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FORESIGHT
Ashvin Parekh - Managing Partner, APAS
Season’s greetings, We have Mr. Paresh Sukthankar taking a view on the performance of the
banking sector in our ‘Guest Column’ this month. He attributes the stress in
the quality of the assets largely to the economic conditions and sets out key
measures in the changed economic outlook for the banking sector. We are
thankful to Mr. Sukthankar for providing his valuable insight to our readers.
The first 100 days of the new Government has brought some cheer to the
economy. The indicators suggest a growth in GDP of appreciable amount.
Manufacturing and Mining have contributed largely to the growth. Inflation
eased during the month from WPI point of view. CPI however was up from
7.46% to 7.9%.
The banking regulator has proposed a restricted limit of 25% on group
exposures. This is step ahead in restricting the default risk and diversify it.
In a separate measure it now requires the Asset Reconstruction Companies
(ARCs) to invest 15% in Security Receipts (SRs). This is to check the rush
made by the banking companies to sell their assets to ARCs. From April
2015 the banks will have to follow stricter norms for financing
infrastructure assets. The banks will have to provide 15% for the
restructured loans compared to 3.5% as of today.
The capital market regulator has announced guidelines on REITs. The
reform is aimed at creating an asset class for retail investors and also
reduced risks by imposing adequate restrictions and controls. This is viewed
as a far reaching reform by the industry.
We welcome your inputs and thoughts and encourage you to share them
with us.
Ashvin Parekh
Volume No. 8 August 2014
May, 2014 December 2, 2013
Table of Contents
Guest’s Column
The Banking Industry – Better Times
Ahead? by Mr. Paresh Sukthankar –
Deputy MD – HDFC Bank Ltd.
Economy
GDP update – 1QFY15
Core sector growth update – Aug
IIP update – June
Inflation update – July
PMI update – July
Banking Sector
RBI proposed to restrict banks’ group
exposure limit at 25%
RBI tightened norms for lending
against shares
ARCs to invest 15% in SRs
RBI’s Monetary Policy Review
Capital Markets
Norms for investment in INVITs, REITs
Easier registration system for brokers
Parliament passed The Securities Laws
(Amendment) Bill, 2014
Infrastructure Updates
Norms for refinancing of infrastructure loans tightened
Cabinet approved raising FDI cap in defense to 49%, opened up railways
Capital Market - Snapshot Economic Data Snapshot
Contact Us 022-6789 1000
www.ap-as.com
The Banking Industry – Better Times Ahead?
Mr. Presh Sukthankar – Deputy MD – HDFC Bank Ltd.
The banking sector in India has been receiving
more than its usual share of attention in the
recent past. Over the last few years, with
growth rates in the real side of the economy
dropping from 9% to below 5%, the impact of
this on the banking sector was inevitable. A
tight monetary policy in the wake of continued
inflationary pressures, and higher volatility in
exchange rates and international capital flows
due to a combination of global and domestic
factors, only exacerbated the challenges for the
banking system over the last year.
So what is the outlook for the banking industry
in the next year or two? For starters, it does
appear that the macro-economic pressures,
both domestic and international, seem a little
less pronounced than a year back. There are,
of course, still some known unknowns at this
stage like the final impact of the poor monsoon
on this year’s GDP growth and the potential
vulnerability of exchange rate and foreign
capital inflows when US interest rates start
moving up in 2015. Nonetheless, with the
economy expected to grow at 5.3 – 5.5% this
fiscal year and probably closer to 6.5 % by
March 2016, banking industry loan growth
which has been languishing in the 12 – 13%
range could well pick up to around 14 - 15% for
the year ending March 2015 and to around 16 -
17% for the following year. To the extent the
pickup in economic growth rate is predicated on
recovery in the investment cycle, demand for
credit and banks’ incremental appetite for
lending will be closely linked to new capex
commitments on the ground. While some
brown field expansions may get kicked off in a
couple of quarters, larger greenfield projects
may take a little longer than that, and
therefore, loan growth may take that much
longer to pick up. Besides, debt raising for
new projects will have to be preceded by equity
raising, given that corporate balance sheets are
fairly stretched for many players in the
infrastructure and some other capital intensive
sectors.
The other area that has been the subject of
much discussion in the banking industry is asset
quality. Gross nonperforming assets (NPAs)
and restructured loans in the Indian banking
system have almost doubled in the last four
years and the total stressed assets (NPAs +
restructured) are around 11% of bank loans.
While roughly half of this deterioration is
viewed as a cyclical phenomenon linked to the
sharp decline in GDP growth, the rest of the
stress is attributed to project or customer
specific issues. In either case, a reasonable
expectation would be that the worst is behind
us. The cyclical uptick in the economy leading
to better cash flows for borrowers and better
asset quality for banks would, however, be a
gradual, protracted process. Quicker
reduction in stress could come from raising of
equity or selling of assets by highly leveraged
corporates and from stalled projects getting
commissioned. Recent regulatory changes
facilitating better information sharing amongst
banks and nudging banks to take a tougher
stance against recalcitrant promoters should
also lay the ground for improvements in asset
quality going forward.
Guest Column
Ultimately, the banking and financial services
industry cannot be at a disconnect with the real
economy. The good news is that through all
the global and domestic turmoil of the last few
years, even though the Indian banking industry
took a few blows on the chin, the sector has not
once been exposed to any meaningful systemic
risk. That is more than what can be said for
the banking industries in several other
developing and developed countries. While,
therefore, banks in India will need to continue
to invest and focus on customer centricity,
technology, risk management, and
capitalization levels, they remain fairly well
positioned to be able to play their role and
contribute to higher economic growth and
greater financial inclusion in the coming years.
Gross Domestic Product (GDP) – Q1FY15
Indian economy expanded 5.7% in the first
quarter of FY15, the highest in nine quarters,
against a growth of 4.6% in Q4 of FY14. The
economy grew 4.7% in the year-ago period. The
economy grew at its highest pace since the
fourth quarter of FY12.
The revival in the first quarter was expected to
be led by industry. Manufacturing, coming off a
low base, was expected to push industries and
it did not disappoint. The manufacturing sector
grew at 3.5%, against a 1.2% contraction
year-on-year.
The mining sector too grew at 2.1% versus
-3.9% YoY. But all eyes were on agricultural
growth, which was expected to disappoint
considering the fact that the first quarter is
generally a lean period for agriculture. But that
too surprised on the positive – the sector grew
at 3.8% versus 4% YoY.
In the quarter under review, trade, hotels
sector grew at 2.8% versus 1.6% (YoY).
Construction sector growth came in at 4.8%,
against 1.1% in the year-ago period. Electricity
sector expanded 10.2% versus 3.8% (YoY). The
construction sector in the first quarter grew at
4.8% versus 0.7% (QoQ).
Data released by the Central Statistics Office
(CSO) showed private final consumption spend
stood at ₹ 9.3 lakh cr. versus ₹ 8.8 lakh cr.
year-on-year, while the government of India
final consumption spend came in at ₹ 1.8 lakh
cr. against ₹ 1.7 lakh cr. First quarter financial
services growth stood at 10.4% versus 12.9%
(YoY).
Core sector growth update – August
Eight infrastructure industries posted a 7-month
high growth rate of 3.7% in August on the back
of good performance by power, cement, steel
and fertilizer sectors. The growth of the core
sectors was, however, lower as compared to
6.1% recorded in the same month last year.
The core industries, which also include coal,
natural gas, refinery products and crude oil,
having a weight of about 38% in the Index of
Industrial Production (IIP), grew at 3.7% January
this year. The growth in output of the core
sectors remained below this mark till July.
Economy
During the April-August period of 2013-14 fiscal,
the growth of core industries has slowed to
2.3% from 6.3% in the same period during
2012-13.
Power generation grew by 6.7% in August as
against a meagre 1.9% in the same month last
year. It registered a cumulative growth of 4.1%
during April to August this fiscal, compared to
4.9% in the same period in 2012-13.
Cement production grew by 5.5% in August
compared to 0.4% in the same month last year.
However, growth in the sector slowed down to
3.2% in April-August period this fiscal,
compared to 8.3% in 2012-13.
The output of steel also grew by 4.3% in August
as compared to 2.9% in the same month last
year. The production was up by 4.1% in
April-August period, compared to 2.8% in same
period in previous fiscal.
The fertilizer production grew by 1.7% in August
as against a contraction of 2.1% in the same
month last year. During the April-August period,
the output grew by 1.8% compared to a
contraction of 7.9% in the same period last
fiscal.
IIP update – June
Sources: APAS BRT
Growth rate of industrial production slowed to
3.4% in June, as against 5% in May, mainly
owing to lower output of consumer goods. IIP
for May was revised to 5% from the provisional
estimates of 4.7% released last month.
The factory output number has remained in the
positive territory for the third month in a row
mainly due to a better show by manufacturing,
mining and power sectors and higher output of
capital goods.
The output, as measured by the Index of
Industrial Production, had contracted by 1.8% in
June, 2013. During the April-June period of the
current fiscal, IIP has recorded a growth of
3.9%, as against contraction of 1% in the first
quarter of 2013-14.
According to the IIP data, output of consumer
goods contracted by 10% in June compared to
the contraction of 1.5% a year ago. For the
April-June quarter, the segment shows a
contraction of 3.6%, compared to a decline of
2.1% in the same period of 2013-14.
The consumer durables segment declined by
23.4% in June, as against a dip of 10.1% a year
ago. For April- June, it declined by 9.6% as
against a dip of 12.7% in the first quarter of last
fiscal.
Similarly, the consumer non-durable goods
output grew at a meagre rate of 0.1% in June
compared to 6.2% in same month last year.
During April-June, the segment grew at 0.7%
compared to 7.1% in same period last fiscal.
Manufacturing, which constitutes over 75% of
the index, grew 1.8% in June, compared to
decline in output by 1.7% a year ago. For
April-June, the sector grew at 3.1% growth,
compared to the contraction of 1.1% in the
year-ago period. Overall, 15 of the 22 industry
groups in manufacturing showed positive
growth in May.
Inflation update – July
Sources: APAS BRT Consumer Price Index (CPI): India’s retail
inflation inched up to 7.96% in July, mainly due
to higher prices of food items such as
vegetables, fruits and milk. Retail inflation
measured on consumer price index (CPI) in June
was 7.46% (revised upwards from 7.31%). It was
at 9.64% in the same month a year ago.
Food inflation in July this year rose to 9.36% as
against 7.97% in June, according to the
government data released today. Vegetables
were costlier in July with a double-digit price
rise of 16.88%, a steep rise from 8.73% in June.
Fruit prices went up to 22.48% in July as against
20.64% in June. The rate of price rise in pulses
was 5.85%. Inflation in milk and milk products
stood at 11.26% during the month under
review.
Amongst others, food and beverages saw a
prices rise of 9.16% and non-alcoholic
beverages prices at 6.35%. Inflation in cereals,
however, eased marginally in July to 7.45% as
against 7.6% in the previous month. Other
protein rich items such as eggs, fish and meat
too witnessed lower inflation in July over the
previous month.
Inflation in rural and urban areas in July was
8.45% and 7.42%, respectively. In June, it was
7.87% and 6.82%
Wholesale Price Index (WPI): Wholesale
inflation eased to a five-month low to 5.19% in
July from 5.43% in June. The reason for
divergence between CPI and WPI in July is
seasonal exclusion of tomatoes in wholesale
price index from April to July.
Sources: APAS BRT
July PMI update – Manufacturing
India's manufacturing activity rebounded to a
17-month high in July in response to a surge in
production backed by new orders. The HSBC
Manufacturing Purchasing Managers' Index
(PMI), a survey-based measure of
manufacturing activity, rose to 53 in July from
51.5 in June.
"A flood of new orders from both domestic and
external sources has led to a surge in activity,"
said HSBC. The sub-index for new orders, one of
the 11 components that makes up the PMI, rose
to its highest in since February last year to 55.9,
the biggest monthly rise in eight months.
The strong PMI adds to rising evidence that the
economy was turning around from two
consecutive years of sub-5% growth.
"A steep jump in output and domestic orders
from a post-election boost to sentiment
explains the rise," HSBC said in a statement
attributing most of the rise to domestic
demand.
Service PMI
Growth in India’s services sector eased in July as
new orders slowed. The HSBC Services
Purchasing Managers’ Index (PMI), compiled by
Markit, fell to 52.2 in July from June’s 17-month
high of 54.4.
“Growth in the services sector softened in July
after a big jump in the previous month.
Nevertheless, the sector recorded its third
consecutive month of expansion,” HSBC said.
While order books were not in as bad a shape
among Indian firms, some businesses did defer
hiring plans. The employment PMI dipped
below the break-even mark to 49.8 from July’s
50.1. The services PMI data also showed input
costs rose at a slower rate in July and that firms
were able to pass on a slightly bigger portion to
customers by raising prices.
“Final prices were marked up at a faster pace to
reflect rising costs, underscoring the need for
the Reserve Bank of India to remain cautious
about inflation risks,” HSBC said.
RBI proposed to restrict banks’ group exposure limit at 25%
The Reserve Bank of India proposes to cut
banks' group exposure limit by as much as 15
percentage points to reduce the systemic risk
posed by lending too much to any single
business house.
This means that credit to any particular group
will have to be restricted to 25% of a bank's
capital, down from 40% now. It's not clear
whether such a move will have any impact on
borrowings by conglomerates, but the move
should act as a protection against banks facing
financial trouble in the event of borrowers
being unable to repay their loans or collapsing.
"Our current exposure limits to a group of
borrowers is much higher at 40% of capital
funds (plus 10% for infrastructure finance)," RBI
said in its annual report-2013-14 on August
22nd. "It is proposed to review the exposure
norms in 2014-15, to gradually align them with
the revised global standards." It should be
noted that RBI's 40% limit can be raised to as
much 55%.
RBI tightened norms for lending against shares
The Reserve Bank of India (RBI) has placed
restrictions on loans given against shares by
non-banking finance companies (NBFCs), citing
volatility in the capital market because of NBFCs
selling shares held by them. The central bank
has asked NBFCs to maintain a loan-to-value
ratio, or the amount loaned out against the
value of the collateral, of 50% with immediate
effect. Also, NBFCs with assets worth Rs.100 cr.
and above will be allowed to accept only group
1 shares as collateral while giving loans of Rs.5
lakh and above. Group 1 shares are those that
are traded on at least 80% of the days for the
previous 18 months on the stock exchanges,
and their average cost incurred due to a price
decline is less than 1%.
These new restrictions were required to avoid
volatility in the capital markets and because
“default by borrowers can and has in the past
lead to offloading of shares in the market by the
NBFCs, thereby creating avoidable volatility in
the market,” the RBI said in a notification.
Banking Sector
Asset Reconstruction Companies (ARCs) to invest 15% in Securities Receipts (SRs)
The Reserve Bank of India (RBI) has notified to
the asset reconstruction companies (ARCs) to
invest at least 15% in securities receipts (SRs)
issued by them on the purchase of distressed
assets from banks.
The new norms are aimed at checking a sudden
spurt in the sale of bad loans to ARCs at
unrealistic prices and making securitization
companies (SCs) and ARCs more accountable.
Earlier, it was mandatory for ARCs to invest and
hold at least 5% of the securities receipts issued
by them against the assets acquired on an
ongoing basis.
Typically, the fee earned is in the range of
1.5-2%, which is sufficient to compensate the
initial investment of 5% in securities receipts
and generates healthy returns as well. Only
after management fees are paid can recoveries
be used for redemption of securities receipts.
Therefore, management fees paid on the
inflated value of securities receipts can turn out
to be a very high-cost solution for the banks.
However, under the new norms, the RBI said,
"The management fees should be calculated
and charged as percentage of the net asset
value, or NAV, at the lower end of the range of
the NAV specified by the credit rating agency
(rather than on the outstanding value of SRs as
at present), provided that the same is not more
than the acquisition value of the underlying
asset.''
RBI has also asked securitization companies and
ARCs to put the names of wilful defaulters on
their website. Securitization companies and
ARCs will also get a seat in the joint lenders'
forum that looks at accounts where interest and
outstanding are overdue for more than 60 days.
In the first quarter of this year, banks offloaded
₹ 30,000 cr. of outstanding loans classified as
stressed loans.
Most public sector banks are selling bad loans
to ARCs ahead of the tighter provisioning norms
kicking in from next April that the central bank
had announced in May last year when it had
more than doubled the provisioning for
restructured loans to 5% from 2%. ARCIL the
largest ARC, has also been one of the most
active in the auctions along with Edelweiss and
JM ARC.
Central Bank’s Third Bi-Monthly Monetary Policy Review, 2014-15
As widely expected the Indian central bank,
Reserve Banks of India (RBI), in its third
bi-monthly policy announcement held on
August 5, 2014 kept the repo rate unchanged at
8%. The apex bank also kept the Cash Reserve
Ratio (CRR) unchanged at 4%. Consequently,
the reverse repo rate remained unchanged at
7% and marginal standing facility (MSF) rate as
well as bank rate at 9%.
However RBI further cut Statutory Liquidity
Ratio (SLR) by 50 basis points to 22%. “With the
Union Budget for 2014-15 renewing
commitment to the medium-term fiscal
consolidation roadmap and budgeting 4.1% of
GDP as the fiscal deficit for the year, space has
opened up further for banks to expand credit to
the productive sectors in response to its
financing needs as growth picks up. Accordingly,
the SLR is reduced by a further 0.5% of NDTL”
RBI said.
RBI mentioned that Emerging Markets (EMs)
remained vulnerable to changes in investor risk
appetite driven by any reassessment of the
future path of US monetary policy or possible
escalation of geopolitical tensions. The
sentiments on domestic economic activity are
reviving and key industrial and export data
suggest that the economy is getting back on
track. It is maintaining its growth outlook for
the current fiscal at 5-6%.
RBI acknowledged that the retail inflation
measured by CPI has eased for the second
consecutive month in June, with a broad-based
moderation accompanied by deceleration in
momentum.
The bank sees upside risks in the form of the
pass-through of administered price increases,
continuing uncertainty over monsoon
conditions and their impact on food production,
possibly higher oil prices stemming from
geo-political concerns and exchange rate
movement, and strengthening growth in the
face of continuing supply constraints.
RBI said that it will continue to monitor inflation
developments closely, and remains committed
to the disinflationary path of taking CPI inflation
to 8% by January 2015 and 6% by January 2016.
"RBI won't hold rates any longer than
necessary. We will have room to cut rates if
disinflation continues," said RBI.
SEBI issued guidelines for investment in INVITs, REITs
The Securities & Exchange Board of India (SEBI)
has issued final guidelines for infrastructure
investment trusts (INVITs) and real estate
investment trusts (REITs), instruments expected
to help these sectors raise resources to meet a
funds crunch.
The Union Finance Minister had, in his budget
speech had announced pass-through status for
the purpose of taxation to these two
instruments to make them attractive to
investors. Trusts are like mutual funds that raise
resources from many investors to be directly
invested in realty or infrastructure projects.
The pass-through status means that the return
from investments through these instruments
will be taxed only in the hands of investors and
the trusts will not have to pay tax on income.
Once the relevant changes in other regulations
are made, overseas investors will be able to
bring funds into India through these vehicles,
reducing the need for bank funds for these
sectors. INVITs will allow infrastructure
developers to monetize specific assets, helping
them use proceeds for completing projects of
theirs stalled for want of funds.
Key salient features of the REIT Regulations, as
approved by the Board, include the following:
REIT shall invest in commercial real estate
assets, either directly or through SPVs. In
such SPVs a REIT shall hold or proposes to
hold controlling interest and not less than
50% of the equity share capital or interest.
Further, such SPVs shall hold not less than
80% of its assets directly in properties and
shall not invest in other SPVs.
Once registered, the REIT shall raise funds
through an initial offer. Subsequent raising
of funds may be through follow-on offer,
rights issue, qualified institutional
placement, etc. The minimum subscription
size for units of REIT shall be ₹ 2 lakhs. The
units offered to the public in initial offer
shall not be less than 25% of the number of
units of the REIT on post-issue basis.
Capital Markets
For coming out with an initial offer, the
value of the assets owned/proposed to be
owned by REIT shall be of value not less
than ₹ 500 cr. Further, minimum issue size
for initial offer shall be ₹ 250 cr.
Not less than 80% of the value of the REIT
assets shall be in completed and revenue
generating properties. Not more than 20%
of the value of REIT assets shall be invested
in following:
o Developmental properties
o Mortgage backed securities
o Listed/ unlisted debt of
companies/body corporates in real
estate sector
o Equity shares of companies listed on a
recognized stock exchange in India
which derive not less than 75% of their
operating income from Real Estate
activity
o Government securities
o Money market instruments or Cash
equivalent
SEBI board cleared one-time registration system for brokers
Seeking to simplify procedural requirements,
SEBI in its board meeting on August 10th has
cleared a proposal for putting in place a
one-time registration process for stock brokers
and clearing entities that would allow them to
operate across bourses. The proposal, which
would replace the current practice of requiring
separate registration certificate to trade in each
stock exchange, was discussed and approved at
a meeting of SEBI board.
The new system would ensure cost efficiency,
avoidance of multiple due diligence process and
prevent duplication of registration process.
Under the new norms, stock brokers and
clearing members would be required to have
only single certificate of registration issued by
the Securities and Exchange Board of India
(SEBI). The exchanges will develop the
mechanism to ensure appropriate due diligence
while granting approvals, coordination and
sharing of information among themselves about
their members.
A simple one time process in entire life time of
a stock broker would help SEBI prevent
duplication of registration process for each
stock exchange. The process would also
decrease the number of registration
applications received by SEBI and in turn help
the regulator save costs and utilize the
resources for better supervision and monitoring
of the market intermediaries.
The new norms also have a provision for SEBI
suspending brokers from the stock exchanges in
case of violations. Besides, as currently
practiced, the fees paid by the stock brokers
would be based on their turnover on stock
exchanges under the proposed norms.
In September, last year, the market regulator
had introduced a common registration
certificate for stock brokers to function in
different market segments within a stock
exchange.
Under this system, an entity is issued a
certificate with a unique registration number
for each stock exchange or clearing corporation,
as case may be, irrespective of number of
market segments.
Further, if the entity is already registered with
any segment of a stock exchange then for
operating in any other segment it need not
apply to SEBI but can directly seek approval
from the bourse or clearing corporation
concerned.
Parliament passed Bill to give teeth to SEBI to tackle ponzi menace
The crucial Securities Laws (Amendment) Bill,
2014, aimed at tackling the ponzi (fraudulent
investment schemes involving money
circulation) menace has been approved by the
parliament, with government saying that it will
soon announce a financial scheme which will
discourage people from being allured by
fraudulent operators.
The new law will empower SEBI investigators to
conduct searches and seek information from
suspected entities, both within and outside the
country. However, as a safeguard, any search
operation can be conducted only after approval
of a designated court in Mumbai, where SEBI
headquarters is based.
Norms for refinancing of infrastructure loans tightened
The Reserve Bank of India (RBI) has tightened
norms for refinancing of infrastructure loans
which banks want to be tagged as standard
assets. From April 2015, the moment a loan is
restructured banks will have to classify them as
bad loan. However, RBI made an except to the
rule by allowing banks to classify infrastructure
loans as standard assets if half of the
outstanding loans are refinanced by new set of
lenders in form of take-out financing.
RBI said that an infrastructure loan that is
refinanced can be tagged as standard assets
provided promoters are willing to invest more
equity in the project and the standard tag will
be applicable only if the project has started
commercial operation. Further the RBI has
stated that this dispensation would be only for
infrastructure loans above ₹ 1000 cr. and that
the loan should be not restructured in the past.
RBI revised it norms after bankers represented
to them that it is difficult to adhere to take out
norm of 50% because a significant number of
banks are already part of the consortium or
multiple banking arrangement of such project
loans.
In this respect, RBI has reduced the ratio by
stating that at least 25% of the outstanding
loans should be refinanced by a new set of
lenders. Further, RBI has said that a project
would not classified as restructured provided it
has started commercial operation after
achieving Date of Commencement of
Commercial Operation (DCCO).
In July this year, RBI gave more flexibility to
banks in structuring infrastructure loans since a
majority of the loans were disbursed for a
shorter tenure even as it is known that
companies do take longer time to execute
infrastructure projects.
From April 2015, banks will have to make a
provision of at least 15% on the loans that are
restructured against 3.5% now. They fear that
the huge provisioning requirement will eat into
their profits and thus want to avoid loans being
tagged as restructured.
As per RBI data, banks’ exposure to
infrastructure sector stood at ₹ 8580 bn as on
June 27, 2014 against ₹ 7297 bn a year ago. The
revised norm is significant for banks since it is
estimated that a huge sum of stress loan -
restructured loans and loans on which
companies have defaulted - is from
infrastructure sector.
Infrastructure Sector
Cabinet approved raising FDI cap in defense to 49%, opened up railway’s infrastructure
The Union Cabinet has allowed foreign
investment in the Railways for the first time and
raised limit for such investment in the defense
sector, steps intended to raise funds for
expansion of the Railways and encourage
domestic manufacture of arms.
100% foreign investment in railway
infrastructure projects will be allowed while in
the case of defense the limit has been raised to
49% from the current 26%, subject to the Indian
owners exercising management control.
The FDI hike in defense is intended to cut
imports by indigenizing defense production as
India is one of the world's largest arms
importers.
Foreign investment in defense will be though
the approval route, implying it will have to be
cleared by the Foreign Investment Promotion
Board (FIPB). Though the 49% cap will be
general rule for the defense sector, 100%
overseas ownership will be allowed in case the
investments comes bundled with state of the
art technology. Such investment proposals will
have to be cleared by the Cabinet Committee
on Security (CCS).
In companies with a 49% foreign holding, more
than one Indian company will be allowed to
hold the 51% share, unlike the present norm
that mandates that a single Indian entity should
own and control the entire 51%, a move that
will encourage more domestic players to enter
the sector.
In case of Railways, 100% FDI will now be
allowed in railway infrastructure segments such
as electrification, signaling, high speed and
suburban corridors. 100% FDI will also be
allowed through the Special Purpose Vehicle
route to provide last mile connectivity to ports
and mines. Further, some railway operations
have also been partially opened up to foreign
investment.
FDI is now allowed in PPP projects, suburban
corridors, high speed train systems, and
dedicated freight lines. Estimates suggest that
the opening of railways to foreign investors will
add 1-1.5 percentage points to the overall GDP
growth. China and Japan are keen to invest in
the railways sector.
As a result of these changes, railways transport
will be removed from the list of prohibited
sectors in the consolidated FDI policy.
Sources: National Stock Exchange, APAS BRT
August series started off with higher volatility
and key indices had been trading in a narrow
range. Market discounted RBI’s Third
Bi-Monthly policy review as there were no
surprises except RBI cut Statutory Liquidity
Ratio by 50 basis pints to 22%. However central
bank’s hawkish tone on future rate action in
view of inflation had turned the sentiment a bit
bearish and pushed bond yields higher.
Sources: APAS BRT
Further geo-political tension in Middle East and
Russia-Ukrain issues added fuel to the volatility
in the Indian as well emerging markets. Indian
Rupee also fell marginally but recovered due to
stable dollar demand in the market.
Sources: APAS BRT
Sources: National Stock Exchange of India, APAS BRT
Sources: National Stock Exchange of India, APAS BRT
Sources: Bombay Stock Exchange of India, APAS BRT
India’s key indices both Nifty and BSE Sensex
started gaining momentum and touched their
all time highs many times towards the end of
the month. It was largely fuled by Prime
Minster’s speech ensaging “Digital India” with
such a hightech infrastructure wherein pleople
living in remote areas and villages will
convenielty access to banking, healthcare and
education services through high speed internet
facility. Strong optimism in the market helped
reduced bond yields.
GDP numbers for the first quarter of the current
fiscal year which were released last week, hit
2.5 year high. The economy expanded 5.7% in
the first quarter of FY15, against a growth of
4.6% in Q4 of 2013-14.
However below normal and uneven distribution
of rain, rising possiblity of Fed raising rates
earlier than expected and currenlty emerged
issues in coal sector can pose a challenge for
aceleration of the economic growth.
Capital Market Snapshot
Countries GDP CPI Current Account
Balance Budget Balance
Interest Rates
Latest 2014* 2015* Latest 2014* % of GDP, 2014* % of GDP, 2014* (10YGov), Latest
Brazil 1.9 Q1 1.0 1.8 6.5 Jul 6.5 -3.7 -3.8 11.4
Russia 0.8 Q2 0.2 0.7 7.4 Jul 8.0 2.9 0.3 9.35
India 4.6 Q1 6.0 6.4 8.0 Jul 8.4 -2.8 -4.9 8.55
China 7.5 Q2 7.5 7.2 2.3 Jul 2.4 1.7 -1.9 4.02^
S Africa 1.0 Q2 2.0 3.4 6.3 Jul 5.9 -5.4 -4.4 7.76
USA 2.4 Q2 2.0 3.0 2.0 Jul 1.9 -2.5 -2.9 2.38
Canada 2.2 Q1 2.3 2.6 2.1 Jul 1.8 -2.7 -2.6 2.01
Mexico 1.6 Q2 2.4 4.0 4.1 Jul 3.8 -1.6 -3.6 7.75
Euro Area 0.7 Q2 1.1 1.6 0.4 Jul 0.7 2.6 -2.5 0.91
Germany 1.3 Q2 2.0 2.0 0.8 Jul 1.0 7.1 0.5 0.91
Britain 3.2 Q2 3.1 2.7 1.6 Jul 1.7 -4.0 -4.6 2.43
Australia 3.5 Q1 3.0 2.9 3.0 Q2 2.7 -2.0 -1.2 3.33
Indonesia 5.1 Q2 5.3 6.0 4.5 Jul 6.0 -3.5 -1.6 Na
Malaysia 6.4 Q2 5.7 5.6 3.2 Jul 3.3 6.3 -3.7 3.95
Singapore 2.4 Q2 4.1 4.4 1.2 Jul 1.8 19.9 0.7 2.30
S Korea 3.6 Q2 3.8 3.6 1.6 Jul 1.6 6.0 0.6 3.04
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Disclaimer – This informative newsletter has been sent only for reader’s reference. Contents have been
prepared on the basis of publicly available information which has not been independently verified by APAS.
Neither APAS, nor any person associated with it, makes any expressed or implied representation or
warranty with respect to the sufficiency, accuracy, completeness or reasonableness of the information set
forth in this note, nor do they owe any duty of care to any recipient of this note in relation to this
newsletter.
Economic Data Snapshot
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