Q1 Gross Domestic Product in India dips to 7.7%

Confirming fears of a slowdown, India's economy grew by just 7.7% in the first quarter of the 2011-12 financial year, compared to 8.8% growth in the same three-month period last fiscal, which was mainly due to the poor performance of the manufacturing sector.

The government has projected overall economic growth in the current fiscal at around 8.5%, while the Reserve Bank has projected the growth to moderate to 8% from 8.5% in FY'11.

In the latest data released by the government, GDP growth for the April-June quarter of the 2010-11 fiscal has also been revised downward to 8.8% from the earlier provisional estimate of 9.3%.

During the quarter ending June 30, 2011, growth in the manufacturing sector dipped to 7.2% from 10.6% in the corresponding period of 2010-11.

In addition, the mining and quarrying sector grew by just 1.8% during the quarter under review, as against 7.4% growth in the first quarter of the previous fiscal.

However, farm output showed an improvement, expanding by 3.9% during the quarter under review, compared to 2.4% in the corresponding three-month period last fiscal.

Furthermore, the trade, hotels, transport and communications segments grew by 12.8% in the quarter under review, up from 12.1% in the year-ago period.

The services sector, including insurance and real estate, grew by 9.1% in the June quarter this year, compared to 9.8% expansion in the corresponding period last year.

The Indian economy expanded by 8.5% in the 2010-11 fiscal.

RBI releases Draft Rules for Bank Licences for Corporates (WEDNESDAY, AUGUST 31, 2011)

Pursuant to the announcement made by the Union Finance Minister in his budget speech and the Reserve Bank's Annual Policy Statement for the year 2010-11, a discussion paper on "Entry of New Banks in the Private Sector" was placed on RBI website on August 11, 2010. The discussion paper marshalled international practices, Indian experience as well as the extant ownership and governance (O&G) guidelines.

The Reserve Bank of India (RBI) released the Usha Thorat committe report on non-banking finance companies or NBFCs. The report speaks about the issues and concerns  of the NBFCs. (Thorat is a former deputy governor of RBI).

Some key recommendations of Thorat-committee:

Tier I capital of NBFCs to be at 12%

So far, NBFCs’ capital adequacy requirement is at 15% wherein there is no stringent stipulation of tier I or tier II capital. If the recommendation is accepted, every NBFC has to have a minimum tier I capital or equity capital of 12%.

Provisioning norms for NBFCs would be similar to those for banks.

In April this year, RBI increased provisioning norms for banks from 10% to 15% on sub-standard assets (where interest payments have not been made for two months) while restructured assets (where concessions have been given to the borrower to prevent the loan from going bad) too have to be provided at 2% as against 0.25-1% earlier. If accepted, NBFCs too have to follow this. NBFC heads feel such provisioning is good on a longer term basis. It has an income tax benefit. The proposed income tax deduction is seen as a big relief.

Liquidity ratio to be introduced for 30 days 

RBI has recommended maintaining a liquidity ratio for 30 days, which means an NBFC has to set aside cash balance equivalent to its debt payments due every month. This debt may include repayment of bank loans, interest payment to bond subscribers and others. Asset finance companies, especially those with longer repayment cycle, may be impacted. The measure is perceived to be important to check asset liablity mismatch of NBFCs.

Risk weights for NBFCs, not sponsored by banks may be raised to 150% for capital market exposures and 125% for commercial real estates

This reflects RBI’s intention to bar NBFCs from taking higher exposure in capital market and real estate. Two such sectors are considered to be risk-prone and inclusive of high volatility. However, asset finance companies which basically do business of funding asset purchases would not be impacted due to this.

NBFCs may be given benefits under SARFAESI Act 

Under Securitisation and Reconstruction of Financial Assets And Enforcement of Security Interest or SARFAESI Act, an NBFC would not move to the court to auction underlying assets to recover loan dues. It will just publish a newspaper notice before such auction. However, it hardly makes any difference for gold loan companies as gold is “pledged” against the loan.

The Reserve Bank of India released the Draft Guidelines for "Licensing of New Banks in the Private Sector". The Reserve Bank has sought views/comments on the draft guidelines from banks, non-banking financial institutions, industrial houses, other institutions and the public at large.

Final guidelines will be issued and the process of inviting applications for setting up of new banks in the private sector will be initiated. After receiving feedback, comments and suggestions on the draft guidelines, and after certain vital amendments to Banking Regulation Act, 1949 are in place.

Key features of the draft guidelines are:

(i) Eligible Promoters: 

Entities / groups in the private sector, owned and controlled by residents, with diversified ownership, sound credentials and integrity and having successful track record of at least 10 years will be eligible to promote banks. Entities / groups having significant (10% or more) income or assets or both from real estate construction and / or broking activities individually or taken together in the last three years will not be eligible.

(ii) Corporate Structure: 

New banks will be set up only through a wholly owned Non-Operative Holding Company (NOHC) to be registered with the Reserve Bank as a non-banking finance company (NBFC) which will hold the bank as well as all the other financial companies in the promoter group.

(iii) Minimum Capital Requirement: 

Minimum capital requirement will be Rs 500 crore. Subject to this, actual capital to be brought in will depend on the business plan of the promoters. NOHC shall hold minimum 40% of the paid-up capital of the bank for a period of five years from the date of licensing of the bank. Shareholding by NOHC in excess of 40% shall be brought down to 20% within 10 years and to 15% within 12 years from the date of licensing of the bank.

(iv) Foreign Shareholding: 

The aggregate non-resident shareholding in the new bank shall not exceed 49% for the first 5 years after which it will be as per the extant policy.

(v) Corporate Governance: 

At least 50% of the directors of the NOHC should be independent directors. The corporate structure should be such that it does not impede effective supervision of the bank and the NOHC on a consolidated basis by the Reserve Bank.

(vi) Business Model: 

Should be realistic and viable and should address how the bank proposes to achieve financial inclusion.

(vii) Other Conditions:

• The exposure of bank to any entity in the promoter group shall not exceed 10% and the aggregate exposure to all the entities in the group shall not exceed 20% of the paid-up capital and reserves of the bank.

• The bank shall get its shares listed on the stock exchanges within two years of licensing.

• The bank shall open at least 25% of its branches in unbanked rural centres (population upto 9,999 as per 2001 census)

• Existing NBFCs, if considered eligible, may be permitted to either promote a new bank or convert themselves into banks.

(viii) In respect of promoter groups having 40% or more assets / income from non-financial business, certain additional requirements have been stipulated.

These conditions may make it difficult for keen aspirants such as Religare Enterprises Ltd., Indiabulls Financial Services Ltd. and Reliance Capital Ltd. to qualify. Companies like Larsen & Toubro Ltd., Mahindra & Mahindra Financial Services Ltd., with a reasonably diversified shareholding, have a fair chance to gain banking licenses.

WHAT IS U.S. DEBT CEILING AND WHY WAS IT RAISED, WHAT ALL DID ROCKED THE FINANCIAL MARKETS ALL OVER THE WORLD IN LAST 15 DAYS?

The U.S. Treasury has borrowed trillions of dollars over the past decade, much of it from foreign investors, to help finance two long wars, rescue its financial system, and promote economic growth through fiscal stimulus. The government must be able to issue new debt as long as it continues to run a budget deficit--the current shortfall is about $125 billion per month. As the national debt approaches its statutory limit of $14.29 trillion, concern mounts over the consequences of congressional delay or paralysis in extending the government's ability to borrow. The United States has never failed to raise its debt limit, hence any failure to do so would have plunged the government into default and precipitate an acute fiscal crisis. Lawmakers from both parties conceded that there were dire consequences associated with a default, but some Republican members of Congress planned to use the debt limit as a negotiating chip to extract deeper spending cuts and long-term fiscal reforms from the White House.

What is the U.S. Federal debt limit?

The debt limit or "ceiling" sets the maximum amount of outstanding federal debt the U.S. government can incur by law. This number stood at $14.29 trillion in the spring of 2011. Increasing the debt limit does not enlarge the nation's financial commitments, but allows the government to fund obligations already legislated by Congress. Hitting the debt ceiling would hamstring the government's ability to finance its operations, like providing for the national defense or funding entitlements such as Medicare or Social Security. Under normal circumstances, the government is able to auction off new debt (typically in the form of U.S. Treasury securities) in order to finance annual deficits. However, the debt limit places an absolute cap on this borrowing, requiring congressional approval for any increase (or decrease) from this statutory level.

The debt limit was instituted with the Second Liberty Bond Act of 1917, and Congress has raised the cap seventy-four times since 1962.

When will the United States hit its debt ceiling?

On May 16, 2011, Treasury Secretary Timothy Geithner wrote a letter to Congress announcing that the United States had reached its statutory debt limit and that "extraordinary measures" would be taken to stave off a default until August 2.

How much would the debt limit need to be raised?

President Barack Obama's proposed budget for 2012 would require a nearly $2.2 trillion hike in the debt ceiling just to meet the government's obligations for next year. The proposed Republican spending plan would entail $1.9 trillion in new borrowing by October 2012.

What could the government have done if the debt limit wasn't raised?

The U.S. Treasury could take special emergency measures to forestall a default--the point at which the government fails to meet principal or interest payments on its debt. These include under-investing in certain government funds, suspending the sales of nonmarketable debt, and trimming or delaying auctions of securities.

On May 6, Treasury began implementing these measures by indefinitely suspending the issuance of State and Local Government Series (SLGS) Treasuries--bonds that help states and municipalities conform to certain IRS regulations. The SLGS window has been closed six times in the past twenty years. On May 16, Treasury announced it would begin a "debt issuance suspension period" as a result of the United States hitting its debt limit, including the suspension of additional investments of amounts credited to the Civil Service Retirement and Disability Fund.

If the debt limit is reached despite such measures, federal spending would have to plummet dramatically or taxes would have to rise significantly (or a combination thereof). However, Geithner warned that because the government's obligations are so great, "immediate cuts in spending or tax increases cannot make the necessary cash available." If Treasury is unable to issue new debt or take further emergency actions to bridge the deficit, the government would be forced to default on some of its financial commitments, limiting or delaying payments to creditors, beneficiaries, vendors, and other entities. Among other things, these payments could include military salaries, Social Security and Medicare payments, and unemployment benefits.

What are the implications for financial markets?

Most economists, including those in the White House and from former administrations, agree that the impact of a government default would be severe. Federal Reserve Chairman Ben Bernanke has labeled a U.S. default a "recovery-ending event" that would likely spark another financial crisis. But short of default, officials warn that legislative delays in raising the debt ceiling could also inflict significant harm on the U.S. economy.

Geithner has argued that congressional gridlock will sow significant uncertainty in the bond markets and place upward pressure on interest rates. He warns that the increase would not only hike future borrowing costs of the federal government, but would also raise capital costs for struggling U.S. businesses and cash-strapped homebuyers. In addition, rising interest rates would divert future taxpayer money away from much-needed capital investments such as infrastructure, education, and healthcare. Estimates suggest that even an increase of twenty-five basis points on Treasury yields could cost taxpayers as much as $500 million more per month.

What are the implications for the dollar?

A shrink in demand for U.S. Treasuries would push down the value of the dollar relative to foreign currencies.

While many U.S. exporters would benefit from currency depreciation because it would increase foreign demand for their goods, the same firms would also bear higher borrowing costs from rising interest rates.

A potential long-term concern of some U.S. officials is that persistent volatility of the dollar will add force to recent calls by the international community for an end to its status as the world's reserve currency.

Historically, the U.S. Treasury market has been driven by huge investments from surplus countries like Japan and China, which view the United States as the safest place to store their savings. A 2009 Congressional Research Service report suggests that a loss of confidence in the debt market could prompt foreign creditors to unload large portions of their holdings, thus inducing others to do so, and causing a run on the dollar in international markets. Others claim that a sudden sell-off would run counter to foreign economic interests, as far as those interests run parallel to a robust U.S. economy.

The U.S. rating agency Standard and Poor's (S&P) in April, threatened to reduce the U.S. credit rating from its long-held "AAA" status, downgrading its outlook from "stable" to "negative" for the first time. The agency said "there is a material risk that U.S. policy makers might not reach an agreement on how to address medium-and long-term budgetary challenges by 2013."

In July Moody’s warned of a possible downgrade too and said the review was prompted by the possibility that the U.S. debt limit will not be raised in time to prevent a missed payment of interest or principal on outstanding bonds and notes.

The global financial crisis, which was rooted in poor regulation of the US housing and banking sectors, already tarnished perceptions of the United States overseas.

United States is home to not only the world’s largest economy but also it’s most liquid and safe debt market, the repercussions of a US financial meltdown are potentially much larger than a more contained emerging-markets crisis.

If the United States had been downgraded, interest rates could rise, risking a new recession. The recovery is already being hampered as the threat of a debt default deals a further blow to consumer confidence.

Both Republicans and Democrats have become addicted to debt and it was just assumed the debt ceiling would get passed automatically.

In a given month the Treasury owes roughly about $30 billion as interest on its debt and the Treasury takes roughly about $200 billion in on average in a month.

Though the debt ceiling is getting all the attention, the real issue is the rapid growth of government debt.  The Federal government is borrowing roughly 44% of what it spends.  That is why it keeps running into the debt ceiling.  The debt ceiling is really just a technicality.  The long-term issue is the size and scope of government and growing debt is just a symptom of that.

Take a look at how much Federal spending has increased in just the past few years. 

Federal Budget Year                   Amount Spent

2008                                             $2.98 trillion

2009                                             $3.51 trillion

2010                                             $3.46 trillion

2011 (est.)                                   $3.81 trillion

Markets all over the World were in extreme fear, already the were battered by the European Debt Crisis and now it was U.S., the Super-Power. It was completely unbelievable for the markets to see U.S. in such a condition. This was the only reason, markets all over the globe witnessed a dismal sell off.

U.S. have raised the Debt Limit again this time, but if a deep insight is taken, this raising of Debt Limit has raised the Debt  available for U.S. The economy is currently standing on a Huge Pile of Debt, which one or other day, will drown the Whole World Economy to a new low.

Reserve Bank of India hiked repo rate by 50 bps, more than expected

RBI raised interest rates by a higher-than-expected 50 basis points on Tuesday (26th July, 2011), stepping up its fight against persistently high inflation despite slowing growth in India, Asia's third-largest economy.

Markets were eagerly awaiting for this Policy, as it was being expected as the last such hike by the RBI to curb Inflation. At the same time, Markets were expecting only an increase of 25 Basis Points, but RBI gave a Big Surprise to the markets by increasing it by 50 Basis Points.

The repo rate, the rate at which the central bank lends short-term money to banks, has been hiked by 0.50 percent to 8 percent and the reverse repo rate, the rate at which the central bank borrows from the banks, has been hiked by 0.50 percent to 7 percent. The cash reserve ratio or CRR remained unchanged at 6 percent.

The hike is likely to further dampen the demands for home and car loans which are already the lowest in recent months.

The rate increase is its 11th since March 2010, making the RBI one of the most aggressive inflation fighters among central banks.

Still, wholesale price index inflation was 9.44 per cent in June, more than double the central bank's comfort level, and high prices are expected to persist in coming months.

The central bank, whose forecasts for inflation have proven optimistic in recent quarters, increased its outlook for wholesale inflation at the end of the fiscal year in March to 7 per cent, from 6 percent earlier.

Recent industrial output and manufacturing data was the worst in nine months, while sales of cars have slowed sharply and loan demand is easing, complicating the central bank's inflation-fighting task.

RBI's Governor has indicated in the earlier policy too, that unless the Inflation will comes into control the Interest Rates will be kept on increasing trend by them, even on the cost of Growth Rate.

This hike would again be a Negative Blow for AUTO, REALTY & INFRA, CAPITAL GOODS and METAL Sectors. Loan Growth has already being dampened and will dampen more now for the BANKS too. Not only Corporate but Individual too are facing problem in raising loan for most important needs to, due to increasing Interest Rate Cost.

Prices of REALTY is expected to go down by almost 20% in Mumbai after this hike and also the Office and Residential Rentals, this and other factors too will help the Inflation to come down to a Comfortable level.