article. With every passing day since the last year, Dr Subbarao’s job is getting increasingly tougher. With inflation still keeping up against RBI and absence of significant structural actions on Government’s part to control inflation, options for policy actions with RBI have been reducing. With the whole onus of managing inflation falling on RBI, I think it is apt to rename RBI as suggested in the title of the article.
US Debt ceiling – What is it all about?
One of the most talked about news doing rounds in the world economy in the last month has been the US debt ceiling. US is the biggest economy of the world with $ 14.6 trillion of GDP. Nearest competitor China is at $ 5.8 trillion i.e less than half of that of USA. Still credit rating agencies gave a deadline of August 2 to decide on the debt ceiling issue failing which credit rating on select US Government bond would have been lowered. Amid a lot of discussions and debates, Obama Government could pass on the bill for raising the debt ceiling. Amid all this, I thought, what is this issue of debt ceiling, and why is it important?
Role of Commercial Banks towards Financial Inclusion
The whole process of financial inclusion will not be possible without the contribution of banks. Banks are the key pillars of India’s financial system. Public have immense faith in banks. Share of bank deposits in the total financial assets of households has been steadily rising (presently at about 40%). Banks enjoy considerable goodwill and access in the rural regions. There are 32600 branches in rural India (about 50% of total), and 14400 semi-urban branches. 196 exclusive Regional Rural Banks in deep hinterland are present. Rural and semi-urban bank accounts constitute close to 60% in terms of number of accounts.
Given the above facts India should formulate its strategy in a manner that the next phase of growth in rural areas should be facilitated by banks. More >
Scams, corruption and WE….
There is an old adage from a Nana Patekar movie –
Sau me assi be-imaan….fir bhi mera BHARAT mahaan
Historically, there always has been much ado about corruption in the country and that sort of became a part of the life. But thanks to Anna Hazare, Baba Ramdev and the recent media hype created on the fast unto death by Hazare, atrocities caused by Delhi Police on Baba Ramdev, the country seems to have awaken to FACT of corruption. More >
Base rate Vs BPLR
Shift from BPLR to Base Rate
Recently with release of RBI circular on Base rate implementation, there has been a lot of debate going on regarding BPLR (benchmark prime lending rate). Here is our beginner’s guide to understand the two rates.
What is BPLR?
BPLR is the reference rate for banks for pricing their loan products. It is calculated taking into account the cost of funds, operational expenses, and the minimum margin to cover regulatory requirements of provisioning and capital and profit margin. Banks are supposed to lend to their prime customers at BPLR and increase the rate with risk premium in case of sub-prime customers and tenor premium wherever applicable.
Problems with BPLR
1. Main problem with BPLR is that banks have resorted to sub-BPLR lending. On an average, 67% of the total loans and Advances of banks was sub-BPLR. For Private banks, the figure was even higher at 83%. Housing, agriculture, and corporate segments were the major beneficiaries of sub-BPLR lending. Nearly 31% of the housing loans in FY08 were disbursed at an interest rate of less than 10%, while 49% of the housing loans were disbursed at 10-12%. In the case of loans to the industry, around 32% were disbursed at an interest rate of 10-12%.
A study of BPLR and actual lending rates of the banks show that as on Sep’2009, against a BPLR in the range of 11-13.5% for public sector banks, actual lending rates where in the range of 4.2-18%. For private banks, actual lending rates were 3-29.5% against BPLR of 12.5-16.7%.
Case for a 50 basis points on May 3??
“Sakhi saiyan to khub hi kamat hai…..mehngai daayan maare jaat hai….” goes a number from a popular bollywood flick and rightly so atleast for RBI.
Since the last 15 months or so…RBI has been trying to battle the rising inflation by raising rates (What are policy rates?) eight times since March last year. However inflation, now it seems, is getting out of RBI’s control. Over the last one year, there have been many a concerns over structural bottlenecks in the economy which have been causing inflation. Well this might be true, I am not arguing against that. But even if Government decisively acts against structural cause of inflation, it would be some time before anything (like improving storage warehouses, improving transportation facilities, improving public distribution system etc) can be done and it impacts the mighty inflation. More >
Federal Reserve and Regulators Work Together For Financial Reform
The economic debacle of 2008 brought the modern economic system to the brink of total collapse. In fact, there was a brief period of weeks in September and October of 2008 when the most powerful people in the world were unsure what was going to happen. The incredible shock and general mayhen that swept through the market when Lehman Brothers and Fannie and Freddie faced collapse resulted in frenzied selling and fear on a catastrophic level.
In response to these dire circumstances, Central Bank leaders around the world joined in a historically unprecedented move of unity as they all slashed short-term interest rates to historically low levels in order to ease credit markets and stimulate interbank lending. Magically, it somehow worked.
The Relevance of Economic Indicators to Financial Markets
Economic indicators can be broken down into 3 basic categories: Primary, Secondary, and Tertiary. Primary indicators are the ones that everyone should be paying attention to, secondary indicators are less important in determining the direction of the market but can often times serve to help evaluate primary indicators, and tertiary indicators are the ones that are only of interest to niche markets.
For this article we will focus on the Primary Economic Indicators and how to use them to determine the direction of the market. It is important to note that every analyst and economist out there has their own list of indicators, so we will be concentrating primarily on the three biggest indicators, and will provide a list of other ones as well should you be interest in doing more in-depth research on the topic.
Maharashtra Budget 2011
Generally it is the Union Budget presented by Finance Minister of India which creates a lot of furor in the securities markets. But this time around, there is a state budget which is causing market participants some panic in operations. It is the Maharashtra State Budget.
Maharashtra Budget 2011
Ajit Pawar, Finance Minister and Deputy Chief Minister of Maharashtra, presented the state’s budget for 2011-12 and since then has been in news and not for very good reasons. More >
Budget 2011- High expectations amid looming concerns
February 28, it is that date on the calendar which probably everyone, from politicians to CEOs to salaried class put a mark and make sure that they pay heed to one guy who has the potential to put a hole in your pocket. The guy is Finance minister and the event is The Union Budget.
Just read about our current FM Mr Pranab Mukherjee that he was rated one of the best finance ministers in the world by Euromoney magazine in 1984. I hope he still retains that status in mind and spirit and delivers a budget which would address most of the bigger concerns looming on the economy currently.
First I would like to take you through several concerns which are likely to be on top of the mind for FM
Inflation has been a continuing concern for the last few months now and the same has not shown any signs of receding. Though WPI has moderated in the last month, but with crude prices touching sky high and high subsidy burden, there is no respite in near future.
Managing growth would be a big challenge considering the high inflation and the corresponding high interest rates in the economy. Industrial production, if IIP is to be believed, has already started moderating. There are good chances that effect of moderation may spread to other sectors of the economy.
Political agenda of the ruling party also needs to be balanced. With state elections in 5 states in the current year, FM cannot think of aggressive measures which might be regarded as pro-populist.
Fiscal deficit needs to be bought under control. For current fiscal, deficit is budgeted at 5.5% of GDP while for the next fiscal i.e FY 2011-12, the same is expected to be budgeted at 4.8%. Conservative calculations show that at 4.8%, there would be a deficit of appx Rs 3,78,000 crore, which is just marginally lower than last year’s figure of Rs 3,81,408 crore.
How to finance this deficit?
Last year, revenue had excess collections from 3G spectrum which could cover up for some of the deficit but this year likelyhood of such windfall gains is less. Again with the current mood of pessimism in the equity markets, divestment proceeds also would be difficult to target. So how does this deficit be financed? This brings me to my expectations from budget.
Increase in indirect tax rates
In arriving at the above figure of Rs 3,78,000 crore, I have kept the revenue growth target of 21% which is quite optimistic given economic growth rate of around 8-9%. Thus, in order to reduce the deficit, some measures to increase the revenues are expected. This view is also confirmed by talks of fiscal stimulus rollback. Hence, I will expect increase in indirect taxes like excise or service tax along with an increase in number of services in service tax net.
Divestment of stake in PSUs
FM would likely announce stake sale in PSUs in order to augment the divestment proceeds of the revenue. Government already is short of current year’s target of Rs 40,000 crore which will be included in next year’s divestment proceeds. I believe FM will have to part with stake in more PSUs in order to bridge the increasing fiscal deficit.
Infrastructure to continue to remain focus area
Major thrust area of expenditure will continue to be infrastructure particularly power, agricultural infrastructure and water resources. Along with this, other measures for increasing the amount of private sector funds available to finance infra needs would be announced.
Increase in minimum income tax exemption limits for individuals
Minimum exemption limit for individuals would be increased considering the high inflation and a move towards convergence with the proposed Direct Tax code (DTC). There are muted expectations that corporate tax rate would be reduced but I think that would be difficult to do considering the increased revenue needs of the government.
Commitment to inclusive growth through social spending schemes
Government’s spending in social sector has been on uprise in the last few years due to emphasis on inclusive growth and reducing the disparity of income. Schemes like NREGA, Bharat Nirman have been appreciated and thrust is given to increase the effectiveness of these schemes through use of information technology.
Increase in FDI for selected sectors
Faced with mounting concern of current trend of financing the increasing current account deficit by FII money, there will be efforts to increase the FDI flow in the country and this would be through increasing the FDI limit in sectors like BFSI, retail and media.
Overall, common man obviously would be benefitted by measures for containment of inflation. But in all, I think this budget might not deliver all good things to hear, there might be some hard hitting measures which are necessary and would be good for the economic health of the nation. Considering the fact that this is the third budget by current government, this is the time when FM would be able to take some tough measures.
