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Reserve Bank of India eases hedging rules to aid volumes

Reserve Bank of India eases hedging rules to aid volumes

MUMBAI: The Reserve Bank of India liberalised hedging norms to boost trading volumes in the over-the-counter market. The RBI had imposed these restrictions to curb speculation in the foreign exchange market after the rupee weakened by over 18% between August and December 2011.

Exporters can now credit 100% of their foreign exchange earnings to the EEFC (exchange earners’ foreign currency account) without having to convert 50% of it in rupee terms.

Exchange earners’ foreign currency account (EEFC) is an account maintained in foreign currency with an authorised dealer or bank. It is a facility provided to the foreign exchange earners, including exporters, to credit 100% of their foreign exchange earnings to the account. But exporters will have to convert the total accrual by the end of the month into rupee terms.

According to market experts, this measure will help exporters to hedge their exposures with banks, which might give a boost to the rupee which has weakened by 9% against the dollar in the first quarter of financial year 2013.

“Exporters might sell (dollars), but it stands to have a limited impact, since the demand for dollars is huge, and one-off inflows have not helped the rupee correct much in the recent past,” said Anil Bhansali, vice-president, Mecklai Financial.

The RBI has also now allowed exporters to book and cancel forwards contracts to about 25% of their total contracts booked for hedging exposures. In an RBI circular issued in July, the bank had clearly said that forwards contracts booked by residents, irrespective of type and tenor of the underlying exposure, once cancelled could not be rebooked.

Exporters and importers get into forwards contract, whereby they agree to sell or buy a currency at a pre-determined exchange rate on a given day. “All the steps (taken in December) seem to help in reducing volatility,” RBI deputy governor, Subir Gokarn said in his interview to ET.

“And having reached that situation, we felt that there was some room to give our participants a little more flexibility in their management of their exposures, their genuine hedging requirements and that has motivated the actions that we took today.”

RBI has also freed the net overnight open positions (NOOP) of overseas branches of banks from the limits imposed earlier. Net open positions are transactions which have not been squared off on an overnight basis.

“This liberalises the NOOP a bit more,” said Ashish Vaidya, ED, trading, UBS. “These moves are directed towards undoing the restrictions the RBI had put in place in December. Trading volumes in the OTC market will certainly increase,” he added.


NEW DELHI: In 2011, Business Standard, in an interview, asked P Chidambaram what aspect of the economy kept him awake at night. “The interplay of high inflation and slow growth,” he replied without hesitation. “Our goal must be high growth with moderate inflation. So, in a situation in which inflation is high and growth may be slowing, we should worry”. How could this be set right ? There is no magic bullet, he said. “It has to be done through appropriate fiscal and monetary policies, which the government is trying to do.” He provided a bit of history. “The fact is low growth and high inflation are not problems new to India. In 1991, Manmohan Singh had the same problem. We had to bring in investment. He slashed expenditure sharply and cut the Budget brutally. While that may not apply in 2011, the problem is the same.” Nothing has changed. In 2012, as Chidambaram returns to the finance ministry, he has to grapple the same demons, and a few more. (For details log on to : http://www.business-standard.com/india/news/p-chidambaram-leadsnew-team/482035/)


MUMBAI: The Reserve Bank of India (RBI) on Tuesday left its key policy rate unchanged at eight per cent in line with expectations, but its sharp tone on inflation doused all hopes of any monetary easing in the near future as well. The central bank’s policy dilemma was clear from the monetary policy statement: it cut its economic growth forecast for the fiscal year to March 2013 and at the same time raised its inflation forecast. While the GDP growth projection for 2012-13 has been lowered to 6.5 per cent from the 7.3 per cent estimated before the onset of the monsoon, the inflation projection for end-March has been increased to seven per cent from six per cent. “In the current circumstances, lowering policy rates will only aggravate inflationary impulses, without necessarily stimulating growth,” Governor D Subbarao said, adding the central bank’s primary focus was inflation control. The RBI left its policy repo rate at eight per cent and the cash reserve ratio for banks at 4.75 per cent. The CRR is the share of deposits banks must keep with the RBI. (For details log on to : http://www.business-standard.com/india/news/rbi-douses-hopesrate-cut-in-near-future/482037/)


NEW DELHI: Outgoing Chief Economic Adviser (CEA) Kaushik Basu, who had earlier differed with the Reserve Bank of India (RBI) on its tight monetary stance, on Tuesday described the central bank’s decision on keeping the repo rate unchanged as the “right move”. He, however, prescribed that RBI go for rate cuts in the medium to long term. In his last media interaction as CEA in the ministry of finance (his extended term ended on Tuesday), Basu said RBI, through a one percentage point cut in the Statutory Liquidity Ratio, had given space to banks to lend more to the private sector. “RBI has said pause. RBI has made a right move,” Basu told a press conference here. Earlier, when RBI had been in a tight monetary stance to contain inflation, Basu had cited the example of Turkey, which despite a high rate of price rise had lowered interest rates and succeeded in boosting growth and lowering inflation. on Tuesday, he said there might have been occasions when he had differed with RBI but the central bank’s move on Tuesday was a step in the right direction. RBI cited high inflation as a reason for not lowering the repo rate, even as economic growth came down to a nine-year low of 6.5 per cent in 2011-12. (For details log on to : http://www.business-standard.com/india/news/rbi-stanceright-move-basu/482043/)


Prime Minister’s Economic Advisory Council Chairman C Rangarajan says the Reserve Bank of India’s (RBI) move of not cutting the repo rate is the right step in the context of high inflation. The former RBI governor tells Dilasha Seth that GDP growth will be higher than RBI’s estimate of 6.5 per cent this financial year. Edited excerpts: RBI did not cut the repo rate, though economic growth is declining. How do you see this move? RBI’s move has been very appropriate, as it has struck the right balance between the need to contain inflation and at the same time, provide some incentive for growth. As inflation remains high, not changing the repo rate is a correct thing. But the reduction of SLR by one percentage point will inject liquidity into the system. This cut in SLR is also expected to be followed by OMOs. A repo rate cut would have sent a wrong signal when inflation is running high. When do you see RBI going for a repo rate cut? It all depends on inflation. Non-food inflation has certainly shown signs of decline. But we need to see how food inflation behaves on the back of weak monsoon. So, we just need to wait and watch. Any reduction in interest rates will depend on how inflation behaves. (For details log on to : http://www.business-standard.com/india/news/cut-in-repo-rate-would-have-sentwrong-signal-c-rangarajan/482042/)


MUMBAI: The Reserve Bank of India (RBI) on Tuesday eased various restrictions on exporters’ exchange earnings and forward contract transactions. These were imposed earlier to curb volatility in the rupee. RBI said the new step was to provide operational flexibility to exporters and banks. The central bank restored the facility of allowing full credit for foreign exchange earning to Exchange Earners Foreign Currency (EEFC) Accounts. However, the relaxation is subject to the condition that accruals during a month should be converted into rupees on or before the last day of the succeeding month. Exporters can adjust for balances for forward commitments. In May, RBI had told exporters to convert half their dollar funds in EEFC accounts into rupees within a fortnight.   Exporters have also been allowed to cancel and rebook forward contracts to the extent of 25 per cent of the total contracts booked for hedging their exposure. RBI had barred exporters from cancelling and rebooking forward contracts in December 2011, to curb speculative trading in the foreign exchange market. (For details log on to : http://www.business-standard.com/india/news/normsforex-earnings-forward-contracts-relaxed/481990/)


MUMBAI: RBI Deputy Governor Subir Gokarn says credit-deposit growth mismatch for a longer period could put pressure on liquidity. He speaks to Parnika Sokhi and Abhijit Lele after the first quarter review of the monetary policy. Edited excerpts: Why is deposit growth not picking up, even though interest rates are attractive? There is a concern that deposit growth has significantly been slower than credit growth for a prolonged period of time. This was one of the issues we discussed with bankers today. We haven’t got a fix on it yet. Some people argue it is because of the real rate of return on deposits turning negative; there is a fiscal asymmetry between bank deposits and other instruments. But the long-term issue is that, ultimately, both credit growth and deposit growth have to be in line with each other. When that gap widens, we have liquidity pressures and we have been dealing with that from late 2010. While we can deal with short-term liquidity pressures, long-term issues remain. We may give a projection in the next quarter’s review. (For details log on to : http://www.business-standard.com/india/news/growth-slowdown-will-impact-asset-quality-subir-gokarn-/482002/)


KOLKATA/MUMBAI: The Reserve Bank of India (RBI) has agreed to review the revised priority sector lending targets with an “open mind” over the next fortnight, Governor D Subbarao said on Tuesday. The announcement follows requests from banks to review the new norms. “Evidently, there are still some open issues on priority sector lending…. I think some of the suggestions were quite reasonable. We decided that in the next 15 days, there will be a meeting at the operational level and (another) meeting at the bank chairmen level. It is not clear what we will change but, certainly, we will have an open mind,” Subbarao told reporters after the first quarter review of monetary policy for 2012-13. The banking regulator had set up a committee led by M V Nair, former chairman and managing director of Union Bank of India, to examine the guidelines on priority sector lending. Earlier this month, RBI released the revised sector lending norms, based on the recommendations made by the Nair committee. The new norms mandated a higher priority sector lending target for foreign banks with more than 20 branches in India. (For details log on to : http://www.business-standard.com/india/news/rbi-to-review-new-rules-for-priority-sector-lending/481988/)


MUMBAI: India’s corporations are now pinning their hopes on the government to revive the slowing economy through administrative steps, after the Reserve Bank of India (RBI) left key policy rates untouched in Tuesday’s first quarter monetary policy review. “Monetary review is just one part of the whole business environment and RBI has to also think of inflation pressure before rate cut,” said K Venkataramanan, managing director and chief executive officer of India’s largest engineering and construction company, Larsen and Toubro Ltd. “What I am hoping is total acceleration on clearing up some of the road blocks by the government. This is in terms of allowing land acquisitions, as projects are getting stuck because of that and coal linkages to power companies, without which you cannot grow at eight per cent,” he added. (For details log on to : http://www.business-standard.com/india/news/india-inc-pins-hopegovt-action/482001/)


KOLKATA/MUMBAI: The Reserve Bank of India’s (RBI) decision to reduce the Statutory Liquidity Ratio (SLR) is likely to bring down bulk deposit rates and encourage banks to cut interest rates on retail loans and working capital finances, said bankers. In an unexpected move on Tuesday, RBI reduced the minimum requirement for banks’ government bond holdings or SLR by 100 basis points to 23 per cent, with effect from the fortnight beginning August 11. The move is aimed to ensure credit flows continue to productive sectors and do not suffer from tight liquidity conditions. At a time when system liquidity is showing signs of improvement, bankers expect the SLR cut to ease the pressure on bulk deposit rates. In turn, this will allow banks to reduce their lending rates in the coming months, bankers said. “I think these (funds that will be available due to SLR cut) will largely go to the retail sector…For banks like us, there is now an option to accelerate in the retail space. So, to attract customers, there will be a reduction in rates,” said Pratip Chaudhuri, chairman of State Bank of India. (For details log on to : http://www.business-standard.com/india/news/slr-cut-may-reduce-bulk-deposit-rates/481987/)


The heightening risk to inflation has prompted the RBI to keep policy rates unchanged in the first quarter review of the monetary policy. This is even as growth is slowing. The central bank, however, cut the Statutory Liquidity Ratio (SLR) from 24 per cent to 23 per cent of deposits so that banks which are facing a deficit can tide over it. Bankers say they will soon take a call on cutting deposit and lending rates by convening meeting of their asset-liability committees. According to Mr Alok Misra, Chairman, Indian Banks’ Association, and Chairman and Managing Director, Bank of India, “It was a very balanced policy action in view of the global economic outlook. An SLR reduction will add about Rs 66,000 crore to the system which will lead to increased credit flow.” State Bank of India (SBI) Chairman, Mr Pratip Chaudhuri, said the RBI has not disappointed the banks in its last two policy announcements. He said the benefit of the SLR cut can be passed on to the retail sector. (For details log on to : http://www.thehindubusinessline.com/todays-paper/tp-money-banking/article3709003.ece)


MUMBAI: Banks will not cut their lending and deposit rates following a 1% cut in the statutory liquidity ratio (SLR) by Reserve Bank of Indiaon Tuesday. The central bank lowered SLR — a portion of deposits that banks have to mandatorily invest in government securities — to 23%. SBI chief Pratip Chaudhuri said that deposit rates need to come down before lending rates fall. However, he added that he doesn’t see deposit rates coming down. On how SLR could impact rates, he said, “The impact of SLR is to make money available for credit growth. There will be a transfer of resources from SLR to real sector and, largely, to retail.” SBI chief had earlier said that the bank will lower the rate only if the RBI cuts the cash reserve ratio. The cut in SLR will theoretically release Rs 60,000 crore into the system but since most banks are holding excess government securities in the books, bankers say that a cut in SLR will not impact their liquidity position. (For details log on to : http://economictimes.indiatimes.com/news/news-by-industry/banking/finance/banking/banks-wont-reduce-rates-despite-a-cut-in-statutory-liquidity-ratio-by-rbi/articleshow/15304130.cms)


HONG KONG: Bank of Indiais close to mandating a seven-bank group for a $175m two-year loan, marking its return to the offshore loan market after a year, according to sources. The seven are Bank of America Merrill Lynch, Barclays, Citigroup, Commerzbank, HSBC, RBS and Standard Chartered Bank. The mandate will likely be awarded this week, one source said. The loan, which has an unspecified greenshoe, might be completed as a club, the source said. BOI last tapped the offshore loan market in August 2011 when it raised US$200m from a three-year loan that paid a top-level all-in of 150bp via a margin of 129bp over Libor. ANZ, BAML, Mizuho Corporate Bank, Natixis, StanChart, RBS and UOB were the mandated lead arrangers and bookrunners on that loan, which was increased from US$175m. Six other lenders participated in that financing. (For details log on to : http://economictimes.indiatimes.com/news/news-by-industry/banking/finance/banking/bank-of-india-to-pick-seven-bank-group-for-175-mn-loan/articleshow/15291921.cms)


For most banks across the globe, the past five years have been a battle for survival with many falling by the wayside and others becoming wards of the state. In late 2008, Indiawas also not immune with ICICI Bank, the nation’s second largest, experiencing some jitters. But one lender which has remained immune to the troubles swirling around the sector is HDFC Bank. With a market capitalisation of Rs 1,38,469 crore (or $24.88 billion) on Tuesday, HDFC Bank has surpassed the biggest lender in the nation – State Bank of India – which has deposits that are almost six times that of the private lender. The bank, which has been helmed during the 16 years of its existence by Aditya Puri, a former Citi banker who aspires to establish India’s Wells Fargo, where billionaire Warren Buffett takes pride in being a shareholder, has proved that it is not just size that matters, but how much every penny earns. At 4.5 times book value, HDFC Bank is probably the most expensive bank in the world while giants like Bank of America and French lender BNP Paribas trade at less than one time their book value. (For details log on to : http://economictimes.indiatimes.com/markets/stocks/stocks-in-news/hdfc-bank-is-now-one-of-the-most-valuable-in-the-world-beats-biggies-like-bofa-bnp-paribas/articleshow/15303336.cms)


CHENNAI: Star Health and Allied Insurance has proposed to raise Rs 150 crore this financial year as part of its plans to augment solvency margin, a top company official said today. The solvency ratio is the amount by which an insurance company’s capital exceeds its projected liabilities. Insurance companies are required to maintain a minimum solvency margin. “We are going to raise about Rs 150 crore… In all probabilities it may materialise shortly…,” Star Health and Allied Insurance Chairman and Managing Director V Jagannathan told reporters here. He said the current solvency margin was at 1.76 per cent as against the industry’s 1.5 per cent. “It will be raised for us to maintain the solvency margin…,” he said. Besides, Jagannathan did not rule out the possibility of getting listed on bourses, saying they would get listed after the guidelines for insurance companies are released by insurance regulator IRDA and SEBI (For details log on to : http://economictimes.indiatimes.com/news/news-by-industry/banking/finance/finance/star-health-to-raise-rs-150-crore-this-fiscal/articleshow/15295040.cms)


CHENNAI: Wealth India Financial Services, promoters of online investment services platform FundsIndia.com, has raised Rs 20 crore from existing as well as new investors. The company said the proposal for fund raising was led by venture capital firm Foundation Capital with follow on investments from current investors Inventus Capital. “The investment will be used for growing the business both in terms of expanding the customer base and enhancing the online platform,” it said. “This round of funding empowers us to expand our vision both in terms of the market reach as well as the depth of our services…,” WIFS CEO C R Chandrasekar said. This funding would enable FundsIndia “leapfrog” its growth, he added. “We are excited to be part of the FundsIndia growth story. FundsIndia brings tremendous conveniences, cost benefits and an exciting online investment experience to its customers,” Foundation Capital Member Ashu Garg said. (For details log on to : http://economictimes.indiatimes.com/news/news-by-industry/banking/finance/banking/wealth-india-financial-raises-rs-20-crore-for-expansion-plans/articleshow/15294924.cms)


Arbitrage funds as a category has beaten the short term bond funds and liquid funds. Over last three months ended 30 th July 2012, arbitrage funds as a category have posted 2.51% says Value Research, a mutual fund tracking entity. Over the same period of time short term bond funds have posted 2.48% and ultra short term bond funds have given 2.4%. “Generally arbitrage funds offer returns in line with ultra short term bond funds’ returns. But when equity markets turn volatile, fund managers get more opportunities with higher spreads in cash and futures markets, thus pushing up returns offered by arbitrage funds,” says Kalpesh Bhansali, head – mutual funds, GEPL Capital. Increased volatility has helped the arbitrage funds, which primarily attempt to capture the price differential between the cash market and the futures market. This can better be understood with the help of an example. Ordinary equity shares of Pantaloon Retail quote at Rs 158 in cash market but the near month futures quote at Rs 160. The fund manager simultaneously buys into cash market and sells in the futures market, thus capturing the spread of two rupees. Towards the end of month the prices converge and the fund manager pockets two rupees. This is a market neutral strategy and movements in stock prices, both upward and downward, have little impact on the returns the fund could generate. (For details log on to : http://economictimes.indiatimes.com/personal-finance/mutual-funds/mf-news/arbitrage-funds-outperform-short-term-bond-funds-liquid-funds/articleshow/15292510.cms)


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