Inflation fell to 11.07% for week ended 11th October 08 against 11.44% of the previous week. The inflation was 3.07% for the corresponding week of the previous year. However, inflation for week ended 16-08-08 was revised upwards to 12.82% from 12.40%.
Looking to the steep fall in global commodity prices like crude, steel, non-ferrous metals as also due to food prices coming under control on the domestic front, due to ensuing kharif crop and liquidation of foodgrain stocks by the traders, we are expected to see inflation softening in single digit by end of November 08 itself. This was earlier expected or likely to happen by end of December or in the first week of January. With Indian crude basket now ruling at close to $ 61 per barrel, we may see reduction in oil prices by the government, which may also help us in seeing lower inflation. Also oil marketing companies, announce the price of non-administered oil products every 1st and 15th of the month, the data of next week’s inflation may be quite low, as effect of falling crude price is not reflected in these datas as they pertain for week ending 10th October 08.
Due to lower inflation figures, which are market friendly, the government has again started releasing them during market hours at 12 noon. When they were on rise, government have been releasing them in the evening, as rising figures were spoiling the market sentiments.
Inspite of a drop in inflation, stock market has not responded too well to these. Maybe, the present problem for the market is not of inflation but of liquidity. And as stated by us in our previous stories, RBI has been pro-active and have gone for CRR cut of 250 bps and Repo rate cut of 100 bps, to inject the liquidity in the system and to make borrowings bit cheaper.
One more step in this direction was taken by the government and RBI by easing the ECB norms, which will help Indian companies to borrow from overseas market to fund its projects.
The revised rules permit ECBs upto $ 500 million per borrower per financial year, for rupee or foreign currency expenditure for permissible end uses under the automatic route. The norm of a minimum average maturity period of seven years for ECB of more than $ 100 million for rupee capital expenditure by borrowers in the infrastructure sector has been dispensed with. Definition of infrastructure sector has also been widened to include mining and refining, henceforth.
Revised rules provide for companies to pay a higher interest of upto 500 bps over the six month LIBOR on ECBs. Borrowers can bring in the proceeds immediately and can also use dollar borrowings for rupee expenditure. Presently, ECB proceeds are required to be parked overseas until actual expenditure takes place. Telecom companies would also be allowed to use ECB for payment of licence/permit for 3G Spectrum. However, this will not be allowed for realty and inter-corporate loans.
This is with a view to ease liquidity in the domestic system as also to stop rupee weakening further, which is ruling close to 50 levels.
India would see short term debt redemption of $ 89 billion between July 08 to July 09 and this could put further pressure on the rupee. This redemption is equal to about 40% of country’s total external debt of $ 220 billion as on date.
So unless, we have huge forex inflow in the next 6 – 12 months, we may see huge imbalance and could see rupee falling to 53 – 54 levels..
The relaxation in ECB norms may not result in an immediate inflow of funds due to widening, spreads over LIBOR and huge credit crunch faced by global markets with huge financial turmoil in US and Europe. But, for the established Indian companies with good track record and good projects, would be able to source funding, as some lenders would also be forthcoming to lend, to keep its business running.
Though market is not responding to both these positive news, as they are driven by global sentiments, which are quite negative but would help in the medium to long term for the Indian economy.
Looking to the steep fall in global commodity prices like crude, steel, non-ferrous metals as also due to food prices coming under control on the domestic front, due to ensuing kharif crop and liquidation of foodgrain stocks by the traders, we are expected to see inflation softening in single digit by end of November 08 itself. This was earlier expected or likely to happen by end of December or in the first week of January. With Indian crude basket now ruling at close to $ 61 per barrel, we may see reduction in oil prices by the government, which may also help us in seeing lower inflation. Also oil marketing companies, announce the price of non-administered oil products every 1st and 15th of the month, the data of next week’s inflation may be quite low, as effect of falling crude price is not reflected in these datas as they pertain for week ending 10th October 08.
Due to lower inflation figures, which are market friendly, the government has again started releasing them during market hours at 12 noon. When they were on rise, government have been releasing them in the evening, as rising figures were spoiling the market sentiments.
Inspite of a drop in inflation, stock market has not responded too well to these. Maybe, the present problem for the market is not of inflation but of liquidity. And as stated by us in our previous stories, RBI has been pro-active and have gone for CRR cut of 250 bps and Repo rate cut of 100 bps, to inject the liquidity in the system and to make borrowings bit cheaper.
One more step in this direction was taken by the government and RBI by easing the ECB norms, which will help Indian companies to borrow from overseas market to fund its projects.
The revised rules permit ECBs upto $ 500 million per borrower per financial year, for rupee or foreign currency expenditure for permissible end uses under the automatic route. The norm of a minimum average maturity period of seven years for ECB of more than $ 100 million for rupee capital expenditure by borrowers in the infrastructure sector has been dispensed with. Definition of infrastructure sector has also been widened to include mining and refining, henceforth.
Revised rules provide for companies to pay a higher interest of upto 500 bps over the six month LIBOR on ECBs. Borrowers can bring in the proceeds immediately and can also use dollar borrowings for rupee expenditure. Presently, ECB proceeds are required to be parked overseas until actual expenditure takes place. Telecom companies would also be allowed to use ECB for payment of licence/permit for 3G Spectrum. However, this will not be allowed for realty and inter-corporate loans.
This is with a view to ease liquidity in the domestic system as also to stop rupee weakening further, which is ruling close to 50 levels.
India would see short term debt redemption of $ 89 billion between July 08 to July 09 and this could put further pressure on the rupee. This redemption is equal to about 40% of country’s total external debt of $ 220 billion as on date.
So unless, we have huge forex inflow in the next 6 – 12 months, we may see huge imbalance and could see rupee falling to 53 – 54 levels..
The relaxation in ECB norms may not result in an immediate inflow of funds due to widening, spreads over LIBOR and huge credit crunch faced by global markets with huge financial turmoil in US and Europe. But, for the established Indian companies with good track record and good projects, would be able to source funding, as some lenders would also be forthcoming to lend, to keep its business running.
Though market is not responding to both these positive news, as they are driven by global sentiments, which are quite negative but would help in the medium to long term for the Indian economy.
By SP Tulsian
source: sptulsian.com
