India Plans Measures to Curb Rupee’s Slide, Mukherjee Says

By Rajhkumar K. Shaaw - Jun 23, 2012

Indian Finance Minister Pranab Mukherjee said the government and central bank will announce measures on June 25 to halt a slide in the rupee after the currency sank to a record low two days ago.
Mukherjee’s comments were made to reporters in Kolkata yesterday and broadcast on local television news channels. Mukherjee is the ruling Congress Party’s nominee for a July 19 presidential election and he told the Press Trust of India yesterday he will resign as finance minister on June 26 after earlier telling PTI he would resign today.
Mukherjee cited Prime Minister Manmohan Singh’s visit abroad as the reason for his change of plan, without saying who his successor will be, according to PTI.
The rupee is Asia’s worst-performing currency of the past year, having tumbled 21 percent against the dollar, and reached an all-time low June 22 of 57.3275 per dollar. Fitch Ratings cut India’s sovereign credit-rating outlook to negative on June 18, joining Standard & Poor’s in signaling the country is at risk of losing its investment-grade status.
“The situation is quite worrisome,” Dharmakirti Joshi, Mumbai-based chief economist at Crisil Ltd., the local unit of S&P, said in an interview. “You have to increase the supply of dollars. A lot of foreign-currency convertible bonds and other payments are due and it does create stress on those who have borrowed abroad.”

Attract Currency

India may start a sovereign-backed deposit project to attract foreign currency from overseas residents and relax limits on foreign investment to halt the rupee’s slide, according to Joshi. The currency slumped 2.9 percent last week, its biggest loss since September.
The prime minister’s chief economic adviser, Chakravarthy Rangarajan, on May 23 said the deposit plan was an option. Indian companies face a record $5.3 billion of maturing foreign- currency debt this year, data compiled by Bloomberg show.
The Reserve Bank of India on Nov. 17 increased the caps on overseas investors’ holdings of India’s local-currency government debt and corporate bonds by $5 billion each to boost inflows and arrest the currency’s decline. The central bank has asked oil refiners to obtain 50 percent of their dollar requirements from a single state-owned bank, Oil Secretary G.C. Chaturvedi told reporters in New Delhi on June 22.
India buys 80 percent of its oil from overseas and pays for supplies in dollars. Every one-rupee drop in the domestic currency against the dollar boosts annual revenue losses for the three government-owned refiners by 80 billion rupees ($1.4 billion), the oil ministry said in November.
To contact the reporter on this story: Rajhkumar K Shaaw in Mumbai at rshaaw@bloomberg.net
To contact the editor responsible for this story: Paul Tighe at ptighe@bloomberg.net

®2012 BLOOMBERG L.P. ALL RIGHTS RESERVED.

India Rupee Tumbles Most in 9 Months to Record Low: Mumbai Mover

By V. Ramakrishnan - Jun 22, 2012

India’s rupee plunged the most in nine months to a record low on concern slower economic growth will reduce capital inflows.

The currency declined after global funds sold $78 million more local shares than they bought this week through June 21, according to the Securities & Exchange Board of India. Asia’s third-largest economy may have to sacrifice growth to contain inflation, Reserve Bank of India Governor Duvvuri Subbarao said in Mumbai on June 19, a day after unexpectedly refraining from cutting interest rates at a policy review.

“Growth is a big concern, and the equity market is also not performing well,” said Naveen Raghuvanshi, a currency trader at Development Credit Bank Ltd. in Mumbai. “It’s uncharted territory for the rupee right now.”

The rupee depreciated 1.5 percent to 57.1550 per dollar in Mumbai, according to data compiled by Bloomberg. Earlier, the currency fell as much as 1.8 percent, the most since Sept. 22, to a record low of 57.3275.

The economy expanded 5.3 percent in the three months through March, the least in nine years, according to government data.

The Reserve Bank of India has asked oil refiners to take 50 percent of their dollar requirements from a single state-owned bank, Oil Secretary G.C. Chaturvedi told reporters in New Delhi today.

Rating Woes

Fitch Ratings this week joined Standard & Poor’s in signaling that the rating of Asia’s third-largest economy is at risk of demotion to so-called junk status.

India’s sovereign-credit outlook was lowered to negative from stable by Fitch, which cited the heightened risk of a deterioration in growth potential and limited progress on paring the nation’s budget deficit.

Price pressures and weak public finances put “even greater onus on effective government policies and reforms that would ensure India can navigate the turbulent global economic and financial environment and underpin confidence in the long-run growth potential of the Indian economy,” Art Woo , a Hong Kong- based director of sovereign ratings at Fitch, said in a statement on June 18.

Finance Minister Pranab Mukherjee wants to reduce the fiscal deficit to 5.1 percent of gross domestic product in the financial year that began April 1, from 5.76 percent last year.

“We do not yet see light at the end of the tunnel for the rupee,” analysts including Hong Kong-based Paul Mackel at at HSBC Holdings Plc wrote in a report today. “This time around domestic factors -- the uncertainty in the investment environment and the large fiscal deficit -- are primary concerns for us.”

The rupee’s one-month implied volatility, a measure of exchange-rate swings used to price options, rose 35 basis points, or 0.35 percentage point, today to 12.30 percent.

Three-month onshore currency forwards traded at 58.14 a dollar, compared with 57.36 yesterday, and offshore non- deliverable contracts were at 58.34 from 57.50. Forwards are agreements to buy or sell assets at a set price and date. Non- deliverable contracts are settled in dollars.

To contact the reporter on this story: V. Ramakrishnan in Mumbai at rvenkatarama@bloomberg.net

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net

®2012 BLOOMBERG L.P. ALL RIGHTS RESERVED.

Gold Financiers’ Growth Stalls as Rules Tighten: Corporate India By Ameya Karve - Jun 21, 2012

India’s biggest lenders that use gold jewelry as collateral say earnings may stall this year as central bank regulation aimed at reducing risk in the banking system chokes off growth.

Net income at Muthoot Finance Ltd. may rise 10 percent in the year that started April 1 after surging an average 86 percent in the past five years, according to Managing Director George Alexander Muthoot. Profit at smaller rival Manappuram Finance Ltd. (MGFL) may be little changed, said I. Unnikrishnan, managing director at the Thrissur, India-based company.

“Our loan disbursements have come down” due to the regulatory changes, Unnikrishnan said in an interview yesterday. “We see flat asset growth this year.”

Muthoot (MUTH) and Manappuram are losing clients to money lenders after the Reserve Bank of India tightened rules to curb expansion at the finance companies and reduce risk at their creditors, mainly commercial banks. Manappuram, endorsed by Bollywood actor Akshay Kumar, will add no branches on a net basis this year while Muthoot will cut office openings by 75 percent. Manappuram has plunged 50 percent this year making it the worst performing stock in the BSE200 Index.

The Reserve Bank of India ordered gold financiers to raise Tier-1 capital to 12 percent by 2014 and cap loans at 60 percent of the value of the gold used as collateral, according to a statement from the regulator on March 21.

Bullion futures in India reached a record on June 19, while global spot prices for gold were down 15 percent from a peak. The metal, which surged 70 percent from the end of December 2008 to June 2011, is heading for its longest slump in a month.

Gold Stash

Business growth at these finance companies will decline “significantly” in the short-term, Crisil Ltd., the Indian unit of Standard & Poor’s said in a report on June 15. Sales growth may stabilize at a “sustainable” level of about 20 percent in the medium term, the rating company said.

Indians, the world’s largest buyers of bullion, have stashed 18,000 metric tons of gold in jewelry, coins and other forms, according to data on Manappuram’s website. That compares with 1,281.62 metric tons of gold held by the SPDR Gold Trust (GLD), the world’s biggest exchange-traded product backed by bullion.

Gold financiers including Manappuram, which started as a pawn broker in 1949, expanded as Indians started to unlock the value of their gold to benefit from growth in Asia’s third- largest economy and rising prices of the bullion. Finance companies in the organized sector hold 1,000 tons of gold, according to Muthoot.

‘New Concept’

Gold loans grew as it “was a new concept to Indians, who are known to sell gold only as a last resort,” Shashank Khade, senior vice president at Mumbai-based Kotak Portfolio Management, said on the phone. Demand for gold loans was also triggered by investors who used these loans to invest back in gold as it fetched them higher returns, he said.

The Reserve Bank set up a panel headed by K.U.B. Rao to analyze the implication of gold imports for financial stability, price trends and the role of non-bank finance companies in influencing rates. The panel is expected to submit its report by the end of July, the central bank said.

“All the uncertainty and speculations on whether there will be more regulations will be over in the next two months after the RBI comes out with its report on gold,” Manappuram’s Unnikrishnan said. Muthoot expects a “partial” relaxation of the rules within a year after the central bank “studies” the gold-loan business, he said.

Shares Drop

Manappuram was unchanged at 23 rupees in Mumbai yesterday, while Muthoot, which has dropped 37 percent from its Aug. 11 record, fell 0.5 percent to 123.25 rupees. The BSE200 index (BSE200) has gained 13 percent this year outperforming the decline in both the companies.

Profit growth at Muthoot may slow to a 4 percent gain in the year ending March 31, according to a median survey of 7 analysts compiled by Bloomberg, while Manappuram’s net income may drop 3.9 percent to 5.68 billion rupees, according to a survey of 13 analysts.

“The assets are likely to fall in the first and second quarters,” Himanshu Kuriyal, an analyst at Mumbai-based Marwadi Share & Finance Ltd., said by phone. “Sequential growth may return from the third quarter as uncertainty over the regulations will subside.”

Muthoot, set up in 1939 in India’s Kerala state, charges as much as 24 percent for lending against bullion for 24 months, according to the company’s website. State Bank of India’s base rate is 10 percent.

The company, which is the main sponsor for the Indian Premier League’s Delhi Daredevils cricket team, plans to raise 15 billion rupees selling bonds this year to boost lending, Muthoot said. The firm may also sell shares when valuations become attractive, he said.

“There’s nothing wrong in the business model,” Muthoot said. “If I had money, I would have invested in the company now.”

To contact the reporter on this story: Ameya Karve in Mumbai at akarve@bloomberg.net

To contact the editor responsible for this story: Grant Clark at gclark@bloomberg.net

Ambani Benefits as Subsidies Drive Diesel Sales to Record By Rakteem Katakey - Jun 20, 2012

Reliance Industries Ltd. (RIL), the operator of the world’s biggest refining complex, is benefiting from a record demand for diesel as consumers in India opt for the subsidized fuel to run vehicles and generators.

State-owned oil companies, unable to meet the surge in domestic requirements, are turning to Reliance, Essar Oil Ltd. (ESOIL) and Mangalore Refinery and Petrochemicals Ltd. to bridge the shortfall. Indian Oil Corp., the nation’s biggest refiner, said its diesel purchases from private companies surged 50 percent in the past two months. Demand for the fuel in India increased 7.8 percent in the year ended March 31, surpassing growth in gasoline sales for the first time in seven years.

Prime Minister Manmohan Singh’s government caps diesel prices to shield farmers and truckers, a significant voting bloc, spurring artificial demand for the fuel that costs 41 percent less than gasoline in the capital New Delhi. The shift in customer preference is helping Essar and billionaire Mukesh Ambani’s Reliance bolster local sales and counter an export slowdown caused by the debt crisis in Europe.

“Demand for diesel has been abnormally high and the situation is escalating,” said R.K. Singh, chairman of Bharat Petroleum Corp., India’s second-biggest state refiner that also purchases the fuel from Reliance and Essar. “As this situation continues, we will have to buy more from the private refiners and maybe also increase imports.”

‘Rationalizing’

Reliance exports 59 percent of its output, while Essar’s overseas shipments account for 34 percent of sales. They sell to state refiners at market rates.

Cheaper diesel is prompting automakers to raise capacity of vehicles using the fuel. Maruti Suzuki India Ltd. (MSIL), the nation’s biggest manufacturer of cars, said in April that it’s setting up a new plant to produce 300,000 diesel engines a year. Maruti’s sales of diesel vehicles jumped 37 percent in the three months ended March 31, while demand for gasoline-powered cars declined by 14 percent.

The local unit of Japan’s Toyota Motor Corp. said yesterday that it has “rationalized” gasoline-car production. A deficit in electricity generation in the South Asian country is also stoking demand for diesel used in generators.

Reliance shares have declined 12 percent in the past year as the company’s net income in the March quarter plunged the most in more than three years. A slowdown in China and Europe cut fuel demand, adding to the drag on Reliance’s earnings from lower production at India’s biggest natural gas deposit.

Countering Negatives

“Sales in India help Reliance and Essar offset most of the negatives from a slowing Europe,” said Niraj Mansingka, a Mumbai-based analyst at Edelweiss Capital Ltd. “Sales in India helps them save around $3 to $4 per barrel on the products sold due to import duty differential between diesel and crude of 2.5% and savings on transportation and handling costs.”

Mansingka is among 28 analysts who rate Reliance’s stock a buy, according to data compiled by Bloomberg. Seventeen recommend holding it, while seven rate it a sell. It was little changed yesterday at 737.40 rupees in Mumbai.

Reliance spokesman Tushar Pania, Essar Oil’s spokesman Rabin Ghosh and Indian Oil Chairman R.S. Butola declined to comment on diesel.

“In terms of the overall trend in the total domestic market, demand growth continues to be strong, partly as a result of the domestic subsidy program,” Reliance said in its annual report for the year ended March 31.

Prime Minister Singh has refrained from raising diesel prices for a year to rein in inflation, a politically sensitive issue in a nation where 30 percent of the population lives below the poverty line, set at 50 cents a day. Central bank Governor Duvvuri Subbarao has termed inflation, which has stayed above his comfort level for more than a year, as a “regressive tax” that “hurts the poor the most.”

Street Protests

A decision to increase gasoline prices last month triggered street protests. The price difference between the two fuels increased to a record in May.

Finance Minister Pranab Mukherjee plans to cap subsidies to narrow the budget deficit, with his Chief Economic Adviser Kaushik Basu calling for a revision in prices. The government gave $15 billion in handouts to state-run refiners for selling diesel, kerosene and cooking gas below cost in the 12 months through March.

Shutdowns of some refineries have also worsened the diesel shortfall for state refiners. Indian Oil partly closed its refinery at Koyali in Gujarat state in the second half of April, according to two company officials. Numaligarh Refinery Ltd., a unit of Bharat Petroleum, halted parts of its eastern Indian plant on April 7 after a fire and closed its entire facility in mid-April for about a month.

‘Full Capacity’

“We are producing diesel at full capacity,” K. Murali, director of refinery operations at Hindustan Petroleum Corp., the third-biggest state refiner, said June 20. “Diesel purchases have also increased because of some shutdowns in the recent past.”

The fuel price controls have forced Reliance and Essar to cut down retail sales in India and export most of their fuel. Essar Oil is seeking additional markets after it increased capacity at its refinery in Gujarat state by 29 percent to 18 million metric tons a year in March and plans to raise it to 20 million tons by September, according to Chief Executive Officer L.K. Gupta.

Essar Oil shares have slumped 54 percent in the past year and traded at 53.90 rupees yesterday. Seven of the 13 analysts who track the stock rate it a buy.

Demand for diesel may increase 5.9 percent to 68.6 million tons in the year that started April 1, according to oil ministry data. Gasoline demand is projected to climb 5.8 percent to 15.9 million tons.

“If I have to buy a car for myself now, I’d definitely buy a diesel one because the running cost for that is so much cheaper,” Hindustan Petroleum’s Murali said.

To contact the reporter on this story: Rakteem Katakey in New Delhi at rkatakey@bloomberg.net

To contact the editor responsible for this story: Amit Prakash at aprakash1@bloomberg.net

Subbarao Says India’s Inflation Rate Is Above Tolerance Level By Anoop Agrawal and Kartik Goyal - Jun 19, 2012

Indian inflation exceeds acceptable levels and restraining it may require sacrificing economic growth, central bank Governor Duvvuri Subbarao said.

“Headline inflation has come down, core inflation has come down to below 5 percent, but WPI inflation is still above our tolerance level at 7.5 percent,” Subbarao said in a speech in Mumbai yesterday, referring to India’s benchmark wholesale-price index. “Consumer-price inflation is running above 10 percent. That is quite disturbing.”

The Reserve Bank of India unexpectedly left interest rates unchanged on June 18 as price pressures narrow scope to bolster the weakest growth in almost a decade. Curbing the nation’s fiscal deficit and the success of the monsoon are among the keys to controlling inflation, Subbarao said.

“India is flirting with stagflation and needs a dose of supply-side reforms to improve medium-term growth potential,” said Prasanna Ananthasubramanian, Mumbai-based chief economist at ICICI Securities Primary Dealership Ltd. “However, the political realities are such that the chances of structural reforms and fiscal consolidation are uncertain.”

Price increases have been stoked in part by costlier imports following a near 20 percent slump in the rupee against the dollar in the past year. The currency tumbled as growth deteriorated and Europe’s debt crisis sapped demand for emerging-market assets.

Growth Sacrifice

“We may have to sacrifice growth in the short term to contain inflation which eventually will help us grow nearly as much as our potential rate in the medium term,” Subbarao said. “In the medium term, inflation is inimical to growth.”

The rupee declined 0.1 percent to 55.97 per dollar in Mumbai yesterday, while the BSE India Sensitive Index rose 0.9 percent. The yield on the 8.15 percent bond due June 2022 declined six basis points, or 0.06 percentage point, to 8.11 percent.

Subbarao said the central bank will continue with its policy of intervening in the foreign-exchange market to curb volatility. India has currency reserves to cover eight months of imports, he said.

The nation’s decision to hold its repurchase rate at 8 percent contrasts with cuts in Brazil and China in the past three weeks as the impact of Europe’s turmoil fans through Asia.

Gross domestic product rose 5.3 percent in the three months through March from a year earlier, the least since 2003, weighed down in part by a moderation in investment caused by political gridlock over proposed economic policy changes.

Price Pressures

The wholesale-price index climbed 7.55 percent in May from a year earlier, the fastest pace in the BRIC group of largest emerging markets that also includes Brazil, Russia and China.

The government’s projected fiscal deficit of 5.1 percent of GDP in the year through March 2013 is the group’s widest, stoked by a subsidy program ranging from diesel to fertilizers.

India needs to narrow its budget shortfall and enact reforms in governance, domestic taxation and the foreign investment regime, Subbarao said. It also needs to accelerate project clearances and improve infrastructure to boost the pace of economic growth, he said.

“The government must discourage expenditure that is for consumption as it drives up wages and is inflationary,” Subbarao said. “That puts pressure on the fiscal deficit to widen.”

Hours after the Reserve Bank left borrowing costs unchanged two days ago, Fitch Ratings lowered India’s credit outlook to negative, joining Standard & Poor’s in saying the nation is at risk of losing its investment-grade status.

Junk-Status Threat

Fitch cited the heightened risk of a deterioration in growth potential and limited progress on paring the budget deficit in its decision to lower the outlook on India’s BBB- rating, which is one step above so-called junk status.

Standard & Poor’s warned on June 11 that it may cut India’s rating after lowering the outlook to negative in April.

“While growth in 2011-2012 has moderated significantly, headline inflation remains above levels consistent with sustainable growth,” the Reserve Bank said after its decision to hold the repurchase rate, an outcome predicted by only four of 25 economists in a Bloomberg News survey.

The expansion in Asia’s third-largest economy has moderated in part after Subbarao raised rates by a record 3.75 percentage points from mid-March 2010 to October last year to try and contain inflation, which exceeded 9 percent for most of 2011.

The central bank in January and March reduced the amount lenders must set aside as reserves by a combined 125 basis points, to 4.75 percent, to ease cash shortages at banks. It said June 18 it will continue to use purchases of government bonds as warranted to “contain liquidity pressures.”

To contact the reporters on this story: Anoop Agrawal in Mumbai at aagrawal8@bloomberg.net; Kartik Goyal in New Delhi at kgoyal@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net

®2012 BLOOMBERG L.P. ALL RIGHTS RESERVED.

Jindal Power to Invest $7.7 Billion in Hydro: Corporate India By Archana Chaudhary - Jun 17, 2012

Jindal Power Ltd., a unit of India’s biggest steelmaker by market value, plans to spend $7.7 billion on hydroelectric projects over the next decade as a coal shortage forces utilities to cut dependence on fossil fuels.

The generator, which shelved a share sale plan announced in 2009, will invest 427 billion rupees in the northeastern state of Arunachal Pradesh to install 6,100 megawatts of capacity, Jayant Shrinivas Kawale, managing director for hydro and renewables, said in an interview in New Delhi. The company expects to get government approvals for its first water-based electricity project by the end of the year, he said.

“These projects will strengthen our portfolio,” Kawale said. “The biggest positive for us will be that for the next 45 years, we will have plants that run steady without troubles coal-fired ones face.” The company’s first unit may start producing power in seven years, he said.

Jindal, GMR Infrastructure Ltd. (GMRI) and Lanco Infratech Ltd. (LANCI) are expanding into hydro projects as a hedge against inadequate fuel supplies in the nation where 56 percent of the power is generated using coal. Apart from the unit of Jindal Steel & Power Ltd. (JSP), at least five companies have announced capacities worth $16 billion of investments to take advantage of incentives offered by federal and state governments for the clean energy.

Power Outages

A shortage of the fuel used in thermal plants is threatening to worsen blackouts in Asia’s third-biggest economy, where power is vital for reviving growth from the slowest pace in almost a decade. About one in four Indians lives without electricity, according to the UN. NTPC Ltd. (NTPC), the nation’s biggest generator, last week said it scaled back plans to add coal-fired capacity by 42 percent for the five years ending 2017.

Prime Minister Manmohan Singh is offering concessions to promote cleaner alternatives to counter concerns from environmentalists even as his efforts in February to boost coal supplies to utilities fail. The government allows hydro operators to sell 40 percent of their output at market rates, unconstrained by state-administered price controls faced by thermal plants.

Fossil fuels are blamed for global warming as a United Nations Environment Program report on June 6 said current trends in carbon output show the Earth may warm by at least 3 degrees Celsius by 2100 from pre-industrial levels.

Hydro projects account for about 20 percent of generation capacity, according to data provided by the Central Electricity Authority. The rest is from gas, wind and solar sources.

Worst Performer

Parent Jindal Steel & Power has slid 32 percent from this year’s high, making it the worst performing stock in the 11- member BSE Metal Index. (BSEMETL) The company is rated a buy by 25 of the 36 analysts who track it, while four recommend a sell, according to data compiled by Bloomberg.

Jindal Power’s plans to expand into hydro may distract its focus away from its core thermal business as the investments take a long time to yield results, said Niraj Shah, an analyst at Mumbai-based Fortune Equity Brokers (India) Ltd.

“Their core strength is thermal and they shouldn’t be and can’t be spending on hydro power,” said Shah, who has a buy rating on the parent. “They should be spending money to complete thermal projects where work is already going on.”

Jindal Power operates a 1,000-megawatt power plant in the central state of Chhattisgarh, and it plans to raise total capacity more than 11-fold to 11,480 megawatts in eight years, according to the company’s website. The New Delhi-based company plans 6,100 megawatts of capacity in hydro, with each megawatt costing 70 million rupees, Kawale said, while a coal-fired capacity costs 50 million rupees typically.

Coal Mines

The government is pushing for about 9,204 megawatts of hydro capacity addition in the five years to 2017, or a 24 percent increase, according to a new policy draft on the website of the Central Electricity Authority.

Chairman Naveen Jindal, who is also a lawmaker belonging to the ruling Congress party, has acquired coal mines abroad to feed his thermal and steel plants as the government estimates the fuel shortfall to widen 40 percent to 192 million tons in the year ending March 31.

Jindal owns three fields in Mozambique, Indonesia and South Africa with combined reserves of 1.5 billion tons. Profit at the parent company rose 5.6 percent to a record 39.65 billion rupees in the 12 months through March. Earnings have lagged behind analyst estimates in each of the past three years.

Low Costs

Jindal Power has yet to decide on the time for its initial public offering, Deputy Managing Director Sushil Maroo said last year, without elaborating. The company planned to raise 72 billion rupees when it announced the proposal on Dec. 29, 2009. Jindal Steel’s shares have since slipped 4 percent.

“There’s incentive now to push for these hydro projects as access to coal is becoming a bigger problem,” said Vijaykumar Bupathy, an analyst at Spark Capital Advisors in the southern city of Chennai. “The running costs are very low compared to thermal plants after considering the risks and delays involved in building the plants” that include flash floods and rehabilitation of people.

Heavy rains, delays with land acquisitions and environmental approvals have crimped coal output in India, with the hurdles exacerbated by inadequate transportation networks. Coal India Ltd., a state-owned company that accounts for about 80 percent of the national output, has failed to sign supply contracts, saying it could meet only 50 percent of the demand even after Singh ordered penalties in February.

Singh is planning to spend $400 billion in the five years ending March 31, 2017 to add 76 gigawatts of generation capacity to spur growth as government data last month showed gross domestic product expanded 5.3 percent in the quarter through March, the least since 2003.

The hydropower business “is relatively risk free,” said Kawale. “It also makes sense because our carbon footprint is so much smaller.”

To contact the reporter on this story: Archana Chaudhary in New Delhi at achaudhary2@bloomberg.net

To contact the editor responsible for this story: Sam Nagarajan at samnagarajan@bloomberg.net

Reliance Asset Says Cash Crunch Needs Reserve Cuts: India Credit

By V. Ramakrishnan - Jun 15, 2012

India’s biggest fund managers say the central bank needs to cut lenders’ reserve requirements to revive economic growth as cash shortages in the financial system enter a record eighth month.
The “excessive focus” of policy makers on curbing inflation could limit access to funds that companies need for expansion, according to Reliance Capital Asset Management Ltd., the nation’s second-largest money manager, which oversees more than $14 billion. Reducing the ratio of cash that banks have to set aside is a “more critical issue” than lowering borrowing costs, according to ICICI Prudential Asset Management Co., which manages $12.3 billion.
Lenders’ borrowing from the central bank, a measure of cash shortages, was 824 billion rupees ($14.8 billion) a day this month, above the 600 billion rupee maximum limit favored by the Reserve Bank of India. Benchmark yields dropped two basis points in June to 8.36 percent as economists predict that policy makers will cut borrowing costs next week. Similar yields rose three basis points in China and six basis points in the U.S.
“More than cutting rates, there has to be a change in stance on liquidity to boost growth,” Amitabh Mohanty, the Mumbai-based head of fixed income at Reliance Capital, said in an interview on June 13. “This is the right time to ensure that there is a surge in liquidity, because the overall sentiment surrounding the economy is very poor.”

Repurchase Rate

Lenders borrowed 914 billion rupees on average from the central bank every day in the past year, compared with 608 billion rupees in the prior 12 months, according to Reserve Bank data. M3, which includes currency in public circulation and bank deposits, rose 13.7 percent in the year through June 1, below the monetary authority’s projection of 15 percent.
State Bank of India, the nation’s largest lender by assets, expects a 1 percentage point cut in the reserve ratio because of the cash crunch, Chairman Pratip Chaudhuri told reporters in New Delhi on June 12. That call isn’t the consensus, with only five of 22 economists in a Bloomberg survey predicting the Reserve Bank will reduce the proportion by 50 basis points to 4.25 percent on June 18.
The monetary authority will lower the repurchase rate, at which it lends, by 25 basis points to 7.75 percent, the survey showed.

Funding Stress

Reliance Capital and ICICI Prudential, the nation’s third- largest fund manager, say the Reserve Bank should cut the reserve ratio by 50 basis points. HDFC Asset Management Co., which oversees $16.2 billion as the biggest money manager, declined to comment.
“I would prefer to see a cut in reserve requirements rather than the repo rate,” Chaitanya Pande, the Mumbai-based head of fixed-income investments at ICICI Prudential, said in an interview on June 13. “It will remove the stress on banks to borrow at any rate.”
Yields on three-month certificate of deposits, which represent the cost of bank borrowings, were 9.05 percent today, 105 basis points, or 1.05 percentage points, above the central bank’s lending rate.
The yield on the 8.79 percent bonds due November 2021 rose two basis points to 8.36 percent today, paring the decrease for this quarter to 23 basis points. The premium over similar- maturity U.S. Treasuries has shrunk 47 basis points this month to 643, according to data compiled by Bloomberg.
Rupee-denominated securities returned 4.6 percent this year, the best performance among 10 Asian local-currency debt markets monitored by HSBC Holdings Plc. That was 208 basis points more than what investors got from South Korean notes, which saw the second-highest increase.

Growth Trade-Off

Accelerating inflation may prevent policy makers from cutting the cash reserve ratio, according to the local unit of Daiwa Asset Management Co., which oversees about $143 million. Wholesale prices rose 7.55 percent last month from a year earlier after increasing 7.23 percent in April, a commerce ministry report showed yesterday. The economy expanded 5.3 percent in the three months through March, the slowest pace since 2003, government data showed two weeks earlier.
“It’s a trade-off between growth and inflation,” Killol Pandya, the Mumbai-based head of fixed-income investment at Daiwa Asset, said in an interview yesterday. “As things stand now, there is only an outside chance of a CRR cut as it will immediately contribute to inflation. I’m not unduly bullish on the RBI easing monetary policy.”
The rupee weakened 0.2 percent to 55.7050 per dollar today. It advanced 0.7 percent this month. Only the Philippine peso, South Korea’s won and Thailand’s baht have fared better among Asia’s most-traded currencies.

Deposit Growth

Credit-default swaps on State Bank, which protect the debt of the lender against a default, fell one basis point this month to 381, according to CMA, which is owned by CME Group Inc. and compiles prices quoted in privately negotiated markets. Some traders consider the bank a proxy for the sovereign. The swaps pay face value if a company fails to adhere to debt terms.
Slowing growth in bank deposits requires Reserve Bank action, according to ING Vysya Bank Ltd., the local unit of the biggest Dutch financial services company. Savings at lenders rose 14.13 percent in the year through May 25, below the 16 percent growth projected by the monetary authority for the current fiscal year.
“I don’t see how the RBI, without easing liquidity, can target deposit growth” above what it is now, Shailendra Bhandari, the Mumbai-based managing director and chief executive of ING Vysya Bank, said in an interview on June 13. “I fully agree with the SBI chairman that there is a need for a reserve- ratio cut,” he said, predicting a 25 basis point reduction.
To contact the reporter on this story: V. Ramakrishnan in Mumbai at rvenkatarama@bloomberg.net
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