The flagship company of Reliance Group, Reliance Industries, RIL has announced its third quarter results. The company's Q3 net profit was up 28.14% at Rs 5,136 crore versus Rs 4,008 crore.
Its net sales were up 5.15% at Rs 59,789 crore versus Rs 56,856 crore.
Excerpts from Reporter's Diary on CNBC-TV18 Watch the full show »
SP Tulsian, sptulsian.com says, the numbers are slightly above than what he was expecting on the bottom-line. On top-line, the numbers are flat, he adds. "I think Q4 is likely to be better than Q3."
He is quite positive on the petchem segment in the next two to three quarters.
According to him, the gross refining margins (GRMs) could be close to USD 9.5 per barrel in the fourth quarter. "I expect a GRM of close to USD 9.5 per barrel, provided crude remains at USD 90 per barrel," he adds.
Tulsian says, till expiry, RIL share should rule in the range of Rs 970 to Rs 1,000.
Here is a verbatim transcript of the exclusive interview. Also watch the accompanying videos.
Q: What is your initial take on the numbers?
A: I had estimated a profit after tax (PAT) of Rs 5,060 crore and the company has reported Rs 5,136 crore. I had estimated net sales of Rs 59,450 crore and company reported net sales at Rs 59,789 crore. So, I don’t think that there is too much variation atleast as per the expectations on the top-line. But, yes, on the bottom-line, it is marginally up may be by about Rs 75 crore which all could come largely because of the lower depreciation or may be some tax adjustments or may be slight increase in the other income.
GRM, I was expecting at USD 8.9 per barrel. So, I think broadly if you really ask me, it is slightly above than what I was expecting on the bottom-line, on top-line it is flat. The market was expecting probably at Rs 5,200 crore, so there may be a little disappointment. But, overall, I don’t think that there should be any disappointment to the market from these results.
Q: Petchem margins, what’s the expectation going forward, are they expected to improve from here on?
A: If you take the present scenario, whether on the polymer front or may be the polyester front and especially the polyester intermediate, when you talk to the yarn makers or the textile makers, they say that they are sitting with the demand draft and asking for polyester staple fiber from the company. The delivery period as of now is two-three months. It has obviously given the selling or the pricing power also to the company. I don’t think that these thing is going to ease out on this atleast on the polyester intermediate front over next six months or so because you cannot really have the production of the cotton getting improved. So, this is going to be the real growth driver for the company.
The margin expansions will keep happening because again as I said 14.81% was my estimation for earnings before interest and tax (EBIT) which has now come to 15.2%. So, this is on the polyester front.
Even if you see on the polymer front also, even there the pricing power has been quite good. The kind of ramp up which we have been seeing in crude, again there I don’t think that even if I take a virtually the status quo on the polymer front or may be the pricing power remaining with the company over polyester, I am quite positive on the petchem segment in the next two to three quarters.
Q: I remember last time on the concall Mr Alok Agarwal saying that mid-cycle margins are seen between USD 9.5-10 a barrel. We have clearly not moved despite Q3 being a very seasonally strong quarter. All the factors being supportive, we haven’t moved really to that. By when do you expect us or Reliance to move towards a mid-cycle margin of say USD 9.5 or do you think there could be a blip up before we can head to that level?
Excerpts from Reporter's Diary on CNBC-TV18 Watch the full show »
A: If the crude prices remains at this level, may be at about USD 90 per barrel, I don’t think that the company will really be in a position to ramp it up beyond USD 9.1 or 9.2 per barrel. The only scope where they can really ramp it up may be beyond USD 9.5 per barrel is the light heavy crude differentials because again we have seen the gap between light and heavy crude differentials widening in the global market. Reliance being the refineries with the highest Nelson complexity, they should be able to take advantage of that.
If you take the case of USD 9 per barrel, which they have reported for this quarter, I think may be the contribution of about 30-40 cents must have come because of that. But this has started at the fag end because if you see the trend that has started happening from the December month onwards. I am quite positive that for January- March quarter the company should be able to enjoy the light heavy differentials of atleast 50 cents to may be 70 cents. So, I should expect a GRM of close to USD 9.5 per barrel provided crude remains at USD 90 per barrel. If it falls, obviously it will have the prorata effect. If it moves up, to that extent the increase in the crude prices can get added to the GRM. But yes going ahead the trigger for expansion in the GRM margin would be the light heavy crude differentials.
Q: Where do you see the stock price headed? Do you think Reliance is going to continue to underperforming streak for the time being or you think there could be some value buying that could emerge and then take the stock higher from these levels?
A: To sum up, I think Q4 should be better than Q3. I don’t think that there should be any disappointment by the market barring the technical factors which you see ahead of the expiry. So, may be it should be able to hold a level of Rs 970-975. But, yes, equally it will have a resistance also at Rs 1,000. So, it is more the technical factor because we have seen huge shorts built up not in Reliance, otherwise also in all frontline counters. So, it is difficult to take how the market will see the short covering on Monday, Tuesday and Thursday because Wednesday being a holiday. So, in a nutshell for next three days, till expiry the share should rule in the range of Rs 970 to Rs 1,000. I don’t see any reason for disappointment by the market on the pricing front for the share and Q4 is likely to be better.
Friday, January 21, 2011
Tata Steel FPO subscribed 6 times
The follow-on public offer of the world's seventh largest steel company Tata Steel, which closed today, has subscribed 5.9 times so far, reports CNBC-TV18.
Qualified institutional investors led the major support to the issue - with their reserved portion subscribed 10.41 times. Retail and non-institutional investors' reserved portion was subscribed 1.27 times and 7.21 times, respectively.
Tata Steel FPO subscribed 6 times
The issue received bids for 29.07 crore equity shares as against issue size of 4.87 crore shares (excluding anchor investors' portion).
The company aims to raise Rs 3,385.8-3,477 crore through the 5.7 crore shares' issue at price band of Rs 594-610 a share.
Tata Steel intends to use issue proceeds for partly financing the company’s share of capital expenditure for expansion of existing works at Jamshedpur; and payment of redemption amounts on maturity of certain redeemable non-convertible debentures issued by the company on a private placement basis.
Qualified institutional investors led the major support to the issue - with their reserved portion subscribed 10.41 times. Retail and non-institutional investors' reserved portion was subscribed 1.27 times and 7.21 times, respectively.
Tata Steel FPO subscribed 6 times
The issue received bids for 29.07 crore equity shares as against issue size of 4.87 crore shares (excluding anchor investors' portion).
The company aims to raise Rs 3,385.8-3,477 crore through the 5.7 crore shares' issue at price band of Rs 594-610 a share.
Tata Steel intends to use issue proceeds for partly financing the company’s share of capital expenditure for expansion of existing works at Jamshedpur; and payment of redemption amounts on maturity of certain redeemable non-convertible debentures issued by the company on a private placement basis.
Thursday, January 20, 2011
Mobile Number Portability is here. But think before you switch
NEW DELHI: With mobile number portability ( MNP )) becoming operational from Thursday, telecom consumers now have the choice of switching their operator without having to change their mobile number. This facility is available to both postpaid and prepaid customers and subscribers of GSM as well as CDMA service. The only restriction is that you can change your operator without changing your number only within your current service area. Which means subscribers cannot take their Delhi number to an operator in Mumbai . They can only change their operator within Delhi.
The cost of porting a number to a new operator is Rs 19, with the maximum porting time capped at 7 working days by telecom regulator Trai except in Jammu and Kashmir, Assam and North East service areas, where it will be 15 working days. However , consumers will have to remain with the new operator for three months before moving on.
Number portability has been delayed by three years, leaving many consumers anxious . Several subscribers, who feel disappointed with billing, customer care, and overall service delivery, have been waiting for this moment . But the real question is whether you should take the plunge and switch loyalties or not. Will the switch really be worth your trouble?
The real reason for change would be to access better quality of service or improved customer care and of course, the proposition of a better tariff package. This, however,will occur only if operators believe that the churn out of their subscriber base will be so high that they need to improve their service or customer care, etc. However , surveys have revealed that the net effect of number portability is practically negligible . This means most large operators gain and lose roughly the same number of subscribers, taking away any incentive to dramatically change quality of service or customer care or pricing owing to the threat of losing subscribers or the option of gaining subscribers.
For the consumer, this could mean you might switch your operator, but based more on a perception of improvement rather than a real difference. Trai’s September 2009 data suggests that at a pan-India level, the call set up success rate was upwards of 97.26%—the lowest being in UP (East) and the highest at 99.99% in Mumbai . Similarly the call drop rate according to Trai is less than 3% across the country with the highest at 1.9% in Rajasthan and the lowest at 0.42% in Orissa. In fact, the difference between GSM and CDMA operators is also negligible .
Further, all operators across the country score upwards of 90% with regards to the parameter called connection with good quality voice with the highest in UP West (CDMA) at 99.99% and the lowest in UP East (GSM) at 95.1%. It is also a well established fact that tariffs are extremely competitive and so moving to a dramatically lower bill is unlikely.
Some consumers who are frequent callers, an equivalent of closed user group—or family members who are currently on different networks could now move to single network to take advantage of attractive tariff packages, including free calls within the same network, etc.But before you make any switch check whether your operator is providing a similar option.
The cost of porting a number to a new operator is Rs 19, with the maximum porting time capped at 7 working days by telecom regulator Trai except in Jammu and Kashmir, Assam and North East service areas, where it will be 15 working days. However , consumers will have to remain with the new operator for three months before moving on.
Number portability has been delayed by three years, leaving many consumers anxious . Several subscribers, who feel disappointed with billing, customer care, and overall service delivery, have been waiting for this moment . But the real question is whether you should take the plunge and switch loyalties or not. Will the switch really be worth your trouble?
The real reason for change would be to access better quality of service or improved customer care and of course, the proposition of a better tariff package. This, however,will occur only if operators believe that the churn out of their subscriber base will be so high that they need to improve their service or customer care, etc. However , surveys have revealed that the net effect of number portability is practically negligible . This means most large operators gain and lose roughly the same number of subscribers, taking away any incentive to dramatically change quality of service or customer care or pricing owing to the threat of losing subscribers or the option of gaining subscribers.
For the consumer, this could mean you might switch your operator, but based more on a perception of improvement rather than a real difference. Trai’s September 2009 data suggests that at a pan-India level, the call set up success rate was upwards of 97.26%—the lowest being in UP (East) and the highest at 99.99% in Mumbai . Similarly the call drop rate according to Trai is less than 3% across the country with the highest at 1.9% in Rajasthan and the lowest at 0.42% in Orissa. In fact, the difference between GSM and CDMA operators is also negligible .
Further, all operators across the country score upwards of 90% with regards to the parameter called connection with good quality voice with the highest in UP West (CDMA) at 99.99% and the lowest in UP East (GSM) at 95.1%. It is also a well established fact that tariffs are extremely competitive and so moving to a dramatically lower bill is unlikely.
Some consumers who are frequent callers, an equivalent of closed user group—or family members who are currently on different networks could now move to single network to take advantage of attractive tariff packages, including free calls within the same network, etc.But before you make any switch check whether your operator is providing a similar option.
Wednesday, January 19, 2011
Black money info can't be made public: PM
Prime Minister Manmohan Singh on Wednesday said there is "no instant solution" to bring back black money stashed in foreign banks and that information with government cannot be made public due to treaty obligations.
"There is no instant solution to bring back what is called black money. We have got some information and that has been provided to us for use in the collection of due taxes," he told reporters at Rashtrapati Bhavan after a rejig of some portfolios and new inductions, the first such exercise in his second term in office.
His comments came close on the heels of the Supreme Court pulling up the government for withholding information on black money stashed in foreign banks, saying it is not just limited to tax evasion but a "mind boggling crime" amounting to "theft" and "plunder" of national wealth having security ramifications.
Noting that he was not aware of what the apex court has said, Singh said "we cannot use the information for any other purposes and that information cannot be made public" as the country cannot violate the obligations under international treaties.
The apex court's observation came while hearing a petition filed by noted criminal lawyer Ram Jethmalani , who along with some retired bureaucrats and police officers, approached it seeking directions to the government to take steps to bring black money to the tune of one trillion dollars stashed in foreign bank back to the country.
The Centre's contention before the court is that it was case of tax evasion and it cannot make public the names of Indian account holders.
"There is no instant solution to bring back what is called black money. We have got some information and that has been provided to us for use in the collection of due taxes," he told reporters at Rashtrapati Bhavan after a rejig of some portfolios and new inductions, the first such exercise in his second term in office.
His comments came close on the heels of the Supreme Court pulling up the government for withholding information on black money stashed in foreign banks, saying it is not just limited to tax evasion but a "mind boggling crime" amounting to "theft" and "plunder" of national wealth having security ramifications.
Noting that he was not aware of what the apex court has said, Singh said "we cannot use the information for any other purposes and that information cannot be made public" as the country cannot violate the obligations under international treaties.
The apex court's observation came while hearing a petition filed by noted criminal lawyer Ram Jethmalani , who along with some retired bureaucrats and police officers, approached it seeking directions to the government to take steps to bring black money to the tune of one trillion dollars stashed in foreign bank back to the country.
The Centre's contention before the court is that it was case of tax evasion and it cannot make public the names of Indian account holders.
Tuesday, January 18, 2011
REPO Rate
CRR
CRR or the Cash Reserve Ratio is the proportion of Bank’s reserves that they have to hold with the RBI. It is mandatory under law for the banks to hold such reserves with the central bank and the RBI is under law, empowered to stipulate this ratio. This amount of reserves that are held with the RBI is known as Required Reserves. It is a percentage of total demand and time liabilities of banks (demand – short term reserves, time – long term reserves).
IMPACT OF CHANGE IN CRR
To understand this, we have to understand the concept of Ordinary Money and High Powered Money.
Ordinary Money (M) is defined as the sum of Currency and Demand Deposits in banks held by public
So, M = C + DD
High Powered Money (H) is money produced by RBI and Government (coins), held by public and banks. It is also called Reserve Money. It is the sum of (i) Currency held by public and (ii) Cash Reserves of Banks.
So, H = C + R
So comparing the two equations, the difference is DD and R, currency being the common factor. This difference arises from the presence of banks as producers of demand deposits, to produce which they have to maintain R, which is a part of H, produced by only RBI and not banks.
So R is the total reserves with the banks. These are further divided into (i) Required Reserves and (ii) Excess Reserves. Required Reserves is explained above. All reserves in excess of Required Reserves are Excess Reserves, which banks are free to hold as “cash in hand”, which banks use to meet their currency drains (net withdrawal of currency by their depositors) and their clearing drains (net loss of cash due to cross-clearing of cheques between banks).
Now the control measure of CRR attempts to affect the stock of money via the impounding (restricting) or release of bank reserves. When the average CRR is revised upwards, banks are required to hold larger reserves or balances with the RBI than before for the same amount of total reserves. Since reserves are a part of H, this amounts to a virtual withdrawal of a part of H from the public equal to the amount of additional reserves impounded.
In the opposite scenario, when the CRR is lowered, this amounts to releasing the reserves so a virtual increase in H.
SLR
The chief role of SLR is to govern the allocation of total bank credit between the government and the commercial sector,. There are two ways in which it plays this role:
- By affecting the borrowings of the government from the RBI
- By affecting the freedom of the banks to sell government securities or borrow against them from the RBI
In both ways the creation of H is affected and thereby variations in the money supply
Under this statutory liquidity requirement, each bank is required statutorily to maintain a prescribed minimum proportion of its daily total demand and time liabilities in the form of designated liquid assets.
The liquid assets consist of
- Excess reserves
- Unencumbered government and other approved securities
- Current account balances with other banks
This SLR is defined as:
SLR = (ER + I + CB)/L
ER = Excess Reserves
I = Investment in unencumbered government and ‘other approved’ securities
CB = Current account balances with other banks
L = Total demand and time liabilities
- Excess reserves are defined as total reserves (Cash on hand plus balances with the RBI) minus statutory or required reserves with the RBI.
- Securities are unencumbered if loans have not been taken against them from the RBI
- Other approved securities are those that enjoy government’s guarantee in respect of payment of interest and principal. E.g. – bonds of IDBI, NABARD, development banks, co-operative debentures, debentures of state electricity boards, state road corporations, port trusts etc.
Bank Rate:
Bank rate is the rate of interest which RBI charges on the loans and advances that it extends to commercial banks and other financial intermediaries.
Repo Rate
Repo or Repurchase rate is the rate at which banks borrow funds from the RBI to meet the gap between the demand they are facing for money (loans) and how much they have on hand to lend.
Both bank rate and repo rate are interest rates at which commercial banks borrow from the RBI. The essential difference is that bank rate is what is used for what is called “clean borrowing” and this is generally for a bit longer-term. For instance, a commercial bank may simply borrow from RBI promising to pay 6% pa on the loan from RBI. This is akin to the normal personal loan that we get from banks except in this case the central bank is the lender.
Repo rate is basically the rate charged on this thing called a repo or “repurchase agreement”. Essentially, a repurchase agreement is an agreement between one party and another in which the former sells a security (like a bond) to the latter with a promise to buy it back after a particular period. For instance, a bank may enter into a repo with RBI, selling a security to RBI and then tell RBI that I will buy this security back from you after 3-months. RBI tells the bank…OK I will pay Rs. 100 for this security now but when you buy it back from me, please pay me Rs. 103. The extra Rs. 3 that RBI charges constitutes the repo rate (translates into 12% pa for this example) Hence, repos are a form of “collateralized or secured borrowings” in which the borrower must place collateral with the lender (in this case RBI). If the borrower does not manage to buy back the security, the lender can redeem its collateral value. Generally, repos are used for managing domestic liquidity in the economy. While a bank rate has a direct impact on borrowing costs for banks, repo rates have a more of a fine-tuning impact. Furthermore, repos are short-term agreements and are entered into by banks to meet short-term shortfalls in their liquidity positions. By raising the repo rate, RBI signals to the commercial banks that …. Hey look, I will still be willing to enter into repurchase agreements with you all but you better pay a higher interest to me. The banks understand this extra cost and cut back on lending to hold more cash or other liquid assets just in case they have liquidity issues as now it’s more expensive to get funding from RBI. Hence, repo rate has an impact on total Money supply and hence inflation.
Essentially, both rates are instruments of monetary policy. The idea is the same for both. They are merely different in how quickly they impact money supply or growth.
“Reverse Repo” rate is just what the name suggests. It’s the reverse of the repo. A reverse repurchase agreement or a ‘reverse repo’ is something like a switch between the buyer and the seller in a repurchase agreement. More specifically it’s a switch in the perspective.
For example in the case of reverse repo, the RBI would be the one selling the security to the commercial bank and telling it….if you give me Rs. 100 for 3 months today, I’ll pay you Rs. 3 as interest on it after 3 months and you give me back this security. So it is actually a ‘repo’ from RBI’s perspective but a ‘reverse’ repo from the commercial bank’s perspective. I hope you see the difference. The interest rate that RBI promises the commercial bank for placing its money with RBI is the reverse repo rate. By hiking the reverse repo rate, RBI can make it attractive for commercial banks to actually enter into reverse repo agreements with RBI thus reducing money supply.
By slashing it, it makes it less attractive for the commercial bank to enter into reverse repo agreement with it. It’s akin to our personal deposits in banks. If deposit rate is high, we’re more likely to keep it with the bank. A closer look-alike of reverse repo in our day to day lives would be a fixed deposit or Certificate of Deposit.
Call money rate is simply another name for ‘inter-bank borrowing’ rate. We need to realize that banks don’t just lend to corporate and individuals like us. They lend to one another. Call money rate generally refers to overnight borrowing and lending among banks. Not all banks are flush with cash all the time. So they have to ask one another for very short-term funding needs like for one a night or a few days. So they will get these funds by borrowing from one another. The lending bank will charge the borrowing bank an interest rate for even a single night (true businessmen, aren’t they?). Call rates are generally the average of all the rates that banks have charged each other overnight. Recently call rates had shot up and banks were charging one another rates as high as 22-24% pa just to lend for one day.
Prime Lending Rate: is a rate fixed by a particular bank which acts as a benchmark for various rates it will charge its customer’s on various loans.
Now a bank borrows funds from various sources and this borrowing has a cost. Now for example the average of this cost works out to be 6%. Now it gives funds to borrowers through many forms: personal loan, car loan, home loan, business loan, term loan etc. every kind of loan has its own risks and returns, some higher and some lower. The bank decides interest rate it will charge on these loans depending upon the risk involved in that particular type of loan. A home loan will be of lower risk so interest rate will be lower than say a personal loan which is riskier because the former is securitized by the purchased home but the latter gives no security to the bank. So these different interest rates will be benchmarked to the PLR, which acts as a guideline. So term loan will be say PLR + 3% and so on.
CRR or the Cash Reserve Ratio is the proportion of Bank’s reserves that they have to hold with the RBI. It is mandatory under law for the banks to hold such reserves with the central bank and the RBI is under law, empowered to stipulate this ratio. This amount of reserves that are held with the RBI is known as Required Reserves. It is a percentage of total demand and time liabilities of banks (demand – short term reserves, time – long term reserves).
IMPACT OF CHANGE IN CRR
To understand this, we have to understand the concept of Ordinary Money and High Powered Money.
Ordinary Money (M) is defined as the sum of Currency and Demand Deposits in banks held by public
So, M = C + DD
High Powered Money (H) is money produced by RBI and Government (coins), held by public and banks. It is also called Reserve Money. It is the sum of (i) Currency held by public and (ii) Cash Reserves of Banks.
So, H = C + R
So comparing the two equations, the difference is DD and R, currency being the common factor. This difference arises from the presence of banks as producers of demand deposits, to produce which they have to maintain R, which is a part of H, produced by only RBI and not banks.
So R is the total reserves with the banks. These are further divided into (i) Required Reserves and (ii) Excess Reserves. Required Reserves is explained above. All reserves in excess of Required Reserves are Excess Reserves, which banks are free to hold as “cash in hand”, which banks use to meet their currency drains (net withdrawal of currency by their depositors) and their clearing drains (net loss of cash due to cross-clearing of cheques between banks).
Now the control measure of CRR attempts to affect the stock of money via the impounding (restricting) or release of bank reserves. When the average CRR is revised upwards, banks are required to hold larger reserves or balances with the RBI than before for the same amount of total reserves. Since reserves are a part of H, this amounts to a virtual withdrawal of a part of H from the public equal to the amount of additional reserves impounded.
In the opposite scenario, when the CRR is lowered, this amounts to releasing the reserves so a virtual increase in H.
SLR
The chief role of SLR is to govern the allocation of total bank credit between the government and the commercial sector,. There are two ways in which it plays this role:
- By affecting the borrowings of the government from the RBI
- By affecting the freedom of the banks to sell government securities or borrow against them from the RBI
In both ways the creation of H is affected and thereby variations in the money supply
Under this statutory liquidity requirement, each bank is required statutorily to maintain a prescribed minimum proportion of its daily total demand and time liabilities in the form of designated liquid assets.
The liquid assets consist of
- Excess reserves
- Unencumbered government and other approved securities
- Current account balances with other banks
This SLR is defined as:
SLR = (ER + I + CB)/L
ER = Excess Reserves
I = Investment in unencumbered government and ‘other approved’ securities
CB = Current account balances with other banks
L = Total demand and time liabilities
- Excess reserves are defined as total reserves (Cash on hand plus balances with the RBI) minus statutory or required reserves with the RBI.
- Securities are unencumbered if loans have not been taken against them from the RBI
- Other approved securities are those that enjoy government’s guarantee in respect of payment of interest and principal. E.g. – bonds of IDBI, NABARD, development banks, co-operative debentures, debentures of state electricity boards, state road corporations, port trusts etc.
Bank Rate:
Bank rate is the rate of interest which RBI charges on the loans and advances that it extends to commercial banks and other financial intermediaries.
Repo Rate
Repo or Repurchase rate is the rate at which banks borrow funds from the RBI to meet the gap between the demand they are facing for money (loans) and how much they have on hand to lend.
Both bank rate and repo rate are interest rates at which commercial banks borrow from the RBI. The essential difference is that bank rate is what is used for what is called “clean borrowing” and this is generally for a bit longer-term. For instance, a commercial bank may simply borrow from RBI promising to pay 6% pa on the loan from RBI. This is akin to the normal personal loan that we get from banks except in this case the central bank is the lender.
Repo rate is basically the rate charged on this thing called a repo or “repurchase agreement”. Essentially, a repurchase agreement is an agreement between one party and another in which the former sells a security (like a bond) to the latter with a promise to buy it back after a particular period. For instance, a bank may enter into a repo with RBI, selling a security to RBI and then tell RBI that I will buy this security back from you after 3-months. RBI tells the bank…OK I will pay Rs. 100 for this security now but when you buy it back from me, please pay me Rs. 103. The extra Rs. 3 that RBI charges constitutes the repo rate (translates into 12% pa for this example) Hence, repos are a form of “collateralized or secured borrowings” in which the borrower must place collateral with the lender (in this case RBI). If the borrower does not manage to buy back the security, the lender can redeem its collateral value. Generally, repos are used for managing domestic liquidity in the economy. While a bank rate has a direct impact on borrowing costs for banks, repo rates have a more of a fine-tuning impact. Furthermore, repos are short-term agreements and are entered into by banks to meet short-term shortfalls in their liquidity positions. By raising the repo rate, RBI signals to the commercial banks that …. Hey look, I will still be willing to enter into repurchase agreements with you all but you better pay a higher interest to me. The banks understand this extra cost and cut back on lending to hold more cash or other liquid assets just in case they have liquidity issues as now it’s more expensive to get funding from RBI. Hence, repo rate has an impact on total Money supply and hence inflation.
Essentially, both rates are instruments of monetary policy. The idea is the same for both. They are merely different in how quickly they impact money supply or growth.
“Reverse Repo” rate is just what the name suggests. It’s the reverse of the repo. A reverse repurchase agreement or a ‘reverse repo’ is something like a switch between the buyer and the seller in a repurchase agreement. More specifically it’s a switch in the perspective.
For example in the case of reverse repo, the RBI would be the one selling the security to the commercial bank and telling it….if you give me Rs. 100 for 3 months today, I’ll pay you Rs. 3 as interest on it after 3 months and you give me back this security. So it is actually a ‘repo’ from RBI’s perspective but a ‘reverse’ repo from the commercial bank’s perspective. I hope you see the difference. The interest rate that RBI promises the commercial bank for placing its money with RBI is the reverse repo rate. By hiking the reverse repo rate, RBI can make it attractive for commercial banks to actually enter into reverse repo agreements with RBI thus reducing money supply.
By slashing it, it makes it less attractive for the commercial bank to enter into reverse repo agreement with it. It’s akin to our personal deposits in banks. If deposit rate is high, we’re more likely to keep it with the bank. A closer look-alike of reverse repo in our day to day lives would be a fixed deposit or Certificate of Deposit.
Call money rate is simply another name for ‘inter-bank borrowing’ rate. We need to realize that banks don’t just lend to corporate and individuals like us. They lend to one another. Call money rate generally refers to overnight borrowing and lending among banks. Not all banks are flush with cash all the time. So they have to ask one another for very short-term funding needs like for one a night or a few days. So they will get these funds by borrowing from one another. The lending bank will charge the borrowing bank an interest rate for even a single night (true businessmen, aren’t they?). Call rates are generally the average of all the rates that banks have charged each other overnight. Recently call rates had shot up and banks were charging one another rates as high as 22-24% pa just to lend for one day.
Prime Lending Rate: is a rate fixed by a particular bank which acts as a benchmark for various rates it will charge its customer’s on various loans.
Now a bank borrows funds from various sources and this borrowing has a cost. Now for example the average of this cost works out to be 6%. Now it gives funds to borrowers through many forms: personal loan, car loan, home loan, business loan, term loan etc. every kind of loan has its own risks and returns, some higher and some lower. The bank decides interest rate it will charge on these loans depending upon the risk involved in that particular type of loan. A home loan will be of lower risk so interest rate will be lower than say a personal loan which is riskier because the former is securitized by the purchased home but the latter gives no security to the bank. So these different interest rates will be benchmarked to the PLR, which acts as a guideline. So term loan will be say PLR + 3% and so on.
Thursday, December 30, 2010
Citibank Fraud
GURGAON: Shivraj Puri , the alleged mastermind behind Rs 300 crore Citibank fraud in the branch here, was today remanded in 7 days' police custody.
Duty Magistrate Raj Kumar Yadav has sent Citibank fraud accused to 7 days police custody, Gurgaon Police Commissioner S S Deswal said.
Talking to Times of India after his arrest, Puri said: "I have already given full details to the police. I have full faith in the judiciary. Truth will come out."
After his arrest this morning, Puri, the Relationship Manager of Citibank, Gurgaon branch, was produced before a special court as other courts are on winter vacation.
During the interrogation the police would trace the money trail which were fraudulently collected from High Networth Individuals (HNIs) by promising unusually high returns of 18 per cent, Deswal said.
Deswal said of the Rs 300 crore estimated to be involved in the fraud Rs 200 crore belong to corporates and Rs 100 crore to individuals.
He said 40 teams have been constituted to crack the case that involved alleged siphoning off funds taken as investments from high networth individuals into a personal account of the main suspect Puri and three of his accomplices.
Deswal said Puri's father Raghuraj Puri is said to be owning a brokerage firm Norway Martin through which diverted funds were invested in the stock market.
Asked whether the Gurgaon police will seek the help of other agencies in the probe, he said "we are qualified and competent to investigate. In case it is needed, we will consider it."
He said the Citibank has already informed RBI and SEBI about the fraud.
The Commissioner said from the interrogation of Puri police hoped to get more clues.
Puri, who worked at the bank's Gurgaon branch as a relationship manager, is accused of siphoning money from 20 accounts of high net worth individuals. Puri, allegedly cheated investors by promising to double their money. Since the task of opening new accounts had been assigned to him, he managed to dupe many people without the bank's knowledge.
A case of cheating and forgery was registered against Puri and the others DLF Phase-II Police Station on Monday night after Citibank lodged a formal complaint.
Duty Magistrate Raj Kumar Yadav has sent Citibank fraud accused to 7 days police custody, Gurgaon Police Commissioner S S Deswal said.
Talking to Times of India after his arrest, Puri said: "I have already given full details to the police. I have full faith in the judiciary. Truth will come out."
After his arrest this morning, Puri, the Relationship Manager of Citibank, Gurgaon branch, was produced before a special court as other courts are on winter vacation.
During the interrogation the police would trace the money trail which were fraudulently collected from High Networth Individuals (HNIs) by promising unusually high returns of 18 per cent, Deswal said.
Deswal said of the Rs 300 crore estimated to be involved in the fraud Rs 200 crore belong to corporates and Rs 100 crore to individuals.
He said 40 teams have been constituted to crack the case that involved alleged siphoning off funds taken as investments from high networth individuals into a personal account of the main suspect Puri and three of his accomplices.
Deswal said Puri's father Raghuraj Puri is said to be owning a brokerage firm Norway Martin through which diverted funds were invested in the stock market.
Asked whether the Gurgaon police will seek the help of other agencies in the probe, he said "we are qualified and competent to investigate. In case it is needed, we will consider it."
He said the Citibank has already informed RBI and SEBI about the fraud.
The Commissioner said from the interrogation of Puri police hoped to get more clues.
Puri, who worked at the bank's Gurgaon branch as a relationship manager, is accused of siphoning money from 20 accounts of high net worth individuals. Puri, allegedly cheated investors by promising to double their money. Since the task of opening new accounts had been assigned to him, he managed to dupe many people without the bank's knowledge.
A case of cheating and forgery was registered against Puri and the others DLF Phase-II Police Station on Monday night after Citibank lodged a formal complaint.
Wednesday, September 1, 2010
Govt went wrong in calculating one of the GDP figures: Mospi
Facing embarrassment after throwing forward sharply different economic growth figures based on two different methodologies, the government will soon set the record straight on the pace of economic expansion.
According to the government data, the economy grew by 8.8 per cent in the April-June quarter based on actual expansion without accounting for taxes - a methodology known as factor cost.
At the same time, the data released by the Ministry of Statistics and Programme Implementation (Mospi) showed growth at market price, which reflects the value of the production or services that includes indirect taxes, at just 3.65 per cent.
"There were some problems in calculating GDP at market prices at constant prices, and we will come out with a corrigendum soon," an official with Ministry of Statistics and Programme Implementation (Mospi) told PTI.
Central Statistical Organisation (CSO) that releases the data is part of Mospi.
The wide difference in GDP growth numbers under the two methodologies created confusion among economists.
Experts said GDP at market price should not have been so low, since indirect taxes--excise duty--rose by two per cent this fiscal, after the government partially withdrew stimulus measures.
The mistake was in calculating a price deflator, which is used for converting nominal GDP into real GDP, explained the official.
Real GDP does not include inflation and hence considered a better indicator of an economy. Also, when economic growth rate is defined, real GDP is used, rather than nominal GDP.
According to the government data, the economy grew by 8.8 per cent in the April-June quarter based on actual expansion without accounting for taxes - a methodology known as factor cost.
At the same time, the data released by the Ministry of Statistics and Programme Implementation (Mospi) showed growth at market price, which reflects the value of the production or services that includes indirect taxes, at just 3.65 per cent.
"There were some problems in calculating GDP at market prices at constant prices, and we will come out with a corrigendum soon," an official with Ministry of Statistics and Programme Implementation (Mospi) told PTI.
Central Statistical Organisation (CSO) that releases the data is part of Mospi.
The wide difference in GDP growth numbers under the two methodologies created confusion among economists.
Experts said GDP at market price should not have been so low, since indirect taxes--excise duty--rose by two per cent this fiscal, after the government partially withdrew stimulus measures.
The mistake was in calculating a price deflator, which is used for converting nominal GDP into real GDP, explained the official.
Real GDP does not include inflation and hence considered a better indicator of an economy. Also, when economic growth rate is defined, real GDP is used, rather than nominal GDP.
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