Rupee fall has forex reserves plunging $16.5 bn since April

Mumbai: RBI's fight to prop the tottering rupee has contributed substantially to forex reserves dipping by a hefty USD 16.554 billion or 6 percent to a low of USD 275.49 billion since the beginning of this fiscal.

According to marketmen, a large part of this has been used to save the bleeding rupee, which went on a downward spiral after May 22 when Ben Bernanke of the US Fed had hinted at turning his easy money policy much earlier than previously hinted.

According to the latest Reserve Bank data, forex reserves plunged to USD 275.491 billion to the week ending August 30, which is a near 6 percent fall from USD 292.646 billion as of March 29.

The rupee opened the fiscal at 54.25 to the US dollar but fell to a life-time low of 68.86 on August 28, losing nearly a third of its value. However, since the new RBI Governor Raghuram Govind Rajan took over the affairs of the Mint Street on September 4, the rupee has been on a winning streak, and closed the last trade on Friday at 65.24 to the dollar.

On a weekly basis, the reserves dropped by USD 2.2 billion as of August 30, marking a three-year low, the RBI data showed.

Overall, the foreign currency assets have fallen more to the tune of USD 3.08 billion to USD 247.40 billion in the week ended August 30.

The Reserve Bank was net seller of the dollar twice this year in May and June, according to its monthly data.

In June this year, RBI sold USD 2.252 billion net of the US currency, while in May it sold USD 107 million dollars.

Looking at the steep fall in the overall numbers, marketmen said, it could be surmised that the central bank has intervened in a much more heavier and frequent manner in the forex market in July and August, as these two months saw the rupee plunging to new lows.

According to forex dealers, RBI not only intervened in May and June, but was present in the market all through July and August when rupee was touching new lows.

The rupee has been in free-fall territory since May 22 when the US Federal Reserve said it would slow and finally taper of its monthly USD 85 billion buyback of government debt or withdraw its easy money policy called quantitative easing.

The announcement led to a massive selling by the overseas investors in the country's debt and equity markets, to the tune of nearly USD 15 billion, mostly from the debt market.

To save the rupee, the central bank had announced various liquidity tightening measures starting July 15, including steeply hiking call money rates and partly bringing back capital control.

India Inc to policymakers: Shape up, or we'll ship out

Mumbai: After the rapid slide in the rupee this year, the message from the country's corporate titans to the government is clear: shape up and fix the problems or more companies will expand their business abroad and deprive the economy of investment.

Many, such as entrepreneur Kiran Mazumdar-Shaw, are already doing just that.

Ranked by Forbes as one of the world's most powerful women, she is investing about $200 million in a manufacturing plant in Malaysia for her biotechnology firm Biocon Ltd to offset unreliable power and water supplies back home. It already makes more than half its sales overseas.

"If India had better infrastructure and more availability of power I may not have gone abroad," said Shaw, who followed in her father's footsteps with a master's degree in brewing in Australia before setting up Biocon in her garage in Bangalore 35 years ago.

"We don't have enough power, we don't have enough water. So some of these projects where we need water and power, I will do it in Malaysia because that's where it is abundant," Shaw, who is ranked 92 in India's rich list with a net worth of $625 million, told Reuters in an interview.

She is one of many top entrepreneurs voicing frustration that policymakers failed to keep economic reforms rolling over the past decade, which they contend would have prevented India from stumbling into its deepest economic crisis since 1991, when it was forced to pledge the country's gold reserves in exchange for international loans.

Economic growth has almost halved in pace to less than 5 percent in the past six years, a flood of cash leaving the country has led to a record current account deficit and combined with a rout of emerging markets, has sent the rupee into a tail spin. At its record low of 68.85 per dollar in late August, it was down around 20 percent from the end of 2012, the worst performer among Asia's currencies. It has since risen slightly to 65.24.

The lack of reform and infrastructure, painfully slow decision making and red tape are common complaints of corporate India, but this time they could come at a cost as the rupee crisis shows businesses how vulnerable they are.

The political cost could hit the Congress-led ruling coalition at national elections that must be called by May. An opinion poll on Friday showed nearly three-quarters of Indian business leaders want opposition figure Narendra Modi to run the country after the election.

Modi is in the political ascendancy after turning the western state of Gujarat into the country's economic star with double-digit growth and investor friendly policies.

The economic cost is underlined by Indian Inc.'s overseas direct investment. Including bank guarantees issued to overseas units, it stood at more than $21 billion in the first seven months of this year, up 38 percent from the same period of 2012.

That is set to increase as Indian companies see the advantages of diversifying globally.

In a bid to reduce its dependence on a slowing Indian auto market and get a foothold in China and the United States, Apollo Tyres agreed in June to pay $2.5 billion for U.S.-based Cooper Tire & Rubber Co , which was nearly three times its own market value at that time.

Yusuf Hamied, the billionaire chief of drugmaker Cipla Ltd, which in July completed the acquisition of South Africa's Cipla Medpro for about $460 million, is expanding his company's base in Algeria and Morocco as part of a North Africa thrust.

Aditya Birla Group, the $40 billion diversified conglomerate that gets more than half its sales from overseas operations, plans to invest $1 billion setting up a chemical plant in the United States, local media reported last month.

A spokeswoman for the group, whose business interests range from mining and metals to financial services and telecoms, was unavailable to comment.

"MORE AND MORE DIFFICULT"

The Reserve Bank of India last month reduced companies' overseas investment limit to 100 percent of their net worth from 400 percent, part of a drive to curb dollar outflows and prop up the rupee.
While these steps could put a brake on overseas investments in the short term, they might not halt the outbound march in the longer term.

"The government has to give us infrastructure - not for a day, not for six months - there has to be long-term infrastructure, policies that are sustainable so that we can then also plan accordingly," said Cipla's Hamied.

"In healthcare there are five ministries involved - chemicals and fertilisers, finance ministry, law ministry, health ministry, commerce ministry - there is no nodal body. Who do you go to for infrastructure or for advice or anything?"

Hamied is particularly concerned about the impact on the domestic pharmaceutical business of a new pricing policy that has increased the number of drugs deemed essential that are subject to price caps.

Many industrialists complain that delays in approving projects due to differences among various government departments and red tape make it tougher for India Inc to set up manufacturing operations in the country than overseas.

"It is becoming more and more difficult, in any sector. Look at the real estate sector, the amount of commissions, the amount of bureaucracy that is there is too much," said billionaire Ajay Piramal, chairman of the healthcare-to-real estate conglomerate Piramal Group. "We need to have clear rules of business ... unfortunately that's not happening."

With the prospect of a populist spending splurge ahead of the national elections, industrialists like billionaire Rahul Bajaj, chairman of motorcycles and three-wheeler maker Bajaj Auto are not betting on any changes soon.

"I believe the government will keep taking short-term measures, which will have limited effect," Bajaj said. "The way things are going, the earlier the elections the better."

Timken Stock Surges Higher After It Confirms Split

Shares of steel products maker Timken Co. (TKR) continued their ascent Friday, climbing as much as 5% in morning trading.
Its stock surged 7% the prior two days amid speculation it might split into two publicly traded companies, and increase its dividend. Timken late Thursday said its board approved a plan to separate its steel business from the unit that makes bearings and power transmissions.
The announcement lifted others in the ailing steel producers group.

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Timken had been under pressure from activist investors, including the Relational Investors fund, who had pressed it to make the move.
Relational has taken positions in several large manufacturers in recent years, including ITT (ITT), Ingersoll-Rand (IR) and Illinois Tool Works (ITW), and advocated changes to make the companies more profitable and lift share price.
Relational was supported in its drive by CalSTRS, the California state teachers' pension fund, which joined in urging Timken management to make changes.
Timken shares were up 3.3% in afternoon trading on the stock market today.
The company had struggled of late, reporting lower year-over-year profit five quarters in a row, and lower sales growth for four quarters.
Still, its stock price rose 63% from a Nov. 16 low to Aug. 5 on prospects of better growth amid a manufacturing resurgence tied to the economy. It's consolidated since, in sync with the market.
Elsewhere in the Metal Processors & Fabricators group, ranked a weak 99 on IBD's list of 197 industries, Valmont Industries (VMI), with annual revenue of about $3.3 billion, edged up.
Smaller but highly rated Handy & Harman (HNH), with sales of $626 million a year, was up 1.4%. Handy & Harman boasts an 89 IBD Composite Rating, meaning its stock has outperformed 89% of all stocks on key metrics such as sales and profit growth.
In the related Steel-Producers group, ranked a dismal 158 on IBD's industries list, Netherlands-based Arcelor-Mittal (MT), the world's largest steel producer with $80 billion yearly revenue, rose 1%. And smaller Valley City, Ohio-based Shiloh Industries (SHLO), with an 83 Composite Rating, was also up about 1%.
Timken plans to spin off the bearings and transmissions business as a $3.4 billion revenue global company, and named Richard Kyle, current chief operating officer of that unit, as CEO. That company will start with 17,000 employees and 35 manufacturing plants.
The new engineered steel company will start with about $1.7 billion annual revenue and be headed by Ward Timken, currently president of the steel business and chairman of Timken's board.
Timken expects to complete the split within 12 months.

Stocks, sectors that will gain from a good monsoon

Monsoon seems on to be the only respite that Indian companies can look forward to this year. Falling rupee, high fiscal deficit , flight of foreign funds and poor earnings, these have been the only themes in the India story for many quarters now. However, a good monsoon might bring good tidings, at least for some companies.

A monsoon is called normal when rains are 96-104% of the long-period (50 years) average, or LPA, of 89 cm between June and September. This year, the first half, that is, June and July, has been satisfactory (17% over LPA). The India Meteorological Department has predicted a normal second half as well.

WHAT IT MEANS

Above normal rains have led to 18% higher sowing of kharif crops so far, says Dipankar Mitra, senior vice president, research, Motilal Oswal Securities.

Although deficient rainfall in east India has slowed rice sowing a bit, the crop has been planted over 7% more area compared to the corresponding period last year. While the crucial sowing months are July and August, sowing across the country has already exceeded 70% of the total acreage last year.

"Monsoon has a direct impact on kharif output; thus, agriculture growth is expected to double to 3.9% in 2013-14 from 1.9% in 2012-13," says Mitra.

A good monsoon creates positive perception about the economy among investors, including foreign institutional investors, as a large part of India depends upon agriculture for sustenance.

"Also, India's economy is known to be driven by domestic consumption, which will get a big boost as rural incomes rise due to a good monsoon," says P Phani Sekhar, fund manager, portfolio management services, Angel Broking.

Although the farm sector's contribution to the country's gross domestic product has fallen from 19% in 2004-05 to 12% in 2013, it still employs half of India's population.

"Also, agriculture has strong links with industrial and services sectors, plus a direct bearing on rural economy and consumption," says Mitra.

"Not only does a good monsoon increase farm production, giving more money to farmers, it also keeps inflation in check by increasing the supply of food articles," says Dipen Shah, head, Private Client Group Research, Kotak Securities.

A fall in inflation means higher possibility of lower interest rates, which is generally supportive of industrial growth.

In fact, we have seen that sustained farm sector growth over the last five years has lowered debt levels in rural India and created job opportunities outside the farm sector. This, plus a plethora of farmer-friendly social sector schemes, is expected to increase consumption in rural areas this year as well.

SECTORS THAT WILL GAIN

There are quite a few industries that will see a rise in demand for their products and services because of this mini rural boom. Shah of Kotak says a good monsoon will benefit fast moving consumer goods companies as rural India's higher purchasing power increases the demand for their products. "Companies with wide rural footprint such as Hindustan Unilever, Dabur and Godrej Consumer Products will benefit the most," he says.

High farm production will also lower raw material costs for companies that make packaged foods, for instance, Britannia, GSK Consumer, ITC and Nestle. "Having said that, we don't expect an explosion in demand in this space. For instance, HUL's volume growth will perhaps rise from 4-6% to 6-7% leading up to the general elections next year," says Sekhar. Investors should not expect phenomenal returns from this sector considering the high valuations, he says. The sector is up 138% since 2008 while earnings have risen 75% compared to 70% growth for the market as a whole.

Data show a close link between rains and fortunes of FMCG companies. For instance, in 2009-10, the average rainfall was 22% below the LPA. HUL's sales fell 13% during the year. In 2007-08, rainfall was 6% above the LPA. As a result, HUL's sales rose 17.6%. Similarly, normal rainfall helped HUL grow sales by 12.1% in 2011-12.

"Also, during years of good monsoon , the demand for two-wheelers and low-cost four-wheelers and tractors also rises. This is expected this year as well," says Shah of Kotak.

Analysts expect M&M to grow tractor sales by 25%. The improvement in consumer sentiment in rural areas will benefit two-wheeler companies as well. However, there are chances that this may be offset by low demand in urban India due to the industrial slowdown there.

Further, if the current liquidity tightness continues and growth in bank deposits slows, lending rates may start rising, impacting demand.

Experts say that besides these, there are some sectors, for instance fertiliser and irrigation, which seem direct beneficiaries of a good monsoon but are facing a lot of other problems.

A normal monsoon usually increases the demand for fertilisers. This explains the rise in stocks of fertiliser companies Coromandel International, Chambal Fertilisers & Chemicals, Deepak Fertilisers and Rashtriya Chemicals & Fertilizers in the last one month. However, for this rally to sustain, earnings have to grow, which may not occur.

Sekhar of Angel Broking says lack of clarity on supply of gas to fertiliser companies and higher prices of gas and other inputs have led to a sharp rise in prices of decontrolled fertilisers in the domestic market. Due to this, companies are burdened with huge inventories. This has also led to an increase in consumption of subsidised urea. Hence, the performance of fertiliser companies may not improve substantially till the second half of the current financial year. Also, the large inventories of complex fertilisers may take time for liquidation and sales may remain sluggish in the medium term, he says.

Irrigation is another area which should do well. However, it comes under the infrastructure category and depends upon money provided by state governments. Although a large number of states are going to polls, which means governments may dole out benefits for farmers, the fiscal deficit situation is so bad that there may be no big bonanza on this front this year, says Sekhar.

Eurogroup: Greece may need further aid

Brussels: Eurogroup president Jeroen Dijsselbloem admitted Thursday Greece would need a third bailout, saying its problems could not be solved by 2014.

Answering questions in the European Parliament here, Dijsselbloem said it was clear Greece's situation would remain grim despite recent progress, reports Xinhua.

"In this context, the Eurogroup has indicated clearly that it is committed to providing support for Greece in the current programme and beyond until it regains market access," he said.

For the Eurozone, he said, "We have to deal with structural problems in our economies to ensure economic growth to rebound".

Dijsselbloem also answered questions on the banking union and a stress test.

Debate over new aid for Greece in 2014 has increased recently. German Finance Minister Wolfgang Schaeuble said last month Greece was not out of the woods and needed further aid.