Intelligentguess

Situation

Consumer prices - the main inflation indicator was down in Feb’07.
On a monthly basis prices were down to -0.50%  ( Jan’07 was at -0.20%).
On an annual basis prices were down to a  -0.20 % p.a ( Jan’07 was at 0.00%)

Background

1. The Bank of Japan (BOJ) raised the uncollateralized overnight call rate from 0.25% to 0.50% on Feb 21 2007 ( with a comment that future rate hikes would depend on growth and consumption).
2. Producer Price Index (PPI) growth rate dropped in Feb’07 (read : PPI growth rate drops - effects interest rate outlook)
3. Consumer prices have been dropping since Aug’06 ( read : Prices flat in Jan’07 - down from 0.3% p.a in Dec’06)
4. Production is expected to increase in Mar’07. ( New orders position seem to back this)

Conclusion (click on picture for a larger visual)

• The BOJ’s raising of interest rates in Feb’07 should keep CPI in the negative territory  
• It does look like CPI will remain between 1.00 % to a  -1.00 % p.a towards Jun’07. ( tendency towards a -1.00% p.a)
• As such the BOJ may have a relaxed posture towards raising interest rates( i.e not raise)  in the coming months.

Note

The expected increase in production in Mar’07 may not be matched by increase in demand ( so will finished products prices drop further ? )  

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Money market lending rates (Overnight and short term) have shot up once again on Friday, after having eased significantly on Thursday.

Rates for clean lending / borrowing hit a high of 70% per annum, while rates for borrowing against collateral have also hit new highs (50% as I write this).

Financial year end considerations seem to be the driving factors. Compounding matters is the fact that this Friday also happens to be a “reporting friday”, a day on which all data is calculated and revealed. Reserve maintenance and other aspects are linked to figures as on the “reporting friday”. Add to it, a bank holiday on the first working day of the new financial year (April 2) means that Friday’s borrowing would need to be made for 4 calendar days. This too has served to drive up rates.

What did come as a small surprise to marketmen was the “rate range” limits imposed by the Clearing Corporation of India (CCIL) for transactions in the CBLO segment (the segment for borrowing / lending against collateral). A price limit of 20% per annum placed, by CCIL, on the transactions came to light only today, since the CBLO rates had never touched these high levels in the past. This fact had not been revealed to the markets in the past.

These limits had ostensibly been imposed to prevent deals at unnaturally high levels due to dealer punching mistakes into the system. A good intent, no doubt, but not congruent with the objective of fair price discovery in a continuous market environment.

To their credit, though, CCIL has increased / removed the range limits as market participants (both lenders and borrowers) complained.

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The Indian Rupee (INR) suffered its sharpest one day fall for more than a decade on Thursday.

At close of local trading in Mumbai, INR fell approx. 1.6% relative to the US Dollar. It closed the trading session at 1 : 43.75 against the greenback. It had closed the previous trading session at  1 : 43.05 to the USD.

This comes after a period of sustained rise witnessed during the month of March. In fact the INR had hit a 7 year high at close on Wednesday.

A chart (Source : Bloomberg) displaying the movement of the currency during the past few months is given below. The chart is in inverted scale (meaning a downmove on the chart reflects weakening USD or strengthening INR and vice versa)

The chart was taken mid session on Thursday and therefore does not reflect the full fall in the value (it stops at 43.42 whereas the actual close was at 43.75)

The primary trigger for the sudden move came from easing money rates. Inter bank overnight money rates eased to single digits (9%) after having hit a high of 30% in the previous trading session.

The initial move in the currency (pictured above) during the morning trading session therefore came from banks who rushed in to cover their short dollar positions, as rupee resources became abundant (possibly as a consequence of government spending finding its way into the banking system). This is corroborated by the fact that the forward premia moved in the opposite direction to the spot rate, confirming suspicions of short covering.

The afternoon trading session was characterised by possible intervention by the central bank. RBI which had been keeping away from the fx markets (very unlike them) for the past couple of weeks is rumored to have intervened (back to their old ways) in the marketplace today buying dollars and therefore amplifying the fall in the value of the local currency.

Software exporters sitting in their naturally cool offices in places like Bangalore must be heaving a sigh of relief. 

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Situation 

On a monthly basis - New orders were down to a  negative growth of -0.19% in Jan’07 as compared to Dec’06.
(growth of 1.76% in Dec’06 and 0.76% in Nov’06 )

On an annual basis - New orders increased by 9.99 % p.a ( growth of 6.41% p.a in Dec’06 and  7.22% p.a in Nov’06 )

Background

1. Interest rates have been raised in Dec’06 towards 3.5% and in Mar’07 towards 3.75%.
2. While the annual growth rates seem to have improved ( from a 6.41% p.a to a 9.99% p.a  ) it may not be sustainable.

•  The hike in interest rate in Dec’06  has already curbed monthly growth rate for Jan’07. The effects of the hike could curb monthly growth rates in Feb’07 - Mar’07 too.
• The second hike in Mar’07 would have effects on the monthly growth rates from Apr’07 towards June’07.
• In order for the annual rates to sustain at a 10% p.a growth rate the monthly growth rate for Feb’07 would need to be at 2.98%. The montly growth rates have been ranging between 2.98% to a -1.31% for the past 12 months.

Conclusion ( click on pic for a larger visual)

At best the New orders growth ( annual) will sustain at 10% p.a . It is more likely to drop to a 7.5% p.a - 8.5% p.a  towards Feb’07 - Mar’07.

The effects of the Mar’07 hike will keep New orders growth range below 10% towards a minimum of 6.4% towards Jun’07 - Jul’07.

- The Production Indices ( IIP )  cannot be expected to rise in the coming 2-3 months ( read also: Euro area Industrial Production )

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Sri Lankan, Lasith Malinga achieved a feat never achieved before in the game of Cricket.

He took four wickets in four balls  in Sri Lanka’s game against South Africa today. Not surprisingly, this has turned out to be the best game in the ongoing world cup so far.

Savour the following description of the feat from a Cricinfo report

An extraordinary spell of fast bowling from Lasith Malinga, where he strung together a devastating sequence of four wickets in four balls, threatened to produce the greatest one-day heist before South Africa scrambled to a dramatic one-wicket victory in a heart-stopping Super Eights clash in Guyana.

South Africa needed a meagre four runs to win with five wickets in hand when Malinga finished batsmen as if swatting flies. He fooled Shaun Pollock with a beauty of a slower ball before hurrying Andrew Hall with a juddering yorker that looped up to cover. The first ball of the next over produced the hat-trick, the fifth in World Cups, when the set Jacques Kallis nicked to the wicketkeeper before a brute of a yorker zoomed past Makhaya Ntini.

Malinga’s burst overshadowed the first five-wicket haul of the tournament - Langeveldt’s 5 for 39 which restricted Sri Lanka to 209.

Malinga’s feat is probably even more difficult to achieve than the six sixes that Herschelle Gibbs delivered against Holland.

Congratulations all around are in order.

Update : Here’s the video of the feat. It’s slightly long (over 5 mins), but worth watching every bit of it.

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Overnight Call Money rates rose in the Indian money market today to over 25% p.a. Rates for borrowing against collateral are at a relatively modest 9.5%. Remembering that it was not too long time ago that rates were in their low single digits, that these things can be put in perspective.

While genuine liquidity tightness might be a reason, the pressure on banks to show growth in balance sheet size on the reporting date of March 31 is also contributing to the situation. This is corroborated by the fact that banks are offering juicy rates for short term deposits of 7-15 days (primarily to crossover the financial year end on March 31). Some banks have been rumored to offer rates as high as 20% per annum for some of these short term deposits.

Corporates have pulled money out of liquid mutual funds, a part of which may have been used to take advantage of these relatively high returns. Funds have therefore been forced to look at liquidating short term assets to meet these cash needs. This has in turn led to an increase in yields on short term money market instruments.

Remarkably, bond prices have not fallen much in spite of the tightness. They have actually risen today (more on this subject in a separate post).

The impact of tight money is also being felt in the fx market. The local currency (INR) now trades at 43.10 to the US dollar, a 4 year high. The cash shortage has forced banks to sell dollars. Some arbitrage money may also have found its way from offshore locales accentuating the upward pressure on the local currency.

It appears that the Reserve Bank of India (RBI) has, for the time being, allowed INR to appreciate. A motive for this could be to maintain the pressure on short term rates which would in turn force banks to become less complacent about credit standards. It would also act to retard runaway growth in credit. Relaxation of credit standards and runaway credit growth has been one of the concerns of the central bank. The current bout of silence on market conditions seems to reinforce the fact that RBI is reasonably happy with the current situation.

The liquidity tightening appears to be deliberate (on the part of RBI) and seems to have the blessings of the government too. Government spending would normally ameliorate the situation of cash shortage, something that does not seem to be happening.

Has the central bank moved away from its primary focus of managing exchange rates, and has tilted towards managing money supply / interest rates / credit growth?

My guess is we’ll have to wait some more time to get a clear answer to this question. For the time being though, either endure the pain or enjoy the ride depending on which side of the table you sit on.

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I had recently come across an Economic Times article talking about the large purchases of government bonds that Indian banks had made in recent times (Unfortunately I’m unable to find a link to the URL of the article on the Economic Times website).

Coming at a time of significant debate on the Statutory Liquidity Ratio (SLR) and, how, many banks have holdings that are close to their bare minimum statutory requirement of 25% of deposits, I decided to look at the numbers per se and these are presented below.

These numbers are for the reporting dates mentioned in the first column. The bond (SLR) holding of banks as a percentage of deposits is given in the second column

Date                               SLR holding as % to deposits

01-Sep-06                                                34.13
15-Sep-06                                                33.78
29-Sep-06                                                32.70
13-Oct-06                                                33.32
22-Oct-06                                                33.17
10-Nov-06                                               32.96
24-Nov-06                                               32.83
08-Dec-06                                               32.40
22-Dec-06                                               32.07
05-Jan-07                                               32.16
19-Jan-07                                                31.78
02-Feb-07                                               31.22
16-Feb-07                                                31.47
02-Mar-07                                               32.17

(The figures above are raw and are not adjusted for variations that may arise from daily LAF subscriptions etc. However, that’s not so important for the critical point of discussion in this post)

While there is no doubt that bond holdings (even as a % of deposits) were dwindling from a high of approximately 34% to a low of about 31.25% in early February, the figures seem to convey that the system as a whole has signifcant slack (approximately 7%- based on raw data - as on March 2, 2007) over the minimum statutory requirement of 25%.

If some banks are close to the minimum of 25%, then very clearly there are many who have significant slack - much higher than even 32%. Relative sizes do play a role here. However, if it was only small banks that were holding bonds close to the minimum required, we could not have explained the resilience in bond prices.

Government bond prices have been relatively resilient (rarely has the yield on the 10 year benchmark government bond broken above 8%, in recent times), in spite of the continued monetary tightening resorted to by the central bank. One of the reasons attributed to this has been the relatively small amount of slack available with banks on the SLR front.

Clearly then, there are quite a few large banks who are also flirting with the magic figure of 25%, but even more significantly there are several who hold significantly large holdings (over and above the SLR requirement).

One of the options under consideration has been reduction in the SLR level itself (for which powers have now been granted to the Reserve Bank of India by the Indian Parliament). However RBI may be unwilling to do so at this juncture, given its stance on monetary tightening.

Maybe, usage of “moral suasion” here may be something that could be under contemplation.

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The Abel Prize in Mathematics for the year 2007 has been awarded this year to Chennai, India born Srinivasa S R Vardhan (pictured alongside).

The Abel Prize is the closest that Mathematics has to the Nobel Prize. It was instituted in the year 2002 by the Norwegian Government.

Vardhan currently teaches at the Courant Institute of Mathematical Sciences, New York University, the leading institution in the field of Applied Mathematics.

Coincidentally, the 2005 prize also went to a faculty of the Courant Institute , Peter Lax.

Though Vardhan has been based out of America for the last 40 years, Indians around the world would still be proud of his achievement. Our congratulations to Vardhan on this feat.

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Link from : the eminently readable PRD blog - who found it on  www.despair.com

Finds a place here since market professionals can relate to it.

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In his column in the Mint today (free registration required), Ramesh Ramnathan, ex- citibanker and founder of Janaagraha writes

One morning, early in my banking career, a business manager publicly chastised a colleague for what seemed like a fairly minor infraction.

“Man, I wish I didn’t have to take this from him. Wish I had enough money to tell him what he could do with his opinion,” Pablo said.

I asked, “How much would be enough? What would the number be for you?”

This got the conversation going among our group of young associates. Chris, the American, wanted a million, so that he could get a sports car and a summer home. ‘The Number’ was different for each person. Pablo wanted two-and-a-half million, so that he could go back to Ecuador and start his own tennis club—his original passion.

Soon, other senior colleagues got involved and highest value that The Number got to was 10 million, with justifications about children, parents and mortgages. By now, the discussion was loud and lively, with a lot of ribbing and day-dreaming, when the head of the trading floor saw the cluster and walked over.

“What’s going on?” he asked. When told about The Number and what it was at, he said, “Sounds reasonable,” and then added, “I’d say double your numbers, just in case you get divorced,” as he walked away.

Ramesh goes on to expound on the changing relationships that Indians have been having with money, and the financial fever evident everywhere.

The killer lines come at the end of his piece

As hard as it is to get on to the financial treadmill, I guess it is equally hard knowing when to get off it. Knowing The Number. After all, even John Rockefeller, the world’s first billionaire and for long the richest man alive, when asked, “How much is enough?” replied, “Just a little more.”

Well Said!

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