FROM AN EXPERIENCE
Hesitation
You are watching a stock that has all the signals you
look for in an opportunity. The proper point to enter comes, but you wait. You
second guess the opportunity and don’t buy the stock. Or, you bid for the stock
at a price that is not likely to get filled if the opportunity does pan out the
way you anticipate it will. As a result, you get left behind while the market
pushes the stock higher. A short while after the initial entry signal, when the
stock has made a decent gain, you decide to finally enter the trade. After all,
the market has proven your analysis correct, so you must be smart, and right!
Not long after you enter, the stock turns south and you end up with a losing
trade. If only you had bought when you first thought about it.
The Solution
This is really just a confidence issue. You are either
not confident in your ability to analyze stocks, or you are not confident in
the methodology that you are using to pick trades. Therefore, you have to
research your method so that you have the confidence that it works. Then, you
have to start small, making trades that have a potential loss that you are
comfortable with. As you gain confidence in your method and your ability,
increase the trade size. With your new found confidence, stand in a crowded
room and scream, “I am great!” Well, maybe don’t carry it that far.
Paul Tudor Jones Quotes on Trader Psychology:
“Every day I assume every position I have is wrong.”
“Losers average losers.”
“Trading is very competitive and you have to be able
to handle getting your butt kicked.”
That cotton trade was almost the deal breaker for me.
It was at that point that I said, ‘Mr. Stupid, why risk everything on one
trade? Why not make your life a pursuit of happiness rather than pain?
(to be contd)
FUNDAMENTAL
This Week’s Market Round Up: Market gains trimmed by
CAG report...
Sensex closes at 17,783.21, down 0.52%; Nifty closes
at 5,386.70, up 0.38%.
The Comptroller and Auditor General report on the
coal, power and aviation sectors highlighted alleged losses borne by the
exchequer, with the loss from coal block allocation during the period of
2004-2009 being the most significant at INR 1.86 lakh crore.
With the Q1FY13 result season having come to an end
the adjusted earnings growth for Q1FY13 stood at 12.4% YoY.
Global growth concerns still remain prevalent as the
Eurozone’s manufacturing PMI contracted for a seventh straight month thus
putting the Eurozone on track for its second straight recession in 3 years.
TODAY's BIG MARKET MOVEMENT EVENTS
Here’s what you need to know.
South Korea starts things off at 5:00 p.m. on Sunday evening with
consumer confidence. There is no consensus for the August report, which last
read at 100.
The U.K.’s
Hometrack Housing Survey hits at 7:00 p.m.
Chinese industrial profits follow at 9:30.
Announcements go quiet until 2:00 a.m. on Monday
morning, when German import prices and Finnish consumer sentiment is announced.
Import prices are expected to increase 0.9 percent in July from a month earlier,
while confidence in Finland
improves 20 basis points to 0.3 in August.
Dutch producer confidence follows at 3:30 a.m., with
expectations for a marginal improvement to -5.0 in August.
It’s back to Germany at 4:00 a.m. with the IFO
Business Climate Index. Economists forecast the composite index declined in
August to 102.7 as both current conditions and expectations for future business
fall.
Taiwan’s Coincident Index will also be released at 4:00 a.m.
There is no consensus for the report.
Attention shifts to the U.S.
at 10:00 a.m. with the Federal Reserve Bank of Dallas’ monthly manufacturing report. Expectations
are for a slight improvement in the headline rate, to -8. A reading below zero
indicates contraction.
Israel’s central bank will announce any changes to monetary
policy at 10:30 a.m. Expectations are for the country’s key benchmark rate to
remain at 2.25 percent.
Closing out the day at 12:00 p.m. is a reading of the
number of people looking for a job in France. Consensus is for a 22,000 increase
to 2.96 million.
Maintain positive stance...
At the current level of 17,783.21, the Sensex trades
at a PE of 15.75x FY12 earnings and 13.41x FY13E earnings estimate.
At 13.41x, we trade below average valuations of 15.4x
1 year forward earnings.
Despite several expectations, the government is yet to
move on any kind of reform / policy action, we still remain hopeful though.
SECTORAL OUTLOOK
Stay with companies robust business models...
RBI in its latest policy kept rates unchanged as it
was concerned about rising inflation.
GDP growth has weakened to 5.3% in Q4FY12, while IIP
growth for the last 6 months has averaged 1.3%
We advice investors to play quality interest rate
sensitives like Banks and Capital Goods (Yes Bank, City Union Bank and Larsen
and Toubro).
At the same time consumption and agri stories (GSK
Consumer, Bajaj Auto, Coromandel Fertiliser) would continue to do well.
We recommend reducing exposure on global cyclicals
like Tata Steel as concerns from China slowdown intensify.
TECHNICAL
Round-up: Profit Booking...
Last week Nifty opened on a positive note and breached
the mentioned resistance level of 5400. Nifty further continued its upside
journey and made a high of 5448. On higher levels profit booking was witnessed
and finally Nifty closed at 5386 with a marginal gain of 0.44% W-o-W.
Nifty Outlook: Support at 5340
EOD CHART
On the daily chart Nifty had already retraced 50% of
the recent rally from 5294 to 5448. Thus now in intraday Nifty has strong
support at 5340 and if this level is breach then we may see some correction.
However as the main trend is still positive, thus we believe that any ongoing
correction should be used as a buying opportunity.
Nifty is still trading above the neckline of Inverse
Head and Shoulder pattern as well as continuously making higher top and higher
bottom. Thus going forward we still believe that Nifty is still looking strong
and we maintain our upside target of 5500/5550.
Downside Nifty has a strong support at 5340.
POSITIVES & NEGATIVES
POSITIVES
1) New Home Sales in July at 372k were a touch above
estimates and the most since Apr ’10, albeit still 73% below its record highs.
2) Short term positive only, Der Spiegel on Sunday reports the ECB is
considering establishing caps on interest rates for government bonds. The
similar story gets somewhat regurgitated today by reuters who said the ECB is
discussing yield bands. Bottom line, I’m sure the ECB is talking about
everything with the Germans staring intensely over their shoulder.
NEGATIVES
1) July Durable Goods Orders weak ex volatile
transports with non defense capital goods ex transports down for 4th month in
past 5 and lower by 6.2% y/o/y.
2) Initial Jobless Claims total 372k, 7k more than
expected.
3) July Existing Home Sales a bit light relative to
est but months supply falls to 6.4 from 6.5.
4) After 5 weeks in a row of declines of a total of
almost 9%, mortgage apps to buy a home rise only .9% on the week and refi’s
fall 9.2% to a 6 week low.
5) While somewhat ‘stale’ as Bullard said, the FOMC
minutes say many Fed participants want more QE. I keep putting this in the
negative camp because I believe the inflation it engenders (CRB index just shy
of highest since early April) won’t be offset by economic growth (squeezing corporate
margins) and wage growth (squeezing the average person) .
6) HSBC preliminary mfr’g PMI at 47.8 is lowest since
Nov ’11 and below 50 for 10th straight month.
7) Shanghai
index closes at lowest level since Mar ’09.
Euro zone
mfr’g and services composite index little changed but at 46.6 is below 50 for
11 month in past 12.
LEVELS OF NIFTY FUTURES - AUG 27
NEARBY RESISTANCE NOW @ 5451
NEARBY SUPPORT NOW @ 5371
Day’s Resistance @ 5416-33-51
Day’s
Supports @ 5404-5373
If cuts & sustains above 5416 for 5 minutes
with (good bulls) volume see a sure hike upto 5432-41-50
Suppose if cuts & trades below 5404 for 5
minutes with (good bear volume) see an intraday slide upto 5404
If trades below 5404 for 5 minutes see more
slide upto 5378
WHAT TO SHORT TODAY...?
Not a big thing in shorting a stock - But one should know when (time) and where (price) to sell a stock and book the profits in intraday - otherwise you would loose
BEML
JINDALSTEL
BANKINDIA
PHOENIXLTD
HSIL
BUT WHEN & WHERE?
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JOIN US FOR MORE DETAILS EVERYDAY
FDI INFLOWS PLUNGE
Foreign direct investment (FDI) in India plunged by
over 78% in June, the third straight monthly fall, to $1.24 billion, from $5.65
billion in the year-ago period, reflecting the impact of slowing global
economy.
Experts have attributed the contraction in foreign
inflows to global and domestic economic problems and asked the government to
push big-ticket reforms to restore the confidence of global investors.
“The numbers are bad. Now the government should
immediately take decisions on issues like allowing FDI in multi-brand retail
and permitting foreign airlines to buy stake in domestic carriers. These
measures would help in attracting more FDI,” Ficci Secretary General Rajiv
Kumar said.
The decline in FDI comes at a time when India’s
economic growth slipped to nine-year low of 6.5% in 2011-12. The growth in the
January-March quarter was merely 5.3%.
During April-June 2012, too, FDI in India declined
by 67% year-on-year to $4.42 billion, a senior official in the Department of
Industrial Policy and Promotion (DIPP) told PTI.
Foreign inflows in April and May dipped to $1.85
billion and $1.32 billion compared to $3.12 billion and $4.66 billion,
respectively, a year ago.
Contraction in FDI will keep the balance of payments
under pressure and could also impact the rupee. If the prices of commodity and
oil increases globally, a weaker domestic currency will add to inflationary
pressures.
The sectors which received large FDI inflows in May
include services ($1.07 billion), pharmaceuticals ($465 million), construction
($348 million) and power ($145 million).
In June 2012, India
received the highest FDI from Mauritius
($1.43 billion) followed by the Netherlands
($543 million), the UK ($418
million), Singapore ($403
million) and Cyprus
($203 million), the official added.
The inflows had aggregated to $36.50 billion in
2011-12 against $19.42 billion in 2010-11 and $25.83 billion in 2009-10.
50% OF FII INFLOWS UNEXPLAINED
Despite the policy paralysis and slowdown in the
economy, FIIs have invested their highest ever amount on a year-to-date basis
in 2012. According to a report by BNP Paribas titled ‘Solving the FII riddle’
authored by Manish Raychaudhuri and Gautam Mehta net FII investments till early
August 2012 in the country stood at $10.7 billion. This figure is higher even
in bull run of 2007 and liquidity driven rally of 2010.
At a time when conspiracy theory of the source of FII
investments in the country are flying thick and thin, BNP Paribas report throws
light on the origin of these funds.
Following are the salient points of the report
More than 50 per cent of the funds have come from Asia ex-Japan (AEJ) funds and Global Emerging (GEM)
market funds
India-dedicated FII funds have been sellers
ETFs have contributed only three per cent to the
inflows
Almost half the funds have come from ‘other’ or
unexplained sources – comprising of sovereign wealth funds, sector funds, hedge
funds. This classification has lent credence to the oft repeated conspiracy
theory that a lot of FII flows are Indian money disguised as FII money. Such a
large quantum of money coming into the country from a non-regular source of
money is adding fuel to the fire.
India’s share of FII into Asia has been 62 per cent which
is much higher than the historical norm of 25 per cent, reflecting their
preference for India.
Both AEJ and GEM funds are investing significantly
over their benchmark weights.
While GEM funds have received considerable inflows
($15.3 billion) in 2012, AEJ funds have lost money and despite such a loss of
funds they are the largest investors in India among FIIs
FII buying has been in relative defensive stocks. Top
15 stocks account for 65 per cent of their buying.
RBI’s ANNUAL REPORT (2011-12) – FULL REPORT
The Reserve Bank of India today released its Annual
Report for 2011-12, a statutory Report of the Central Board of the Reserve
Bank. It covers (i) the assessment of the macroeconomic performance during
2011-12 and the prospects for 2012-13, and (ii) the working and operations of
the Reserve Bank and its financial accounts for the year 2011-12. Highlights of
the Report:
Inflation slowed in response to past monetary
tightening and growth deceleration in 2011-12. Growth during 2012-13 is expected
to stay below trend at around the same level as in the previous year. Inflation
is likely to remain sticky around 7 per cent with upside risks emanating from a
deficient monsoon.
Concurrently, the risk of twin deficits has
accentuated causing concern for macro-financial stability. With limited fiscal
and monetary space available to provide direct stimulus to growth without
stoking inflation, an expenditure switching strategy is needed that reduces
government’s revenue spending by cutting subsidies with a step up in capital
expenditure to crowd-in private investment.
Over the medium-term, addressing issues impeding
infrastructure investment have become important for stepping up India’s growth
potential which has been dented post-crisis. While the Reserve Bank is focusing
on price stability and sustainable growth over the medium-term keeping in view
its welfare implications, the human face of its financial policy can be
buttressed with a greater thrust on effective financial inclusion.
Assessment for 2011-12
Growth decelerated in 2011-12 to below the economy’s
potential due to domestic and global factors. Inflation persistence and
widening twin deficits constrained the Reserve Bank’s ability for
counter-cyclical measures. Going forward, the priority should be to bring down
the twin deficits to support potential growth even if it means a slower pace of
recovery in the short run (para I.1 and para I.6).
After two years, high inflation moderated in the later
part of 2011-12 in response to past monetary tightening and growth
deceleration. High inflation had adverse consequences on welfare and on saving
and investment, particularly household saving in financial assets (para I.2).
The most serious consequence of inflation is its
adverse distributional impact on the poor, people without social security and
pensioners. As growth slowed down, in part due to high inflation, it further
reduced the welfare of the common man through adverse impact on employment and
incomes (para I.3).
In view of the adverse welfare consequences and its
impact on growth, the Reserve Bank combated high inflation through monetary
tightening. Several other factors combined with monetary tightening caused
growth to slow down (para I.4).
Interest rates increased during 2011-12 and may have
impacted investment, but they are clearly not the primary reason for downturn.
Computation from accounts-level data shows that real (net of inflation)
Weighted Average Lending Rates (WALR) was 3.8 per cent in 2011-12, lower than
the average of about 7.0 per cent in the pre-crisis period of 2003-04 to
2007-08 when investment had boomed (para I.10-I.11).
Fiscal consolidation is needed to sustain growth and
reduce inflation. Subsidies have risen from 1.3 per cent of GDP in 2005-06 to
2.4 per cent of GDP in 2011-12. Revenue constraints make it impossible to
finance them in a sustainable manner. Resource mobilisation has been
insufficient and there is a need to push tax reforms (para I.17-23).
Deterioration in asset quality of banks emerged as a
concern during 2011-12, especially in case of public sector banks. While some
of it was the result of economic slowdown, sector-specific issues needs to be
resolved. With increasing restructuring there is a need for doing way with
regulatory forbearance and introducing a principle of higher amount of
promoters’ sacrifice to bring about lending discipline (para I.24-I.28).
Prospects for 2012-13
Growth outlook
Growth in 2012-13 is expected to stay below trend at
around the previous year’s level of 6.5 per cent. Growth outlook remains weak
as factors that slowed down growth in the previous year persist and show no
signs of getting resolved. The government in August 2012 promised to take
several steps to address macro-economic weakness. As these steps materialise,
growth could gradually start to improve later this year and trend growth could
be restored next year (para I.29-30).
Newer uncertainties for growth have emerged from
unsatisfactory monsoon so far, which is likely to result in contraction in
foodgrains output in 2012-13 (para I.32).
In absence of signs of global conditions improving,
the burden of adjustment would have to be borne by domestic policies.
Structural impediments impacting business confidence needs to be addressed
immediately, especially in mining and infrastructure sector. Fast-tracking of
infrastructure projects will help boost investment (para I.34).
With limited fiscal and monetary space available to
provide a direct stimulus, an expenditure-switching policy is needed that
reduces revenue spending by cutting subsidies and using the resources so
released to step up public capital expenditures. This would provide some space
for monetary policy, but lower interest rates alone are unlikely to jumpstart
investment cycle (para I.34).
Inflation outlook
Inflation is likely to remain sticky at around 7 per
cent with upside risks emanating from deficient monsoon, large upward revision
in Minimum Support Prices (MSP) on the back of cost escalation and exchange
rate depreciation during Q1 of 2012-13 (para I.34).
Latest assessment suggests that there could be
considerable upside pressure on price of pulses. The prevailing drought in
parts of US, Eurasia and Australia
may add to price pressures on food in global markets. Other upside risks arise
from suppressed inflation in energy prices of diesel, coal and electricity
(para I.36-I.37).
While inflation risks in 2012-13 are on the upside,
there is a need to distinguish between temporary and permanent supply shocks.
If left unchecked, persistent inflation could unhinge inflation expectations.
Furthermore, demand pressures emanating from high rural wages and growing
corporate staff costs would need to be factored in. A close vigil on inflation
would be necessary during 2012-13 to prevent reemergence of inflationary
pressures (para I.39).
Need to address twin deficits to contain risk to
macro-financial stability
The emergence of twin deficits during 2011-12 was a
major cause of macro-economic weakness. Current assessment suggests that they
are likely to stay wide in 2012-13 in absence of sufficient policy response and
no improvement in business cycle conditions (para I.40).
With growth remaining slow, budgetary targets are at
risk. Shortfall in indirect tax revenue, decline in corporate earnings,
difficulties with disinvestment and expenditure overshooting due to
under-provision of petroleum subsidies are likely to put fiscal position under
pressure (para I.41).
Consequently, some level of fiscal slippage is
unavoidable. Estimates suggest that if no revision is made in administered fuel
prices, this slippage may turn out to be about 0.4 per cent of GDP at the
current level of crude prices on this account alone. Such slippage could
crowd-out private investment at a time when reviving investment, both public
and private, is critical. This could through higher aggregate demand then spill
over to higher inflation and wider current account deficit (CAD) (para I.41).
CAD risks are maintained and overall CAD-GDP ratio may
not correct significantly in 2012-13. Even though merchandise trade balance
narrowed in Q1 of 2012-13, net services exports were 22 per cent lower on a
year-on-year basis. Software exports are likely to moderate as global IT
spending is expected to be lower (para I.46).
With a lower growth, the sustainable level of CAD is
now assessed at around 2.5 per cent of GDP. It is important not only to focus
on financing of CAD, but also on compressing it to lower manageable levels
(para I.47).
In recent period, CAD has been managed by improving
debt inflows. However, this has long-term costs for debt sustainability and
increase refinancing risk over time. Therefore, there is urgent need to step-up
non-debt creating inflows, especially in form of Foreign Direct Investment
(FDI) (para I.47).
Medium-term Challenges for the Indian Economy
Key to improving growth lies in addressing medium-term
challenges. Three illustrative medium-term challenges highlighted in the Report
are:
(i) Preserving India’s growth story through
revival of infrastructure investments.
India’s growth story in recent past has been substantially
driven by large infrastructure investments. However, new investments have
slowed down and existing investments are at risk. Elongated gestation periods
and input supply shortages have affected the viability of projects going
on-stream (para I.48) .
The Reserve Bank’s collation from banks and financial
institutions show that envisaged total fixed investments in new projects that
were sanctioned financial assistance during 2011-12 dropped by 46 per cent to
about `2.1 trillion. This drop was led by infrastructure and metals. Envisaged
investment in infrastructure declined by 52 per cent to `1 trillion with power
and telecom accounting for most of this fall (para I.49).
Road projects have also slowed down due to problems
relating to land acquisition, legal and environmental clearances as also
tightening of financial conditions. Road tendering activity has suffered
significantly in Q1 of 2012-13 after a record tendering by NHAI in 2011-12
(para I.53).
Investment climate in power sector has been affected
by State Electricity Board (SEB) losses and coal supply shortages. As much as
54GW of power capacity has been created during 11th Plan and another 60-75 GW
of capacity may be planned during 12th Plan. A large part of this capacity is
facing coal linkage issue. All pending issues in respect of proposed new Fuel
Supply agreements (FSAs) and coal block auction need to be resolved without any
further delay (para I.51).
There is need to make doing business easy by adopting
models like the one in Singapore, where multiple agencies/ Ministries sit
together to quickly give its decision clearing investment projects. Businesses
also need to re-jig their strategies and aim at operating in a more competitive
environment earning normal profits within the legal and environmental framework
and not try to exploit rules and weak regulation (para I.52).
(ii) Strengthening banking soundness through Basel
III.
The Reserve Bank has issued guidelines for
implementation of Basel III capital regulation to be completed in a phased
manner by March 31, 2018. In these, the minimum capital requirements have been
kept one percentage above the minimum suggested by the Basel Committee (para
I.59).
Broad estimates suggest that for full implementation
of Basel III, public sector banks would require common equity to the tune of
`1.4-1.5 trillion on top of internal accruals, in addition to `2.65-2.75
trillion in form of non-equity capital. Major private sector banks would
require common equity to the tune of `200-250 billion on top of internal
accruals, in addition to `500-600 billion in form of non-equity capital (para
I.62).
There have been some arguments whether the regulatory
regime could be softer for public sector banks given the backstop that they
enjoy with the government as the principal owner and stakeholder in such banks.
From a regulatory standpoint, this would be detrimental for the financial
system. The Reserve Bank is committed towards developing level playing field
for all banks irrespective of the ownership (para I.63).
(iii) Financial inclusion, led by the Reserve Bank
policies with a human face.
To impart a human face to the bank lending policies,
the Reserve Bank has supported directed lending route as an integral part of
its bank lending policies. As part thereof, banks priority sector lending
target for foreign banks with 20 or more branches has been raised from 32 per
cent to 40 per cent (para I.66).
Notwithstanding the efforts, a recent World Bank study
has revealed the dismal state of financial inclusion world-wide and even more
so in India.
India
scored poorly on financial inclusion parameters than the global average in
respect of percentage of population with formal accounts, credit cards,
outstanding mortgages, health insurance, origination of new loans and mobile
banking (para I.69).
The Reserve Bank has adopted ICT-based bank agent
model through Business Correspondents (BCs). This model has not been very
successful in addressing financial inclusion needs and cannot substitute the
services of brick and mortar bank branches. There is need for mainstreaming
financial inclusion, while at the same time improving the BC functioning (para
I.71).
The Reserve Bank’s assessment is that financial
inclusion is a substantially unfinished agenda and the efforts need to be upscaled.
The change from no-frills account to ‘Basic Saving Bank Deposit Account’ is an
effort to integrate them as part of basic banking services. Financial inclusion
may result in short term pressure on banks’ profitability, but as size and
scope of banking increase, it would add to their revenue stream (para I.72).
Real Economy
In 2012-13, the south-west monsoon (up to August 16,
2012) was 16 per cent below the long period average. The deficiency as measured
by the Reserve Bank’s production-weighted rainfall index is even higher at 21
per cent. This has affected the kharif sowing with sowing for coarse cereals
and pulses being 16 per cent and 12 per cent below normal, respectively.
However, drought conditions are less severe than that during the 2009 (para II.1.16-II.1.18).
Preliminary estimates show that the net financial
saving of the household declined further to 7.8 per cent of GDP at current
market prices during 2011-12 from 9.3 per cent in the previous year and 12.2
per cent in 2009-10. This was due to an absolute decline in small savings and
slower growth in households’ holdings of bank deposits, currency as well as
life funds. High inflation and proclivity for investment in gold could have
impacted household saving behaviour (para II.1.11).
Price Situation
In recent period output gap has contributed to
moderating inflation, but the moderation has been less in relation to fall in
growth. Reserve Bank’s empirical estimates show that output gap is a leading
indicator of inflation. However, the pace and extent of moderation could be
conditional on other determinants such as supply shocks from food, global
commodity price movements, exchange rate pass-through, as well as the overall
fiscal position (Box II.2).
Cost-push inflation caused by sustained wage pressures
is a dominant determinant of inflation. In India, wages in rural areas have
increased at a faster rate than inflation, partly as MGNREGS is exerting
pressure on the overall wage structure. Empirical estimates suggest a
bi-directional causality between wage growth and prices, implying that there is
some evidence of a wage-price spiral (Box II.8).
Money and Credit
Monetary and liquidity conditions in the year 2011-12
were marked by two distinct phases. In the first half, monetary policy was
tightened and liquidity conditions generally remained in line with the policy
objective of maintaining moderate deficit. In the second half, the Reserve Bank
paused its tightening cycle. Liquidity deficit, however, worsened due to forex
interventions and sudden build up of government cash balances that persisted
for a longer duration para II.3.1).
In recent years there is significant evidence that the
interest rate channels and credit channels of monetary transmission have been
working effectively. Policy rate increases in India had a negative effect on
output growth with a lag of two quarters and moderating effect on inflation
with a lag of three quarters. As banks adjust portfolios, a 100 bps increase in
policy rate was found to reduce credit by 2.8 per cent in nominal terms and 2.2
per cent in real terms (Box II.10).
Financial Markets
A financial conditions indexed developed in-house
shows that though financial conditions somewhat worsened in 2011-12 mainly due
to stock and forex markets; however, they remain far better than in October
2008 (Box II.12).
With housing and gold prices running ahead of
inflation, there is a need for containing risks. The Reserve Bank will continue
to monitor the asset prices ahead from a macro-prudential angle (para II.4.25).
Government Finance
Current indications are that fiscal targets can again
be missed in 2012-13, unless immediate remedial measures are undertaken. The
risks to fiscal targets laid down for 2012-13 are large if the envisaged tax
buoyancies are not realised and the cap on subsidies is not adhered to. During
the first quarter of 2012-13, the fiscal deficit of the central government was
more than one third of the budget estimate for the whole year (para II.5.3).
Estimates of fiscal multipliers for India show that
while impact multiplier on growth is higher for revenue and expenditures, the
long-run multiplier is higher for capital outlays. In this context, credible
fiscal consolidation accompanied with higher capital outlay is crucial for
improving long-run growth prospects (Box II.16).
External Sector
CAD-GDP ratio reached 4.5 per cent in Q4 of 2011-12,
taking the full year ratio reached to an all-time high of 4.2 per cent. Going
forward, the moderation in global oil prices from the earlier highs and
softening of gold imports if sustained, are likely to have a favourable impact
on CAD. Notwithstanding these factors, CAD may still stay wide enough to put
strains, especially if capital flows remain moderate (para II.6.2-II.6.3).
In view of the high dependence on debt flows to finance
CAD during 2011-12, there is need for policy initiatives to augment non-debt
creating flows, especially by improving FDI inflows into sectors such as
insurance, retail, aviation and urban infrastructure. In recent years outward
FDI has increased significantly and there is a need to balance the domestic
investment interests in the overall FDI policy (para II.6.16).
Working and Operations of the Reserve Bank of India
Monetary Policy Operations
Monetary policy in 2011-12 had to address the risks of
entrenchment of inflation pressures and unhinged inflation expectations during
the first half of the financial year and the significant slowdown in domestic
growth even while maintaining its anti-inflationary stance during the second
half.
During 2012-13 so far, on growing evidence of slowdown
in the economy, the Reserve Bank used available space to cut policy rates and
frontloaded the policy action in April 2012, but maintained status quo later as
inflation concerns persisted. It reduced Statutory Liquidity Ratio (SLR) in
July 2012 to provide liquidity to facilitate credit availability to productive
sectors (para III.19).
Credit Delivery and Financial Inclusion
Improving credit delivery and financial inclusion have
remained key priorities of the Reserve Bank. One major step in this direction
was to introduce biometric smart card system for the kisan credit card (KCC),
to be used in ATMs and hand held devices. The financial inclusion plan (FIP),
under which the commercial banks set their targets for financial inclusion
activities, has been making substantial progress (para IV.6).
The Reserve Bank has recently issued guidelines on the
implementation of electronic benefit transfer (EBT) and its convergence with
FIP. Apart from providing a whole range of banking services, this will enable
the beneficiaries to get the social security benefits (Box IV.2).
Development and Regulation of Financial Markets
As the Indian financial markets, particularly foreign
exchange market, turned volatile against the backdrop of weakening domestic
macroeconomic fundamentals and the euro area sovereign debt crisis since august
2011, the Reserve Bank took a slew of measures to contain the volatility in the
forex market and encourage foreign inflows (para V.22-V.31).
The Reserve Bank also continued with its efforts to
impart liquidity to the secondary G-sec market and to develop the corporate
bond market further by providing for risk transfers. The Working Group on
Enhancing Liquidity in the G-sec and Interest Rate Derivatives Market has made
important recommendations in this respect (Box V.1).
Regulation, Supervision and Financial Stability
During 2011-12, the banking sector remained robust
with high capital adequacy, even though rising NPA levels emerged as a concern.
The NPAs, however, are in part a reflection of overall slowdown in the economy.
An analysis using data since June 2000 brings out this pro-cyclicality in asset
quality of Indian banks (Box VI.1).
The Reserve Bank has undertaken several initiatives
like faster grievances redressal mechanism, facilitating better banking
experience for the disabled and intra-bank transfer of deposit facility to
benefit the common man (para VI.42-VI.61).
The NBFC sector in India has undergone a significant
transformation in the past few years, with growth of non-deposit taking
systemically important NBFCs. In this backdrop, risks from regulatory gaps,
arbitrage and systemic interconnectedness have assumed importance. A Reserve
Bank Working Group has made several recommendations to address these (Box VI.5).
Public Debt Management
With inflation persisting at a high level, it would be
a challenge to manage the relatively higher budgeted market borrowings of the
central government as also the expected elevated level of borrowings of the
state governments in 2012-13. In an environment of slowing growth and given the
limited options regarding debt management, it is crucial that the fiscal deficit
and its financing by way of market borrowings do not escalate beyond the
budgeted level (para VII.13).
Reflecting the impact of the change in interest rate
cycle and large government borrowing, the weighted average yield of dated
securities issued by the central government during 2011-12 rose by 60 basis
points to 8.52 per cent. Also, the weighted average yield of state government
securities issued during 2011-12 was higher at 8.79 per cent, compared with
8.39 per cent during the previous year (para VII.8).
Currency Management
During 2011-12, the Reserve Bank continued with its
efforts to strengthen security features of banknotes and increase public
awareness to address the challenge of counterfeit notes (para VIII.2).
There was a marked decline in the volume and value of
small coins in circulation in 2011-12 as coins of denomination of 25 paise and
below ceased to be legal tender from June 30, 2011. A committee constituted by
the government is examining the issues relating to the increase in demand for
coins and supply/distribution bottlenecks (Box VIII.2).
Payment and Settlement Systems and Information
Technology
The Reserve Bank continued its efforts at enhancing
safety, security and efficiency of payment transactions coupled with low
transaction costs and better risk management for system participants and to
also improve the accessibility and affordability of the payment and settlement
systems para IX.16).
The Reserve Bank has furthered its social
responsibility by enabling payment system services at low costs by promoting
systems such as Indian Financial Network (INFINET) and Next Generation Real
Time Gross Settlement (NG-RTGS) systems.
Governance, Human Resource Development and
Organisational Management
The Reserve Bank has initiated several measures to
enhance its communication strategy to the public, apart from improved
transparency in its governance. Though the governance practices by boards of
the central banks differ widely, the Reserve Bank has taken several initiatives
to improve transparency and accountability (Box X.1).
The Reserve Bank has also taken several capacity
building initiatives with a view to acquiring, grooming and enhancing the
quality of its human resources. It has also taken several new research
initiatives, besides initiatives to promote energy conservation and environment
preservation in line with its corporate social responsibility (Box X.2).
The Reserve Bank’s Accounts for 2011-12 (July-June)
The balance sheet of the Reserve Bank expanded
significantly by about `4 trillion or 22 per cent during the accounting year. A
little over half of the increase was on account of open market purchases of
government securities (domestic assets). The increase in foreign assets was
mainly due to valuation effect arising from depreciation of the Indian rupee
against the US dollar that more than offset the decline in net stock of foreign
currency assets due to dollar sales during the year (para XI.5-XI.6).
In 2011-12, the Reserve Bank’s gross income increased
by 43.4 per cent. The income from foreign assets declined for the third
successive year, reflecting the low interest rates prevalent in international
markets. The decline in income from foreign assets was more than offset by an
increase in earnings from domestic assets (para XI.4).
The transfer of surplus profit to the central
government amounted to `160.10 billion compared to `150.09 billion in the
previous year (para XI.11).
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