Reserve Bank of India Ignores Oil Price Drop; Maintains Interest Rate


IndusView, Tuesday 2 December 2014 (London): The Reserve Bank of India (RBI) left its benchmark rate unchanged at 8.00% Tuesday, failing to take advantage of the drop in international crude oil prices and the resulting deflationary effect on India’s biggest import item.

The India crude basket, computed by the petroleum planning and analysis cell, was $72.51 per barrel on November 27 compared with $90.50 per barrel on October 9. The Indian basket of crude oil is based on the weighted average of Middle East sour grades (Dubai and Oman) and the North Sea Brent sweet grade of London.

Despite the lower oil price, RBI Governor Raghuram Rajan said he was still awaiting more proof that inflation was under control.

“Lower oil prices keeps inflation low and could have served as a cue for the RBI to reduce interest rates and foster GDP growth,” said Bundeep Singh Rangar, Chairman of London-based consulting firm IndusView. “It increases prospects of the Narendra Modi government meeting its fiscal deficit target for 2014-2015. A lower RBI rate would have helped ensure it also meets its GDP growth target.“

India imports more than two-thirds of its oil requirements, which constitutes 37% of total imports. A one-dollar fall in the price of oil saves the country about $648 million. Every $10 a barrel fall in prices lowers retail inflation by 0.2 of a percentage point and wholesale inflation by half a point, experts estimate. Lower oil prices, therefore, have a three-fold effect spread across the economy.

Cheaper energy moderates inflation, which has already fallen from over 10% in early 2013 to 6.5%, bringing it within the central bank’s informal target range. This should lead to lower interest rates, boosting investment.

Cheaper oil also cuts India’s budget deficit, now representing 4.5% of GDP, by reducing fuel and fertilizer subsidies: along with food subsidies, the total is $41 billion in the year ending March 2015—14% of public spending and 2.5% of GDP.

The government controls the price of diesel and compensates sellers for their losses. But, for the first time in years, sellers are making a profit. As in China, cheaper oil should reduce the pain of cutting subsidies. Since Oct. this year, India has ended diesel price subsides and raised the price of natural gas.

Gross domestic product expanded 5.3% in the July-September quarter from a year earlier, as a manufacturing slump took the bounce out of Asia’s third-largest economy. Growth in the previous quarter was at 5.7%. 
Thanks to growth in services and stronger-than-expected farming after a bad monsoon, the reading was higher than predicted by economists polled by Reuters, who on average forecast growth of 5.1%. On a year-on-year basis, trade deficit increased by 28.1 per cent during Q2 FY 15 (Jul-Sep) as compared with a decline of 24.1% in Q1 of 2014-2015.

Prime Minister Modi is keen to promote India as an investment destination. Moves are afoot to schedule Prime Minister Narendra Modi’s first bilateral visit to the United Kingdom for an event on January 30, the death anniversary of Mahatma Gandhi. The trip will be his first bilateral visit to Europe. U.S. President Obama is also due to visit to India as Chief Guest of its Republic Day parade on Jan. 26.


India’s First Female Bank CEO Aims High


Chanda Kochhar, the first woman to run a bank in India, is no stranger to tough situations.

She became chief executive officer and managing director of Mumbai-based ICICI Bank Ltd., India’s largest private-sector lender, as the global financial crisis raged in 2009. Soon she was battling a run on retail deposits, fuelled by unfounded reports the bank had significant exposure to troubled U.S. banks.

With the quiet confidence that is her trademark, Ms. Kochhar ordered branches across India to stay open as long as customers wanted their money, made sure ATMs were constantly restocked and coached edgy branch managers late into the night.

The key, she explained, was doing everything possible to make customers and employees feel comfortable in the face of a crisis, and communicate clearly.

With similar resolve, she has pushed ICICI, a bank hitched to India’s burgeoning middle class, into risky new markets – from the smallest of Indian villages to Canada’s rugged oil sands. Under Ms. Kochhar’s leadership, ICICI has followed India’s far-flung diaspora of immigrants and businesses into 18 other countries, while nearly doubling the bank’s return on equity.

And with clever use of technology, such as full-service branches in mobile vans and transactions via Facebook, she has brought millions of India’s “unbanked” into the modern economy.

ICICI, which stands for Industrial Credit and Investment Corp. of India, is now the country’s largest private bank, as well as its leading, private life and general insurer. It has more than 3,750 branches and 11,300 ATMs in India. Ms. Kochhar’s goal is to grow ICICI into a top 20 global bank.

The bank was a “gender neutral” institution long before it gained favour in the banking industry, in India and elsewhere. It has evolved into an organization that doesn’t give any special privileges to women, but also doesn’t distinguish between the sexes, Ms. Kochhar said. She’s now one of at least three female bank CEOs in India who rose through the ranks at ICICI, along with Axis Bank’s Shikha Sharma and JPMorgan India’s Kalpana Morparia.

In contrast, none of Canada’s Big Six banks has ever had a female CEO; nor have most of the top banks in the United States. With worldwide assets of $124.5-billion (U.S.), it is significantly smaller than National Bank of Canada, the smallest of Canada’s Big Six banks (assets: $199-billion Canadian) and Toronto-Dominion Bank, the largest (assets: $922-billion).

Ms. Kochhar regularly ranks on Forbes magazine’s annual list of most powerful women (No. 42 in 2014) and is widely recognized as India’s leading female CEO. She has earned every leading business prize in India as well as the Padma Bhushan, one of the country’s top civilian honours.

Expanding ICICI’s presence in Canada is a natural, given the extensive familial ties and growing economic relationship between the two countries, she said. She pointed out that roughly 30,000 Indian immigrants come to Canada every year, along with tens of thousands of students.


Modi Rolls Out More Reforms to Boost Economy


Prime Minister Narendra Modi has unleashed a slew of reforms in the past weeks, scrapping fuel subsidies, simplifying labour rules and pledging to open coal mining to private players in a bid to boost the economy.

When Narendra Modi’s Bharatiya Janata Party won a thumping majority for its pro-growth promises in India’s elections in May, hopes swelled that the new government would adopt economic reforms that had proved beyond the brittle coalitions of the past.

Prime Minister Narendra Modi has launched long-awaited labour reforms, emphasizing that ease of business is essential to the success of 'Make in India,' his government's plan to turn India into a manufacturing hub. The measures simplify employment rules and smooth the way for people to move social security funds when they change jobs. They also provide for an improved pension and minimum salary grade.

“According to The World Bank, India has one of the world's most rigid labour markets, but fears of a trade union backlash and partisan politics have deterred previous governments from reform measures,” said Bundeep Singh Rangar, Chairman of London-based consulting firm IndusView. “Business leaders have high hopes that Modi, an advocate of smaller government and private enterprise, will change that.”

Economists have long argued the country's potential will only be unleashed when it curbs subsidies, relaxes suffocating regulation and rigid labour laws and eases complex rules governing industrial land acquisition.

The Make in India campaign, which was launched by Modi on Sept. 25, seeks to emulate China and other East Asian powerhouses by focusing on export-oriented manufacturing.

India's industrial production growth slowed down further to 0.4% in August 2014 after growing by just 0.5% in September 2014.

“The sluggish growth in industrial production has undermined hopes of a sharp rebound in manufacturing. The festive season did not bring much of a cheer to the consumer durables sector owing to the adverse impact of uneven rainfall on crop production and rural incomes,” said Rangar.

In a bow to free markets, the Government released diesel pricing from state control, ending a battle for eliminating subsidies on the largest component of fuel consumption. It also cleared a delayed increase in domestic gas prices; hiking by one-third the amount the government pays natural gas producers to encourage exploration in the fuel-hungry nation.

Economists say they expect more progress on resolving labour issues and bringing in a national goods-and-services tax that will end the patchwork of levies making doing business in India costlier.

Many supporters expected bigger things from Modi by now: perhaps a lifting of all fuel and fertilizer subsidies, or the privatization of state-owned Coal India. Modi’s more modest reforms, however, may be a smarter way for India to move forward.