JPMorgan Lowers Forecasts for Indian Rupee, Predicts Decline

JPMorgan Chase & Co. lowered its forecasts for the Indian rupee, predicting the currency will decline this year as rising crude oil prices double the nation’s current-account deficit.

The rupee, the second-worst performer this year among the 10 most-active currencies in Asia excluding the yen, will weaken almost 5 percent to 45 against the dollar by the end of the year, versus an earlier forecast of 40, the third-largest U.S. bank said in a research note dated yesterday. Slowing capital flows and exporters holding back foreign exchange earned abroad will fuel the currency’s decline, according to JPMorgan.

``Deteriorating balance of payments dynamics led us to reassess our view,’’ wrote JPMorgan’s strategists Siddharth Mathur and Vikas Agarwal. ``We were optimistic of a reversal in the rupee later in the year, driven by a revival of global risk appetite and return of stability to the credit markets. We no longer anticipate rupee strength in the second half of 2008.’’

The rupee fell 0.5 percent to 42.9575 today in Mumbai, according to data compiled by Bloomberg. It may slide to 44 by the end of June, compared with a previous estimate of 42, Singapore- based Mathur and Mumbai-based Agarwal said, confirming the contents of the report.

Goldman Sachs Group Inc. lowered its forecasts on May 23, saying the rupee will drop to 44.10 a dollar in six months, compared with its earlier prediction of 40.30.

The advance in crude oil will almost double the nation’s import bill to $100 billion in the financial year ending March 2009, from $55 billion last year, according to JPMorgan. That will more than double the shortfall in India’s current account, a broad measure of trade and investment flows.

Oil Doubles

India depends on imports to meet three-quarters of its annual energy needs. Oil futures on the New York Mercantile Exchange touched an all-time high of $135.09 a barrel last week after doubling in the past 12 months.

The local currency may also fall as money managers abroad reduce their holdings of the nation’s assets, JPMorgan said. The benchmark Bombay Stock Exchange Sensitive Index, or Sensex, has slumped almost 20 percent this year following a 47 percent rally in 2007, Bloomberg data show.

``The outlook for Indian equities remains uncertain as country-specific headwinds are increasing,’’ Mathur and Agarwal said. ``Slowing earnings growth and still weak appetite for risky assets suggests continued weak equity flow for now.’’

Global funds have sold $3 billion more of local stocks than they bought this year through May 26, according to the Securities & Exchange Board of India. They bought a net $17.2 billion of stocks in 2007, a record, helping the rupee complete its best year in at least 34 years.

``The path of local equities remains the most important indicator to watch,’’ the analysts said. ``A return of net flows of $1.5 billion to $2 billion every month might be necessary to reinforce the waning rupee-bullish sentiment.’’

SBI employees call for nationwide strike on June 6

State Bank officers on Tuesday said they would hold a day-long nationwide strike on June 6, protesting against SBI management’s policies on different issues.

Their demands include a review of the existing State Bank pension scheme, recruitment of adequate staff, termination of the contract system and regulated working hours for officers.

"The strike would be observed nationwide. The Government and the Indian Banks Association (IBA), despite having signed an agreement on various issues, have not taken any significant steps to resolve our issues," All India State Bank Officers’ Federation’s General Secretary, G D Nadaf, told reporters in Mumbai.

Nadaf said SBI management, with its decision to go ahead with the merger proposal of State Bank of Saurashtra, was not taking into account the feelings of employees on the matter.

"Such a merger between State Bank and its associates will lead to a plethora of issues, including termination of jobs in different categories. Any such move (of merger) will definitely be met by nationwide protests from the unions," Nadaf said.

Bank unions had struck work early in 2008 to voice their protests on various critical issues including the merger of state-owned banks and one more option for employees to join in the pension scheme.

Later, bank unions and the Indian Banks’ Association had signed an agreement following intervention by the Union Finance Minister, leading to deferral of the two-day nationwide strike called for, just prior to the Budget in February end.

Nadaf charged the IBA with not taking any steps so far to resolve the outstanding issues.

RBI expected to hike CRR, Repo rate

The Reserve Bank is likely to surprise the market by tightening money supply to combat inflation, which would push up interest rates, according to a study by financial services giant Barclays.

"We believe the central bank’s policy (in India) objective will be to contain inflation, and that it will tolerate sub-trend growth if necessary... We expect the RBI to continue withdrawing liquidity via cash reserve requirement hikes of at least 25-50 basis points within the next few months," Barclays said in its emerging market research.

The study also expects ‘possibly more hikes’ in CRR in the second half of this year. Besides, it expects the RBI to follow through with a repo rate hike of 25-50 basis points in the next one to two quarters.

Cash Reserve Ratio (CRR) is the requirements for banks to keep a proportion of its deposits with central bank and repo is the rate at which RBI injects liquidity in the system by buying government securities.

The Reserve Bank has already announced 0.75 per cent hike in CRR to suck out around Rs 27,000 crore from the system to cool down inflation.

A few other studies on inflation by reputed names like IMF, NCAER and Crisil were also put out.

An IMF study puts weekly inflation rate in India at an annualised rate of 3.4 per cent, much below official estimates of eight per cent and caste doubts over the efficacy of current methodology of calculating year-on-year inflation.

Economic think tank NCAER expects that international food prices are unlikely to fall in the immediate future owning to low tradable stocks and lag in supplies of farm produce.

Rating agency CRISIL cautioned the government against using price control measures to soften inflation, saying they would distort resource allocation and create shortages.

The RBI’s belief, according to the Barclays study, is that regardless of whether inflation is supply side driven or not, the endgame is a situation where excess demand pressures are prevalent.

"In addition, we believe the central bank’s perception is that supply-side shocks from oil, food and base metals are not temporary and will persist," it said.

The RBI would utilise the various instruments it has at its disposal to withdraw liquidity and guide market interest rates higher, the study said.

An IMF study, When will inflation subside, said the traditional year-on-year data are contaminated by base effects. As such, it is much better to use week-on-week or month-on-month data.

If this calculation methodology...

Religare acquires 97.76% stake in Hichens

Domestic brokerage firm Religare Capital Markets on Tuesday said it has acquired 97.76 per cent stake in Hichens Harrison & Co Plc following the acceptance of its open cash offer by the UK firm.

Hichens has accepted the offer for 1,70,06,441 shares, representing 97.76 per cent stake in the UK firm, Religare said in a fling to the Bombay Stock Exchange.

Religare Capital Markets, the wholly-owned subsidiary of Religare Enterprises Ltd (REL), had in April announced its decision to make an open offer to UK-based broking firm Hichens Harrison.

REL, the holding company for financial services businesses of the group, had offered 285 pence per share cash and valued Hichens Harrison at around 55.5 million pound.

Post acquisition, Religare is planning to delist Hichens from the London Stock Exchange’s Alternative Investment Market (AIM), the filling said.

The cancellation of the admission of Hichens shares to the AIM Market would significantly reduce the liquidity and marketability of the remaining shares in the company, it said.

Further, Religare Capital Markets International UK, an indirect wholly-owned subsidiary of Religare Capital Markets, intends to re-register the firm as a private company, it added.

Last week Religare had received approval from the UK regulatory body Financial Services Authority (FSA) for completing the acquisition of Hichens Harrison & Co Plc.

Shares of Religare were trading at Rs 396, up 0.97 per cent in the afternoon trade on the BSE.

India's annualised inflation lower than data - IMF

India’s weekly inflation is running at annualised rate of 3.4 percent, within the Reserve Bank of India’s comfort zone and below the official year-on-year rate near 8 percent, according to an internal study by the International Monetary Fund (IMF).

The study comes at a time when latest government data shows preliminary annual inflation, as measured by the wholesale price index, at 7.8 percent in May and an upwardly revised 3-½ year high above 8 percent in mid-March.

The IMF study said using weekly or monthly changes in price data, which were then adjusted for seasonal effects, was better for measuring the rate of change in prices, as year-on-year changes were distorted due to base effects.

The study, made before a revision last Friday showed mid-March WPI above 8 percent, measured price changes in provisional data for the five weeks starting April 5 to May 3 after seasonally adjusting them. It showed inflation for that period running at an implied annual rate of 4.7 percent.

"Inflation has been slowing, quite dramatically," the study concluded.

But it said even if that trend continued, the year-on-year rate was unlikely to subside soon because of unfavourable base effects.

"To the contrary, the yearly rate is likely to climb through June when it could exceed 8 percent," it said.

"And it may not fall to 6 percent until the third or even the final quarter of the fiscal year."

Seasonal adjustment means stripping out seasonal effects such as harvesting and extra working days by using econometrics to examine the underlying data trends.

Joshua Felman, IMF resident representative in India, told Reuters by telephone using provisional data to estimate the rate of change in prices when past data had been revised up sharply may not be very distortionary at the moment as most global commodity prices had stabilised.

Also that stabilisation may take a few weeks to filter into the price index, he said.

Indian policy makers have taken many steps to check price pressures in recent months, including banning some exports and cutting import duties, but the year-on-year readings have stayed well above the central bank’s comfort zone of 5.5 percent.

Felman said what happened to inflation from here depended on a lot of things including government policies.

"I don’t want any one to think I am saying the inflation problem is over and we can go back to sleep," he said.

"The report says 1) that the best way to look at inflation right now is seasonally adjusted weekly or monthly numbers, 2) there are some encouraging signs and 3) because of unfavourable base effects the yearly numbers are going to climb."

Indian oil retailers risk cash crisis - source

State-run Indian oil retailers will run out of money to cover crude imports within a few months unless the government announces a rescue package soon, a senior oil ministry source said on Tuesday.

The firms are losing millions of dollars each day as they must sell their fuel at discounted rates set by the government far below oil’s surge to above $135 on the world market. They have appealed for price hikes and duty cuts.

On Tuesday, Taiwan joined Asian nations Indonesia and Sri Lanka in deciding to raise fuel prices as they can no longer afford to shield consumers from soaring crude oil prices.

"At this rate, Hindustan Petroleum (HPCL) and Bharat Petroleum (BPCL) can only pay for imports till end- July. Indian Oil (IOC) can only sustain till mid-September," the official, who did not wish to be identified, told reporters.

The three firms plans to raise their borrowing limits, but the official said: "This is not a long-term solution. For how long can you continue to run like this?"

While IOC seeks to double its borrowing limits to 800 billion rupees (nearly $18.7 billion), HPCL and BPCL are also planning to raise their current limits from 200 billion rupees.

HPCL’s director for finance said last week the company was in talks with bankers to raise its borrowing limit.

FUEL PRICE HIKE

The oil ministry has been pitching for a hike of five rupees a litre in the price of diesel, 10 rupees a litre for petrol and a 50-rupee increase in the price of a cylinder of cooking gas.

Analysts say ministers are likely to tone down the proposal to raise fuel prices by 15-20 percent given that inflation is already at 8 percent, a three and a half year high.

The oil ministry is also seeking zero customs duty on crude oil, reducing import duties on petrol and diesel to 2.5 percent from 7.5 percent and halving the excise duty on the two fuels.

Oil minister Murli Deora on Tuesday met Finance Minister Palaniappan Chidambaram, Foreign Minister Pranab Mukherjee, who is also chairman of a ministerial panel on fuel pricing, and Prime Minister Manmohan Singh to discuss ways to stem the losses of oil firms.

The official said oil retailers’ revenue loss worked out at an annual 2,250 billion rupees ($79.59 billion) if the Indian crude basket continued to hover at $125 a barrel.

Even with a proposed government package and other measures including issuing oil bonds, "a gap of 510 billion rupees is still left," the official said.

Reliance Comm and MTN seen favouring share swap

South Africa’s MTN Group and India’s Reliance Communications may swap shares or take big stakes in a new company as regulatory hurdles and both firms’ global ambitions seem to rule out a $66 billion emerging markets telecoms merger.

The companies said on Monday they were discussing a possible combination, just days after India’s top mobile firm Bharti Airtel ended talks with MTN after failing to agree how to structure a deal.

Bharti has said MTN proposed a structure that would have made it an MTN subsidiary, an outcome that was unacceptable to the Indian firm, which has ambitions of becoming a global player.

Analysts said Reliance Communications’ chairman, Anil Ambani, who owns two-thirds of India’s No.2 mobile operator, would also not want to cede control, casting doubt on media reports that MTN, valued at around $38 billion, planned a reverse takeover of Reliance, which has a market value of about $28 billion.

"If the structure proposed by MTN was not agreeable to Bharti, it’s very hard to see them getting Anil Ambani agreeing to it," said one telecom analyst, who asked not to be identified.

MTN has more than 68 million subscribers, while Reliance Communications has around 48 million.

Rishi Sahay, director of Indusview Advisors, said the two firms might transfer shares to a separate entity in which they would both hold significant stakes, or swap shares in a way to get around potential regulatory hurdles.

MTN could take a stake of below 15 percent in Reliance Communications, avoiding having to make an open offer for a further 20 percent, and Reliance could take a minority stake in MTN that avoids regulatory triggers.

"It will most likely be a simple share swap that doesn’t run into regulatory hurdles or require big cash," Sahay said. "No sudden-death M&A type of deal."

The Economic Times, citing unidentified sources, said Ambani may swap his 66 percent stake in Reliance Communications for a one-third holding in MTN. Ambani would retain an indirect holding of nearly a fifth in Reliance Communications.

The Financial Times, citing people familiar with the matter, said such a deal would leave Ambani as the biggest single shareholder in an enlarged MTN.

A banking source said Reliance held informal talks with MTN last year, leading to it conducting due diligence on MTN, sub-Saharan Africa’s leading mobile operator.

"The best outcome would be the formation of an offshore holding entity in a tax-neutral zone with (both) as units," said the banker, who advised Reliance last year and asked not to be named because of the sensitivity of the current talks.

The banker said last year’s talks broke down after the two sides could not agree on a valuation.

"If talks don’t progress as expected, the two could trade minority stakes in each other. Such a move sets the contours for further discussion and kisses a long-drawn bidding war goodbye," the banker said.

NO BIDDING WAR

Indusview’s Sahay said Reliance Communications, which has a track record of buying up smaller, often distressed assets, would not want to risk a bidding war over MTN.It’s in their DNA. They might do due diligence and negotiate but if they feel it’s too expensive, they will just walk away," Sahay said, noting Reliance lost out to Vodafone last year in an $11 billion race for control of smaller local rival Hutchison Essar.

"Their strategy has been to go after distressed assets because they can buy them cheap, then sell stakes at a premium," said Nishna Biyani, telecoms analyst at Prabhudas Lilladher.Biyani said Reliance would want to avoid any deal structure that would issue fresh equity or load on debt, noting the firm had aggressive capex plans -- including more than $1 billion to roll out GSM services across India -- and an IPO lined up for its Reliance Infratel tower unit.

"RComm is the smaller player in this case, so it can’t ask for a majority shareholding in MTN," Sahay said. "But neither will it be willing to be just a subsidiary."

Reliance Communications shares rose 1.5 percent on Tuesday, while MTN was quoted off 4.5 percent at a 4-week low.