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Markets depend on govt reaction to inflation
31 Mar, 2008, 0758 hrs IST......................


The domestic market’s renewed strength may be put to test this week, as traders are expected to book profits on further upside. Experts believe that traders may look to cash in fearing that the sharp rise in India’s inflation could delay official interest rate cuts and slow economic growth.

A sharp slowdown in India’s economic growth is the last thing investors would want, as the founding stone of its five-year bull run has been the galloping economic growth.

Last week, the Sensex rose 9%, posting its highest weekly gain in five months. It dodged the weak trend in the US market on short-covering and value purchases in hammered shares, especially in mid-and small-caps. Fund managers and analysts are reluctant to stick their neck out and conclude that the rally may extend, unless signs of more foreign institutional inflow is seen.

Reasons Nomura International Asia Pacific strategist Sean Darby in his latest note, “The amount of ‘free liquidity’ available for financial assets, including equities, is likely to diminish, as banks undergo a balance-sheet recession and curtail lending in order to preserve cash.”

Foreign banks and institutions have taken advantage of the excess money supply, globally, and borrowed in places with benign interest rates to invest in equity markets with high returns, including India. But with the US credit market turmoil eroding credit-related assets of most of these banks, they have liquidated a lot of their equity holdings in emerging markets like India and Russia.

“We doubt that changes to the Fed operation of credit markets will allow financial firms to releverage (borrow and invest in financial markets, including equities). Indeed, bank balance sheets will be forced to deleverage (withdraw borrowed money from assets) over the forthcoming quarters,” the note added.

Foreign institutions, in the past five sessions, net-bought Indian shares worth Rs 3,195 crore, one of the highest in a week since January. This week, investors will keep a close watch on the response of the government and RBI to the rise in inflation to a 14-month high.

Inflation rose 6.68% in the year to March 15, higher than the previous week’s 5.92% and market expectations of 6%. This
level is significantly higher than the RBI’s comfort level of 5%. The jump in inflation followed statements from finance minister P Chidambaram that he was prepared to forgo bit of growth to control inflation.

While the higher-than-expected inflation has dashed the slightest of hopes of rate cuts in the immediate future, it has increased the probability of further tightening of money supply in the banking system, which is expected to further curb consumption. Investors see a reversal in the interest rate cycle to be the next major positive trigger for the market.

“We expect a clampdown by the government on all inflationary commodities, especially food and metal products, through excise and customs duty cuts, increasing export prices, and forced price cuts,” said Goldman Sachs, in its note economic research note.

Cabinet Committee on Prices to take stock of inflation

New Delhi, March 31: Concerned over spiraling inflation the Cabinet Committee on Prices will meet on Monday to take stock of rising prices.

"The Cabinet Committee on prices will meet on Monday," Finance Secretary D Subbarao told reporters on the sidelines of a seminar on proposed amendments to `securities contracts (regulations) rules` here on Sunday.

He was responding to a query whether any fiscal step to control rising prices will be forthcoming.

Earlier addressing the seminar, Subbarao said yesterday`s inflation numbers were quite disturbing and he attributed the reason behind them partly to high global commodity prices.

Inflation rate for the week ended March 15 rose to 6.68 per cent, while the Reserve Bank aims to limit it to an average five per cent for the current fiscal.

Commodity prices are rising globally despite fears of recession in the US, he said at the seminar organised by the Institute of Company Secretaries of India.

"Generally, we expect commodity prices will go down when there is recession in the developed countries. If you look at past recession in the US, there is depression in commodity prices. But, this time there is elevation in commodity prices together with recession in the US," he said.

Meanwhile, another high-level meeting will be held on Wednesday to consider measures for maintaining adequate supply line in the face of global pressure on prices, according to Commerce Secretary G K Pillai.

He had said yesterday that the empowered group of ministers on prices, headed by External Affairs Minister Pranab Mukherjee, would meet on April 2 to review prices of rice, wheat and procurement of edible oil.

2:08 PM - European markets have opened lower too. The market back home is off the day's lows, but key indices are still trading below important levels. Sensex is currently at 15,783, down 587 points from the previous close. Nifty is at 4785, down 156 points. Market breadth is weak, with 511 advances against 714 declines on the NSE

4:28 pm - europe stock market seems turning green.

Morgan Stanley scales down Indian economic growth forecast to 7.1%

Mumbai, March 31: Morgan Stanley said on Monday that it had cut its forecast for India`s economic growth to 7.1% for the fiscal year starting in April, after the government said last week it was prepared to give up growth to fight inflation. This would be the slowest economic expansion in Asia`s third-largest economy in six years, after a sizzling 9.6% rise in 2006-07 and a central bank estimate of 8.5% in 2007-08.

Annual inflation in India struck 6.68% in mid-March, the highest since a two-year peak of 6.69% in January last year, mainly due to a jump in world prices of food, oil and metals.

"This has increased the risk that policymakers will initiate fresh measures which will further compress the growth trend," Chetan Ahya and Tanvee Gupta, economists at the US investment bank, wrote in a note.

Morgan Stanley, which had earlier projected India`s growth at 7.4% in 2008-09, said it had also lowered its forecast for 2009-10 to 7.6% from 7.8%.

The reductions follow cuts by other research houses, including JPMorgan and HSBC.

"Increased risk aversion in the global financial markets and delay in the much-needed policy rate cuts due to inflation`s rise, will affect India`s growth outlook," Morgan Stanley said.

"We believe that, in addition to weak consumption and export growth, now business investment will also start slowing over the next six months," it said. Export growth in rupee terms has slowed to an average 7.9% over the past six months from 23.3% in the 12 months ended March 2007, it said.

Industrial production grew 5.3% in January, sharply slower than an average of 8.3% in the December quarter and a peak of 15.8% in November 2006, it said.

"In our view, weaker sales growth when capital charge for new capacity is increasing will hurt corporate profitability and sentiment," it said.

Gov't Official Says HUD Chief Leaving, No Reason Disclosed, Announcement Expected This Morning


WASHINGTON (AP) -- Housing and Urban Development Secretary Alphonso Jackson is resigning Monday, according to a government official.
Jackson is under criminal investigation at the same time the housing industry is in a crisis so serious that it has imperiled the nation's credit markets, placing the country on the brink of what some economists predict will be a major recession.
The department has scheduled a 10 a.m. announcement Monday. The government official, who spoke on condition of anonymity ahead of the announcement, did not disclose the reason for Jackson's resignation.

Jackson's plans to resign were first reported on the Web site of the Wall Street Journal.

A week ago, Democratic Sens. Patty Murray of Washington state and Christopher Dodd of Connecticut said that Jackson's problems represented a "worsening distraction" at HUD at a time when the nation needs a credible housing secretary who is beyond suspicion.

Jackson, 62, has been fending off allegations of cronyism and favoritism involving HUD contractors for the past two years.

The FBI has been examining the ties between Jackson and a friend who was paid $392,000 by Jackson's department as a construction manager in New Orleans after Hurricane Katrina.

When the existence of the criminal probe was revealed in October, the White House said President Bush supports Jackson and that Jackson "expects that the investigation will clearly establish that he did nothing improper or unethical."

In another controversy, the housing authority in Philadelphia has filed a lawsuit alleging that Jackson tried to punish the agency for nixing a deal involving music-producer-turned-developer Kenny Gamble, a friend of Jackson.

At a congressional hearing this month, Jackson repeatedly refused to answer questions about the Philadelphia redevelopment deal.

Last year, the inspector general at Jackson's department found what it called "some problematic instances" involving HUD contracts and grants, including Jackson's opposition to money for a contractor whose executives donated exclusively to Democratic candidates.

The HUD IG found that Jackson blocked the money "for a significant period of time." Jackson blamed his own aides for the delay.

In 2006, Jackson triggered the IG inquiry when he said publicly that he revoked a contract because the applicant who thanked him said he did not like President Bush.

Jackson later told the IG's investigators that "I lied" when he made the remark about taking back the contract.

Associated Press Writer Pete Yost also contributed to this report

RBI likely to raise CRR to curb inflation

New Delhi, March 31: The Reserve Bank is likely to tighten money supply in its annual credit policy on April 29 to rein in inflation, but the move may not push interest rates up because of huge liquidity in the banking system.

With inflation over a year high of 6.68 percent, there is widespread expectation of RBI increasing cash reserve ratio (CRR), amount of mandatory deposits each bank has to keep with the Central Bank.

There is a high probability of hike in CRR and further rupee appreciation in the near term, standard chartered said in a report.

But, deprecation is likely in the Indian currency to 42.50 per dollar level by September, it said.

Risks of hikes in CRR have increased substantially, it said, adding that though growth has moderated in the recent months and tight money supply can slow it further, the hastened pace of increase in inflation in the backdrop of moderating growth raises concern about price stability.

"Hence the central bank can resort to a CRR hike (perhaps a 50 basis points hike from the current 7.5 per cent) as a last resort if inflation continues to fly," it said.

Oriental bank of commerce Executive Director Allen C A Perriera said the situation is quite complex for the RBI. It is difficult to say what monetary initiative would come to sooth inflationary expectations.

However, interest rates seem to be stable in the short term, he said.

According to another senior banker, it would be a tough call for the RBI to raise interest rates in the backdrop of falling rates globally.

Any upward rate revision would lead to inflow of capital by virtue of differential rates, he said.

India`s external debt touches USD 201.4 billion

New Delhi, March 31: With spurt in overseas borrowings by corporates and rupee appreciation against major currencies, India`s external debt has gone up by 31.8 billion dollars in first nine months of the fiscal to 201.4 billion dollars (about Rs 7,94,017 crore).

It implies that with total population of about 110 crore, per capita debt on each Indian stood at Rs 7,218.

According to a Finance Ministry statement, the external debt stood at 169.7 billion dollars at end-March 2007 and increased by 10.3 billion dollars in the third quarter this fiscal.

In fact, the rupee appreciation led to rise in external debt by USD 6 billion dollars during April-December 2007.

The long term debt rose by 6.3 billion dollars to 166.2 billion dollars, while short-term debt increased by 4 billion dollars to 35.2 billion dollars over the third quarter.

Amongst the components of long-term debt, which accounted for 82.6 per cent of the total debt, commercial borrowings increased by USD 4.9 billion (9.4 per cent) to 57 billion dollars during the nine months.

The share of government debt in total external debt stood at 26.3 per cent or 53 billion dollars, while private debt was 73.7 per cent or 148.5 billion dollars.

The share of US dollar in the external debt portfolio continued to show an increasing trend going up to 54.5 per cent at end-December 2007 from 52 per cent at end-March 2007.

While NRI deposits declined by 1.5 per cent at 43 billion dollars, multilateral debt, bilateral debt and export credit increased marginally to reach 37.9 billion dollars, 17.3 billion dollars and 8.9 billion dollars respectively at end-December 2007

SEBI for ban on buy/sell tips on subjective information

Mumbai, March 31: Market regulator SEBI today proposed to ban brokers from recommending shares to investors based on subjective and arbitrary information, as part of the exercise to guard against insider trading.

"Trading members shall not recommend to their clients securities or derivative contracts on such securities in a concentrated manner, which represents a subjective or arbitrary supply of information", said SEBI's draft policy for improvement in sales practice by the members of stock exchanges.

The guidelines, on which SEBI has invited comments from public by April 15, further said that investors would be required to have a minimum net worth of Rs 5 lakhs for trading in derivative segments.

Brokers, it added, "shall not executive transactions for own account in securities ahead of making recommendations to their clients in such securities."

Brokers would also be prohibited from executing contracts which are "not explicitly authorised" by their clients.

Paulson Proposes Financial Overhaul
Monday March 31, 11:07 am ET
Administration Unveils Sweeping Plan to Overhaul Financial Regulation

WASHINGTON (AP) -- The Bush administration Monday proposed the most far-ranging overhaul of the financial regulatory system since the stock market crash of 1929 and the ensuing Great Depression.
The plan would change how the government regulates thousands of businesses from the nation's biggest banks and investment houses down to the local insurance agent and mortgage broker.
Treasury Secretary Henry Paulson unveiled the 218-page plan in a speech in Treasury's ornate Cash Room. He declared that a strong financial system was important not just for Wall Street but also for working Americans.

The administration's plan was already drawing criticism from Democrats that it does not go far enough to deal with abuses in mortgage lending and securities trading that were exposed by the current credit crisis.

The plan, which would require congressional approval for its biggest changes, seeks to trim a hodge-podge collection of overlapping jurisdictions that date back to the Civil War.

It would give the Federal Reserve more power to protect the stability of the entire financial system while merging day-to-day bank supervision into one agency, down from five at present.

It also would create one super agency in charge of business conduct and consumer protection, performing many of the functions of the current Securities and Exchange Commission.

It would propose eliminating the Office of Thrift Supervision and the Commodity Futures Trading Commission, merging their functions into other agencies.

It would ask Congress to establish a federal Mortgage Origination Commission to set recommended minimum licensing standards for mortgage brokers, many of whom now operate outside of federal regulation, and it would also take a first step toward federal regulation of the insurance industry by asking Congress to establish an Office of Insurance Oversight inside the Treasury Department.

Paulson acknowledged in his remarks that most of the changes will not occur until after a lengthy debate in Congress, leaving it to the next administration to deal with the biggest changes proposed by the report. He also said the Bush administration's focus would remain on getting through the current severe credit crisis, which has roiled financial markets since last August.

President Bush's aides said Monday after the announcement that Bush was happy to let Paulson be the lead figure on this issue.

"The president's point of view is that he trusts Secretary Paulson to put forward what he thinks is a constructive plan," White House press secretary Dana Perino told reporters traveling with Bush aboard Air Force One to Ukraine on Monday.

She said administration officials will work with lawmakers in hopes of having constructive conversations. Asked if Bush's goal is to get the overhaul approved before he leaves office, Perino said: "We'll have to see. It's a big attempt."

"Secretary Paulson has been working on this package for about a year, so it's not like pulling a rabbit out a hat," Perino added. "It's very constructive, deliberate thinking amongst the best minds in economics."

For his part, Paulson rejected Democratic charges that it was lax regulation of mortgage brokers and the financial industry that had led to the current problems.

"I do not believe it is fair or accurate to blame our regulatory structure for the current market turmoil," he said. "I am not suggesting that more regulation is the answer or even that more effective regulation can prevent the periods of financial market stress that seem to occur every five to 10 years."

Banking groups raised strong objections to the plan while other industry groups had mixed reactions.

"Dismantling the thrift charter and crippling state banking charters will weaken banking in America," said Edward Yingling, president of the American Bankers Association.

In Congress, House Financial Services Committee Chairman Barney Frank, who is working on his own regulatory revamp, called Paulson's proposal a "constructive step forward" but said it wouldn't give the Federal Reserve enough authority to carry out its expanded job to police the stability of the entire financial system.

Many Democrats said that Congress' first priority should be to deal with the current mortgage crisis that is threatening millions of Americans with the loss of their homes and that an extensive debate on a regulatory overhaul should not occur until a new president is in office next year.

Senate Banking Committee Chairman Christopher Dodd, D-Conn., said in an appearance on CBS' "Early Show" that it was not a failure of the regulatory scheme but "a failure of leadership" that led to the current crisis.

The proposed overhaul would be the most extensive since the current regulatory system was created in response to the 1929 stock market crash and the Great Depression.

It comes at a time when the financial system faces its most severe credit crisis in two decades, one that has resulted in billions of dollars of losses for big banks and investment houses and the near-collapse of Bear Stearns, the country's fifth-largest investment bank.

The rising tide of bad debt has made it harder for consumers and businesses to get credit, further weighing on an economy struggling with a prolonged housing slump and soaring energy prices. Many economists believe the country is already in a recession.