AKT on markets

2010-05-01T22:20:00.007+05:30

From Athens to America…

Is Greece the Lehman Brothers of the next crisis?

Rating downgrades for Greece, Portugal and Spain have triggered fears of a widespread sovereign debt crisis. While an IMF-backed European bailout package is being worked out, it may be a case of too little, too late and at best might help delay the disaster. Given the lack of a sense of urgency among European governments to stitch together a rescue package and the increasing estimates of the size of the bail-out, the financial markets have started pricing in a high chance of a default by Greece.

What would a default by Greece on its debt obligations mean for Euro and EU (and for global financial markets)?
Who is the next in line?
Does UK face an imminent rating downgrade?
Will the sovereign debt crisis spread beyond Europe?
What happens to the ongoing global recovery?

The focus now is on the so-called PIIGS economies – Portugal, Ireland, Italy, Greece and Spain – the European economies running heavy debt burden and high deficit position. However, the growing risk aversion might trigger a sovereign debt crisis, where cost of raising money for the countries would increase. A general loss of confidence in the safety of sovereign debt will chill the financial system and would be disastrous for the still fragile recovery. See the position of debt and deficit for other major European economies.

Talking about the risks beyond the peripheral EU economies, virtually no rich country has a “sustainable” debt position. Whether it’s UK, US or Japan, none is running a tight enough budget or growing fast enough to stop the debt burden from rising. It may sound preposterous to compare Britain’s fiscal condition with Greece’s or to talk about the American economy in the same breath, but the stakes are too high to remain complacent.

While a default by Greece cannot be ruled out, it would be interesting to see how the events unfold over the next few months in Spain whose economy is much larger than Greece. If Spain comes out successfully, it would mean the sovereign debt crisis can be contained for now. In the longer run, position of high indebtedness of the rich nations would still be a major risk.

2010-03-20T14:03:00.004+05:30

KIDS' GLOVES OFF !!!

Taking a tough stance on the spiraling inflation, RBI has announced a surprise hike in its key policy rates – repo and reverse repo –by a quarter percentage point each. This is the first increase in two years and more tightening measures are expected to follow as the central bank gears up to fight inflation. Post-increase, the repo rate stands at 3.5% and reverse repo rate at 5%.

The hike comes one month before the scheduled annual policy review and follows a 75 basis points hike in the cash reserve ratio in January. The rate hike should anchor inflationary expectations and contain inflation going forward, the central bank said. The measure also shows policy makers’ confidence in the momentum of economic recovery. As liquidity in the banking system will remain adequate, credit expansion for sustaining the recovery will not be affected.

While the headline inflation on a year-on-year basis at 9.89% exceeds RBI’s baseline projection of 8.5% for end-March and is within a striking distance of a double-digit score, India’s industrial production gained 16.7% in January following a 17.6% increase in December from a year earlier - the fastest pace in more than a decade. The high inflation was until recently perceived to be on account of supply-side factors. But, the central bank now recognises the rising demand side pressures accentuating and complicating the risk of rising inflation.

It is clear that the focus of monetary policy will now tilt towards containing the inflation and inflationary expectations, rather than worrying about a pre-mature tightening undermining the recovery. The fine print of the RBI statement indicates that the pace of the ‘calibrated exit’ would be accelerated. Please share your views.

Will there be another 25 basis points hike in April? My expectation is YES followed by a series of hikes.
What will be the level of the policy rates in one year from now (March 2011)? My hunch is at least 150 basis points above the current level.

2010-03-20T13:25:00.004+05:30

EXCEPTIONALLY LOW …….. FOR AN EXTENDED PERIOD ……..

America’s Federal Reserve indicated it would be keeping interest rates at close to zero for the foreseeable future, in order to nurture the economic recovery. While the Fed has declared its optimism that the country’s economy was slowly recovering, it decided to maintain the target federal funds rate at the current level of 0-0.25% in view of a mixed picture of the recovery from recession amidst low rates of resource utilization, subdued inflation trends, and stable inflation expectations.

The Fed is widely expected to maintain the current level of interest rates through 2010. However, more significant will be its moves on withdrawal of the liquidity stimulus programmes running into hundreds of billions of dollars that have been in force since the beginning of the sub-prime crisis – the pace and timing of the unwinding. Also, when it is going to drop the four magic words from its statements – ‘exceptionally low’, ‘extended period’.

2007-06-15T17:22:00.000+05:30

Of froth and bubbles
.…. and fundamentals

In 2003, the Bombay Stock Exchange's Sensex index passed what was seen as the psychologically crucial 4,000 mark. It closed Thursday at 14,203.72, and many traders expect it to hit 15,000 this year.

Stock-watching has become an obsession in India, one that rivals cricket and Bollywood. Believing in India's stock markets means believing in India itself — and in the country's ability to transform its combination of a young population, a dilapidated infrastructure, chaotic streets and unbridled optimism into a corporate superpower.

For now, markets in India are on a roll, surpassing even the rosiest forecasts, thanks in part to a young, wealthy, expanding middle class that is banking on aggressive corporate growth. While Alan Greenspan, the former chairman of the U.S. Federal Reserve, is offering warnings about China, Indian indexes have hit new highs drawing in foreign investors and Wall Street banks.

Many Indian companies are looking to take advantage of the fervor. This week, the country's largest public offering came to the market, the $2.4 billion float of the real estate company DLF. Later this month, the state bank ICICI plans to tap markets in India and the United States for $5 billion.

The frothy share prices and large initial offerings are exacerbating a debate in India. Market bulls say a fundamental shift is under way as consumers tie their personal wealth more closely to India Inc., paving the way for a more prosperous middle class. But bears have begun to talk about a bubble fueled by naïve optimism and day trading. Indian investors have forgotten, critics say, the heavy losses they suffered after fraud racked the markets in the early 1990s and the technology bubble broke a few years ago.

Source : As stocks soar in India, everyone wants in (International herald Tribune)

2007-06-15T17:16:00.000+05:30

BOJ Leaves Rate Unchanged at 0.5 Percent

The Bank of Japan decided Friday to keep a benchmark interest rate unchanged at 0.5 percent, maintaining its ;wait and watch’ policy before moving the rates further up. The bank last changed the benchmark interest rate in February, doubling it from 0.25 percent. That was the first hike since July 2006, when the bank ended five years of near zero interest rates. The low interest rates, to a great extent, helped the word’s second largest economy to come out of a decade of stagnation.

The central bank's decision at the end of a two-day meeting was unanimous. There are expectations that the BOJ would like to wait for more signs of economic strength before tightening policy.

Figures released earlier this week showed that the economy grew at an annual pace of 3.3 percent for the January-March quarter, up from an earlier estimate of 2.4 percent. The nation's unemployment rate has also declined to 3.8 percent in April, the lowest level in nine years.

However, consumer prices have fallen the last three months, raising concerns that Japan might be slipping back into deflation. The core consumer price index edged down 0.1 percent in April, 0.3 percent in March and 0.1 percent in February — which was the first drop in 10 months.

2007-06-12T20:10:00.000+05:30

Inflation in China surges to two year high

Chinese inflation rose to its highest level in more than two years, raising renewed concerns about potential fallout of the sizzling growth in the economy. The surge in inflation is mainly driven by soaring prices for pork and other food items. According to government figures released Tuesday, consumer prices rose by 3.4 percent in May, while food prices jumped 8.3 percent from a year ago.

A rise in food prices is politically sensitive, as it will affect the common masses who have not benefited from the prosperity generated by the country's two-decade-old boom. Beijing has adopted a series of monetary measures aimed at cooling the economy and the latest inflation figure may induce further tightening.

2007-06-12T20:08:00.000+05:30

Eurozone rates raised to 4%, UK steady at 5.5%

The European Central Bank (ECB) last week raised interest rates for the eurozone to 4% from 3.75% - taking rates in the area to their highest level in six years.

Though the rate increase was widely expected, what was awaited eagerly was cues on further rate actions. At his news conference, ECB president Jean-Claude Trichet said that eurozone monetary policy is "still on the accommodative side", suggesting that more rate hikes may be in the pipeline.

The eurozone economies, especially Germany, have been growing strongly in 2007, unemployment in the eurozone is at its lowest level since the launch of the euro, while confidence is high and business activity is expanding.

Meanwhile, the Bank of England decided to keep its benchmark rate at 5.5%. Even as the bank freezes the rate and goes in a ‘wait and watch’ mode to assess the impact of the series of recent rate hikes, a rate rise later this year remains likely. UK rates have been increased four times since August last year in an attempt to rein in inflation. But price growth still remains strong. While consumer price index (CPI) inflation fell from 3.1% to 2.8% in April, the measure still remains well above the government's target of 2%.

2007-06-06T14:29:00.000+05:30

ECB Expected to Raise Key Rate

The European Central Bank is expected to raise its key interest rate by a quarter of a percentage point to 4 percent when it meets today, taking the borrowing cost in the 13-nation euro zone to its highest level in six years. The corresponding benchmark rate is 5.25 percent in US and 5.50 percent in Britain.

Besides the rate decision today, on which there is a near unanimity, the markets will be looking for clues on future rate moves.

The euro zone economy has been growing at a healthy pace, unemployment is at its lowest level since the launch of the euro while business and consumer confidence are up. ECB has been calling for “strong vigilance" to keep inflation under control – a phrase considered by the market as a signal of continued rate increases, typically a quarter of a percent. Year-on-year inflation in the zone was 1.9 percent in May — unchanged from the previous two months, and around the ECB's guidelines of just under 2 percent. While there are concerns about inflationary risks, the ECB will also have to consider global developments such as the problems in the US housing market and uncertainty about Chinese stock markets.

2007-06-06T12:55:00.000+05:30

Bernanke expects economic rebound, dashes rate cut hopes

Federal Reserve Chairman Ben Bernanke has re-iterated his belief that the US economy will bounce back from its sluggish performance so far this year to advance at a “moderate pace” in the coming quarters - close to or slightly below the economy's trend rate of expansion, even if the housing slump persists. The US economy's trend or normal growth rate is put at around 3-3.25 percent. The assertion dashes the prevailing expectations that Fed will start cutting interest rates in order to stimulate growth. A section of the market has been expecting that Fed will be forced to cut interest rates later this year, as the economy struggles to come out of the slowdown.

Economic growth in the year's first three months nearly stalled, logging just a 0.6 percent pace. It was the worst quarterly showing in more than four years. Bernanke said he believes some forces that figured prominently in that poor performance — including a bloated trade deficit, cutbacks by businesses in inventory investment and weak federal defense spending — "seem likely to be at least partially reversed in the near term."

The Fed meets next on June 27-28 and many economists predict policymakers will again hold a key interest rate steady at 5.25 percent, where it has been for a year. Many economists think rates will stay where they are for the rest of this year.

Regarding the housing slump, the US Fed Chairman accepted that it may continue to be a drag on economic growth for longer than previously expected. The saving grace is the housing market's problems haven't spread through the broader economy in a significant way. "We have not seen major spillovers from housing onto other sectors of the economy," he observed.

2007-06-05T14:35:00.000+05:30

Chinese Stocks : Rebound from Free Fall

China's stocks have been in a virtual free fall since the government tripled the tax on securities trading on May 30. The slide has wiped out more than $500 billion of market value - more than the combined GDP of Taiwan and Singapore.

The benchmark Shanghai index closed more than 8% lower on Monday on concerns that the government is set to launch further measures to cool the gravity-defying rise, including a capital gains tax. On Tuesday, a late rally saw the market rebound to finish more than 2.5% higher after a volatile day of trading that saw a 7% decline earlier in the day.

In an apparent bid to reassure investors, editorials in official newspapers have said that the market's medium- and long-term outlook was still positive, and that the tax hike was merely aimed at speculators. Terming the fall as a healthy short-term correction that won’t hurt the “bull run”, the newspapers have advised investors to take a long-term view of the development of the Chinese capital markets and the importance of the financial reforms.

The meteoric rise of the Chinese stock market has led to widespread fears of a bubble-in-making and warnings of dramatic corrections. Significantly, global markets, which were shaken by a heavy Chinese market sell-off in late February, appear relatively calm to the latest meltdown.

2007-06-04T14:34:00.000+05:30

America’s Economy

Sunny outlook, but the weather may turn

THE primary job of any pundit is to forecast all the ways in which things could go wrong. So far, however, the American economy has stubbornly defied the dire prognostications of those expecting bad weather. Economic growth has swayed and faltered. Revised figures announced on Thursday May 31st showed that the economy grew at an annual rate of 0.6% in the first quarter of 2007, less than half the initial estimate. But no matter how close recession seems, somehow the storm clouds never quite break. This may explain why Americans are gaining in confidence, despite a negative household-savings rate, a collapsing housing market, increasing global competition, and a currency that looks decidedly anaemic.

The Conference Board's consumer-confidence index has risen, admittedly from a five-month low. And house prices are still increasing, though at the slowest quarterly rate for ten years, according to the Office of Federal Housing Enterprise Oversight. And even if the American economy is doing all right now, what of the future? This is the question asked in a new survey by the Organisation for Economic Co-operation and Development. The report is surprisingly upbeat on current trends, saying that the economy seems to be weathering the sharp correction in the housing market surprisingly well. Though the Federal Reserve must restrain lingering inflationary pressures without unduly straining growth, the outlook for the short term seems reasonably sunny.

Over the long term, however, America faces gloom: a shrinking labour force. In essence economic growth depends on two things: how fast the number of workers rises and how much more they can produce. For most of the past two decades, both have grown briskly. And the American economy has enjoyed the fastest pace of growth in the developed world.

Since the 2001 recession, however, the labour force has not grown as robustly as after previous downturns. More importantly, labour-force participation is still more than a full percentage point below what it reached in 2000. If the size of the labour force does not track population gains, the remaining workers will have to work harder, or more efficiently, if living standards are to keep rising.

There are reasons to think that the slowdown in labour-force growth is permanent. The great transition of women into the working world, which has boosted participation rates for decades, seems to be over. The proportion of women working is expected to remain roughly stable, or grow only slowly, barring big social or institutional change. Meanwhile, another enormous demographic shift is on the way: the retirement of the baby boomers. That will place an extra burden on tomorrow's workers unless productivity growth is strong enough to plug the gap.

On this point, the OECD is sceptical. American productivity growth has been well above the OECD average for more than a decade and should remain strong. But expected gains will come more slowly than in the past ten years. Unless America undertakes structural reform to make its economy even more competitive, the nation will struggle to support its ever-increasing number of dependants.

The proposed reforms are mostly tricky: trade liberalisation and an end to the distortions caused by farm subsidies; tax reform to broaden the base and remove economically inefficient tax breaks; changes to social security in order to encourage saving and delay retirement; and deep changes to the education system at all levels. Most of these will be politically unpopular. Even improving education, by itself an uncontroversial proposition, generally ends up becoming highly contentious when the details of reform start undercutting powerful interest groups such as the teachers’ unions.

The OECD also wants changes to disability benefits. Some evidence indicates they depress labour-force participation rates. Low-income workers struggling to find jobs may be turning to permanent sick leave when their unemployment benefits run out. But picking on the sick and old to make life easier for young workers will be a hard sell even to the hard-hearted American electorate looking for protection as the clouds begin to gather.

Source : Economist

2007-05-30T15:50:00.000+05:30

Will the Bubble Burst?
Chinese Stocks Plunge as Transaction Tax Trebled

China's main share index has fallen 6.5% in Wednesday trading following the government’s decision to triple the tax on stock transactions. The move is seen as an effort to cool the overheated market that has led to fears of a possible bubble.

The Shanghai Composite Index had risen 62% this year to Tuesday's record close and has quadrupled in value since the start of 2006. Last week former Federal Reserve chairman Alan Greenspan warned of a looming correction in the Chinese stock market.

It’s the unprecedented demand from domestic investors that has fueled the rally. There is a flood of fresh money from millions of new investors – including students and pensioners - sinking their savings into the stock market in the hope of super returns as there is a scarcity of other investment options.

The number of stock trading accounts has risen to about 100 million, with tens of thousands being opened every day. It is reported that 300,000 people a day opened brokerage accounts last week. The finance ministry is tripling the stamp tax on stock trading to 0.3 percent, from 0.1 percent, effective Wednesday. Although investors are sanguine about growth prospects and many feel that the correction may be short-lived, there are fears that the government will follow with more steps to curb speculation and excessive flow of money into the stock market.

2007-05-04T17:50:00.000+05:30

S&P Beats 1500, Dow Jones at New High

Better-than-expected earnings, positive economic data, M&A news driving the market

The raging bulls continue to scale the mountains as S&P500 beat the 1500 point once again since late 2000 and the Dow made another new high of 13241.38. The economic data continues to paint an optimistic picture of controlled inflation and steady growth. That, along with the great earnings so far, continues to fuel the bulls ahead.

Besides economic and earnings data, what has added to the upbeat mood on the Wall Street is a spate of corporate takeover news. After Rupert Murdoch’s News Corp. offered to buy Wall Street Journal publisher Dow Jones & Co. for $5 billion, there are reports that Microsoft has renewed talks to take over Yahoo Inc. and Reuters Group has received a preliminary takeover offer. The frenzied activities on M&A front are seen as bullish signs for the future of the economy.

2007-05-02T18:47:00.000+05:30

China Continues Credit Tightening, Raises Reserve Ratio Again

China’s central bank announced another increase of 0.5 percentage point in the reserve ratio effective May 15. Big banks will now be required to hold 11 percent of their deposits in reserve at the central bank. This is the latest in the series of measures the People’s Bank of China has been taking to cool down credit and investment growth - fourth increase in reserve requirements this year and seventh in past one year. Over the past year, the central bank has also raised interest rates three times - most recently on March 17.

The central bank of the word’s fourth largets economy has been struggling to sterilize a surfeit of liquidity largely flowing in from the burgeoning trade surplus and capital inflows. The excessive liquidity has given rise to worries of potential asset price bubbles. In particular, the easy money has been fueling rally in the domestic stock market which is being considered unsustainable. Chinese stocks have risen 40 percent this year on top of a 130 percent leap in 2006.

2007-04-18T13:10:00.000+05:30

Rate hikes imminent in UK

Inflation surges, Pound breaches $2

The British pound has moved through the $2 mark for the first time in nearly 15 years after the latest data showed an unexpected surge in inflation, prompting speculation that interest rates would have to be increased to slow inflation. The last time the $2-level was breached was just before sterling dropped out of the Exchange Rate Mechanism in September 1992. Significantly, Euro is also trading at a two-year high against the dollar and a record high versus the Japanese yen.

According to the data released by the government's Office for National Statistics on Tuesday, consumer price inflation increased to 3.1 percent in March, up from 2.8 percent in February - well above the Bank of England's target of 2 percent. The headline rate of retail price inflation, a wider inflation measure, rose to 4.8 percent from 4.6 percent. The rising inflation rate forced the Bank of England governor to write a letter to the government explaining why inflation has climbed and what the central bank proposes to do about it. The letter said that the central bank is “determined” to set interest rates at a level required to bring inflation back to its 2% target.

The central bank has raised its benchmark rate three times by a quarter percentage point each since August last year in an attempt to contain inflationary pressures. At its last rate-setting meeting earlier this month it kept rates at 5.25%. Now in the wake of the continued surge in inflation, it is expected to lift rates in May to 5.5% and possibly beyond.

2007-02-23T08:26:00.000+05:30

HOUSING LOANS - TO FLOAT OR NOT TO FLOAT?

Interest rates in India have been rising relentlessly and home loan borrowers - both existing and potential - are a baffled lot. Those who opted for floating rates a couple of years back when interest rates were falling are now required to shell out larger sums of money (for a longer term in many cases). The potential borrowers - those who are planning to buy a house - are looking on helplessly as both the price of residential property and the housing loan rates move northwards.

Should one opt for a fixed rate or a floating rate loan? How far will the interest rates go from here? Is it wise to lock in a fixed rate when interest rates are so high? As housing loans are long-term in nature - typically 15-20 years - it's important to understand the nature of the risks involved and to evaluate the risk-reward equation - the pros and cons - of all the options.

When you opt for a floating rate loan, you expose yourself to the vagaries of interest rate movements over the entire life of the loan. The expected pay-off for bearing the interest rate risk is to benefit from a possible fall in interest rates. In case of a fixed rate loan, the risk of interest rate movements is borne by the bank, while the borrower is immune to interest rate changes (at least his cash outflows will not change during the entire loan period). However, if interest rates fall, there will be a potential loss as you will earn lesser interest on your savings (deposits) but keep paying higher interest rate on the loan. As banks have to bear the risk in case of fixed rate loans, they price in the risk and such loans are available at a premium campared to floating rates. For example, if a 15 year floating rate loan costs 10% and a fixed rate loan of same maturity is available at 12%, the 2% premium is charged by the bank to cover its risk because it is bearing the interest rate risk in case of a fixed rate.

Interest rate movements are cyclical and a period of 15-20 years is enough to see all the phases of the movement. We can possibly see two to three complete cycles with rates rising, then stabilising at higher levels before starting a downward movement, again falling for some time, then stabilising at lower levels, rising again and so on. If this is the case, ideally it should not make a difference over such a long period of time whether it is a fixed rate or a floating rate. However, it has been seen that while the banks will immediately pass on the rising costs to the borrowers, they don't show the same promptness in giving the benefits of falling interest rates. A repo rate hike as small as 25 basis points, an increase in cash reserve ratio or even a hawkish statement by a Reserve Bank official lead to rate increases of 50 to 100 basis. It is basically the inefficiency or non-transparency of the floating rate mechanism which skews the balance against the borrowers.

As it is difficult to take a call on interest rate movements over a long period of time (even the best forecasting tools cannot predict how interest rates will move over next 15 years), the decision has to be based on a trade-off - how much risk you want to take given your current stage of life (i.e. whether you are young, middle-aged, approaching retirement, etc.) and expected income pattern (i.e. whether you can absorb unexpected changes in the cash outflows). Considering the near tem outlook, it will be advisable to go for a fixed rate. As Indian economy is on a high growth trajectory and doesn't show any signs of fatigue (plus shows some signs of overheating), interest rates are expecetd to keep moving up in near future. However, if you are young and don't mind rising EMIs in the initial few years but would like to benefit from lower interest rates later, you can go for a floating rate. But keep the option to switch to a fixed rate later if required and see its cost.

As an alternative to pure fixed or floating rate loans, some banks and HFCs are also offering hybrid loans. In such loans, a part of the loan will be at a fixed rate and remaining will be floating (ideal for those who are not able to decide between fixed and floating !). Another variant is based on duration - the rate will be fixed for the first 2-3 years and will become floating afterwards. These donot make much sense to me, as anything that looks seemingly attractive will have a premium based on the bank's view on interest rates. Bankers will come up with more innovative products to further confuse the borrowers, as the interest rate scenario gets more hazy. Personlly, I will stick to the idea of fixed rate as it implies a known mothly outgo for a fixed time. No shocks.

And, as for the floating rate loans, I would like to see two changes in the mechanism to make it more meaningful. One, rates are reset at a pre-determined frequency, say every three months or six months (and not every time the bank decides to change its PLR). Two, the rates are linked to some transparent market benchmark and not the arbitrarily determined PLR - for exmaple, average of daily MIBOR over the period or yield on 10 year government bond (plus a spread). These will make the changes more predictable and transparent for the borrower.

I am writing this article based on the request of Amit Shekhar who is planning to buy a house. Hope this will be useful. All the best Amit and all prospective home loan borrowers.

2007-02-21T12:01:00.000+05:30

THE SUSPENCE IS OVER..
BoJ Raises Interest Rate

The Bank of Japan has raised its overnight lending rate to 0.5 percent, saying that prolonging a low-interest-rate policy could hamper economic growth. This has been one of the closest calls for the market as opinion was sharply divided amidst strong fourth quarter growth numbers but lingering doubts on sustainability of the economic recovery.

The central bank of the world's second largest economy said in a statement that the the economy is likely to continue its moderate expansion with a virtuous circle of production, income and spending in place. The statement indicated that future adjustments on interest rates will be gradual.

Here are some major points from the statement--

Uncertainties over the future course of overseas economies, including that of the United States, are abating, and this is likely to reinforce the prospects of continued increase in corporate profits and business fixed investment.
With respect to private consumption, the weakness observed in the last summer seems temporary, and it is judged that private consumption is on a moderate increasing trend.
Consumer prices (excluding fresh food) have been registering small increases on a year-on-year basis, and it is possible that the rate of change will be around zero in the short run. From a longer-term perspective, however, consumer prices are likely to increase as a trend, since the utilization of resources such as production capacity and labor has been increasing and the economic expansion is expected to continue.

2007-02-19T22:38:00.000+05:30

WILL FUKUI RAISE INTEREST RATES ?

As Bank of Japan's policy board starts its two-day meeting on 20th February, opinions are divided on whether inerest rates will be raised. The board at its last month's meeting voted 6-3 to keep borrowing costs on hold, with three dissenting members having favoured a rate increase. The central bank of the world's second largest economy ended its zero rate policy last July when it raised the overnight lending rate to 0.25%.

Each piece of economic data since then has been closely monitored and speculations on the timing of next rate increase have been doing the rounds. There are, however, lingering doubts on whether the economy is ready for higher interest rates. The Japanese economy, after growing steadily for about five years, is showing signs of faltering. And, the political leadership has expressed its preference for low interest rates saying that any increase now may hurt the recovery.

According to the latest figures released last week, Japan's economy posted strong growth in the last quarter of 2006 - an annualised rate of 4.8%, highest in almost three years. Consumer spending rose 1.1% rebounding from an equal drop in the July-September period and business spending increased 2.2% in the fourth quarter, following a revised 0.8% increase in the third quarter. However, there are no signs of inflation yet and this makes the central bank's pursuit of a rate increase difficult. Core consumer prices rose 0.1% in December, slowing from 0.2% in the previous month.

Besides the figures of economic growth and inflation, one factor that BoJ will consider is the so-called yen carry trades. This is a transaction that looks quite simple - borrow in yen (at very low rate of interest) and invest in higher-yielding assets in other markets (such as US treasury bonds). But the build up of positions has been so massive that it is being seen as a source of potential financial crisis. So much so that the G-7 group earlier this month warned investors against making "one-way bets". A rapid unwinding of such positions may lead to huge losses for the investors. And may be collapse of many hedge funds?

2007-02-18T13:48:00.000+05:30

Dow Jones dream run continues

The Dow Jones Industrial Average reached an all-time high marking a record for the third day in a row, as Federal Reserve Chairman Bernanke painted a broadly optimistic picture of the economy. The 30-stock index has risen seven straight months - the longest winning streak since 1995 - and has gained 2.4% in 2007. It closed at 12,767.57 this Friday, basking in the optimism generated by Bernanke's testimony and positive data on wholesale prices, while shrugging off another set of data that showed a continued slowdown in the housing market.

The Fed Chairman sounded less hawkish in his semi-annual congressional testimony than expected, spurring expectations that interets rates will remain on hold and will be cut later this year. He assessed that there were some indications that inflation pressures were beginning to diminish. Since there was much noise in monthly data, it may be some time before the Fed could be confident that underlying inflation was moderating as anticipated. He noted that core inflation rate remained somewhat elevated. However, if activity expanded over the next year or so at a moderate pace as anticipated by the FOMC, pressures on both labour and product markets should ease modestly. Consumer spending has been the "mainstay" of growth, and the worst housing slump in more than a decade won't have a significant effect on other parts of the economy, Bernanke said.

Reflecting anticipation of lower rates, the yield on the benchmark 10-year U.S. Treasury note has fallen to 4.69 percent.

2007-02-18T13:05:00.000+05:30

Inflation in India rises to 6.73%

Defying all the monetary and fiscal measures taken by the government and the central bank in the past few months, inflation continues its upward march. The annual inflation measure based on wholesale price index has returned a reading of 6.73 per cent for the week ended February 3, up from the previous week's 6.58 per cent and highest in about 2 years. What's worse is the inflation estimate for the week ended Dec. 9 has been revised to 5.63 percent from 5.32 percent. It's a usual practice to revise the inflation data with a lag of two months on additional price data.

The rise in inflation figures is being driven by the rapid economic growth and credit expansion, together with supply constraints in agricultural commodities and food articles. While the RBI has been pursuing a gradual tightening to avoid liquidity overhang, the central government has taken measures like ban on export of certain items, easing import restrictions, cuts on customs duties, restriction on futures trading of some essential commodities and cut in petrol and diesel prices. With the combined effect of these measures, inflation numbers should moderate over next couple of months. However, as the economy has taken off into an unchartered territory of high growth, it is expected that the central bank will continue to raise rates and do everything at its disposal to actively manage the liquidity.

Bond markets have been in a virtual free fall in this scenario of rising inflation and monetary tightening (and 'to be continued' signs). The benchmark 10 year yield is above 8 per cent.

2007-02-17T21:11:00.000+05:30

China raises reserve ratio

In a move to temper the staggering pace of economic growth and curb inflationary pressures, China's central bank has raised the reserve ratio by 50 basis points. Commercial banks will now be required to set aside 10% of their deposits in cash reserves. This is the second hike in 2007 and fifth since last July.

The People's Bank of China is concerned that continued growth will stoke consumer prices as the economy marks a record trade surplus. Mounting trade surplus along with strong FDI inflows are adding to the excessive liquidity in the banking system and the central bank has taken a slew of measures to slow the pace of lending.

"Since 2006, the People's Bank of China has used a combination of monetary tools to soak up liquidity in the banking system and has achieved some results," the central bank said in a statement posted on its web site. "But the surplus in international payments remains large and the pressure on loan expansion is still relatively big so it is necessary to again increase the reserve ratio," it said.

China's economy, the world's fourth-largest, expanded 10.7% in 2006. And consumer prices returned a rise of 2.2% for the month of January - lower than the previous month's 2.8%, still high enough to call for continued tightening bias.

2007-02-14T21:31:00.000+05:30

War on inflation intensifies - CRR raised again

The Reserve Bank of India has announced another hike in the cash reserve ratio, as inflation continues to surge despite a slew of monetary and fiscal measures taken in the last couple of months. The 50 bps hike takes the CRR - the balance that banks need to maintain with the central bank - to 6% and will be effective in two phases of 25 bps each, first phase kicking in on 17th February and second phase starting 3rd March. The move will impound about Rs. 14,000 crore out of the banks' deposits.

It was on 8th December 2006 that the RBI had last raised CRR by 50 bps, absorbing around Rs 13,500 crore. This was followed by a 25 bps increase in the repo rate on 31st January. RBI is worried about the spiraling inflation and has been taking measures to avoid overheating of the economy as it continues to grow ferociously. See a detailed analysis of the interest rate scenario and RBI's actions here.

The Indian economy is expected to grow at 9.2% in FY2007 on the back of 9% growth last year. The annual wholesale inflation rate has touched 6.58% for the week ended 27th January - a full percentage point higher than RBI’s target for the current fiscal.

Besides the surging inflation numbers, the recent move seems to have been triggered by the rise in liquidity from RBI's intervention in the forex market in the last few days. RBI has been buying dollars to halt the appreciating rupee as a strong domestic currency affects the country's exports.

The CRR hike is bound to have an impact on banks' lending rates, including those on home loans, auto loans and personal loans. In the weeks following the recent repo rate hike, some of the private sector banks have already raised their lending rates. Public sector banks, which constitute three-quarters of India’s banking industry refrained from doing so as they were advised by the finance minister to maintain the current rates, especially on housing loans. They may have to follow suit now, as the liquidity squeeze puts pressure on their cost of funds.

2007-02-08T21:39:00.000+05:30

ECB holds interest rate, may raise in March

The European Central Bank has decided to keep its key interest rates on hold at 3.5%, waiting to see if its last increase in December can keep inflation at bay and hinting that a hike may come in March. The ECB President Jean-Claude Trichet said "strong vigilance" was needed to avoid "risks to price stability" – a statement being seen by the market as a clear signal for a rate hike next month. The term ‘vigilance’ seems to have acquired a new meaning for the followers of Trichet-speak - each of the last six times Trichet used the word vigilance, a rate increase was handed down the next month.

The key eurozone economies have had a strong start to 2007. Unemployment has fallen in France and Germany, with consumer confidence remaining strong, despite Germany's decision to increase value added tax (VAT) from 16% to 19%. While growth is expected to remain strong, wage pressures are mounting. The latest round of pay negotiations in Germany will be keenly watched. Inflation in the euro zone was 1.9 percent in December for a third straight month, at its recommended level of just under 2 percent.

Meanwhile, Bank of England also held official interest rates steady at 5.25 percent after a surprise increase last month of a quarter of a percentage point.

2007-02-07T23:04:00.000+05:30

ICICI Bank raises home loan rates

Following the repo rate hike announced by RBI in its quarterly policy review on January 31, ICICI Bank has raised interest rates on all advances including home loans by one percentage point. The fixed rate home loan will now cost 12.5% and floating rate home loans between 9.5% and 10.5%.

The rate hike by India’s largest private sector lender comes just a day after the Finance Minister, Mr P. Chidambaram, asked public sector banks to maintain interest rates on home loans at current levels. While it may be politically correct for the public sector banks to hold on to current rates, the increasing pressure on borrowing costs will force them to raise rates sooner or later. Given the huge growth in the economy, the Reserve Bank of India has been taking steps to cool down inflationary trends and to avoid building up of asset price bubbles. There are clear indications that the rate tightening cycle – “measured increase in interest rates” - will continue.

Interest rates on housing loans have risen substantially in the past couple of years. For the existing floating rate borrowers, each reset will mean higher outgo. So far, the upward revision in the rates was being adjusted by banks by increasing the maturity period. Now the banks have started increasing monthly instalments. This may also lead to a rise in delinquencies in a segment that has historically been seen by banks as less risky.

2007-02-03T19:47:00.000+05:30

US hopeful of soft landing

Interest Rates Unchanged

The U.S. Federal Reserve has left interest rates unchanged at 5.25 per cent for the fifth time running. The widely expected move comes amid signs of the US economy staying reasonably strong and inflation being more under control. While recognizing “somewhat firmer economic growth” and “signs of stabilization” in the housing market, the rate-setting Federal Open Market Committee has expressed growing confidence that inflation is running lower. "Readings on core inflation have improved modestly, and inflation pressures seem likely to moderate over time," the central bank said. At the same time, it also repeated its caution that "some inflation risks remain" - a sign that it is likely to keep its benchmark rate at current levels for the near future (or, may even raise further). The US economy grew faster than expected in the last three months of 2006, as increased consumer spending offset a housing market slowdown. The GDP rose at an annual rate of 3.5% from October to December, while the growth rate for 2006 as a whole was 3.4%, more than 2005's 3.2% expansion. The Fed's policy aim is to achieve a “soft landing” - a mild slowdown in growth that would cool down inflationary pressures but not spiral into a recession.

2007-02-03T10:32:00.000+05:30

On interest rates and home loans

Fellow blogger Amit Shekhar has requested for a detailed analysis of the recent repo rate hike by RBI and its impact, particularly on home loan rates. Amit authors two great blogs Indian Thinking and Bombay Today. He writes on contemporary issues and trends in areas as diverse as technology, business and crime. His writings are deep and thought-provoking. “ …. blogging is my way of connecting to the world, cause i believe there are like minded and fresh thinkers around to praise advise and encourage.”, Amit says.

Here's my take on the repo rate hike announced by RBI in its quarterly policy review on 31st January. I have tried to analyse the significance of repo rate as the signal rate for the economy, reasons for the monetary tightening in the context of current and evolving economic situation, future course of interest rates and housing loans market. I believe housing loans will gradually lose their status as the most preferred segment for the bankers and will become costlier for the consumers as interest rates in the economy rise further and policy preferences change.

As Indian economy and the interest rate cycle are at a very interesting stage, I will be writing more on the subject in the coming weeks. Please give your opinion and feedback.

What is the significance of repo rate?
RBI conducts daily repo auctions as part of its liquidity adjustment facility (LAF). Repo is the short form of repurchase which refers to lending or borrowing against marketable securities (such as government bonds). This is used by RBI as a tool to manage the system liquidity – banks having surplus intraday cash can lend to RBI (at reverse repo rate – currently 6%) and those having shortfall can borrow from RBI (at repo rate – currently 7.50%). Although these are short term (overnight) rates, repo and reverse repo rates are used as the signal rates for the economy.

Why has RBI been raising interest rates?
As Indian economy has been growing strongly, the central bank’s primary concern is to avoid over-heating and a likely surge in inflation (inflation is already beyond the informal tolerance range of 5-5.50%). Typically, periods of high growth culminate into formation of asset price bubbles in pockets of the economy, like stock markets, real estate, etc. By raising interest rates in a measured way, RBI has been trying to cool down inflationary pressures and to avoid the undesirable side effects of high growth like escalating asset prices.

What is the significance of the latest rate hike?
The latest repo rate hike is one step in a series of measures that RBI has been taking in the past couple of years to address the concerns arising from high growth. To be precise, since September, 2004 repo rate has been increased by 125 bps, reverse repo rate by 150 basis points and the CRR by 100 basis points. CRR – cash reserve ratio - is the amount of cash (as a percentage of bank deposits) that banks are required to set aside and maintain with the central bank. A higher CRR will mean banks have lesser money available for lending, hence will charge higher interest rates.

Simultaneously, RBI has also taken measures to avoid building up of asset price bubbles, especially in the real estate sector and has been trying to reduce the flow of funds from banking system into the hot property market (as also other potential ‘trouble-spots’). Towards this end, it has taken steps like increasing the risk weights for housing loans from 50 per cent to 75 per cent, for commercial real estate from 100 per cent to 150 per cent and consumer credit from 100 per cent to 125 per cent, increasing provisioning requirement for standard advances for personal loans, credit card receivables, loans to real estate and capital markets. All this means the borrower will have to pay a higher interest rate for such loans.

More rate hikes to come?
There are clear indications that the rate tightening cycle – “measured increase in interest rates” - will continue. Domestic economy is expected to continue on the high growth trajectory and containing inflation will be high on the monetary policy agenda. Who wants a double-digit growth and double digit inflation? Global trends also point to a continued high interest rate bias. Global growth continues to be strong despite fears of a slowdown in US. Although there are no signs of a runaway inflation growth in the major economies, the central banks do not want to let their guard down.

Will home loan rates rise?
Yes. With loan growth out-stripping deposit growth and liquidity drying up, banks are feeling continued pressure on their borrowing costs. This is evident in the scramble to mobilize deposits and the rise in deposit rates by many leading banks in the recent past. Although there may not be immediate increases because of the latest repo rate increase (this was widely expected), there will definitely be upward pressure on home loan rates because of the overall rise in interest rates in the economy.

Some respite for the banks may come in the Budget if the lock-in period for tax rebate on long term deposits is reduced from 5 years to 3 years – banks would be able to mobilize more deposits. But, another factor that will play against home loan borrowers is a growing feeling among policy-makers, especially in RBI, that there is a good deal of speculative money flowing into the property market (including residential property) through banks. Although the current focus is on reducing the flow of funds into commercial real estate, RBI has made it clear that it is not happy about the bankers going all out to woo the housing loans borrowers. RBI has urged upon banks to re-jig their credit portfolio – from the hot housing loans and personal loans into 'more productive sectors' of the economy. The Governor's worry about the under-performance of agriculture expressed in policy statements is a clear sign of where the central bank wants the bankers to lend. Even the government is likely to give a big push to agriculture sector in this year's budget (and beyond) and banks will be called upon to play a bigger role in this.

I believe, housing loans will gradually lose their status as the most attractive sector for the bankers and become costlier for the consumer, as interest rates in the economy rise further and policy preferences change. Same for personal loans and credit cards.

An update
Indian Bank has announced that it is increasing its benchmark prime lending rate (PLR) by 50 basis points to 12.5 per cent, deposits rates by 25-50 basis points and home loan rates by 25 basis points across all tenors from February 1.

2007-01-31T21:50:00.000+05:30

RBI raises repo rate

RBI has raised the short-term repo rate by 25 bps to 7.50 per cent, while keeping reverse repo (6 per cent), bank rate (6 per cent) and CRR (5.50 percent) unchanged.

Concern over surging inflation is the dominant theme of the quarterly review of monetary policy and the hike is on expected lines as the central bank had given enough indications in its macroeconomic review that it is worried about the underlying inflationary pressures. Inflation, which had breached the 6 per cent mark in the first week of January, had eased marginally to 5.95 per cent in the following week ended January 13. The RBI’s year target band for inflation is 5-5.50 per cent. Meanwhile, the Government on its part has taken a series of fiscal measures to rein in the rising inflation.

Repo rate is the rate at which the central bank buys securities to infuse liquidity in the system and reverse repo rate is the rate at which it sucks out excess liquidity by selling securities in the market. The daily repurchase window is expected to provide a ‘corridor’ for the overnight rates, with reverse repo rate and repo rate acting as the floor and the ceiling respectively. By increasing the repo rate while keeping the reverse repo rate unchanged, RBI has widened the spread to 150 bps which has traditionally been maintained at 100 bps. Interbank overnight rates tend to stay near the repo rate in a situation of tight liquidity as prevailing now.

Echoing the all-pervasive bullish outlook on economy, the RBI has revised upwards the GDP growth projection to 8.5 to 9 per cent in 2006-07 as compared to 8 per cent projected in mid-term review and 7.5 to 8 per cent earlier. On inflation, it observed prices of food articles would have considerable impact on headline inflation over the rest of the year. The seasonal decline in prices of food articles in the second half of the year has been less than normal. The prices of manufactures are firming up and were close to the headline level by the end of December.

The central bank has re-iterated its worries on continued high credit growth in the real estate sector, also identifying outstanding credit card receivables, loans and advances qualifying as capital market exposure and personal loans as a matter of concern. It says, there are abiding concerns relating to the persistently high credit growth and the potential for erosion in the quality of credit so that balance sheets of banks need to be fortified against the build-up of loan delinquencies by precautionary provisioning and a greater sensitivity to underlying risks by enhancement of risk weights applied to advances to specific sectors in which banks’ exposures have been rising at a fast pace.

Significantly, RBI has signaled in its statement that more interest rate hikes are on the cards, as the economy continues to grow ferociously and containing inflation takes priority in policy. RBI mentions that early warning signals emanating from rising inflation in an environment of high money and credit growth indicate that monetary policy is still accommodative, warranting a policy response in terms of a measured increase in interest rates to assuage demand pressures. The stance of monetary policy has progressively shifted from an equal emphasis on price stability alongside growth to one of reinforcing price stability with immediate monetary measures.

2007-01-30T22:27:00.000+05:30

S&P raises India's rating to investment grade

Global rating agency Standard & Poor's has raised India's sovereign credit rating to investment grade, citing the country's strong economic outlook, its rising foreign exchange reserves and the improved regulation of its stock and bond markets.

Gradual reforms and consistent monetary and fiscal policy stances have sustained macroeconomic stability and India's huge foreign-exchange reserves provide a buffer against changes in investor confidence, according to the agency. The foreign exchange reserves, which totaled about US$176 billion at the end of 2006, are more than 16 times of India's outstanding short-term debt.

India's GDP has clocked an average of over 8 percent growth in the past three years and the economy is expected to grow a record 9 percent in the current fiscal year ending March 2007. The rating upgrade from BB+, the highest junk rating, to BBB-, the lowest investment grade rating, will help improve India’s credit standing and reduce the borrowing costs in the global market.

S&P said India's fiscal position has improved and the country has a "well-functioning" bond market, which provides long-term financing of government deficits. The central government's budget deficit for the current year seems to be back on track to meet its target of 3.8 per cent of GDP due to strong revenue collection. The secular decline in general government deficits in the medium term is likely to continue due to tax reform and improved administrations and implementation of fiscal responsibility laws across more states, currently enacted by 23 out of 29 states, according to the rating agency’s assessment.

Further rating improvements will, however, depend on sustained prudent fiscal policy that leads to a decline in government debt and interest burden, and further reforms that lift the country's growth prospects and income levels.

2007-01-21T21:35:00.000+05:30

Bank of Japan's assessment of economic & financial developments

The Bank of Japan’s policy board decided, in a 6-3 vote, to keep its benchmark interest rate steady at 0.25 percent, leaving the impression that the central bank has bowed to political pressure to move slowly. The political establishment has expressed concerns that raising rates too quickly will choke off the nascent recovery, as the economy faces weak consumer spending and no clear signs of inflation.

In its Monthly Report of Recent Economic and Financial Developments January 2007 released on 18th January, BoJ has said that the developments have so far deviated slightly downward from the outlook presented in October 2006, mainly due to weaker-than-expected private consumption. Looking ahead, the bank expects that the economy will develop broadly in line with the outlook, as a virtuous circle of production, income, and spending is likely to remain intact. Here's the text of the report.

Japan's economy is expanding moderately.
Exports have continued to increase, while public investment has been on a downtrend. Business fixed investment has continued to increase against the background of high corporate profits. Household income has also continued rising moderately. In this situation, private consumption has been on an increasing trend, although the pace of increase has been only modest. Housing investment has been increasing moderately with some fluctuations. With the rise in demand both at home and abroad, production has also been increasing.

Japan's economy is expected to continue expanding moderately.
Exports are expected to continue rising against the background of the expansion of overseas economies. Domestic private demand is likely to continue increasing against the background of high corporate profits and the moderate rise in household income. In light of these increases in demand both at home and abroad, production is also expected to follow an increasing trend. Public investment, meanwhile, is projected to remain on a downtrend.

On the price front, domestic corporate goods prices have recently been somewhat lower than their levels of three months earlier, due to the drop in international commodity prices. The year-on-year rate of change in consumer prices (excluding fresh food) has been on a positive trend.

Domestic corporate goods prices are expected to be somewhat weak or stay flat in the immediate future, due to the drop in international commodity prices. The year-on-year rate of change in consumer prices is projected to continue to follow a positive trend, as the output gap continues to be positive.

As for the financial environment, the environment for corporate finance is accommodative. The issuing environment for CP and corporate bonds is favorable. Also, the lending attitudes of private banks have continued to be accommodative. Credit demand in the private sector has been increasing. Under these circumstances, the amount outstanding of lending by private banks has been increasing. The amount outstanding of CP and corporate bonds issued is slightly below the previous year's level. Funding costs for firms have risen slightly. Meanwhile, the year-on-year rate of change in the money stock is at the 0.0-1.0 percent level. As for developments in financial markets, in the money markets, the overnight call rate has been at around 0.25 percent, and interest rates on term instruments have been around the same level as last month. In the foreign exchange and capital markets, stock prices have risen compared with last month, while the yen's exchange rate against the U.S. dollar has fallen compared with last month. Meanwhile, long-term interest rates have been around the same level as last month.

Developments in Japan's economy have so far deviated slightly downward from the outlook presented in the Outlook for Economic Activity and Prices (the Outlook Report) released in October 2006, mainly due to weaker-than-expected private consumption caused partly by temporary downward pressure stemming from the unfavorable weather conditions. Looking ahead, however, the economy is expected to develop broadly in line with the outlook, as a virtuous circle of production, income, and spending is likely to remain intact. As for prices, domestic corporate goods prices are expected to deviate slightly downward from the expected trajectory, reflecting the drop in crude oil prices. Consumer prices have so far deviated slightly downward from the projection, partly reflecting the drop in crude oil prices, but they are expected to develop broadly in line with the projection.

2007-01-21T21:17:00.000+05:30

OIL MARKET REPORT - HIGHLIGHTS

Following are the highlights of the latest oil market report released by the International Energy Agency (dated 18 January 2007):

Crude oil prices fell to 20-month lows in mid-January as lower demand, due to unusually warm weather and fund repositioning in commodity markets, offset the impact of OPEC cuts. Despite a sharp fall in US crude stocks, high inventories at the NYMEX delivery point of Cushing, Oklahoma, are contributing to the persistence of higher forward prices.

Global oil product demand has been cut by 450 kb/d in 4Q06 following large US data revisions, unseasonably mild temperatures, fuel switching and lower apparent demand in the FSU. Some of these factors, together with a lower US GDP assumption, contribute to a reduction in forecast global demand growth to 1.6% in 2007 (85.8 mb/d).

World oil supply rose by 110 kb/d in December to 85.4 mb/d, as strong recent non-OPEC growth continued. However, revisions to Norway, Mexico, Canada and Latin America lowered non-OPEC supply by 0.3 mb/d to 52.3 mb/d in 2007. Mild weather cut the 4Q06 ‘call on OPEC plus stock change’ to 29.4 mb/d, but the 2007 call was lifted by 0.1 mb/d to 28.6 mb/d, only marginally below the average call in 2006.

December OPEC-11 crude supply fell by 155 kb/d to 28.8 mb/d, but persistent disruptions to Iraqi and Nigerian supply limit effective spare capacity to 2.5 mb/d. Indications of further cuts in 1Q OPEC output follow the recent fall in prices and an agreement in Abuja to curb supply by 500 kb/d from February. Angola became an OPEC member from January 2007.

OECD refinery throughputs increased by 1.1 mb/d in November to average 39.1 mb/d. Weekly data suggest a further increase of 0.6 mb/d in December to a winter peak of 39.7 mb/d. Global throughputs are expected to decrease over the course of the first quarter, as maintenance takes place sequentially in the US, Europe, the Middle East and Asia.

OECD total industry oil stocks continued to decline in November, falling by 33 mb as product draws offset a modest crude oil stock build. Provisional data suggest the trend continued in December. While total OECD stocks are 41 mb higher than one year ago at 2,712 mb, forward demand cover fell by one day from October to 54 days.

2007-01-20T23:40:00.000+05:30

The politics and the economics of interest rates

Bank of Japan has decided to keep the borrowing rates unchanged at 0.25 percent, concluding that it is too early to raise rates. Recent signs of slowing growth have prompted worries that Japanese economy could be faltering after five years of slow but steady growth. The central bank of the world’s second largest economy cited weaker-than-expected private consumption and growing downward pressures on domestic prices as the reason for going against an increase. BoJ had raised the level of borrowing rates by a quarter point to 0.25% last July, ending a long period of zero rates and another increase was widely expected as the economy has been doing well. The bank maintains its stance of gradually adjusting interest rate levels based on the economy and prices, though some recent comments by bank officials seemed to favour a rate increase. The decision is also being scrutinised from political angle - for the central bank's ability to maintain independence in its conduct of monetary policy.

2007-01-20T23:24:00.000+05:30

Oil sees sub-50, still seeking bottom

Continuing its falling spree, oil briefly fell below $50 per barrel this Thursday before recovering slightly on Friday. Crude oil has shed about 18% in 12 sessions of 2007 and the sub-50 level has been seen for the first time in 20 months.

Weeks of mild winter weather in the U.S. Northeast, a key consumer of heating fuels, and growing energy stockpiles amidst doubts on OPEC’s ability to effect production cuts have been driving the recent fall. OPEC has committed itself to a total cut in output of 1.7 million barrels per day, including a 500,000 barrel-a-day reduction set to begin February. But the oil cartel is believed to have cut output by little more than half of its pledged levels. Production remains near 27 million barrels a day or about 700,000 barrels a day above OPEC's target.

OPEC member Saudi Arabia, which is also the world's biggest oil exporter, has been vocal about not making further production cuts and has instead said it plans to increase its crude oil production capacity nearly 40 percent by 2009 and double its refining ability during the next five years to keep pace with growing global demand.

Although crude oil for February delivery at NYMEX managed to close above $50 per barrel, it's expected to keep its date with sub-50 level. It should trade in a $40-50 band in the near future - a level where most of the consumers, notably developing economies like India, will be comfortable.

2007-01-14T20:40:00.000+05:30

OIL – ALL’S NOT WELL

The southward movement of oil prices continues. NYMEX crude slipped last week below $52 a barrel before rebounding to $53 on Friday. While mild weather has been the prime driver in the recent downward movement, future direction will depend on a host of forces, including the stance OPEC is going to take (also the OPEC’s capacity to deliver production cuts and influence prices - OPEC's credibility has been on the wane), hedge fund speculators (a number of funds are taking short positions, on bets that prices will fall) and the strength of the global economy (which will affect the demand going ahead). Also on the market’s radar will be the geo-political developments especially in the middle east, though worst of the fears are already discounted.

The prices are expected to go below $50 very soon. Some analysts are even predicting the drop to extend to $40 a barrel, a price not seen since 2004. Crude oil has been in an eight-year bull market until last summer’s high above $78 a barrel. In 1998, oil traded as low as $10.35.

2007-01-14T20:23:00.000+05:30

Bank of England surprises with rate hike, ECB holds

Monetary policy and central bank actions need not always be boring. Bank of England has delivered an exciting story to the markets, by raising its base rate by another quarter-point to 5.25%. This follows two earlier hikes of same magnitude, as part of an effort to stem inflationary pressures – one in November last and another one in August, the hike in August being similar to the latest one in surprise element.

The European Central Bank, on the other hand, decided to hold rates steady while hinting at an increase later this quarter.

The Bank of England’s move is spurred by worries on creeping inflation which reached 2.7 percent in November — above the bank's target of 2 percent for the seventh month in a row. Given the expectations that inflation may rise further, the BoE's pre-emptive strike looks sensible. What surprised the markets is the timing of the move. It was widely expected that the central bank would wait until February, when it would take stock of the economy as part of its quarterly review of inflation prospects.

The ECB, meanwhile, left its benchmark rate unchanged at 3.5 percent, but President Trichet's comment that it would engage in "very close monitoring" of inflation risks is taken as a signal that a quarter-point hike could be on the cards for March. Annual inflation in the euro zone was at 1.9 percent in December, just below the ECB's target of about or below than 2 percent.

The ECB's forecasts for euro-zone growth this year are between 1.7 percent and 2.7 percent, up from 1.6 percent and 2.6 percent issued last year. For next year, GDP growth is expected to be between 1.8 percent and 2.8 percent. While Trichet said euro-zone inflation is expected to hover at around 2 percent this year and in 2008, analysts expect inflation to rise above the ECB's target early this year and lead to a rate increase in March. The ECB sets policy for 13 nations with more than 316 million people and a combined gross domestic product that accounts for more than 15 percent of the world's economy.

2007-01-08T22:33:00.000+05:30

Red ink on the bourses,

Bears are coming back .....

After recording strong gains last year – though punctuated by unprecedented volatility - Indian stock markets have begun the year 2007 on a hesitant note. Are bears coming back? Or is it the usual caution ahead of the earnings season?

Sensex shed over 200 points on Monday, as investors pressed sell button in line with other Asian markets. The fall was led by frontline IT stocks on concerns that the appreciation of the rupee and a slowdown in the US economy might hurt earnings of software. This is the third consecutive day of fall in Indian equity market.

While the 30-share blue-chip index of the BSE today ended 208.37 points down at 13,652.15 (-1.50%), NSE’s Nifty closed 50 points down at 3,933.40 (-1.26%). Besides IT stocks, heavy selling was seen in auto and metal counters. Overall breadth of the market was, however, positive and some buying was seen in mid-cap and small-cap scrips.

The quarterly earnings season kicks off later this week with Infosys results on 11th. While the incoming numbers will drive the sentiments in the coming weeks (and, numbers and guidance are generally expected to be good), there are some uncertainties going ahead. Although economy is expected to post robust growth, there are concerns ranging from high valuations, uncertainty in the metals market to looming interest rate hikes.

2007-01-07T11:25:00.000+05:30

China hikes reserve ratio to cool liquidity growth

In a bid to rein in bank lending and cool liquidity surge in the booming economy, China's central bank has announced another increase in the reserve requirements. The 50 bps hike will be effective from 15th January, bringing the effective rate to 9.5% and follows a series of tightening measures last year - three 50 bps hikes in the reserve ratio and two 27 basis-point hikes in lending rates.

Chinese monetary authorities are worried about the prospects of an overheating in the economy and surging liquidity leading to asset price bubbles. Controlling liquidity has, therefore, been a high priority. The central bank has expressed concerns on various ocassions about the surfeit of liquidity in the system and is expected to follow-on with more rounds of hikes. The "excessive" liquidity in the world's fastest growing economy is building up from large trade surpluses and capital inflows.

2007-01-07T10:56:00.000+05:30

Oil Prices South-Bound

First week of the New Year marked the sharpest fall in two years for crude oil prices – a weekly loss of about 8%. The fall comes amidst continued mild weather in the north-east coast of the US and ample supplies of petroleum products. On Friday, the prices recovered slightly, helped by a better-than-expected US jobs report for December. US light crude oil settled 72 cents up at $56.31 a barrel in New York and London's Brent crude rising 53 cents to $55.64. The overall sentiment, however, looks to be bearish.

The crude prices have been falling despite two production cuts agreed on by OPEC members - 1.2 million barrels a day in November and 0.5 million barrels per day beginning February next. The continued price fall reflects the market belief that members of the oil cartel are not adhering to the agreed production cuts.

While weather has been a key driver of sentiments in recent weeks, the drop in oil prices is accompanied by a simultaneous drop in other commodities as well. With global outlook for commodities being not-so-bullish, significant shifts in asset allocation of investors is expected in the year ahead. This may mark a halt in the bull run in commodities. The informal 'floor' price for crude oil that OPEC wants to defend - understood to be $60 a barrel - has been convincingly breached and next few weeks may even take the price below $50, as little support is seen forthcoming at current levels.

2007-01-01T11:28:00.000+05:30

Top Business Stories of 2006
Housing slump on top, corporate scandals dominate

The slowdown in US housing market – marked by a sudden stall in home sales, home construction and home prices - has been voted as the top business story of the year by U.S. newspaper and broadcast editors surveyed by the Associated Press. The world has been keenly watching as to what the housing slump means for the economy and how the US Fed is going to respond. Also, how all this will affect the rest of the world economy.

Stories relating to corporate scandals dominate the list – Enron, options backdating scandal and the HP spying case. While the climb of Dow Jones to a new peak features at no. 10, the troubles of US automakers are ranked higher. Other stories included in the list of top 10 business stories are the surge in oil and gas prices, a pause in the interest rate hikes by US Fed and China's economic growth with burgeoning trade surplus with the US. Here is the top 10 list –

1. Housing slips
2. Enron's final act
3. Backdating scandal
4. Auto woes
5. Oil prices
6. Fed halts
7. Gas prices
8. HP spying
9. China tiger
10. Record Dow

Besides top 10, these are some other important stories listed by the survey - private equity on a buying spree, Warren Buffett's philanthropy, sagging sales at Wal-Mart, steping down of Bill Gates as chief software architect at Microsoft, Google's purchase of YouTube and AT&T -BellSouth deal .

A list of top 10 business stories selected by MSNBC.com features the stock market surge as its top story and housing slump at number two. Here goes the complete list-

1. Wall Street surges
2. Housing slump

3. HP spy scandal
4. Enron's final chapter
5. Motown struggles
6. Gas prices soar
7. Wal-Mart assailed
8. Backdating scandal
9. Gates to step down
10. Fed snaps streak

While saying that “2006 was a wild year” - from Wall Street records to soaring gas prices, MSNBC has this to say on its top story:

"As recently as mid-July, it was looking like another ho-hum year for Wall Street. After a dispiriting spring slump in the stock market, the major indicators were barely above water for the year. The economy was showing signs of slowing, and gas prices were driving energy sharply higher.

That's when the stock market began its biggest rally in years, propelling the bellwether Dow Jones industrial average through a record close that had stood unchallenged for more than six years. The Dow soared through the 12,000 barrier and kept going, closing at a record high 21 times at last count. Over five months the broad Standard & Poor's 500 jumped more than 15 percent, leaving the market poised for its best year since 2003, when it was bouncing back from an awful three-year bear market.

Much of the rally was driven by wealthy individuals pouring money into hedge funds, which snapped up dozens of publicly held companies and drove share prices higher. By year's end, Wall Street executives were rolling in greenbacks, with at least two CEOs raking in more than $40 million each in year-end bonuses.”

The other big story of the year is “Housing market slides after long boom” :
“The era of Americans using their homes at ATMs ended this year as the housing market's rapid cooling. With sales and appreciation rates falling or leveling in most markets, former Federal Reserve Chairman Alan Greenspan in May flatly declared “the boom is over.” ..

…… As 2007 approached there was cause for some optimism amid the bleak outlook. BusinessWeek reported that interest rates should stay at historic lows and predicted -– for those in it for the long haul –- the market might actually be poised for a 2009 comeback. The magazine noted, however, that home prices will continue to fall and price appreciation will slow in most markets throughout 2007.”

My Wish List for 2007

As we enter 2007, I hope that the US economy will escape the looming recession, rest of the world will find ways to offset the effect of the US slowdown, there will be fewer scandals in the corporate world, less volatility in the financial markets, more wealth creation with progress towards more equitable distribution, steps to contain the climate shifts and of course fewer wars.

2006-12-31T10:42:00.000+05:30

Turbulence in Indian Money Market – Call Rates Shoot Up

Monetary measures taken by Reserve Bank of India in the recent past in response to the huge credit growth and growing fears of inflation getting out of control, coupled with other seasonal factors like advance tax outflows, have led to a sever liquidity crunch in the Indian banking system. The cash squeeze led the call money rates to shoot up to as high as 20% this Friday.

This is much beyond the ceiling provided by the central bank’s repurchase window and something rarely since the monetary reforms began and the repurchase window was introduced as a mechanism to provide stability in the money market by providing a ‘corridor’ for overnight rates.

Bank credit has been growing at over 30% and the central bank is worried about the inflationary trends. As part of its continuing tightening policy, the RBI announced a two-phase hike in the Cash Reserve Ratio (CRR) earlier this month. CRR is the amount of cash (as a percentage of bank deposits) that banks are required to set aside and maintain with the central bank. The first phase kicked in on last Saturday (December 23) and the second phase will be effective from January 6.

Compared to an estimated surplus of about Rs 25,000-30,000 crore in the beginning of this month, there is a cash shortage of about Rs. 12-15000 crore now. The central bank injected an average of Rs. 12500 crore daily last week through its repurchase window, up from Rs. 4000 crore in the previous week. The repurchase window is expected to provide a ‘corridor’ for the overnight rates, with reverse repo rate and repo rate acting as the floor and the ceiling respectively. Reverse repo rate is the overnight rate at which the central bank sucks out excess liquidity by selling securities in the market and repo rate is the rate at which it injects liquidity into the system by buying securities.

The reason for the rates shooting up much beyond the repo rate of 7.25% is the decline in the bank’s holding of government bonds. With most of the banks’ holding being close to the minimum SLR requirement of 25%, they are not able to borrow from RBI under the repurchase window.

How long will the cash crunch last? It is expected to ease in the coming weeks, as coupon payments, government expenditure and special deposit scheme redemptions will bring back some cash into the system. These may bring the call rates closer to the repo rate of 7.25% - the informal ‘ceiling’ provided by the repurchase window. The days of easy money are, however, over. And, the banks should be ready for occasional bouts of volatility.

2006-12-09T23:33:00.000+05:30

US jobs data beats forecasts,

Japan surprises on the negative side

The US economy beat forecasts by adding more jobs in November than expected, showing the economy's resilience as housing and manufacturing slump. According to the Labour Department report released on Friday, 132,000 jobs were added last month, a marked improvement from the 79,000 in October, and higher than market expectations of 110,000. The jobless rate rose to 4.5 percent from a five-year low of 4.4 percent.

The US economy expanded at a 2.2 percent annual rate in the third quarter - the slowest this year - largely owing to a slump in the housing sector and reports suggest that the weakness may be spreading beyond housing. Manufacturing, which accounts for about 12 percent of the economy, contracted for the first time in more than three years last month as inventories grew and orders slowed, according to the Institute for Supply Management report.

The jobs data is consistent with the soft-landing scenario and shows that the economic slowdown remains mild. The central bank has held its benchmark lending rate steady for a third straight month in October and is expected to maintain the stance at its forthcoming meeting next week. The Federal Reserve Chairman Ben S. Bernanke maintains that the economy will continue to expand and even pick up next year.

While the latest data release comes as a silver lining in the cloud of economic slowdown for the world’s largest economy, there were fresh clouds over the economic recovery of Japan. The world’s second largest economy has been emerging from a decade of stagnation, recession and deflation. According to the final numbers released by the Government, GDP in the July to September quarter was up 0.8% on a year ago, compared with the 2% estimated earlier. The main reason for the disappointing figures was a drop in domestic demand, which contracted by 0.2% from the previous three-month period.

The slower economic growth may prompt the Bank of Japan to delay interest rate increase which was expected to come as early as later this month. The Bank of Japan had raised interest rates from almost zero to 0.25% earlier this year in July, as the economy gained in strength and is expected to follow-up with more hikes in future.

2006-12-09T22:40:00.000+05:30

Is OPEC ready for further cut?

Oil prices have risen in the recent weeks, amidst growing uncertainty and speculation on deeper production cuts from OPEC. The oil producers’ cartel which controls about 40 percent of the world's oil production is worried about a surplus of global crude-oil inventories and has been trying to stem the fall in prices after they fell from a peak of $78.40 a barrel in July to below $60 in October. According to latest estimates, the US has inventories of 340 million barrels, 14% more than average. Similarly, stocks held among the 30 OECD members stood at 2.76 billion barrels at September end, the highest level in almost eight years and 4.5 percent higher than a year ago.

The production cut of 1.2 million barrels a day agreed by the OPEC members in October has helped a rebound, although there were doubts about the actual cuts when the decision was announced. Crude prices have now come back to well above $60 a barrel.

And, now another cut is being contemplated by OPEC. OPEC President and Nigeria's oil minister Edmund Daukoru has been quoted as saying that he's “not comfortable” with current prices and is in favor of a further trimming in production. OPEC oil ministers are to meet next week in Nigeria. Will they deliver further cuts? While many members support deeper cuts, some believe that the current price levels are acceptable and can be maintained without further cuts.

Of opaque flows, cuts and prices http://aktonmarkets.blogspot.com/2006/10/of-opaque-flows-cuts-and-prices-oil.html

2006-12-09T21:34:00.000+05:30

RBI hikes cash reserve ratio to tame inflation

Reflecting the persistent worries on inflation amidst ferocious economic growth and surging forex inflows, the Reserve Bank of India has decided to raise the Cash Reserve Ratio (CRR) to 5.50 percent. CRR, a tool used by central banks to control liquidity in the system, refers to the amount of cash (as a percentage of bank deposits) that banks are required to set aside and maintain with the central bank.

Inflation, as measured by rise in wholesale price index, continues to stay near the higher end of the central bank’s target range of 5-5.50 per cent. The economy expanded 9.2 percent in the quarter ended September 30 and foreign investors have been pouring money into Indian stock markets, leading to an overwhelming liquidity surge. The current surplus liquidity in the banking system – reflected in the amounts absorbed by RBI in its daily reverse repo auctions (banks parking excess funds with RBI) – is estimated to be in the range of Rs 25,000-30,000 crore. This is on the back of a strong over 30% growth in bank lending.

“It is necessary to recognize the challenges emanating from capital flows and consequent impact on increasing liquidity”, the RBI statement notes. ``The overall impact on inflation expectations requires to be monitored and moderated.”

The CRR hike will be effected in two phases - from current 5 per cent to 5.25 per cent effective December 23 and to 5.50 per cent from January 6. The move will impound about Rs 13,500 crore of bank funds.

Related posts:

(1) 'Reddy' for another hike?

http://aktonmarkets.blogspot.com/2006/10/reddy-for-another-hike-when-reserve_28.html

(2) RBI hikes repo rate, leaves other rates unchanged

http://aktonmarkets.blogspot.com/2006/10/rbi-hikes-repo-rate-leaves-other-rates.html

2006-11-16T22:02:00.000+05:30

Japan interest rates on hold - for now

Japan’s central bank has decided to keep interest rates frozen at 0.25%, as the policymakers take stock of the pace of recovery before taking the rates northward. The decision was widely expected by the market.

Bank of Japan ended its five-year policy of keeping base rates at zero in July this year, in a bid to stimulate growth. Japan's economy grew more strongly than expected in the third quarter, but consumer demand has remained sluggish.

The strong economic growth suggests that rate hike may come as early as next month. The next policy meeting of the central bank is scheduled for December 18-19 and the policy-makers will have more data to make a thorough assessment of economic and price situation. The economy grew at a 2 percent annual rate in the last quarter. The revised third-quarter GDP figures will be published on December 8 and the central bank's quarterly Tankan survey a week later. The most recent Tankan business survey last month showed strong business confidence.

2006-11-16T21:57:00.000+05:30

US FOMC minutes hawkish again, inflation eases, Japan rates untouched

US Fed officials maintain a hawkish tone on inflation in the minutes of the last month’s meeting. The Federal Open Market Committee, which decides on interest rates on monetary policy actions, had decided to keep interest rates on hold at its October 24-25 meeting.

This marks a pause for the third time in a row. US interest rates have risen over the past two years as the world's largest economy has recovered and price growth has picked up. The US central bank has kept interest rates steady at 5.25% since August, and is expected to maintain its current stance when it meets next month.

According to the minutes released Wednesday, the Fed noted that reducing inflation to counter expectations of higher prices was its 'greatest concern' and worried that inflation might not recede as hoped and an inflationary psychology could set in, making its job tougher. It assessed that core inflation was still uncomfortably high and that a tight labour market could lead to wage pressures. However, Fed officials also observed that high profit margins may be able to absorb some part of the higherlabour costs. On the housing market, the minutes said that ongoing adjustment was likely to depress real activity in the near term, but thatthis effect was expected to wane gradually.

Meanwhile, consumer prices fell in October for the second month in a row, on the back of cheaper oil. The reading will offer some comfort to the policy-makers when they meet next month. The Labor Department said that prices fell by 0.5% in October, more than many analysts had forecast. The annual inflation rate was 1.3%.

The Bank of Japan (BoJ) voted to keep policy rates steady, as widely expected. Japanese GDP grew 2% annualised for the quarter ended September, twice thatexpected, but the data did not provide sufficient fuel for the BoJ to act this time around.

2006-11-14T19:25:00.000+05:30

Japan's growth beats forecasts, rate hike may come sooner

Japan's economy has recorded strong growth for the July-September quarter, quelling any fears that the world's second largest economy could be slowing. Growth at an annualized rate of 2% during the period – supported by strong exports and greater investment by firms - is higher than expected. Exports rose 2.7% in the quarter, helped by the weak yen, while capital investment grew by 2.9%.

The strong growth has once again fueled the speculation on interest rate hikes. In July this year, Bank of Japan raised interest rates for the first time in six years to 0.25% riding on the longest post-war expansion. The timing of follow-up hikes has been a matter of speculation in the market. It left rates unchanged at 0.25% in October and has maintained that it would gradually adjust monetary policy based on economic and price conditions. The US Federal Reserve has kept interest rates at 5.25 percent since August. The European Central Bank's benchmark stands at 3.25 percent.

Bank of Japan Governor Toshihiko Fukui said last week the central bank needs to act "in advance" to prevent the lowest interest rates among major economies from triggering excessive capital investment. He said "we must not take a long time to adjust policy interest rates," and "waiting for inflation to build up" would cause sharp swings in the economy.

A large section of the market now believes that the central bank will raise interest rates early next year, although some see the possibility of the hike coming as early as in December. The Bank of Japan concludes a two-day policy meeting on November 16, when it is widely expected to leave rates at 0.25 percent.

2006-10-31T18:59:00.000+05:30

RBI hikes repo rate, leaves other rates unchanged

Repo Rate – Increased to 7.25% from 7% Reverse Repo Rate – Unchanged at 6%
Bank Rate – Unchanged at 6.0 % Cash Reserve Ratio – Unchanged at 5 %

In a deft balancing act, the Reserve Bank of India increased the repo rate by 25bps to 7.25 percent, while leaving the reverse repo rate unchanged at 6 percent. Reverse repo rate and repo rate act as the floor and the ceiling providing a ‘corridor’ for the money market. Reverse repo rate is the overnight rate at which the central bank sucks out excess liquidity by selling securities in the market and repo rate is the rate at which it injects liquidity into the system by buying securities. Normally, a 100 bps spread is maintained between the two rates rates, but it has now been increased to 125 bbp. Bank Rate and CRR have also been left unchanged.

The announcement made in the mid-term review of the Annual Policy Statement for FY'07 came as a surprise for the market. Market was expecting a hike in reverse repo rate as well, in view of the pressure on inflation from a strong economic growth. Maintaining optimism about the economic growth, RBI has upped the GDP growth projection for 2006-07 to 8 percent from the earlier 7.5-8 percent. The central bank also maintains the year end (March 2007) inflation target at 5-5.50. Inflation reading for the week ended October 14 stood at 5.26%.

2006-10-28T19:31:00.000+05:30

'Reddy' for another hike?

When the Reserve Bank of India reviews its monetary policy on October 31, will it raise the interest rates once again or will it wait and watch, giving the previous hikes more time to work? The central bank has raised the reverse repo rate three times this year by quarter percentage point each to 6 percent, to curb inflationary expectations stoked by strong economic growth.

The inflation has mostly remained within the RBI's comfort zone of 5-5.50 percent. But of late, it has started edging towards the higher end of the range. The latest data has shown the annual inflation measured by Wholesale Price Index at a four month high. The inflation for the week ended October 14 was at 5.26 percent - up from the previous week's figure of 5.16 percent, on account of higher prices for food, edible oils and textiles. Going ahead, the inflation numbers are expected to return higher readings because of low base effect and may inch up to 6%.

As the strong growth momentum keeps an upward pressure on inflation, RBI may have to do a bit more monetary tightening. Bond markets have been generally sanguine in the past couple of months. Yield on the 10 year benchmark government bond has fallen three quarters of a percentage point after touching an almost five-year high of 8.4 percent in July. This optimism may be misplaced. RBI may go in for a pre-emptive hike now rather than waiting for the next review when inflation may have gone beyond the March-end target of 5-5.50 percent. Even if RBI decides not to change the rates now, the tightening cycle is far from over.

Besides domestic growth considerations and inflationary expectations, RBI will also have to weigh the global scenario – US rates being on hold amid economic slowdown, strong growth and continued tightening bias in Euro-zone economies, sustained expansion in Japan and possible rate actions.

2006-10-28T09:12:00.000+05:30

An update on ICBC IPO

After raising US$21.9 billion in the world's largest IPO, the Industrial & Commercial Bank of China (ICBC) has made its debut in China's first simultaneous listing on Shanghai and Hong Kong markets. While the Shanghai debut was a bit uninspiring with a modest gain of just 5 percent, the Hong Kong listing was along the expected lines marking a gain of 15%.

The IPO was oversubscribed 26 times. Four of China's banks have come out with initial public offers in the past one year and have seen strong demand particularly from overseas investors. China's surging economy, which is set to grow by more than 10% this year, has created strong demand for these banks’ shares. However, there are fears that banks have been overvalued, with questions raised over levels of bad debt.

Here's a list of the world's 10 largest IPOs till date (source: Reuters). It can be seen that 3 Chinese banks figure in the list.

Date Company Size (Billion USD)
Oct. 20, 2006 Industrial & Commercial Bank of China 21.9
Oct. 12, 1998 NTT Mobile Communications 18.4
Oct. 31, 1999 Enel 17.4
Nov. 17, 1996 Deutsche Telekom A.G. 13.0
May 24, 2006 Bank of China 11.2
Apr. 26, 2000 AT&T Wireless Services Inc. 10.6
July 14, 2006 Rosneft 10.4
Nov. 15, 1997 Telstra Corp Ltd. 10.0
Oct. 20, 2005 China Construction Bank 9.2
Nov. 18, 2005 EDF 9.0