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India eases rules for foreign banks

Nov 072013

India eases rules for foreign banksIndia’s central bank has unveiled new rules that will allow foreign banks to expand their presence in the country.

Foreign banks will now be allowed to set up “wholly owned subsidiaries” in India, which will enable them to open branches anywhere in the country.

The subsidiaries will need a minimum capital of 5bn rupees ($80m; £50m).

The changes are a part of the push by the central bank’s new governor, Raghuram Rajan, to liberalise the sector as he looks to boost growth.

Foreign banks have long wanted to boost their presence in the country – home to nearly 1.2 billion people.

However so far they have had to face tight regulations, especially over the number of branches they can open.

The Reserve Bank of India said the new rules would allow them to open branches “at par with Indian banks”.

However, they will need permission to open branches in “certain locations that are sensitive from the perspective of national security”.

The RBI said it would also consider introducing takeover rules that would allow foreign companies to own as much as 74% of a domestic bank.

But it said any such decision will be taken after a review relating to “the extent of penetration of foreign investment in Indian banks and functioning of foreign banks”.

India raises interest rates for the second month running

Oct 292013

India raises interest rates for the second month running India’s new central bank governor has raised interest rates for the second consecutive month by a quarter of one percent to 7.75% to try to fight inflation.

The move applies only to the repo rate – the rate at which the central bank lends to commercial banks.

The cash reserve ratio – the percentage of banks’ deposits they must keep in cash – has been kept unchanged.

India’s inflation hit a seven-month-high annual rate of 6.46% in September.

“The policy stance and measures … are intended to curb mounting inflationary pressures and manage inflation expectations in a situation of weak growth,” bank chief Raghuram Rajan said in a statement.

“It is important to break the spiral of rising price pressures in order to curb the erosion of financial saving and strengthen the foundations of growth,” he said.

India’s main share index rose 0.20% to 20,611.27 points after Mr Rajan’s announcement.

Mr Rajan, who took over as the head of the central bank in September, surprised markets by raising interest rates in his first monetary policy meeting.

India’s economy has been hurt by a range of factors in recent months.

A slowdown in key sectors such as mining and manufacturing has curbed its growth rate.

At the same time, foreign investors have pulled out money from the country because of the government’s failure to enact key reforms, as well as improving economic conditions in the US.

Bank Nifty tumbles more than 700 points; realty stocks nosedive

Sep 202013

Bank Nifty tumbles more than 700 points; realty stocks nosediveNEW DELHI: Banking stocks extended their intraday losses, with the S&P BSE Banking index plunging over 6 per cent, after the Reserve Bank of India (RBI) decided to hike policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 7.25 per cent to 7.5 per cent with immediate effect.

Bank Nifty plunges 7% from Friday’s peak. The index has wiped out entire gains it made on Thursday.

Banking stocks slipped, led by losses in Yes Bank, IndusInd Bank, ICICI Bank and Bank of Baroda.

The Reserve Bank of India raised repo rate or the rate at which it lends to banks by 25 basis points to anchor inflation and inflationary expectations. The repo rate is increased to 7.5 per cent from 7.25 per cent with immediate effect.

RBI reduced the marginal standing facility rate by 75 basis points to 9.5% from 10.25% with immediate effect. The measure was taken to tighten liquidity and arrest volatility in the foreign exchange market.

At 11:20 a.m.; the S&P BSE Banking index was trading 6.05 per cent lower at 11,917, while Bank Nifty was down 700 points, or 6.34 per cent at 10,439.

Yes Bank which skyrocketed over 22 per cent to Rs 386.80 and was the top gainer in the S&P BSE Banking on Thursday, index slipped 12 per cent to Rs 338.15. Other stocks in the BSE Banking index such as Bank of India, Union Bank, BoB, Federal Bank and ICICI Bank were trading 2-4 per cent lower.

Along with banking stocks, other rate sensitive stocks such as autos, realty and capital goods also slipped post the RBI announcement.

The BSE realty index was trading 5.8 per cent lower, led by losses in HDIL which was down 2.1 per cent, DLF slipped 2.2 per cent and Unitec was trading 1.9 per cent lower.

The BSE auto index plunged 2.5 per cent, led by losses in Maruti Suzuki which was trading 1.7 per cent, Hero MotoCorp was down 1.7 per cent and Bajaj Auto slipped 0.6 per cent.

The BSE Capital Goods Index was trading 3.3 per cent lower, led by losses in Punj Lloyd which was down 5.8 per cent, L&T which slipped 4.7 per cent, Welspun Corp dropped 4.2 per cent and Jindal Saw was trading 3.1 per cent lower.

India rupee and markets up as Rajan boosts confidence

Sep 062013

India rupee and markets up as Rajan boosts confidenceThe Indian currency and stocks have jumped a day after the country’s new central bank chief took charge and promised tough action to boost growth.

The Indian rupee, one of the world’s worst performers this year, rose 2.3% against the US dollar.

India’s main stock index, the Sensex, closed up 2.2% on Thursday.

On Wednesday, Raghuram Rajan unveiled a series of measures aimed at propping up the currency and liberalising the country’s banking sector.

“To a certain extent, the recent rupee tumble and instability in the financial markets has been a crisis of confidence,” said Radhika Rao, an economist with DBS Bank.

“To that end, the path of action provided by the new governor and the stress on keeping communications predictable and consistent will be a welcome move.”

Tough decision

One of the biggest issues facing the Indian economy has been the sharp decline in the rupee.

The Indian currency has dipped nearly 20% against the US dollar since May, as international investors pulled out money from the country.

The pull-out has been triggered by a range of factors, including slowing economic growth and a lack of key reforms. At the same time, a recovery in the US economy has also made India a less attractive option for investors.

India’s central bank has taken some steps to try to maintain the rupee’s value and also shore up confidence in the economy.

However, these measures, which include increasing duty on gold, imposing capital controls and raising short-term interest rates, have failed to have any significant impact.

When he took charge, Mr Rajan announced that some of the actions that he would take to tackle the issue “will not be popular”.

“The governorship of the central bank is not meant to win one votes or Facebook ‘likes’. But I hope to do the right thing, no matter what the criticism, even while looking to learn from the criticism,” he said.

His statement has helped to restore confidence, with the Indian currency rising more than 2% to 65.53 rupees against the US dollar on Thursday.

‘Pointed steps’

Mr Rajan also unveiled steps aimed at opening up the country’s banking sector.

Under the new rules, Indian banks will no longer have to seek the central bank’s approval for each branch they want to open.

However, the banks will be obliged to open branches in rural areas – in proportion with their expansion in the cities – in order to extend financial services to all areas of the country.

The central bank will also issue new banking licences, beginning next year.

He added that the central bank would also look at easing the requirement for banks to invest in government bonds, to free credit for productive parts of the economy.

Analysts said the moves indicated that Mr Rajan would take concrete steps to tackle the issues facing the country.

“Expectations were quite high from him and he has gone far beyond expectations on day one,” said Siddhartha Sanyal, chief India economist at Barclays.

“The fact that he has come with such pointed steps in mind shows that we will see more concrete steps very soon.”

Raghuram Rajan takes charge of Reserve Bank of India

Sep 042013

Raghuram Rajan takes charge of Reserve Bank of IndiaRaghuram Rajan, a former International Monetary Fund chief economist is taking over as head of Reserve Bank of India.

He takes charge as the central bank grapples with a weakening rupee, a widening current account deficit and a slowdown in economic growth.

India’s currency has declined 20% against the US dollar since May and its growth rate fallen to a ten-year low.

Analysts said that stemming the decline in the rupee would be the first issue that Mr Rajan had to address.

“The rupee will be Rajan’s first and key challenge,” said Vikas Babu Chittiprolu, a senior foreign exchange dealer at Andhra Bank.

For his part, Mr Rajan – known for having predicted the 2008 global financial crisis – has said that “all options were on the table” to stabilise the currency.

“Economic policymakers require an enormous dose of humility, openness to various alternatives (including the possibility that they might be wrong), and a willingness to experiment,” he wrote in a column on the Project Syndicate website last month.

Win back investors

India’s economy has been hurt by a range of factors in recent months. To begin with, its growth rate has been hurt by a slowdown in key sectors such as mining and manufacturing.

In the April-to-June quarter, the economy grew at a rate of 4.4%, compared with the same period in the previous year.

On Tuesday, Goldman Sachs cut its growth forecast for India to 4% from 6%.

At the same time, foreign investors have been pulling out money from the country amid a lack of key reforms as well as improving economic conditions in the US.

Some analysts have said that a slowdown in India’s growth – coupled with a pick up in the US economy, have made the country less attractive to investors.

All of that has hurt the country’s stock market and the currency.

The decline in the rupee especially has stoked fears that India may not be able to trim its current account deficit – a key area of concern among policymakers.

The deficit, which happens when a country’s import bill exceeds the earnings from exports, drains its foreign exchange reserves.

‘Rock star image’

Mr Chittiprolu said that while Mr Rajan’s background of having worked with the International Monetary Fund would be an advantage “he will need to win the market’s faith by announcing something which helps bring in dollar inflows”.

However, Rajeev Malik, a Singapore-based economist, said Mr Rajan’s “rock star academic image could be a hindrance”.

“That is because it has generated unrealistic hope that he has some magical prescription to fix our problems,” he wrote in the Business Standard newspaper on Tuesday.

Mr Rajan is a well-known academic and the author of a prize-winning book, Fault Lines: How Hidden Fractures Still Threaten the World Economy.

India’s industrial production dips 0.4% in September

Nov 122012

India’s industrial output registered a surprise fall in September, adding to concerns about slowing growth in the country’s economy.

Factory output fell 0.4% from a year earlier. Most analysts had projected a rise of 2.8%.

Manufacturing activity, which accounts for almost two-thirds of overall output, fell 1.5% from a year earlier.

The weak data has once again raised calls for policymakers to boost stimulus measures to spur growth.

“We believe this is high time for the central government to restore the investment sentiment by implementing and introducing some more policy stimulus,” said Shakti Satapathy an analyst with AK Capital in Mumbai.

‘Balancing act’

Like many of its regional neighbours, India’s economy has also been hurt by the economic slowdown in the US and eurozone – which has hurt demand for the region’s exports.

In an attempt to offset the decline in foreign sales, India has been trying to boost its domestic consumption to sustain growth.

Last month, India’s central bank, the Reserve Bank of India (RBI) lowered the amount of money that banks need to keep in reserves in a bid to boost lending.

The RBI said the move would inject 175bn rupees ($3.2bn; £2bn) into the market.

However, analysts have argued that injecting cash into the markets may not be enough and that the central bank needs to cut interest rates to bring down the burden on businesses and consumers.

For its part, the RBI has said that keeping inflation in check is one of its top priorities.

But Moses Harding, head of asset-liability management at IndusInd Bank said the bank needed to do a “balancing act between growth and inflation”.

“”The trend in growth and inflation is clear; downward pressure on growth and uptrend on inflation into the near term,” he said.