Economy Snapshot

This post provides a snap shot of the falling global FI's and Indian economy indicators.

September 2008 has gone down in the annals as the worst period for financial companies worldwide. It all started with the placement of Fannie Mae and Freddie Mac under conservatorship and Lehman Brothers Holdings filing for bankruptcy after the failure of talks of a sell-off. Close on the heel came Merrill Lynch’s acquisition by Bank of America and the capital infusion into AIG by the Fed. Later during the month, Washington Mutual’s assets were seized by federal regulators, thereby putting an end to the USA’s largest savings and loan company.

The effect of the turmoil in the US mortgage market has spread far and wide, including the financial institutions in Europe that are holding mortgage securities backed by US subprime loans.

We have already seen European financial institutions reporting huge losses, with UBS at the forefront. The Dutch and Luxembourg governments rode to the rescue of Fortis with an 11.2-billion-euro bail-out to keep the US-born financial crisis from claiming another victim in Europe.

The governments of France and Belgium threw a $9-billion lifeline to Dexia SA, a French-Belgian lender that has suffered huge losses in its American operations. Moreover, many countries have had to ban short selling temporarily.

Meanwhile India’s trade deficit stood at USD13.9 billion in August 2008 compared with USD10.8 billion in the previous month. The August trade deficit indicates a 96.4% yearon-
year (y-o-y) growth. With this, the year-till-date (YTD) trade deficit has now widened to USD55.2 billion from USD34.4 billion in the comparable period of the last fiscal.

IIP:
In August 2008, the country’s industrial production grew by a dismal 1.3% year on year (yoy). The growth is below the 7.4% growth seen in July 2008 and well below the 10.9% growth recorded a year ago. On YTD basis, the growth in the Index of Industrial Production (IIP) stands at 4.9%, which is almost half the growth achieved (10.0% in the financial year 2008 till date) in the comparable period of the last year.

Domestic Inflation:
Inflation has cooled off to 11.44% for the week ended October 4, 2008, after touching a record high of 12.91% for the week ended August 2, 2008. The continued downturn in the commodities market would remain the key to the Reserve Bank of India (RBI)’s target of reducing inflation to 7% by the end of FY2009. Importantly, the sharp decline in the prices of crude oil and other commodities coupled with the high base effect of the previous year that will come into play in the days ahead augurs well for further decline in inflation going forward.

Indian Banking :
The credit growth (as on October 3, 2008) has moderated to 24.8% yoy from the high of 26.6% in June 2008, reflecting the impact of the recent monetary tightening.The deployment rate (ie the credit-deposit [CD] ratio) has increased to 72.6% while the incremental CD ratio has spiked up to over 87%, as deposit growth has fallen steeply since the beginning of the current fiscal.

As a fall-out of the liquidity crunch in the global as well as domestic markets, the RBI has cut the CRR by 250 basis points. Besides, the government has decided to disburse Rs25,000 crore to banks with immediate effect as a part of the first installment for the farm loan waiver scheme. The tighter liquidity conditions along with the cooling off of growth in the key monitorables (M3, credit, deposit) builds up a case for an earlier reversal in the interest rate cycle than previously expected.

Interest rate ceiling on FCNR(B) and NR(E) RA have been increased by 50 basis points each.

Also, Banks will be allowed to borrow funds from their overseas branches and correspondent banks up to 50% of their unimpaired Tier I capital as at the close of the previous quarter or $10 million, whichever is higher, as against the existing limit of 25%.


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