Thursday, 4 December 2008

Back to Business?

After the attacks and the aftermaths of the attacks. The Indian business community seems to be coming back to its usual business along with the regulators. The RBI is expected to cut rates further during the weekend. What are we bargaining for? Are we saying that as debt becomes cheaper growth will pick up? Inflation was reported to be 8.4% for the week ending November 22. with repo rate at 7.5% we have a negative real interest rate of 1.34%. If we continue to have negative real interest rates then the Rupee will keep on depreciating until either inflation comes below the repo rate or the repo rate goes above the inflation rate. Both seem impossible, looking at the thinking in the minds of the "Powers That Be".
A new thing brewing is the scheme of using $10 bn of forex reserves to finance infrastructure projects in India. Extracts of the scheme being thought of is as follows:
"Under the proposal now being finalized, RBI will use up to $10 bn from its reserves to buy bonds issued by foreign subsidiaries of the Indian Infrastructure Finance Corporation Ltd (IIFCL). The subsidiary will then bring this money into India and the parent company will use the rupee resources thus generated to lend to infrastructure projects. The scheme is being seen as serving several purposes apart from giving IIFCL more funds to lend to infrastructure. First, when IIFCL sells the dollars back to RBI, the central bank will end up adding to the supply of rupees in the system, thus easing liquidity. Second, dollars that would otherwise have gone back to the US to buy US treasury bills will remain in India, thereby adding to the supply of the greenback and help in counteracting the depreciation of rupee. It is proposed that IIFCL will use this money to lend to banks at 9%. Banks will on-lend it to companies executing infrastructure projects at around 11%. However, in this case banks want government to ensure viability of such projects since a two percentage point spread would otherwise not make commercial sense for them. Apart from this, RBI will be asked to extend a line of credit of Rs 10,000 cr to the Small Industries Development Board of India (SIDBI) to lend to small scale units at 8%. RBI will lend these funds at about 6% to SIDBI. A similar Rs 10,000 cr line of credit will also be opened by RBI for the National Housing Bank (NHB), which provides refinancing facilities to housing finance companies. NHB will be asked to lend to housing finance companies at rates of around 6-7% so that they can provide home loans to the ultimate consumers at around 9%. This, it is expected, will help revive the demand for housing that has gone down sharply in recent months. The proposal to allow NBFCs to access external commercial borrowings (ECBs) is also likely to come through. The government believes that some NBFCs have credit lines tied up with foreign lenders and could easily bring in money if they are allowed to do so."
This means that another Rs. 75000 cr being poured into the market. This money seems to be directed specifically at the target. This should spur growth specifically in private infrastructure and housing. Only thing we need now is spending on Government Infrastructure. We only hope that the government starts talking about investing on infrastructure.

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