Jan 11, 2008|
Food prices, 1-lakh car, US subprime and more...
Headline inflation (Wholesale Price Index) rose to 3.5% during the week ended December 22 2007, from the low of 3.0% during the week ended November 10, 2007. Food imports have increased by 56.5% YoY - a key contributor to this acceleration being wheat and pulses imports. The prime reason for the imports has been the stagnation in agricultural productivity growth. On a trailing five-year basis, yield per hectare for major crops such as rice has increased by only 0.1%, while for wheat, it has declined at an average rate of 1.1% (source: RBI). The most important factor behind the current state has been low spending by the government on agriculture-related infrastructure services. Public investment in agriculture has only recently picked up to 0.5% of GDP in FY07 after averaging 0.4% of GDP in the preceding three years. Spending on irrigation has also been negligible with only 40.3% of the farming land being irrigated. Meanwhile, India has recently allowed export of 17,000 tonnes of wheat flour to Maldives, an exception from the current prohibition on exports of wheat and wheat products. India is a net wheat importer and does not allow export of wheat and wheat products.
The risk of higher food prices is constraining monetary policy management. Even as consumption growth has slowed meaningfully, the RBI is deferring policy rate cuts. It is concerned about higher food and energy prices weighing on inflationary expectations. The rise in international food prices, in addition to the rise in oil prices, has also revived inflation concerns.
Tata Motors' much-awaited Rs 1 lakh car 'Nano' was launched amidst much fanfare yesterday and is said to have the potential for revolutionising the small car market in the country.
Meanwhile foreign carmakers are also finding the Indian automobile market very enticing. Germany's Volkswagen hopes to sell 110,000 cars a year in India starting 2009 and plans to launch two models new to the country's market this year, including the Jetta. Annual passenger vehicle sales in India are forecasted to nearly double to 2 m units by 2010 and Volkswagen aims to cut its traditional reliance on European drivers by focusing on emerging markets like India. Volkswagen will be investing about US$ 530 m to set up a plant near Pune to achieve its sales target. Rising incomes and new models are boosting sales of cars in India where only 8 people in every 1,000 own a car, compared to 300-500 in many western nations. Almost all major global carmakers are either expanding in India or setting up plants. General Motors is also building its second plant in India and rival Ford Motor has recently announced a US$ 500 m investment in India.
Credit-default swaps, used to help protect against the risk of a company's debt default, may cause losses of US$ 250 bn this year, helping send the U.S. economy into a recession as corporate defaults rise. Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. The sub-prime losses and the repercussions thereof are expected to trigger the credit default losses this year. Meanwhile, Citigroup Inc., the biggest bank in the US, is expected to write down US$ 16 bn of subprime assets in 4QFY08 and post a larger loss than previously estimated.
Amid soaring valuations for recently listed Indian brokerages, the largest private sector banking entity, ICICI Bank, is planning to list its brokerage arm ICICI Securities in 1QFY09. ICICI Securities will be the first subsidiary of ICICI to get listed. This will be followed by the bank's other three unlisted subsidiaries - ICICI Prudential Asset Management, ICICI Prudential Life Insurance and ICICI Lombard General Insurance. ICICI Securities houses the investment banking, institutional equity and debt broking and ICICIdirect.com - the retail broking business. Being an early starter in the business, ICICIdirect.com is a dominant market player in the online retail broking space and is said to have maximum number of online retail investors. It has 1.4 m customers and handles on an average at least 350,000 trades on a daily basis. The stock of ICICI Bank has gained over 32% in the past 3 months.
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