Category Archives: CRR
India will emerge as the fourth strongest economy among the G-20 countries after China, Russia and S Korea from the global crisis, given its robust forex reserves, high GDP growth rate and various fiscal and monetary measures taken to tackle the downturn, a study said.
Developed economies like the US, UK and Japan would fare relatively bad in terms of their emergence from the crisis with a ranking of 11th, 12th and 13th respectively, Assocham said in its study titled India & G20: Economic fundamentals amid global recession.
The study considered seven economic indicators relating to size of the economy, spending power, tax structure, interest rate policy, budget balances, debt burden and foreign exchange reserves.
“India, along with China, Russia and South Korea would emerge stronger out of the current crisis as they enjoy strong economic foundations based on foreign exchange reserves, higher growth rates in GDP per capita and sound monetary policy measures,” the chamber said.
India ranked last 19th in terms of budget balance as a per centage of GDP and 12th in terms of public debt as a per centage of GDP, it said, adding that low ranking on these indicators gives the country key challenges to announce heavy fiscal stimulus package, it said.
The government launched its second attempt to stimulate the economy into growing faster. Simultaneously, the Reserve Bank has lowered two key rates to help get more credit flowing through the economy. The repo and the reserve repo rate under the liquidity adjustment facility (LAF) has been cut by 1 per cent while the cash reserve ratio (CRR) has been reduced by 0.5 per cent. The reverse repo rate is now 4 per cent, the repo rate at 5.5 per cent and the CRR at 5 per cent. The CRR cut will effectively make about Rs 20,000 crore available banks. It remains to be seen how much of this the banks will actually use for fresh credit.
Other major steps announced this evening are:
* FII investment limit in rupee denominated corporate bonds increased from $6 bn to $15 bn.
* The ‘all-in-cost’ ceilings on external commercial borrowings (ECBs) removed
* Development of integrated townships would be permitted as an eligible end-use of the ECB
* NBFCs dealing exclusively with infrastructure financing permitted to access ECB from multilateral or bilateral financial institutions
* A Special Purpose Vehicle will be designated shortly to provide liquidity support against investment grade paper to Non Banking Finance Companies (NBFCs) fulfilling certain conditions. The scale of liquidity potentially available through this window is Rs.25,000 crores, although details are yet to be announced.
* An arrangement will be worked out with leading Public Sector Banks to provide a line of credit to NBFCs specifically for financing commercial vehicles.
* Credit targets of Public Sector Banks are being revised upward to reflect the needs of the economy in the present difficult situation. Government will closely monitor, on a fortnightly basis, the provision of sectoral credit by public sector banks.
States will be allowed to raise in the current financial year additional market borrowings of 0.5% of their Gross State Domestic Product (GSDP) for capital expenditures. This would amount to about Rs 30,000 crore.
* India Infrastructure Finance Company (IIFCL), which has already been authorized to raise Rs.10,000 cr. through tax free bonds by 31st March ’09 for refinancing bank lending of longer maturity to eligible infrastructure bid based PPP projects, will be accessing the market next week for raising the first tranche of the amount. This will enable the funding of mainly highways and port projects on hand of about Rs.25,000 crore. To fund additional projects of about Rs.75,000 crore at competitive rates over the next 18 months, IIFCL is being enabled to access in tranches an additional Rs.30,000 crores by way of tax free bonds once funds raised in the current year are effectively utilised.
Apart from these, there are also measures to help exporters and some duty changes.
RBI is expected to announce a 50 basis point cut in rates tomorrow and no one expects them to go beyond the 50 basis points in repo rate for supporting liquidity enhancement in the markets. However, I expect that in the next one year there will be regular rate cuts in repo and reverse repo rates and to ensure that we are in a better condition next time to effectively compete in size in the global markets and take our share of the responsibility, we will also have SLR cuts of upto 400-500 basis points in this coming year. I hope we do that starting tomorrow itself – never a better time.
In the other battles coming up for end 2008, the two remaining banking stalwarts of the previously state owned ICICI Bank are going to cause much trouble at the bank, with no credentials to lead. The onus of Indian banking’s stab at global leadership is now likely to shift to the state owned SBI for its size. Of course the new look JP Morgan leadership of India is also likely to make suitable comments on this turn at appropriate forums.
And the last battle of all, the general elections of 2009, I still root for the battle bruised and much better coiffured Congressman than the Orange blokes and the other half baked concoctions that dot the landscape. (No wonder Obama got elected so easy in the US, no one seems to have time to build parties anymore, there aren’t any Republicans or Tories left either in the US or the UK)
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Note of Saturday, Dec 6: Finally a “large-ish” repo rate cut of 100 BP with a corresponding reverse repo rate cut of 100 BP was announced today, setting the stage for further cuts in January 2009 and more. However, some commentators continue to focus on additional CRR cuts.
Saturday Dec. 20: Another large rate cut expect as call rates trace the exact amount of the last rate cut and then refused to provide any respite from liquidity. This year will be big for bond funds and even money market options. but don’t be too sure of the diustressed debt available in the market yet.
India’s central bank took emergency measures at the weekend to avert a growing liquidity crunch affecting the country’s estimated $43.7bn of outstanding trade finance.
Blocked trade credit is threatening to bring productive sectors of the economy to a standstill, particularly small and medium-sized businesses that are unable to fall back on large balance sheets.
Citi has singled out India’s $43.7bn (€34.7bn, £30bn) of trade credit as a particular “problem area”. The Reserve Bank of India is also increasingly concerned about the country’s outstanding short-term corporate sector foreign debt of $82bn.
The RBI on Saturday night more than doubled the funds it makes available for banks to refinance export credit at favourable interest rates to Rs220bn ($4.5bn, €3.8bn, £3bn).
It also extended the export credit repayment window for exporters to nine months from six months.
“There are indications that the global slowdown is deepening with a larger than originally expected impact on the domestic economy,” the RBI said.
The move came as the Asian Development Bank on Sunday appealed to Asian banks to unfreeze credit to customers, saying financial institutions had overreacted to the effects of the global financial crisis in the region
After pumping in around Rs 2.80 lakh crore liquidity into the banking system, the Reserve Bank on Saturday announced a slew of measures to give a boost to the real estate sector, in addition to taking steps to arrest decline in forex reserves.
In order to ensure more liquidity for the real estate sector, RBI allowed the registered housing finance companies to raise short-term funds from overseas markets.
"It has been decided to allow, as a temporary measure, housing finance companies registered with the National Housing Bank to raise short-term foreign currency borrowing under the approval route", a release by RBI said.
The decision will also help the country shore up its declining forex reserves, which according to the latest data, has slipped to about USD 250 billion from a high of $ 314 billion in April-May.