NEWS SUMMARY

RBI INFUSES CASH TO EASE LIQUIDITY

Even as the short-term interest rates continued to remain high in a tight money market, the Reserve Bank of India (RBI) on Friday initiated moves to ease the situation, allowing banks to temporarily hold a slightly smaller quantum of government securities than the mandated 25%. The central bank is also giving banks special access to liquidity windows for the next few days to “provide liquidity comfort arising out of frictional liquidity pressure.”

Banks need to hold only 24% of their net demand and time liabilities in the form of the statutory liquidity ratio (SLR) for two days on October 30 and October 31 as a temporary measure. They can use the cushion to access the RBI’s special liquidity window. Collectively, 1% of the net demand and time liabilities would amount to Rs 45,000 crore.

Among the measures initiated to ease liquidity, a special second liquidity adjustment facility (LAF) has been slated by the apex bank for two days on Friday and Monday. Further, a special two-day repo auction, under the LAF, will be conducted on Saturday. That apart, reverse-repurchase auctions will also be held on all three days to mop up any surplus.

Meanwhile, overnight borrowing rates surged to an intra-day of 12% on Friday, though they closed at 6.5%, slightly lower than Thursday’s closing of 6.8%, with banks borrowing Rs 1,31,260 crore from the RBI’s first LAF window and Rs 350 crore from the second special window. Over the past week, daily borrowings by banks have averaged Rs 80,000 crore. Approximately, Rs 70,000 crore is estimated to have moved out of money market mutual fund schemes over the past month with banks withdrawing the bulk.

“There is some amount of uncertainty on the liquidity position which will become clearer once the money invested in the Coal India IPO is refunded to investors next week. However, at a fundamental level the market estimates the deficit to be around Rs 50,000 crore,” said RVS Sridhar, president, global markets, Axis Bank.

Added Manish Wadhawan, director and head of interest rates, HSBC India, “The system is structurally short by close to Rs 75,000-80,000 crore. However, the IPO money will flow back into the system by early next week.” Last week, the government announced a buy-back of government securities worth Rs 12,000 crore. In the first tranche, RBI has bought Rs 2,148 crore worth of gilts.

The scramble for money has left companies borrowing for three months, with commercial papers forking out 8.4% while banks looking to pick up funds through three-month certificates of deposits (CD) were paying 7.85%. Longer money was more expensive with CDs commanding 9%, up 40 basis points compared with a fortnight back. Volumes in the CD market crossed Rs 23,170 crore compared with the average volume in the last four days of Rs 80,000 crore.

DK Joshi, principal economist at Crisil Ratings, believes that given the current inflationary pressures in the economy, the central bank is not in favour of excess liquidity. “They basically want to maintain a tight leash on the liquidity front. Banks have started lending but then we will have to watch out for the credit growth numbers for the second half of the year,” Joshi observed.

Liquidity has been in short supply since mid-September following outflows for advance tax payments. Coal India’s Rs 15,000-crore IPO hit the market last week and was oversubscribed by almost 15 times. The quota reserved for institutions was subscribed more than 23 times, of which about two-thirds of the subscription came in from foreign institutional investors.

CENTRAL BANKS NARROW INDIA-US GAP

The scene is set for the Indo-US sovereign yields to narrow as respective yields will slide as central banks take more monetary steps to achieve their targets.

In India, the central bank, on its own admission, is near the end of its rate tightening cycle because rates are near ‘normal’. And, in the US, authorities are preparing the ground for another round of money injection or quantitative easing. “When we look at our forecast for both countries, we don’t see anymore widening of the spread from here,” said Indranil Sengupta, chief economist of Bank of America-Merrill Lynch.

“It will be range-bound,” he said. Domestic yields are expected to come down as RBI gradually adopts a softer monetary stance because inflation has softened, economists said. On October 25, the 10-year bond spread was 554 basis points — a huge jump from 385 bps at the beginning of the year.

The India-US gilt spread steepened since January. Now it is will come down as US yields fall on Federal Reserve’s likely quantitative easing by buying back Treasuries to aid the economy’s recovery.

“We are near the peak in Indian bond yields, and they are likely to go down as we are expecting RBI will be less hawkish going forward,” said Vivek Rajpal, India rates strategist, Nomura Financial Advisory.

The Reserve Bank of India, like other central banks in Asia, will not tighten policy rates further in the current climate of weak growth in demand from the advanced countries, he said. With inflation slowing, RBI is likely to soon halt rate hikes or at least introduce a pause in the cycle that began earlier this year and has involved five rounds of hikes so far.

A section of the market albeit a minority expects the pause could be signalled as early as in the next monetary policy review on November 2. That optimism is based on slowing pace of inflation. The key inflation level that would persuade RBI to slow or end rate hikes is 8%. Reaching there may not be far off —in August and September, headline inflation hovered a wee bit above 8.5%, down from 11% in April.

“Although inflation in September (at 8.6%) was marginally higher than expected, it does not change the moderating trajectory of inflation,” Rajpal said in a recent research note.

NO CRR TINKERING AS TIGHTNESS ACUTE

The Reserve Bank of India will leave cash reserve ratio untouched at the November 2 monetary policy meet as liquidity conditions remain tight and loan growth is moderate.

In a poll of economists conducted last week, only two of 20 economists surveyed expected RBI’s policy review to raise cash reserve ration (CRR) by 25 basis points to tighten liquidity further. The overwhelming majority said CRR won’t be revised.

However, one of the two economists, namely Rupa Rege Nitsure, chief economist at Bank of Baroda, on Thursday reversed her expectation from increasing CRR by 25 bps to no change as liquidity conditions have tightened further. An indicator of the tightness comes from borrowing by banks from RBI’s repo window. This month, until Wednesday, banks have borrowed Rs 10.9 lakh crore with Rs 6,040 crore in all of September.

The extreme tightness forced the government to offer buyback of Rs 28,600 crore worth of gilts from investors to infuse liquidity. “I now don’t expect the RBI to hike CRR as the drain from the Coal India IPO has been far longer than expected,” Nitsure said.

Liquidity tightness aggravated after an initial public offering of shares from the country’s biggest miner of coal drained more than the expected Rs 15,000 crore. Investors demanded 15 times more than the number of shares offered by the state-owned miner.

This year, RBI hiked CRR by 100 basis points to rein in liquidity and as part of a plan to exit monetary stimulus measures. The hike follows a 400-basis point CRR cut in four stages between October 2008 and January 2009 to infuse liquidity in response to the global financial crisis. “CRR is more of a permanent tool for liquidity and may not be used to tinker with to resolve short-term problems,” said Madan Sabnavis, chief economist at Care Ratings Ltd.

Investors, however, see existing tightness in liquidity as a transient phase with conditions likely to ease in coming months on accelerated government spending and higher bank deposit mobilisation. One-year overnight indexed swaps that tracks liquidity movement closely, climbed to 25-months-high of 6.72% on October 19 on tightness concern. It, however, failed to top the level as most investors expected cash crunch problems to ease. Nomura Securities’ rate strategist Vivek Rajpal does not expect 1-year OIS touching 7% as liquidity is expected to ease on government spending. Although Bank of Baroda economist Nitsure now expects CRR won’t be hiked on November 2, she expects RBI to hike CRR by 50 bps.

ICICI BANK Q2 NETRISES 18.8% ON CREDIT GROWTH

A robust growth in fee income and lower provisions for bad loans saw ICICI Bank’s net profit rise by 18.8% to Rs1,236 crore for the quarter ended September 30, 2010. The consolidated profit increased by 21.8% to Rs1,395 crore from Rs1,145 crore at the end of September 2009. The consolidated results include earnings for Bank of Rajasthan (BoR), which was acquired by ICICI in the second quarter.

The bank’s close competitors like HDFC Bank and Axis Bank have seen their profits rise by 32.7% to Rs 912.1 crore, and 38.27% to Rs735.14 crore, respectively, in the second quarter driven largely by loan growth. “A 14.6% growth in fee income, increase in net interest margins and lower provisions have lead to a growth in net profit,’’ said Chanda Kochhar, MD and CEO, ICICI Bank.

The bank’s total income fell by 7% to Rs7,887.03 crore at the end of September 2010 as against Rs 8,480.73 crore in the corresponding period last year. Despite a 14.6% increase in fee income of Rs 1,590 crore the bank’s other income has dipped by 13.48% to Rs 1,511.93 crore on account of lower treasury gains.

Advances increased by 5.3% to Rs1,94,201 crore in the second quarter from Rs 1,84,378 crore in the quarter ended June 30, 2010. This growth was largely driven by the acquisition of BoR. “The loan growth is dismal when compared to its peers like HDFC Bank and Axis Bank that have seen a growth of over 30%. It is to be seen how the bank maps its growth plan from here on,’’ said a banking analyst with a Mumbai based brokerage. ``

Most of the growth comes from corporate book, which includes infrastructure loans and working capital funding. The retail book has been stable as the unsecured loans are still being pared,’’ added Kochhar. “In the coming quarter we expect retail loan growth to also pick up. For the year, we expect to see a credit and deposit growth of about 18 to 20%,’’ Kochhar added.

The bank’s total deposits increased by 11% to Rs 2,23,094 crore at the end of September 2010. Current and savings account (CASA) ratio increased to 44% at the end of September 2010 from 36.9% in the corresponding quarter last year. The net interest margin of the bank improved marginally to 2.6% at the end of September 2010 as against 2.5% in the corresponding quarter last year.

MICROSOFT PROFIT JUMPS 51% BEATS WALLSTREET ESTIMATES

High windows,office sales allay fears of iPad biting into business.Microsoft beat Wallsteet expectations with a 51% jump in quatertly profit.Window and office software knocked down fears Apple inc's iPad would take a bitout of its main bisiness.

Despite doubling sales and profit in the last eight years,Microsoft's stock largely languished at the same level.Microsoft's windows7 has sold a record-breaking240 million copies since its launched a year ago and its office suite ofapplications,which debuted this spring,its off to a strong start.An analyst at BGC financial.”people are buying about $10 billion worth of windows and office this quarter.The unit which is investing heavily in an attempt to catch up with search advertising leader GOOGLE and now powers

YAHOO! Web searches has lost $6 billion in last five year.

GLOBAL OUTSOURCING INDUSTRY GROWS 20%

On the outsourcing of it services,the growth in the industries stood 20% in the quarter ended september as compare to the same time period of previous year.According to the latest report of global manegment fir...Everest group increases 89% in it services (ACV) but 50% declined in ACV BPO's deal.Quite in contrast the April-June quarter has witnessed a 33% increase in the BPO segment and a marginal decline in the contract values of ITO on the yearly basis. Analysing Indian share report,they observed that the indian buyer s contribute 5% of the total transactions globally.The indian service providers cater to 60% of the global IT market.

PM,WEN THAW CHINA CHILL,SEAL INDIA VISIT

Manmohan singh on friday discussed all the core difficulty issues,including the boundary isputes.visas to indian citizens from jammu and kashmir and imbalances in bilateral trade b/w india and china with his chinese counterpart Wen Jiabao. Both two prime minister decided to be sensitive to each other and directed their officials and special representative to work towards an early resolution.

By: Shikha suman ( Sec:I )

Shashank singh ( Sec:I )