CIBP/Altius/2013/Aug/1

ALTIUS
'An e-newsletter from the Centre for International Business & Policy'

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CIBP/Altius/2013/Aug/1

Table of Contents S.No. 1. 2. 3. 4. 5. 6. Topics

From the Chief Editor's Desk News Snippets RBI, Rupee and Growth Major Ports Losing Cargo Volumes: A Report by ICRA The Rising Dollar : Green & Back News from CIBP

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CIBP/Altius/2013/Aug/1

From the Chief Editor's desk

Since the last issue of Altius, not much change has been observed in the gloomy economic scenario. Global growth overall has remained subdued with some notable exceptions like the US and Japan showing some improvements. But this has been counterbalanced by slowing growth in key emerging and developing economies. This has lead to a strengthening dollar.

As history goes, a strengthening dollar is a rare thing. The upward bursts in the early 1980s and the late 1990s were deviations from a generally falling trend. Since it was freed from the Bretton Woods system of fixed exchange rates four decades ago, the dollar has mostly fallen in value against other rich-world currencies. The cause of the dollar rally is the relative health of Americas economy which is showing sign of revival and an end to quantitative easing. This is one of the lead articles in this issue. We also bring you an article on the rationale behind recent monetary policy actions undertaken by RBI and why the furor is going on against these measures. The third article is a critique on how major ports are losing their cargoes to newer ports which are more diversified in terms of cargo mix and higher efficiency standards. Happy Reading!

Dr. Anupam Varma

From the Editor's Desk

This issue of Altius brings you more news from the Centre as the new batch of students gear up for the annual ritual of the selection of CRs. A huge thank you for the plethora of mails from the alumni, updating us on their achievements, one of which we carry in this issue. Keep mailing. Dr. Abha Rishi

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News Snippets

Joe Biden visit: Industry to press for renewal of export preference programme (GSP)
When US Vice-President Joe Biden arrived in the countrys financial capital of Mumbai on Wednesday, he was flooded with requests by Indian industry to renew the Generalised System of Preferences (GSP), set to expire this month. India Inc has decided to strongly pitch for it during their meeting with him. Presently, exports to the US from small- and medium-scale Indian industries under the GSP are allowed dutyfree entry. If the programme gets discontinued, Indian exports will be subjected to US import duties. India was the top developing country GSP-beneficiary in 2011, with $3.7 bn in imports entering the US duty-free.

Mundra overtakes Kandla to emerge as Indias largest port

Cargo handled by Adani port between April and June was close to 24 million tonnes against 23 mt handled by Kandla in the same period. Mundra port, run by Adani Ports and Special Economic Zone Ltd (APSEZ), has emerged as the largest merchant port in India, overtaking the Union government-controlled Kandla Port by a whisker in terms of cargo handled in the first quarter of the current fiscal. Its the first time t hat a private port has taken the top position.

Realty, gold soak up nearly two-thirds of household savings

That Indians are in love with fancy houses and precious metals is no secret. This only gets affirmed by the sharp rise over the past five years in the share of national savings diverted from financial assets, such as bank deposits, bonds, mutual funds, equities and insurance & pension funds, to physical ones land, buildings and precious metals. This diversion has led to a corresponding fall in the flow of capital to productive sectors,
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CIBP/Altius/2013/Aug/1 affecting the capex cycle and economic growth. According to Central Statistics Office (CSO) data, nearly half (46.4 per cent) of the countrys gross domestic savings in 2011 12 were in physical assets a nine-year high.

. PM: need to reduce demand for gold, petroleum products

India is committed to bringing its current account deficit under control and reducing demand for gold and petroleum products, Prime Minister Manmohan Singh said on Friday."We are committed to bringing the current account deficit under control by addressing the demand side and supply side of the problem. On the demand side we need to reduce the demand for gold and the demand for petroleum products, the two biggest components of our trade deficit," he told businessmen in New Delhi.

Rupee recovers on RBI therapy; bonds, equities sink

As the RBI put the squeeze on the liquidity in the banking system, the rupee perked up but hit the bond and equity markets. The rupee ended stronger at 59.15 to the dollar against the previous close of 59.77. The Indian currency swung between a high of 59.01 to a low of 59.60 intraday. Markets may remain volatile till monetary policy gives direction on rates.

Barcoding, labelling norms for all major exports soon

The government of India is planning to come up with barcoding and labeling norms for all major exports soon. Speaking to newspersons after the inauguration of a national conference on global trends in packaging of food, pharmaceutical and bulk drugs organized by the Indian Institute of Packaging(IIP) here on Friday, Union Minister of State for Commerce and Industry D.Purandeswari said It would improve the quality and prevent spurious goods. As of now, barcoding and labeling is mandatory for pharma and grape exports. She, however, did not give any time frame for the expansion of barcoding norms for other sectors.
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RBI, rupee and growth

RBI announced its strongest set of measures to stem the fall in the rupee on the July 15. As part of the measures, RBI decided to suck out rupees from the system, in order to push up the value of the rupee relative to the dollar. This was first done by capping the amount that banks can borrow from RBIs Liquidity Adjustment Facility ( LAF) at R75,000 crore and selling government bonds worth R12,000 crore. On Tuesday, RBI adjusted those measures and said that banks can only borrow 0.5% of their deposit base from the LAF window.

Since the availability of dollars in the market has been low for many months and the supply of rupees has been more than adequate, the value of the dollar has risen relative to the rupee. By reducing rupee liquidity, RBI was trying in part to correct this imbalance. RBI also feared that traders were using cheaply available rupees to speculate on the currency markets, making the rupee more volatile. By pushing up the cost of borrowing rupees from the market and the banking system, RBI is trying to discourage such speculative trading. At the same time, higher domestic interest rates could help marginally in luring back foreign investors to invest in government and corporate bonds in India due to the higher returns offered in comparison to developed markets like the US. The rupee fell to a record low of 61.21 per dollar in intra-day trade on July 8 but has recovered marginally since then to trade below the 60 level.

Speculation in the currency markets Abundant rupee liquidity had led to some increase in speculation on the rupee. Anecdotal evidence suggested that traders were borrowing funds in the inter-bank market, where rates were low, and using those funds to take speculative positions on the rupee. This was adding an element of volatility to

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the currency markets, which RBI was uncomfortable with. Tightening domestic liquidity will reduce some of this unnecessary speculation on the domestic currency market. However, a large amount of the speculation on the currency takes place in an offshore market known as the non-deliverable forward (NDF) market. This market, which deals in currency forwards, is actively used by foreign investors to hedge their currency risk. However, in some cases when there is a wide differential between rates on the NDF market and rates in the domestic market, traders try and take advantage of the arbitrage opportunity. This arbitrage has, in recent months, added to the pressure on the rupee. Forex experts feel that curtailing this kind of speculation is difficult for RBI, since it does not regulate the NDF market.

At a macro level, the fall in the value of the rupee has been driven by the wide trade deficit and current account deficit that India is facing. Given the uncertainty in the global markets, India may struggle to get an adequate amount of foreign capital to cover this deficit, which, in turn, will lead to a weaker currency since dollar outflows will be higher

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CIBP/Altius/2013/Aug/1 than dollar inflows. Therefore, curbing speculation will not necessarily stem the fall in the rupee.

Government bond prices and bond yields RBIs decision to make liquidity scarcer and more expensive led to investors and banks selling their excess holdings in government bonds in order to conserve cash. This meant that prices of government bonds fell and yields which move inversely to pricessurged. Investors also feared that RBI may announce further measures such as an increase in the cash reserve ratio (CRR) the proportion of deposits that banks have to hold in cashin the coming months. On Tuesday, RBI asked banks to maintain 99% of the required amount on a daily basis. A section of the market believes that RBI may hike CRR from the current level of 4% at its quarterly monetary policy on July 30 if the rupee continues to remain weak. Economists, however, argue that an increase in CRR will lead to an immediate increase in lending rates, which could hit growth in the economy. The 10-year benchmark bond yield has remained above 8% since the RBIs announcements. Deposit and lending rates Bankers do not plan to raise deposit and lending rates at the current juncture. Since demand for loans remains weak, banks are likely to refrain from raising the cost of loans. At the same time, banks have adequate liquidity, so an increase in deposit rates is also unlikely. While rates are unlikely to go up immediately, hopes that banks will reduce lending rates further have dimmed. For instance, public sector lender Oriental Bank of Commerce, which had recently announced a reduction in its lending rates, decided to defer the rate reduction following RBIs announcements.

Slipping Growth A number of economists and forecasting agencies have reduced their outlook for growth for the current fiscal year in the last one week. The reduction in forecasts is partly linked
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CIBP/Altius/2013/Aug/1 to a lack of pick up in industrial activity so far this year. Most economists were also expecting a further reduction in interest rates from RBI this year, which may have helped spur economic activity to some extent. However, with the probability of rate cuts reducing, a boost to growth seems unlikely. Brokerages that have reduced their forecast for growth include Nomura which expects 5% growth compared to 5.6% earlier. Deutsche Bank, Macquarie and Bank of America-Merrill Lynch, all have pegged down their growth forecasts to between 5.3% and 5.5%.

Major ports losing cargo volumes: A report by ICRA

Export and import cargoes are increasingly getting diverted from major ports in India to the new non-major ports due to capacity constraints. The major ports, which registered a three per cent fall in cargo volumes last fiscal to 546 million tonnes, have been slow in capacity addition, benefiting the privately-operated non-major ports. Cumulatively, in 2012-13, the major ports registered their lowest cargo volumes in the last four years. Non-major ports, by virtue of a more diversified cargo mix and higher efficiency
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CIBP/Altius/2013/Aug/1 standards, gained 13 per cent in volumes terms. In terms of market share, major ports accounted for 58 per cent of the total throughput, compared to 61 per cent in the previous year, said a new report by ICRA Ltd, an associate of Moodys Investors Service. The share of non-major ports was up 42 per cent last year, it added.

Even during the first quarter of the current fiscal, the cargo throughput decline in major ports continued, with a one per cent reduction in volumes over the year-ago period. ICRA feels cargo growth outlook for the Indian port sector is strong over the medium to long term, driven by domestic requirements of coal, crude oil and containers.

The progress on award of projects at major ports was better last fiscal. A total of 32 projects could be finalised and awarded during the year, as compared to just three in the previous year. However, even this fell short of the planned target of 42 projects. Despite the uptick in project award s, actual implementation could see further delays. The progress in the greenfield non-major ports sector continues to be slow due to a host of problems such as land acquisitions and clearances, the report said.

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The rising dollar: Green and back

The dollar is enjoying a rare period of strength. How far can the rally go?
A strengthening dollar is a rare thing. The upward bursts in the early 1980s and the late 1990s were deviations from a generally falling trend. Since it was freed from the Bretton Woods system of fixed exchange rates four decades ago, the dollar has mostly fallen in value against other rich-world currencies. But a growing band of analysts reckon it is time for the greenback to regain a bit of lost ground . The immediate spur for optimism about the dollar is the recent signalling from the Federal Reserve that its purchases of bonds with newly created money may start to tail off as soon as September. The prospect of an end to quantitative easing has already pushed up long-term interest rates. The yield on ten-year Treasuries has risen to 2.6% from a low of 1.6% in May. As yields rise, capital is attracted to America from riskier parts of the world. That in turn pushes up the dollar. The deeper cause of the dollar rally is the relative health of Americas economy. Bad mortgage debts have been cleaned out of banks. The housing market is recovering. Jobs are growing steadily. Non-farm employers added 195,000 workers to their payrolls
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CIBP/Altius/2013/Aug/1 in June, in line with the average increase so far this year.GDP growth has been modest even if it is likely to strengthen a bit. In an update to its projections, the IMF this week forecast that the American economy will grow by 2.7% next year. That is hardly a boom. But other big rich economies, such as Japan and Britain, cannot hope to do nearly as well. And the euro zone is still in recession.

As if to underline these divergent fortunes central banks in Europe indicated earlier this month that looser monetary policy may still be required on their patch. Mario Draghi, the president of the European Central Bank (ECB), said on July 4th that the bank expects to keep its main interest rates at present or lower levels for an extended period of time. This was the first time the ECB had given explicit guidance about the future path of interest rates. The Feds own forward guidance about the probable tapering of its bond purchases is what pushed up these yields in Europe. As the extent to which monetary policy in America and Europe are on different paths becomes clear, the transatlantic gap in market interest rates is likely to widen. The dollar ought to rise further. Still shallow But how much further? For now a fitful upwards grind of 5-7% against the other major currencies might well be the limit. Americas economy is doing well enough to give its currency a boost, but it is not yet so strong as to spur the sort of bull run the dollar enjoyed in the late 1990s. Even if the Fed dials back bond purchases soon, it might be years before it raises its benchmark interest rate from near zero.

The Fed has said it will stay where it is until unemployment, now 7.6%, has fallen to 6.5%; on July 10th Ben Bernanke, its chairman, said the rate could stick at near zero long after that. And the Fed would itself react to a fast-rising dollar: no rich country is keen to have a strong currency when growth is scarce. That is why the dollar rally will be a shallow one, says Kit Juckes, an analyst at Socit Gnrale.

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CIBP/Altius/2013/Aug/1 There may also be a limit to how far the euro can fall. The euro zones sovereign -debt crisis has dragged on for more than three years. Yet in all that time the euro could rarely be described as cheap. And even after the monetary-policy steers from the Fed and the ECB, the euro is still a bit above the fair value of $1.26 suggested by the Big Mac index, our rough-and-ready guide to currencies (see graph).

One reason for this resilience might be that euros are harder for foreigners to earn than dollars are: the euro zone has a large current-account surplus whereas America has a big deficit. Another is that Chinas central bank may have used any temporary weakness in the euro as an opportunity to diversify its huge reserves away from the dollar. Can the euro get below, say, $1.20? Youll have to ask the Chinese, says a USbased hedge-fund manager.

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CIBP/Altius/2013/Aug/1 The dollar seems likely to make the biggest gains against emerging-market currencies. A handful of countries, including India and South Africa, which depend on foreign capital to finance their trade deficits have already seen their currencies fall by around 10% since the beginning of May, merely on the prospect that the Fed might take its foot off the monetary-policy pedal (see chart). As long as bond yields were low in America, richworld investors were happy to buy emerging-market bonds. But such capital will be a lot harder to secure from America as quantitative easing comes to an end. Some emerging markets have already reportedly sold a slug of dollars from their foreign-exchange reserves to slow the descent of their currencies. There may be some second-round effects from this as these central banks then replenish their dollar reserves by selling some of their euros. By next summer visitors to America may find the dollar that bit stronger and their wallets emptying that bit faster.

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CENTRE FOR INTERNATIONAL BUSINESS AND POLICY

ALUMNI NEWS KEYOOR PRASHANT DIWAKER PGDM (IB) BATCH 2009-11 Prashant Keyoor, has been awarded the Annual Titan Award for Best Sales Person towards contribution to Customer Satisfaction (FY 12-13). In the past he has been awarded with Strategic Sales Spot Award for achieving targets under a difficult business environment in Q1-Q2, FY 12-13. These awards recognize the significant contribution towards ensuring high Customer Satisfaction and ensuring continuous business growth for the organization. Congratulations, Keyoor and all the best for the future. He can be contacted at <keyoor.diwaker@wipro.com>.

CIBP NEWS Congratulations to the four CRs of the incoming batch of 2013-15 and we wish them a successful stint in the coming year.

SATAMANYU PANDA

CHINMAY MODI

SHIVANI MADHAVAN

NYSHIDHA NEKKANTI

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ABOUT THE CENTRE

The Centre for International Business and Policy, established circa 2005, under the aegis of Birla Institute of Management Technology (BIMTECH), has been striving to be a leader in providing students and business managers with the skills to understand foreign cultures and business practices and to perceive and grasp overseas marketing and investment opportunities, to overcome language barriers, and to deal effectively with foreign governments and international institutions.

Editorial Team Chief Editor: Editors: Dr. Anupam Varma Dr. Abha Rishi Dr. Anuj Sharma Prof. Rajiv Sharma Mr. Atul Juyal Ms. Rupali Singh

Res. Associate: Centre Manager:

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