Posts tagged economic review
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%.
Rating upgrade, rate hike – Growth on track
Equity markets continued the uptrend with all major markets closing in the green for the week. The Sensex was up 500 points. On the global front, nothing much changed vis-a-vis risk appetite as stand-off over Greece continued to haunt the Euro, which shed 300 pips during the week. The week also saw concerns over asset bubble in China and more pressure being put on China to appreciate its currency. While the global outlook continues to be bleak over the sovereign risk, the domestic outlook gained a fillip with S&P raising India’s rating from negative to stable. This seems to be a reward for the fiscal prudence being followed by the government and also the stable economic and political environment. Inflation crossed RBI target of 8.5 % and was 9.89% for Feb 2010 prompting RBI to raise policy rates by 25 basis points. USDINR was in range for the week and did not break 45.60 and 45.33 on either side. We see continued consolidation in this range with importer buying and state-bids conflicting with the positive sentiment that would otherwise take the pair downwards.
Currency markets at crucial point….
Markets seem to come out of the consolidation mode and increase in risk appetite saw the US Dollar being sold across the board. Almost all markets closed in the green and all currencies except the JPY saw strength against the greenback. The Dollar index closed below a key support level at 80 before closing 79.83. Sustained move below these levels would initiate further downside for the dollar. The Euro saw movement of 250 pips with 1.3800 being tested on Friday in the European market. The INR strength continues buoyed by strong fundamental coming on the back of a strong IIP numbers for a second month in a row. Movements on both side were very erratic with 45.38 levels bringing in importers and state bids while 45.63 level bringing further shorts into play. We would maintain an intraday range of 45.38-45.63 with bias tilted towards buying the dips. Technically 45.28 is yet to be tested and exporters are “not yet” panicking. Once exporters start panic booking with a simultaneous drop below the 45.28, it is likely to bring further downside.
Market Developments
Global Outlook
- The US Dollar fell against all majors except the Japanese Yen, breaking out of its tight range against the Euro and testing its recent lows. A limited week of economic event risk initially left the heavily-traded currency relatively motionless, but the latter half of the week saw the Greenback considerably lower through Friday’s trade. The declines were perhaps surprising given a significantly stronger-than-expected US Retail sales report on Friday morning; robust spending gave modest hope that the US consumer may prove more resilient than previously predicted. CFTC data is mixed with Dollar’s net long positions fell from $5.58 billion to $3.99 billion, however Euro shorts rose to another record of 74551 contracts suggesting that 1.3800 would be hard to break. After the break of 80 levels in the dollar index we feel that 78.56 would a decisive level to watch. A busy week of economic event risk likewise promises considerable volatility in the days ahead.
- EUR/USD was encouraged by better equity market and stronger than expected EU Industrial Production to hunt for stops through 1.3750, despite initially hampered by Russian selling. Prices made a run close to 1.3800, but lost momentum. Equity markets were majorly buoyant for the major part of last week with S&P 500 breaking January’s high of 1150. Nikkei managed to rise 382 pts to close at 10751. Markets are cautiously looking at the upside after the consolidation which has lasted for almost two months. However only a weekly close above the 1.3800 levels should show more upside. Market is still short ahead of FOMC next week and that’s going to limit dips within a range of 1.3600-1.3800.
- The British Pound rose to 1.5200 levels and may continue to rise if the Bank of England is able to convince the markets about its current stance The British Pound may benefit if the BOE succeeds in branding themselves as standing truly at the center of the policy spectrum. Rating agency Fitch said the UK’s AAA credit rating may be jeopardized if it doesn’t do more about its fiscal shortfall reminding us that political risk could be a major factor in the United Kingdom.
- Commodity currencies continue to be bullish on the backdrop of strong economic data from Canada, Australia and New Zealand. Australia is the first country to raise rates to 4%. RBNZ left rates unchanged at 2.5% and reiterated the already stated stance of removing stimulus in the middle of 2010. The key risk for commodity currency comes from the tightening policies to cool down China.
- Key Data for the coming week are Euro-Zone Employment and US industrial production on Monday. Tuesday would be crucial with Euro-Zone CPI, ZEW survey, US Housing data and the most important FOMC rate decision (rate may not be hiked but the wordings need to be watched). On Wednesday we would see the UK Jobless and other unemployment figures for the UK with Thursday bringing focus back to the weekly jobless claims. Friday would see housing, retail sales coming out of various regions.
Indian Economy – Review and Analysis, February 2010
Readers, as promised, we have posted the market review for February without delay this time. Month of February witnessed the most important calendar event for Indian economy, the Budget 2010. Our reports on the same would have kept you updated. Hopefully this will update you about its affect on various markets.
Equity
After correcting for most part of January and early February, Sensex touched a monthly low of 15725 on Feb 5 and thereafter gained strength from positive news on the budget front. It touched a monthly high of 16669 on the day of budget and closed the month at 16429, about 2 % above the last month’s close and 4.5% above the monthly low.
