FRANKFURT -(Dow Jones)- The time for a tightening of monetary conditions in the euro zone is approaching, European Central Bank executive board member Juergen Stark said Tuesday.
"After extended discussions, we are moving closer to phasing out our liquidity measures, as not all of them will be needed to the same extent as in the past," Stark told a banking conference.
He noted that the revival of world trade, the rebuilding of inventories and the huge influence of fiscal and monetary policy stimulus measures had helped bring the global recession to an end, adding that "recent economic and financial information is encouraging."
Stark said that the most pressing need of the day is to remove moral hazard from financial markets, while ensuring that there is enough liquidity for "markets and solvent institutions" and that proper procedures are in place for resolving the insolvencies of systemically important financial institutions.
"The first line of defense is that market participants must be liable for their actions," Stark said, adding a heavy hint that this appeared not to be the case at present. "As yet, I have...not seen any significant change in the behavior of market participants," Stark said. He stressed that the record amount of liquidity created by central banks across the world in the wake of the 2008 financial crisis "mustn't sow the seeds of new imbalances."
Some analysts have expressed concern that the sharp rebound in equity and, especially, debt markets this year may be more due to excess liquidity, rather than any improvement in the fundamental value of those assets.
Stark also rejected the creation of an 'emergency fund' financed or co-financed by taxpayers to insure the financial system. At a recent meeting of the G-20 group of countries, U.K. Prime Minister Gordon Brown had suggested levying a tax on financial transactions to seed such a fund, but the proposal was resisted by the U.S. and others.
Stark also repeated his opinion that the ECB has no great need to change its approach to monetary policy, saying that its emphasis on monetary analysis had proved its worth. He also argued that the ECB doesn't need any new policy tools to maintain price stability in the future.
Web site: www.ecb.int
-By Geoffrey T. Smith, Dow Jones Newswires (+49 160) 743 40 90; geoffrey.smith@dowjones.com
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(END) Dow Jones Newswires
November 17, 2009 11:39 ET (16:39 GMT)
Copyright 2009 Dow Jones & Company, Inc.
Tuesday, November 17, 2009
Bank Of Portugal Upgrades 2009 GDP Forecast To -2.7%
Bank Of Portugal Upgrades 2009 GDP Forecast To -2.7%
MADRID (Dow Jones)--The Portuguese economy will shrink 2.7% in 2009, the Bank of Portugal said, in a set of improved forecasts signaling that the pace of economic contraction is slowing. The Lisbon-based central bank said in its quarterly economic bulletin, published Tuesday, that its gross domestic product estimate is improved from its previous projection of a drop of 3.5% because exports and private consumption are showing more favorable trends in the second half of 2009.
Portuguese GDP was flat in 2008 and grew 1.8% in 2007.
The Portuguese economy will contract at a slower pace than other euro-zone peers because its banking sector has resisted turbulence from the global financial crisis and the country didn't suffer from a real estate price correction, the central bank added.
Consumer prices are expected to drop faster than expected, with the country's harmonized consumer price index falling 0.9% this year, compared to a previous forecast of a 0.5% drop.
Central Bank Web Site: www.bportugal.pt
-By Madrid Bureau, Dow Jones Newswires; +34-91 395 8120; djmadrid@dowjones.com;
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(END) Dow Jones Newswires
November 17, 2009 11:00 ET (16:00 GMT)
Copyright 2009 Dow Jones & Company, Inc.
MADRID (Dow Jones)--The Portuguese economy will shrink 2.7% in 2009, the Bank of Portugal said, in a set of improved forecasts signaling that the pace of economic contraction is slowing. The Lisbon-based central bank said in its quarterly economic bulletin, published Tuesday, that its gross domestic product estimate is improved from its previous projection of a drop of 3.5% because exports and private consumption are showing more favorable trends in the second half of 2009.
Portuguese GDP was flat in 2008 and grew 1.8% in 2007.
The Portuguese economy will contract at a slower pace than other euro-zone peers because its banking sector has resisted turbulence from the global financial crisis and the country didn't suffer from a real estate price correction, the central bank added.
Consumer prices are expected to drop faster than expected, with the country's harmonized consumer price index falling 0.9% this year, compared to a previous forecast of a 0.5% drop.
Central Bank Web Site: www.bportugal.pt
-By Madrid Bureau, Dow Jones Newswires; +34-91 395 8120; djmadrid@dowjones.com;
Click here to go to Dow Jones NewsPlus, a web front page of today's most important business and market news, analysis and commentary: http://www.djnewsplus.com/access/al?rnd=a%2B9%2B7AGMLKtlUOD8sI0Q6w%3D%3D. You can use this link on the day this article is published and the following day.
(END) Dow Jones Newswires
November 17, 2009 11:00 ET (16:00 GMT)
Copyright 2009 Dow Jones & Company, Inc.
Hungarian Min: Exports, Not Consumption To Drive GDP
BUDAPEST -(Dow Jones)- Hungary should continue to rely on exports and not domestic consumption to boost its gross domestic product so as to pursue sustainable growth, Finance Minister Peter Oszko said Tuesday.
"It's possible to generate pro forma growth from debt, domestic --public --consumption, but that wouldn't be real and sustainable," Oszko said in a speech at a conference about the lessons of the global economic crisis.
Growth should be generated while the economy is in equilibrium, Oszko added. The size of sovereign debt and the indebtedness of households should receive a bigger weight than earlier when judging a country's economic health, he added.
Hungary was the first country in the European Union that sought help last year from the International Monetary Fund, when it was hit hard by the crisis because of its large budget deficit and external debt.
It has also seen its exports falling sharply as demand for Hungarian goods has fallen drastically, especially for automotive and consumer electronics, from Western Europe, its main export market, and especially from Germany.
The IMF and the EU, Hungary's biggest creditors, agreed Monday that Hungary won't draw on the next installment of its EUR20-billion credit line but keep it as a reserve should need for it arose.
The IMF also said Monday that it wouldn't tolerate the next government, due to come into power after general elections in spring next year, amassing a budget deficit of 7% or even more of GDP. The Fidesz party, which is widely tipped to make up the next government, has already said that it expects the budget shortfall to widen to 7% or more in 2010.
"The leaders of Fidesz must have realized that they'll have to stick to the main parameters of the IMF-EU agreement" to ensure the financing of the budget, KBC economist Zsolt Papp said earlier Tuesday.
"The interesting question remains how Fidesz will attempt to consolidate the fiscal targets with its general campaign promise of easing the tax burden," Papp added.
Fidesz doesn't support a fiscal policy that would boost the deficit but the current 2010 budget plan fails to include the proper amount of losses expected from the state railways, public transport, state hospitals, foreign exchange losses and a potential shortfall of tax revenues, state news agency quoted Fidesz Vice President Mihaly Varga as saying earlier Tuesday.
Ministry web site: www.pm.gov.hu
-By Margit Feher, Dow Jones Newswires; +36-20-925-2364; margit.feher@dowjones.com
Click here to go to Dow Jones NewsPlus, a web front page of today's most important business and market news, analysis and commentary: http://www.djnewsplus.com/access/al?rnd=a%2B9%2B7AGMLKtlUOD8sI0Q6w%3D%3D. You can use this link on the day this article is published and the following day.
(END) Dow Jones Newswires
November 17, 2009 12:22 ET (17:22 GMT)
Copyright 2009 Dow Jones & Company, Inc.
"It's possible to generate pro forma growth from debt, domestic --public --consumption, but that wouldn't be real and sustainable," Oszko said in a speech at a conference about the lessons of the global economic crisis.
Growth should be generated while the economy is in equilibrium, Oszko added. The size of sovereign debt and the indebtedness of households should receive a bigger weight than earlier when judging a country's economic health, he added.
Hungary was the first country in the European Union that sought help last year from the International Monetary Fund, when it was hit hard by the crisis because of its large budget deficit and external debt.
It has also seen its exports falling sharply as demand for Hungarian goods has fallen drastically, especially for automotive and consumer electronics, from Western Europe, its main export market, and especially from Germany.
The IMF and the EU, Hungary's biggest creditors, agreed Monday that Hungary won't draw on the next installment of its EUR20-billion credit line but keep it as a reserve should need for it arose.
The IMF also said Monday that it wouldn't tolerate the next government, due to come into power after general elections in spring next year, amassing a budget deficit of 7% or even more of GDP. The Fidesz party, which is widely tipped to make up the next government, has already said that it expects the budget shortfall to widen to 7% or more in 2010.
"The leaders of Fidesz must have realized that they'll have to stick to the main parameters of the IMF-EU agreement" to ensure the financing of the budget, KBC economist Zsolt Papp said earlier Tuesday.
"The interesting question remains how Fidesz will attempt to consolidate the fiscal targets with its general campaign promise of easing the tax burden," Papp added.
Fidesz doesn't support a fiscal policy that would boost the deficit but the current 2010 budget plan fails to include the proper amount of losses expected from the state railways, public transport, state hospitals, foreign exchange losses and a potential shortfall of tax revenues, state news agency quoted Fidesz Vice President Mihaly Varga as saying earlier Tuesday.
Ministry web site: www.pm.gov.hu
-By Margit Feher, Dow Jones Newswires; +36-20-925-2364; margit.feher@dowjones.com
Click here to go to Dow Jones NewsPlus, a web front page of today's most important business and market news, analysis and commentary: http://www.djnewsplus.com/access/al?rnd=a%2B9%2B7AGMLKtlUOD8sI0Q6w%3D%3D. You can use this link on the day this article is published and the following day.
(END) Dow Jones Newswires
November 17, 2009 12:22 ET (17:22 GMT)
Copyright 2009 Dow Jones & Company, Inc.
EUR/USD falls further to hits intra-day low at 1.4807
The Euro has continued falling against the Dollar during the American session with the pair extending decline from yesterday high at 1.5015 to reach lowest level since Nov 4 at 1.4807.
Currently the pair is trading around 1.48300/40, well within oversold territory, and reaching 0.90% daily losses from opening price action at 1.4968.
According to the FastBrokers research team, the EUR/USD is trading lower as investors await more data: “The EUR/USD is trading lower this morning as the S&P futures consolidate just above 1100. The EU is relatively quiet on the data front right now, making the EUR/USD’s present movements more reliant the Dollar’s reaction to upcoming economic data. Thus far we received slightly better than expected CPI and RPI data from Britain earlier in the session followed by weak PPI numbers from the U.S. The most disconcerting release was the -0.6% Core PPI reading (minus food and energy). The -0.6% decline is the largest in the Core number since November 2006. The setback in producer prices adds onto the sluggish EMI, Business Inventories, and Core Retail Sales data investors received yesterday. In other words, prices are declining while manufacturing slows and inventories rise, not to mention retail sales minus autos are weak as well. Hence, the Fed just received more evidence which may support its continued loose monetary policy stance. As a result, one would expect the Dollar to decline and the EUR/USD to benefit after such news. However, we will have to wait and see how the rest of today’s data pans out.”
Currently the pair is trading around 1.48300/40, well within oversold territory, and reaching 0.90% daily losses from opening price action at 1.4968.
According to the FastBrokers research team, the EUR/USD is trading lower as investors await more data: “The EUR/USD is trading lower this morning as the S&P futures consolidate just above 1100. The EU is relatively quiet on the data front right now, making the EUR/USD’s present movements more reliant the Dollar’s reaction to upcoming economic data. Thus far we received slightly better than expected CPI and RPI data from Britain earlier in the session followed by weak PPI numbers from the U.S. The most disconcerting release was the -0.6% Core PPI reading (minus food and energy). The -0.6% decline is the largest in the Core number since November 2006. The setback in producer prices adds onto the sluggish EMI, Business Inventories, and Core Retail Sales data investors received yesterday. In other words, prices are declining while manufacturing slows and inventories rise, not to mention retail sales minus autos are weak as well. Hence, the Fed just received more evidence which may support its continued loose monetary policy stance. As a result, one would expect the Dollar to decline and the EUR/USD to benefit after such news. However, we will have to wait and see how the rest of today’s data pans out.”
Monday, November 16, 2009
EUR/USD: Euro recovery stalls right below 1.5000
Euro recovery from 1.4825 low on Friday extended during Asian session and has stalled after hitting 1.4995 on early European session, and remains trading in a range between 1.4960 and 1.4995.
Despite recent pick up, the Euro is biased to the downside while below 1.5050, according to Ian Coleman, technical analyst at Turtle Futures: "At the moment I still have a wave count. It will become invalid if it breaks higher than 15050. I have no signal to sell as yet but with a previous high at 15017 I am expecting a turnaround soon (I see an ascending wedge formation on the 10 mins). I would then look to 14822 as P1 (profit 1) then 1.4680 area."
Resistance levels lie at 1.4980, and above here at 1.5000/15 (Nov 12 high) and 1.5050 (Nov 11 high). On the downside, support levels lie at 1.4935 (Intra-day low/ Nov 13 high), and below here, 1.4890/00 and 1.4870.
Despite recent pick up, the Euro is biased to the downside while below 1.5050, according to Ian Coleman, technical analyst at Turtle Futures: "At the moment I still have a wave count. It will become invalid if it breaks higher than 15050. I have no signal to sell as yet but with a previous high at 15017 I am expecting a turnaround soon (I see an ascending wedge formation on the 10 mins). I would then look to 14822 as P1 (profit 1) then 1.4680 area."
Resistance levels lie at 1.4980, and above here at 1.5000/15 (Nov 12 high) and 1.5050 (Nov 11 high). On the downside, support levels lie at 1.4935 (Intra-day low/ Nov 13 high), and below here, 1.4890/00 and 1.4870.
USD/CHF opens the week with losses and trades back at 1.0060
The Dollar has begun the current week against the Swissy with negative tone, extending its decline from Friday's high at 1.0182 and after opening the Asian session at 1.0120, pair has continued falling to trade below 1.0100 level and hit 1.0065 as intra-day low.
Currently the pair is trading around 1.0075/85, 0.40% below today's opening price action after using intra-day low as support level. Next supports could be 1.0055, Nov 12 low, below that, 1.0035, Nov 11 low, will be exposed.
Tomas Cedavicius, analyst at Investija.com gives us his scoop on USD/CHF: “Negative channel continued towards support level, selling actions are on a table now.”
Rajoo C, analyst at Precise Trader, comments: “The Hourly trend is in a Range trading with a downside bias expect the bears to struggle near 10070-30 levels , 10145-10205 are the critical levels to watch to maintain the bearish out look . On the 5 min is along the Horizontal Channel and the price patterns are suggesting choppy with lower lows. Fed Chairman Bernanke speaks today.”
Currently the pair is trading around 1.0075/85, 0.40% below today's opening price action after using intra-day low as support level. Next supports could be 1.0055, Nov 12 low, below that, 1.0035, Nov 11 low, will be exposed.
Tomas Cedavicius, analyst at Investija.com gives us his scoop on USD/CHF: “Negative channel continued towards support level, selling actions are on a table now.”
Rajoo C, analyst at Precise Trader, comments: “The Hourly trend is in a Range trading with a downside bias expect the bears to struggle near 10070-30 levels , 10145-10205 are the critical levels to watch to maintain the bearish out look . On the 5 min is along the Horizontal Channel and the price patterns are suggesting choppy with lower lows. Fed Chairman Bernanke speaks today.”
Euro recovery stalls right below 1.5000
Euro recovery from 1.4825 low on Friday extended during Asian session and has stalled after hitting 1.4995 on early European session, and remains trading in a range between 1.4960 and 1.4995. Despite recent pick up, the Euro is biased to the downside while below 1.5050, according to Ian Coleman, technical analyst at Turtle Futures.
Saturday, November 14, 2009
Wall Street rises on Friday; Stocks finish week with gains
U.S. markets rose on Friday and ended the week in positive with moderate gains. The Dow Jones rose 0.72% to finish at 10,270. The index is consolidating above 10,000 and for the week rose more than 2%. Equities worldwide ended mostly in positive for the week, after receiving the boost from the G20 on Monday and on
Friday with the return to growth in Europe.
The ecPulse.com analysis team affirms: “U.S. equity indexes ended this week’s session in green to extend a second straightly weekly rally, whereas better than expected earnings from Walt Disney Co and Abercrombie & Fitch Co managed to boost investors’ confidence, despite that the University of Michigan confidence index failed to meet expectations.
In the macroeconomic side, U.S. deficit in goods and services trade with the rest of the world has widened to $36.5 Billion in September from $30.8 Billion in Agust, well beyond the market consensus of $32.0 Billion. Furthermore, U.Michigan/Reuters Consumer Confidence Index has dropped to 66.1 in November, from 70.6 in October.
Nicole Elliott, senior technical analyst at Mizuho Corporate Bank, comments: “Analysis We continue to feel that stock indices have probably put in this year’s highs, or are about to do so, and are more likely to drift in thin markets over the next six weeks. FX will continue to consolidate, as should most commodities, with a tendency for the Yen to strengthen slightly and for the US dollar to weaken medium term. Treasury yields might drift lower too.”
Friday with the return to growth in Europe.
The ecPulse.com analysis team affirms: “U.S. equity indexes ended this week’s session in green to extend a second straightly weekly rally, whereas better than expected earnings from Walt Disney Co and Abercrombie & Fitch Co managed to boost investors’ confidence, despite that the University of Michigan confidence index failed to meet expectations.
In the macroeconomic side, U.S. deficit in goods and services trade with the rest of the world has widened to $36.5 Billion in September from $30.8 Billion in Agust, well beyond the market consensus of $32.0 Billion. Furthermore, U.Michigan/Reuters Consumer Confidence Index has dropped to 66.1 in November, from 70.6 in October.
Nicole Elliott, senior technical analyst at Mizuho Corporate Bank, comments: “Analysis We continue to feel that stock indices have probably put in this year’s highs, or are about to do so, and are more likely to drift in thin markets over the next six weeks. FX will continue to consolidate, as should most commodities, with a tendency for the Yen to strengthen slightly and for the US dollar to weaken medium term. Treasury yields might drift lower too.”
GBP/USD: Cable ends week below 1.6700
FXstreet.com (Córdoba) – Cable rose sharply on Friday against the Dollar. GBP/USD jumped from 1.6575 to test the 1.6700 zone. The pair peaked at 1.6706 (intra-day high) but failed to hold at those levels. Pound pulled down but found support at 1.6660.
Mohammed Isah, analyst at FXTechstraegy, comments: “To the topside, the pair must break back above the 1.6740 and the 1.6842 levels to reverse its downside threats and bring gains towards the 1.7041 level where its YTD high is standing with a penetration of there triggering the resumption of its medium term uptrend now on hold towards its .50 Ret (2.1160-1.3501)at 1.7314. On the whole, GBP remains pressured to the downside having collapsed off the 1.6842 level.”
The Sterling also rose against the Euro on Friday, for the second day in a row and managed to recover from Wednesday’s losses when EUR/GBP rose to 0.9063 posting a two week high. To continue rising Cable needs to break below 0.8900.
Mohammed Isah, analyst at FXTechstraegy, comments: “To the topside, the pair must break back above the 1.6740 and the 1.6842 levels to reverse its downside threats and bring gains towards the 1.7041 level where its YTD high is standing with a penetration of there triggering the resumption of its medium term uptrend now on hold towards its .50 Ret (2.1160-1.3501)at 1.7314. On the whole, GBP remains pressured to the downside having collapsed off the 1.6842 level.”
The Sterling also rose against the Euro on Friday, for the second day in a row and managed to recover from Wednesday’s losses when EUR/GBP rose to 0.9063 posting a two week high. To continue rising Cable needs to break below 0.8900.
Friday, November 6, 2009
Openness to Foreign Investment
Post-independence scenario
India's post-independence economic policy combined a vigorous private sector with state planning and control, treating foreign investment as a necessary evil. Prior to 1991, foreign firms were allowed to enter the Indian market only if they possessed technology unavailable in India. Almost every aspect of production and marketing was tightly controlled, and many of the foreign companies that came to India eventually abandoned their projects.
New policies
The industrial policy announced in July 1991 was vastly simpler, more liberal and more transparent than its predecessors, and it actively promoted foreign investment as indispensable to India's international competitiveness. The new policy permits automatic approval for foreign equity investments of up to 51 percent, so long as these investments are made in one of 35 "high priority" industries that account for the lion's share of industrial activity.
Hassles earlier
Prior to 1991, foreign equity participation was limited to 40 percent, and foreign investors were saddled by numerous operating constraints. Foreign equity investments in excess of 51 percent, or those which fall outside the specified "high priority" areas, must be approved by the Foreign Investment Promotion Board (FIPB) and approved by a Cabinet Committee.
Constraints: too many
The government on occasion has denied requests for a foreign equity stake exceeding 51 percent. Non-resident Indians (NRI's) and Overseas Corporate Bodies (firms with NRI majority ownership) may hold 100 percent ownership in all industries except those reserved for the public sector.
These reserved industries are:
Improved conditions
To allow more NRI investments, the GOI recently allowed repatriation of investment in all activities, except agriculture and plantations, subject to certain conditions. As of June 1995, NRIs and OCBs may invest on a repatriable basis in new issues of shares/debentures only of industrial or manufacturing companies.
India's post-independence economic policy combined a vigorous private sector with state planning and control, treating foreign investment as a necessary evil. Prior to 1991, foreign firms were allowed to enter the Indian market only if they possessed technology unavailable in India. Almost every aspect of production and marketing was tightly controlled, and many of the foreign companies that came to India eventually abandoned their projects.
New policies
The industrial policy announced in July 1991 was vastly simpler, more liberal and more transparent than its predecessors, and it actively promoted foreign investment as indispensable to India's international competitiveness. The new policy permits automatic approval for foreign equity investments of up to 51 percent, so long as these investments are made in one of 35 "high priority" industries that account for the lion's share of industrial activity.
Hassles earlier
Prior to 1991, foreign equity participation was limited to 40 percent, and foreign investors were saddled by numerous operating constraints. Foreign equity investments in excess of 51 percent, or those which fall outside the specified "high priority" areas, must be approved by the Foreign Investment Promotion Board (FIPB) and approved by a Cabinet Committee.
Constraints: too many
The government on occasion has denied requests for a foreign equity stake exceeding 51 percent. Non-resident Indians (NRI's) and Overseas Corporate Bodies (firms with NRI majority ownership) may hold 100 percent ownership in all industries except those reserved for the public sector.
These reserved industries are:
- arms,
- ammunition and defense equipment;
- atomic energy;
- mineral oils;
- minerals used in atomic energy; and
- railway transport.
Improved conditions
To allow more NRI investments, the GOI recently allowed repatriation of investment in all activities, except agriculture and plantations, subject to certain conditions. As of June 1995, NRIs and OCBs may invest on a repatriable basis in new issues of shares/debentures only of industrial or manufacturing companies.
Foreign Direct Investment Introduction
Foreign Direct Investment (FDI) is permited as under the following forms of investments.
Forbidden Territories:
FDI is not permitted in the following industrial sectors:
Foreign Investment through GDRs (Euro Issues)
Foreign Investment through GDRs is treated as Foreign Direct Investment
Indian companies are allowed to raise equity capital in the international market through the issue of Global Depository Receipt (GDRs). GDRs are designated in dollar and are not subject to any ceilings on investment. An applicant company seeking Government's approval in this regard should have consistent track record for good performance (financial or otherwise) for a minimum period of 3 years. This condition would be relaxed for infrastructure projects such as power generation, telecommunication, petroleum exploration and refining, ports, airports and roads.
Clearance from FIPB
There is no restriction on the number of Euro-issue to be floated by a company or a group of companies in the financial year . A company engaged in the manufacture of items covered under Annex-III of the New Industrial Policy whose direct foreign investment after a proposed Euro issue is likely to exceed 51% or which is implementing a project not contained in Annex-III, would need to obtain prior FIPB clearance before seeking final approval from Ministry of Finance.
Use of GDRs
The proceeds of the GDRs can be used for financing capital goods imports, capital expenditure including domestic purchase/installation of plant, equipment and building and investment in software development, prepayment or scheduled repayment of earlier external borrowings, and equity investment in JV/WOSs in India.
Restrictions
However, investment in stock market and real estate will not be permitted. Companies may retain the proceeds abroad or may remit funds into India in anticiption of the use of funds for approved end uses. Any investment from a foreign firm into India requires the prior approval of the Government of India.
- Through Financial collaborations.
- Through joint ventures and technical collaborations.
- Through capital markets via Euro issues.
- Through private placements or preferential allotments.
Forbidden Territories:
FDI is not permitted in the following industrial sectors:
- Arms and ammunition.
- Atomic Energy.
- Railway Transport.
- Coal and lignite.
- Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds, copper, zinc.
Foreign Investment through GDRs (Euro Issues)
Foreign Investment through GDRs is treated as Foreign Direct Investment
Indian companies are allowed to raise equity capital in the international market through the issue of Global Depository Receipt (GDRs). GDRs are designated in dollar and are not subject to any ceilings on investment. An applicant company seeking Government's approval in this regard should have consistent track record for good performance (financial or otherwise) for a minimum period of 3 years. This condition would be relaxed for infrastructure projects such as power generation, telecommunication, petroleum exploration and refining, ports, airports and roads.
Clearance from FIPB
There is no restriction on the number of Euro-issue to be floated by a company or a group of companies in the financial year . A company engaged in the manufacture of items covered under Annex-III of the New Industrial Policy whose direct foreign investment after a proposed Euro issue is likely to exceed 51% or which is implementing a project not contained in Annex-III, would need to obtain prior FIPB clearance before seeking final approval from Ministry of Finance.
Use of GDRs
The proceeds of the GDRs can be used for financing capital goods imports, capital expenditure including domestic purchase/installation of plant, equipment and building and investment in software development, prepayment or scheduled repayment of earlier external borrowings, and equity investment in JV/WOSs in India.
Restrictions
However, investment in stock market and real estate will not be permitted. Companies may retain the proceeds abroad or may remit funds into India in anticiption of the use of funds for approved end uses. Any investment from a foreign firm into India requires the prior approval of the Government of India.
Financial and Banking Sector Reforms
The last decade witnessed the maturity of India's financial markets. Since 1991, every governments of India took major steps in reforming the financial sector of the country. The important achievements in the following fields is discussed under serparate heads:
Financial Markets
In the last decade, Private Sector Institutions played an important role. They grew rapidly in commercial banking and asset management business. With the openings in the insurance sector for these institutions, they started making debt in the market.
Competition among financial intermediaries gradually helped the interest rates to decline. Deregulation added to it. The real interest rate was maintained. The borrowers did not pay high price while depositors had incentives to save. It was something between the nominal rate of interest and the expected rate of inflation.
Regulators
The Finance Ministry continuously formulated major policies in the field of financial sector of the country. The Government accepted the important role of regulators. The Reserve Bank of India (RBI) has become more independant. Securities and Exchange Board of India (SEBI) and the insurance Regulatory and Development Authority (IRDA) became important institutions. Opinions are also there that there should be a super-regulator for the financial services sector instead of multiplicity of regulators.
The banking system
Almost 80% of the business are still controlled by Public Sector Banks (PSBs). PSBs are still dominating the commercial banking system. Shares of the leading PSBs are already listed on the stock exchanges.
The RBI has given licences to new private sector banks as part of the liberalisation process. The RBI has also been granting licences to industrial houses. Many banks are successfully running in the retail and consumer segments but are yet to deliver services to industrial finance, retail trade, small business and agricultural finance.
The PSBs will play an important role in the industry due to its number of branches and foreign banks facing the constrait of limited number of branches. Hence, in order to achieve an efficient banking system, the onus is on the Government to encourage the PSBs to be run on professional lines.
Development finance institutions
FIs's access to SLR funds reduced. Now they have to approach the capital market for debt and equity funds.
Convertibility clause no longer obligatory for assistance to corporates sanctioned by term-lending institutions.
Capital adequacy norms extended to financial institutions.
DFIs such as IDBI and ICICI have entered other segments of financial services such as commercial banking, asset management and insurance through separate ventures. The move to universal banking has started.
Non-banking finance companies
In the case of new NBFCs seeking registration with the RBI, the requirement of minimum net owned funds, has been raised to Rs.2 crores.
Until recently, the money market in India was narrow and circumscribed by tight regulations over interest rates and participants. The secondary market was underdeveloped and lacked liquidity. Several measures have been initiated and include new money market instruments, strengthening of existing instruments and setting up of the Discount and Finance House of India (DFHI).
The RBI conducts its sales of dated securities and treasury bills through its open market operations (OMO) window. Primary dealers bid for these securities and also trade in them. The DFHI is the principal agency for developing a secondary market for money market instruments and Government of India treasury bills. The RBI has introduced a liquidity adjustment facility (LAF) in which liquidity is injected through reverse repo auctions and liquidity is sucked out through repo auctions.
On account of the substantial issue of government debt, the gilt- edged market occupies an important position in the financial set- up. The Securities Trading Corporation of India (STCI), which started operations in June 1994 has a mandate to develop the secondary market in government securities.
Long-term debt market: The development of a long-term debt market is crucial to the financing of infrastructure. After bringing some order to the equity market, the SEBI has now decided to concentrate on the development of the debt market. Stamp duty is being withdrawn at the time of dematerialisation of debt instruments in order to encourage paperless trading.
The capital market
The number of shareholders in India is estimated at 25 million. However, only an estimated two lakh persons actively trade in stocks. There has been a dramatic improvement in the country's stock market trading infrastructure during the last few years. Expectations are that India will be an attractive emerging market with tremendous potential. Unfortunately, during recent times the stock market have been constrained by some unsavoury developments, which has led to retail investors deserting the stock markets.
Mutual funds
The mutual funds industry is now regulated under the SEBI (Mutual Funds) Regulations, 1996 and amendments thereto. With the issuance of SEBI guidelines, the industry had a framework for the establishment of many more players, both Indian and foreign players.
The Unit Trust of India remains easily the biggest mutual fund controlling a corpus of nearly Rs.70,000 crores, but its share is going down. The biggest shock to the mutual fund industry during recent times was the insecurity generated in the minds of investors regarding the US 64 scheme. With the growth in the securities markets and tax advantages granted for investment in mutual fund units, mutual funds started becoming popular.
The foreign owned AMCs are the ones which are now setting the pace for the industry. They are introducing new products, setting new standards of customer service, improving disclosure standards and experimenting with new types of distribution.
The insurance industry is the latest to be thrown open to competition from the private sector including foreign players. Foreign companies can only enter joint ventures with Indian companies, with participation restricted to 26 per cent of equity. It is too early to conclude whether the erstwhile public sector monopolies will successfully be able to face up to the competition posed by the new players, but it can be expected that the customer will gain from improved service.
The new players will need to bring in innovative products as well as fresh ideas on marketing and distribution, in order to improve the low per capita insurance coverage. Good regulation will, of course, be essential.
Overall approach to reforms
The last ten years have seen major improvements in the working of various financial market participants. The government and the regulatory authorities have followed a step-by-step approach, not a big bang one. The entry of foreign players has assisted in the introduction of international practices and systems. Technology developments have improved customer service. Some gaps however remain (for example: lack of an inter-bank interest rate benchmark, an active corporate debt market and a developed derivatives market). On the whole, the cumulative effect of the developments since 1991 has been quite encouraging. An indication of the strength of the reformed Indian financial system can be seen from the way India was not affected by the Southeast Asian crisis.
However, financial liberalisation alone will not ensure stable economic growth. Some tough decisions still need to be taken. Without fiscal control, financial stability cannot be ensured. The fate of the Fiscal Responsibility Bill remains unknown and high fiscal deficits continue. In the case of financial institutions, the political and legal structures hve to ensure that borrowers repay on time the loans they have taken. The phenomenon of rich industrialists and bankrupt companies continues. Further, frauds cannot be totally prevented, even with the best of regulation. However, punishment has to follow crime, which is often not the case in India.
Deregulation of banking system
Prudential norms were introduced for income recognition, asset classification, provisioning for delinquent loans and for capital adequacy. In order to reach the stipulated capital adequacy norms, substantial capital were provided by the Government to PSBs.
Government pre-emption of banks' resources through statutory liquidity ratio (SLR) and cash reserve ratio (CRR) brought down in steps. Interest rates on the deposits and lending sides almost entirely were deregulated.
New private sector banks allowed to promote and encourage competition. PSBs were encouraged to approach the public for raising resources. Recovery of debts due to banks and the Financial Institutions Act, 1993 was passed, and special recovery tribunals set up to facilitate quicker recovery of loan arrears.
Bank lending norms liberalised and a loan system to ensure better control over credit introduced. Banks asked to set up asset liability management (ALM) systems. RBI guidelines issued for risk management systems in banks encompassing credit, market and operational risks.
A credit information bureau being established to identify bad risks. Derivative products such as forward rate agreements (FRAs) and interest rate swaps (IRSs) introduced.
Capital market developments
The Capital Issues (Control) Act, 1947, repealed, office of the Controller of Capital Issues were abolished and the initial share pricing were decontrolled. SEBI, the capital market regulator was established in 1992.
Foreign institutional investors (FIIs) were allowed to invest in Indian capital markets after registration with the SEBI. Indian companies were permitted to access international capital markets through euro issues.
The National Stock Exchange (NSE), with nationwide stock trading and electronic display, clearing and settlement facilities was established. Several local stock exchanges changed over from floor based trading to screen based trading.
Private mutual funds permitted
The Depositories Act had given a legal framework for the establishment of depositories to record ownership deals in book entry form. Dematerialisation of stocks encouraged paperless trading. Companies were required to disclose all material facts and specific risk factors associated with their projects while making public issues.
To reduce the cost of issue, underwriting by the issuer were made optional, subject to conditions. The practice of making preferential allotment of shares at prices unrelated to the prevailing market prices stopped and fresh guidelines were issued by SEBI.
SEBI reconstituted governing boards of the stock exchanges, introduced capital adequacy norms for brokers, and made rules for making client or broker relationship more transparent which included separation of client and broker accounts.
Buy back of shares allowed
The SEBI started insisting on greater corporate disclosures. Steps were taken to improve corporate governance based on the report of a committee.
SEBI issued detailed employee stock option scheme and employee stock purchase scheme for listed companies.
Standard denomination for equity shares of Rs. 10 and Rs. 100 were abolished. Companies given the freedom to issue dematerialised shares in any denomination.
Derivatives trading starts with index options and futures. A system of rolling settlements introduced. SEBI empowered to register and regulate venture capital funds.
The SEBI (Credit Rating Agencies) Regulations, 1999 issued for regulating new credit rating agencies as well as introducing a code of conduct for all credit rating agencies operating in India.
Consolidation imperative
Another aspect of the financial sector reforms in India is the consolidation of existing institutions which is especially applicable to the commercial banks. In India the banks are in huge quantity. First, there is no need for 27 PSBs with branches all over India. A number of them can be merged. The merger of Punjab National Bank and New Bank of India was a difficult one, but the situation is different now. No one expected so many employees to take voluntary retirement from PSBs, which at one time were much sought after jobs. Private sector banks will be self consolidated while co-operative and rural banks will be encouraged for consolidation, and anyway play only a niche role.
In the case of insurance, the Life insurance Corporation of India is a behemoth, while the four public sector general insurance companies will probably move towards consolidation with a bit of nudging. The UTI is yet again a big institution, even though facing difficult times, and most other public sector players are already exiting the mutual fund business. There are a number of small mutual fund players in the private sector, but the business being comparatively new for the private players, it will take some time.
We finally come to convergence in the financial sector, the new buzzword internationally. Hi-tech and the need to meet increasing consumer needs is encouraging convergence, even though it has not always been a success till date. In India organisations such as IDBI, ICICI, HDFC and SBI are already trying to offer various services to the customer under one umbrella. This phenomenon is expected to grow rapidly in the coming years. Where mergers may not be possible, alliances between organisations may be effective. Various forms of bancassurance are being introduced, with the RBI having already come out with detailed guidelines for entry of banks into insurance. The LIC has bought into Corporation Bank in order to spread its insurance distribution network. Both banks and insurance companies have started entering the asset management business, as there is a great deal of synergy among these businesses. The pensions market is expected to open up fresh opportunities for insurance companies and mutual funds.
It is not possible to play the role of the Oracle of Delphi when a vast nation like India is involved. However, a few trends are evident, and the coming decade should be as interesting as the last one.
- Financial markets
- Regulators
- The banking system
- Non-banking finance companies
- The capital market
- Overall approach to reforms
- Deregulation of banking system
- Capital market developments
- Consolidation imperative
Financial Markets
In the last decade, Private Sector Institutions played an important role. They grew rapidly in commercial banking and asset management business. With the openings in the insurance sector for these institutions, they started making debt in the market.
Competition among financial intermediaries gradually helped the interest rates to decline. Deregulation added to it. The real interest rate was maintained. The borrowers did not pay high price while depositors had incentives to save. It was something between the nominal rate of interest and the expected rate of inflation.
Regulators
The Finance Ministry continuously formulated major policies in the field of financial sector of the country. The Government accepted the important role of regulators. The Reserve Bank of India (RBI) has become more independant. Securities and Exchange Board of India (SEBI) and the insurance Regulatory and Development Authority (IRDA) became important institutions. Opinions are also there that there should be a super-regulator for the financial services sector instead of multiplicity of regulators.
The banking system
Almost 80% of the business are still controlled by Public Sector Banks (PSBs). PSBs are still dominating the commercial banking system. Shares of the leading PSBs are already listed on the stock exchanges.
The RBI has given licences to new private sector banks as part of the liberalisation process. The RBI has also been granting licences to industrial houses. Many banks are successfully running in the retail and consumer segments but are yet to deliver services to industrial finance, retail trade, small business and agricultural finance.
The PSBs will play an important role in the industry due to its number of branches and foreign banks facing the constrait of limited number of branches. Hence, in order to achieve an efficient banking system, the onus is on the Government to encourage the PSBs to be run on professional lines.
Development finance institutions
FIs's access to SLR funds reduced. Now they have to approach the capital market for debt and equity funds.
Convertibility clause no longer obligatory for assistance to corporates sanctioned by term-lending institutions.
Capital adequacy norms extended to financial institutions.
DFIs such as IDBI and ICICI have entered other segments of financial services such as commercial banking, asset management and insurance through separate ventures. The move to universal banking has started.
Non-banking finance companies
In the case of new NBFCs seeking registration with the RBI, the requirement of minimum net owned funds, has been raised to Rs.2 crores.
Until recently, the money market in India was narrow and circumscribed by tight regulations over interest rates and participants. The secondary market was underdeveloped and lacked liquidity. Several measures have been initiated and include new money market instruments, strengthening of existing instruments and setting up of the Discount and Finance House of India (DFHI).
The RBI conducts its sales of dated securities and treasury bills through its open market operations (OMO) window. Primary dealers bid for these securities and also trade in them. The DFHI is the principal agency for developing a secondary market for money market instruments and Government of India treasury bills. The RBI has introduced a liquidity adjustment facility (LAF) in which liquidity is injected through reverse repo auctions and liquidity is sucked out through repo auctions.
On account of the substantial issue of government debt, the gilt- edged market occupies an important position in the financial set- up. The Securities Trading Corporation of India (STCI), which started operations in June 1994 has a mandate to develop the secondary market in government securities.
Long-term debt market: The development of a long-term debt market is crucial to the financing of infrastructure. After bringing some order to the equity market, the SEBI has now decided to concentrate on the development of the debt market. Stamp duty is being withdrawn at the time of dematerialisation of debt instruments in order to encourage paperless trading.
The capital market
The number of shareholders in India is estimated at 25 million. However, only an estimated two lakh persons actively trade in stocks. There has been a dramatic improvement in the country's stock market trading infrastructure during the last few years. Expectations are that India will be an attractive emerging market with tremendous potential. Unfortunately, during recent times the stock market have been constrained by some unsavoury developments, which has led to retail investors deserting the stock markets.
Mutual funds
The mutual funds industry is now regulated under the SEBI (Mutual Funds) Regulations, 1996 and amendments thereto. With the issuance of SEBI guidelines, the industry had a framework for the establishment of many more players, both Indian and foreign players.
The Unit Trust of India remains easily the biggest mutual fund controlling a corpus of nearly Rs.70,000 crores, but its share is going down. The biggest shock to the mutual fund industry during recent times was the insecurity generated in the minds of investors regarding the US 64 scheme. With the growth in the securities markets and tax advantages granted for investment in mutual fund units, mutual funds started becoming popular.
The foreign owned AMCs are the ones which are now setting the pace for the industry. They are introducing new products, setting new standards of customer service, improving disclosure standards and experimenting with new types of distribution.
The insurance industry is the latest to be thrown open to competition from the private sector including foreign players. Foreign companies can only enter joint ventures with Indian companies, with participation restricted to 26 per cent of equity. It is too early to conclude whether the erstwhile public sector monopolies will successfully be able to face up to the competition posed by the new players, but it can be expected that the customer will gain from improved service.
The new players will need to bring in innovative products as well as fresh ideas on marketing and distribution, in order to improve the low per capita insurance coverage. Good regulation will, of course, be essential.
Overall approach to reforms
The last ten years have seen major improvements in the working of various financial market participants. The government and the regulatory authorities have followed a step-by-step approach, not a big bang one. The entry of foreign players has assisted in the introduction of international practices and systems. Technology developments have improved customer service. Some gaps however remain (for example: lack of an inter-bank interest rate benchmark, an active corporate debt market and a developed derivatives market). On the whole, the cumulative effect of the developments since 1991 has been quite encouraging. An indication of the strength of the reformed Indian financial system can be seen from the way India was not affected by the Southeast Asian crisis.
However, financial liberalisation alone will not ensure stable economic growth. Some tough decisions still need to be taken. Without fiscal control, financial stability cannot be ensured. The fate of the Fiscal Responsibility Bill remains unknown and high fiscal deficits continue. In the case of financial institutions, the political and legal structures hve to ensure that borrowers repay on time the loans they have taken. The phenomenon of rich industrialists and bankrupt companies continues. Further, frauds cannot be totally prevented, even with the best of regulation. However, punishment has to follow crime, which is often not the case in India.
Deregulation of banking system
Prudential norms were introduced for income recognition, asset classification, provisioning for delinquent loans and for capital adequacy. In order to reach the stipulated capital adequacy norms, substantial capital were provided by the Government to PSBs.
Government pre-emption of banks' resources through statutory liquidity ratio (SLR) and cash reserve ratio (CRR) brought down in steps. Interest rates on the deposits and lending sides almost entirely were deregulated.
New private sector banks allowed to promote and encourage competition. PSBs were encouraged to approach the public for raising resources. Recovery of debts due to banks and the Financial Institutions Act, 1993 was passed, and special recovery tribunals set up to facilitate quicker recovery of loan arrears.
Bank lending norms liberalised and a loan system to ensure better control over credit introduced. Banks asked to set up asset liability management (ALM) systems. RBI guidelines issued for risk management systems in banks encompassing credit, market and operational risks.
A credit information bureau being established to identify bad risks. Derivative products such as forward rate agreements (FRAs) and interest rate swaps (IRSs) introduced.
Capital market developments
The Capital Issues (Control) Act, 1947, repealed, office of the Controller of Capital Issues were abolished and the initial share pricing were decontrolled. SEBI, the capital market regulator was established in 1992.
Foreign institutional investors (FIIs) were allowed to invest in Indian capital markets after registration with the SEBI. Indian companies were permitted to access international capital markets through euro issues.
The National Stock Exchange (NSE), with nationwide stock trading and electronic display, clearing and settlement facilities was established. Several local stock exchanges changed over from floor based trading to screen based trading.
Private mutual funds permitted
The Depositories Act had given a legal framework for the establishment of depositories to record ownership deals in book entry form. Dematerialisation of stocks encouraged paperless trading. Companies were required to disclose all material facts and specific risk factors associated with their projects while making public issues.
To reduce the cost of issue, underwriting by the issuer were made optional, subject to conditions. The practice of making preferential allotment of shares at prices unrelated to the prevailing market prices stopped and fresh guidelines were issued by SEBI.
SEBI reconstituted governing boards of the stock exchanges, introduced capital adequacy norms for brokers, and made rules for making client or broker relationship more transparent which included separation of client and broker accounts.
Buy back of shares allowed
The SEBI started insisting on greater corporate disclosures. Steps were taken to improve corporate governance based on the report of a committee.
SEBI issued detailed employee stock option scheme and employee stock purchase scheme for listed companies.
Standard denomination for equity shares of Rs. 10 and Rs. 100 were abolished. Companies given the freedom to issue dematerialised shares in any denomination.
Derivatives trading starts with index options and futures. A system of rolling settlements introduced. SEBI empowered to register and regulate venture capital funds.
The SEBI (Credit Rating Agencies) Regulations, 1999 issued for regulating new credit rating agencies as well as introducing a code of conduct for all credit rating agencies operating in India.
Consolidation imperative
Another aspect of the financial sector reforms in India is the consolidation of existing institutions which is especially applicable to the commercial banks. In India the banks are in huge quantity. First, there is no need for 27 PSBs with branches all over India. A number of them can be merged. The merger of Punjab National Bank and New Bank of India was a difficult one, but the situation is different now. No one expected so many employees to take voluntary retirement from PSBs, which at one time were much sought after jobs. Private sector banks will be self consolidated while co-operative and rural banks will be encouraged for consolidation, and anyway play only a niche role.
In the case of insurance, the Life insurance Corporation of India is a behemoth, while the four public sector general insurance companies will probably move towards consolidation with a bit of nudging. The UTI is yet again a big institution, even though facing difficult times, and most other public sector players are already exiting the mutual fund business. There are a number of small mutual fund players in the private sector, but the business being comparatively new for the private players, it will take some time.
We finally come to convergence in the financial sector, the new buzzword internationally. Hi-tech and the need to meet increasing consumer needs is encouraging convergence, even though it has not always been a success till date. In India organisations such as IDBI, ICICI, HDFC and SBI are already trying to offer various services to the customer under one umbrella. This phenomenon is expected to grow rapidly in the coming years. Where mergers may not be possible, alliances between organisations may be effective. Various forms of bancassurance are being introduced, with the RBI having already come out with detailed guidelines for entry of banks into insurance. The LIC has bought into Corporation Bank in order to spread its insurance distribution network. Both banks and insurance companies have started entering the asset management business, as there is a great deal of synergy among these businesses. The pensions market is expected to open up fresh opportunities for insurance companies and mutual funds.
It is not possible to play the role of the Oracle of Delphi when a vast nation like India is involved. However, a few trends are evident, and the coming decade should be as interesting as the last one.
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