Worms Digest 05 September 2013

Good Morning !!!

Sensex: 18567 (+1.83%), Nifty: 5448 (+2.00%)

Dow: 14930 (+0.65%), S&P: 16513 (+0.81%)

Nikkei: 14054(+0.54%)

Reforms roll-on : Government clears Pension Bill

• PFRDA Bill 2011 (Pension Fund Regulatory and Development Authority) was cleared yesterday in Lok Sabha as the opposition party BJP supported the same
• The Bill was due since 2005 and will now strengthen the sector with a regulator in place and opening up  the sectors to more established and experienced foreign players. The foreign investment limit will be same as that for insurance sector which is 26% today. 

Raghuram Rajan charts the course to liberalize the financial markets

• Policy actions to immediately address rupee depreciation
• Allows exporters and importers to re-book cancelled forward exchange contracts to the extent of 50 per cent and 25 per cent of the value, respectively. Currently, exporters are allowed to re-book cancelled forward exchange contracts to the extent of 25 per cent and importers are not allowed to do so 
• to improve dollar inflows RBI to open a window to  the banks to swap the fresh FCNR (B) dollar funds, mobilised for a minimum tenor of three years and over at a fixed rate of 3.5 per cent per annum for the tenor of the deposit
• allow banks to borrow 100 per cent (from 50 per cent currently) of their unimpaired Tier-I capital from overseas. These borrowings can be swapped with the RBI at a concessional rate of 100 basis points below the ongoing swap rate
• In a separate notification RBI also allowed foreign companies to borrow from the parent under ECB route foe general corporate purpose provided the loan is not less than 7 years of tenure and 

• Key takeaways from Governor's speech which outline his thought process and future course of actions 

1. He outline the primary objective of the RBI is monetary stability which would essentially demand a stable rupee and low inflation expectations. As mentioned earlier he simultaneously announced the above listed measures to improve dollar inflows. To anchor lower inflation expectations, I expect him to raise the policy rates on 20th September 
2. The second important aspect he stressed upon was inclusive growth. Since its important to spread wings to cover as much population, he said stronger banks will no more require branch licenses which is a great step. 
3. New bank licenses will be announced within or soon after Mr Sinha, Deputy Governor of RBI who is spearheading this process retires which is in January 2014. Interestingly, he also mentioned that there are considering of making bank licenses available thereafter as well on continuous basis. Also under consideration is providing bank licenses to large and strong co-operative banks
4. Emphasizing role and importance of foreign banks in India, he mentioned about the desire to provide near national treatment to foreign banks subject to conditions. This will severally increase the depth of financial sector not to mention competition and productivity of the sector.
5. In order to make productive use of limited financial resources he said there is need to divert savings to productive assets and hence need to lower the current high lever of SLR requirement. However given the fiscal constraints it would take longer time than desired to achieve the same objective
6. Will be reviewing PSL norms to make more efficient
7. Deepen fixed income market - will introduce 10 year interest rate futures. Will generally follow policies removing restrictions on trading and deepening fx and FI mkts 
8. Rajan's baby "Bill Factoring Exchange" for MSME will see the light of the day. 
9. Will come up with policies to strengthen Debt Recovery Tribunals and Asset Reconstruction Companies. Most welcome is step to collect credit data across the banks of a particular lender - common exposures under stress can be managed proactively at least in theory 
10. Stressed the need to clean balance sheet and help roll on the stalled projects. Expect concessional allowances by banks to infra sector
11. In order to protect household sector from persistent high levels of inflation in India RBI will come out with Inflation indexed savings certificates by November 2013

Other Important Developments

• Heavy Industries Minister Praful Patel is pitching for stimulus to revive automobile industry however given the fiscal constraints its very unlikely that Ministry of Finance will accept any such request
• Karl Slym, CEO, Tata Motors confirmed that diesel variant of Tata Nano will be launched during the current year.
• No gold was imported in the month of the August as Customs department had not put in place the requirements as per the RBI guidelines...during the month of September 30mn ton of imports are expected. Meanwhile jewelers are coming under pressure due to short supply of the metal

"For those properly prepared in advance, a bear market in stocks is not a calamity but an opportunity"

...Sir John Templeton