RBI's lethal strike & more...
(Jul 29, 2008)
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In this issue:
» No end to troubles for the US
» Some breather on the crude price front?
» Textile companies worry about cotton prices
» 'Realty' sinks in
» ...and more!
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With India's inflation soaring to double-digit levels, the RBI today resorted to a hike in some of the key rates. In its first quarter review of the monetary policy for 2008-09, India's central bank has effected a 50 basis point (0.5%) hike in the repo rate (rate at which RBI lends to banks) and a 25 basis point (0.25%) hike in the cash reserve ratio (CRR), which leaves banks with lesser cash to lend. The CRR post this hike at 9% is at a 12-year high, while the repo rate post this hike also at 9%, is at nearly a decade high.
Also read - Monetary policy: RBI doesn't give up
||The monetary policy and RBI's stance
While the RBI eventually aims to bring down inflation to more respectable levels of within 5% in the medium term, the target clearly is to bring down the inflation level to atleast 7% by the end of March 2009. Further, the central bank has revised the GDP growth estimate for FY09 from the range of 8% to 8.5% to just 8%. While not completely unanticipated, this measure by the RBI will put further strain the funding costs of banks that are already trying hard to sustain their net interest margins (NIMs). Also, corporate and retail borrowers alike are expected to defer their borrowing plans to avoid the high rates.
The president of the Federal Reserve Bank of Minneapolis in the US, Gary Stern has stated that the credit crunch is expected to persist for the months to come. The US economy is tottering having received heavy blows from the subprime crisis and rising energy and food prices. The US Fed sought to douse the subprime mess by resorting to a slew of interest rate cuts hoping that this move would spur Americans to spend more. However, falling house prices and soaring energy costs has taken its toll on the American consumer's wallet and many of them are having problems footing their bills.
||US woes continue...
Inflation in the US, as in many countries across the world, is inching upwards. This has created a dilemma for the US Fed, which will now have to decide whether it can forego growth in a bid to contain inflation. In its last meeting, while the Fed did not hike interest rates, it kept them untouched signaling that any further cutting of rates would have to be put on the backburner.
In the meanwhile, investment bank Merrill Lynch has stated that it would have to write down US$ 5.7 bn in the third quarter of this year, following the US$ 9.7 bn that it had written off in the second quarter. Pain from the subprime crisis continues to afflict American and European banks and financial institutions. Big names like Citigroup, Freddie Mac, Fannie Mae, Merrill Lynch, Bear Stearns and the like have failed to display any signs of recovery as yet. As a result, any negative development on this front has sent the US stockmarkets in a tailspin and brought down the other indices around the world as well. Given that the depth of this mess has been most difficult to gauge, when this crisis will be well and truly over is anybody's guess.
To give an overall view of the sorry state of the US economy, the Economist states, "American house prices are falling faster than during the Depression, petrol is more expensive than in the 1970s, banks are collapsing, the euro is kicking sand in the dollar's face, credit is scarce, recession and inflation both threaten the economy and Belgians have just bought Budweiser, 'America's beer'."
The US markets closed lower on Monday led by the seemingly unending subprime crisis and a weakening US economy. Not surprisingly, financial sector stocks were among the worst hit. This gloom spilled over to other global indices as well with India not being spared either. The Indian indices were further spooked by another round of rate hikes announced by the RBI and the tempering of its GDP forecast for this fiscal to 8%. The BSE-Sensex closed lower by almost 550 points. The Asian indices were at the receiving end too with most of the key indices closing the day in the red. The European indices, however, are trading mixed currently.
||In the meanwhile...
In ancient times, potential heirs to a throne used to inherit huge fortunes from their predecessors. However, the next US president is not likely to be that fortunate. Instead, what the likes of Obama/McCain are likely to inherit is a gargantuan deficit to the tune of nearly US$ 600 bn. Years of living beyond means has started pinching the Americans in a big way. As a result, the expense of the American government has for some time now outpaced income, forcing it to rely heavily on debt. As per estimates, the total debt that the US owes to the rest of the world is believed to in the region of US$ 10 trillion and the number is likely to only get bigger in the coming years.
||Next US president has his task cut out|
Courtesy this huge debt, the interest payment alone accounts for some US$ 200 bn and this could easily inch northwards if the financial condition of the world's largest economy deteriorates. While it is normal for a developing country like India to rely on debt so that it gets to invest in infrastructure and create even more GDP in the future, for a developed nation like US that has little incremental infrastructure needs, high levels of debt would surely mean courting trouble. If this weren't enough, the government's bailout of the troubled finance sector companies might result in more pain ahead for the US. Unless the average American drastically cuts its consumption and saves more, there does not seem to be an easy solution in sight.
Volatility on the crude price front continues. Oil prices have come off by around US$ 24 a barrel from a high of US$ 147 a barrel it had reached on July 11 with the OPEC and China signaling their plans of raising output. Concerns over supply disruptions, fuelled by the escalating tensions between Iran and Israel, sustained oil demand from China and India and speculative activity were keeping the crude prices buoyant. As per Bloomberg, the OPEC, which supplies more than 40% of the world's oil, will provide 32.9 m barrels daily this month as compared to 32.7 m a day in June.
||Breather on the crude prices front?
In another development, China has cut down its imports and is focusing more on bolstering its domestic output. For instance, crude oil imports by China, the world's second-biggest energy consumer, fell to 14.57 m metric tonnes (MMT) in June 2008 from 16.2 MMT in May 2008 as reported on Bloomberg. Further, firm crude prices have also had an impact on the demand side, with the US (the world's largest consumer of oil) facing a slowdown in the consumption of the commodity. However, all is not hunky dory and disruptions on the supply side continue to sway crude prices. The latest development in this regard is the sabotage of two oil pipelines by militants in Nigeria. While this resulted in crude prices moving above the US$ 125 a barrel mark, it is still much lower than the high that it had reached earlier this month.
Falling oil prices is certainly good news for the Indian economy as well, which is already reeling under double-digit inflation and a widening trade deficit. Given that India imports around 70% of the oil that it consumes, any decline in crude prices will play some role in tempering the current account deficit, if not eliminate it.
Also read - India's oily politics
Worries abound for domestic textile companies. If slowing demand in the West and rising machinery and fuel costs were not enough, there seems to be no respite coming from the raw material front as well. In its latest missive, the government has hinted that it does not have any plans to restrict cotton exports out of the country. This indication comes just after a leading business daily reported that the government may limit cotton exports to 8 m bales of 170 kilograms each in the year ending September 2008.
||Cotton price worries for textile companies
As a matter of fact, India recently scrapped duty on cotton imports and asked traders to register export contracts with the Textiles Commissioner this month to curb this year's 50% jump in domestic prices of the commodity. The registration was made compulsory to keep track of sales to overseas buyers. As reported on Bloomberg, a revival in monsoon over the weekend in the western states of Maharashtra and Gujarat, the nation's biggest cotton-growers, has improved crop prospects. Cotton output is expected to reach a record 32.5 m bales this year.
Also read - Textile: Offering value?
German conglomerate Siemens AG had put an apartment in Walkeshwar (Mumbai) for auction in June expecting a crowd of buyers for the premium property. The lack of buying interest however led to the auction being aborted. According to the Estate Agents Association of India, the fall in real estate prices have been in the in the range of 15% to 30% even in the normally price-inelastic areas of Greater Noida, Noida, Gurgaon and Mumbai amongst the most expensive in the world.
What also must be noted is that the set of buyers today are not investors but occupants (who wish to occupy the property themselves). Investors, until about a year ago, accounted for nearly 50% of property and apartment deals. They were attracted to the real estate as an asset class given the pace of capital appreciation witnessed until last year. Such investors are shying away from new realty projects, making it tougher for developers to get financing for their projects. Coupled with the decline in demand is the surge in prices of raw materials such as steel and cement and the dwindling availability of financing from banks and other financial institutions. Thus, although the real estate market is not on the verge of sinking, reality seems to be setting in amongst buyers and sellers who until a couple of months back considered this sector as a money making machine. The RBI has done its best to negate all such perceptions.
Also read - India property goes bust!
"Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years." - Warren Buffett.
Also read - More lessons from Buffett
||Today's investing mantra
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