It is published on a monthly basis by the OIL($/barrel) 78.73 0.69
Ministry of Statistics and Programme
Implementation under the Government of
India. It is used by the Government for
planning purposes and is extensively used
by Industrial Associations, Research
Institutes and Academicians.
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NEWS SNIPPETS
Banks Divided over Rate Cut
The interest rate uncertainty has divided the bankers into two: State Bank of India (SBI), versus the rest.
SBI is in no mood to cut interest rates on deposits while the rest of the banks are inclined to do so.
Their argument is that high interest rates being charged will eventually lead to a slow down in growth
and increase in defaults. They are looking to cut rates on loans and HDFC bank has already taken the
lead and announced a cut in interest rates. Private Banks also believe that the Reserve Bank of India
(RBI) should cut interest rates in the wake of weak IIP (Index of Industrial Production) numbers for July
2007. SBI on the other hand is looking to regain the market share it has lost to private and foreign banks
in the past few years and is therefore inclined to keep deposit rates uncut so as to mobilize more funds.
The smaller banks can only cut rates once the larger banks decide to do so and this has left the banks
divided and waiting for other larger banks like ICICI to disclose their policy.
Monetrix Opinion
• The IIP (Index of Industrial Production) has shown a 3.2% decline in growth of consumer
durables in July 2007 over the previous year and forms the basis for some of smaller banks
demand for a rate cut. However it’s not clear if the IIP is a clear indicator of consumer demand
in general due to its composition which gives weight to households buying sewing machines and
tape recorders while more accurate measures of consumer demand like mobile phones being
purchased have not been updated. The IIP consumer durables basked which is largely
unchanged since 1994 thus gives a downward bias to production numbers.
• The RBI’s Mid Term Review of its Annual 2007‐2008 policy on 30th October 2007 will determine
the course that the banks finally take.
Deutsche Bank buys 25% in Lodha’s SPV
Deutsche Bank Singapore has picked up around 25% stake in a special purpose vehicle (SPV) owned by
Mumbai‐based developer Lodha Group for Rs 1,700 crore. The SPV will set up three FDI‐compliant real
estate projects over 70 acres in Thane and Dahisar. The Lodha group is currently developing as many as
27 realty projects. The deal is believed to be the single‐largest FDI in the real estate sector in India by a
financial investor till date.
The Deutsche Bank transaction is the third private equity investment in the Lodha group. Apart from
Deutsche Bank and ICICI Ventures, JP Morgan had invested Rs 274 crore in a debt‐cum‐equity deal in
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Lodha Bellissimo — a premium residential property, developed at Apollo Mills in Vile Parle, which the
group acquired from National Textile Corporation.
Impact
• This transaction is yet another instance of a foreign investor picking up a stake in the Indian Real
Estate space and consistent with Deutsche Banks policy to expand its presence in India.
• Indian Real Estate is expected to grow to a $90 billion sector by 2015 and this has resulted in
huge inflows. However the increased risk weightage to real estate loans by the RBI, increasing
loan rates and high valuations have led to a decreased expected return on investments from 25‐
30% to 20% and a further decrease may result in the deal being too expensive.
Inflation in Euro‐zone expected to jump to 2.1 percent in September
Inflation in the 13 nations that use the euro is expected to jump to 2.1 percent for September according
to preliminary figures released by the EU's statistical agency on Friday. Eurostat's estimate did not give
reasons for the rise from 1.7 percent in August, an increase that puts inflation above the European
Central Bank's guideline of just under 2 percent and puts EU bank governors under increased pressure
to cut rates.
EU Economic and Monetary Affairs Commissioner Joaquin Almunia told a meeting in Barcelona that the
recent financial turmoil, including the high value of the euro against the U.S. dollar and the credit crisis
in the United States, has increased the risk of growth slowing.
Impact
• The high value of the Euro against the dollar and recent credit crisis in USA has increased the risk
of a slowdown. This news adds to the worries that Europe is heading for an economic
slowdown.
• The dollars decline has meant that US exports have become more competitive as compared to
European exports which have become more expensive as a result. This has added to the
problems.
• Going forward the key is believed to be the impact of financial crisis on consumer confidence.
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Fastest 1000 by the Indian market
Indians are on a roll, few days back Yuvraj singh made fastest 50 in Twenty 20 world cup, and in the
same week Indian markets recorded their fastest 1000 ever.
It took Dalal Street just 5 days to travel 1000 points. Sensex touched a life time high of 17,074, though it
ended only marginally higher at 16,921 because of heavy profit booking in the last hour of trading.
Driving Force
• Most major Asian indices rose on Wednesday. Total new Indian equity purchases by FIIs have
crossed $11billion, exceeding the previous highest of $10.7 billion in 2005.This can be linked to
the theory of “Decoupling” which says that China and India are now less dependent on US
growth, so the slowdown in US economy would not affect these 2 countries that much.
• The major driving factors were the hopes that the rupee will soften as a result of RBI’s latest
announcements to allow more outflow.
• Also, we can not overlook the mood Indians are in, after India lifted the Twenty 20 world cup.
Good sentiments of people have always affected the market positively.
Reliance Retail may call it quits from UP
The Organized retail has been opposed ever since it’s inception by the local shopkeepers. One of the
most famous player of organized retail has been Reliance Fresh.
Last month the company started its operations in Lucknow and Varanasi with 14 stores, but there were
violent protests against it from local shopkeepers and they had to be closed down. After the protests,
the state government instructed all standalone food and grocery stores run by corporates to shut down.
Due to all these oppositions faced by reliance, it is now formally preparing to exit India’s most populous
state, UP. As a consequence of this closing, Reliance has announced that it will be handing out
termination letters to its 1000 employees but the rest of them, it will try to accommodate.
Reasons
• The Positioning of Reliance Fresh Format (Small convenient stores) puts it in direct competition
not only with neighborhood Kirana stores but also with small fruits and vegetable vendors .This
makes company vulnerable to political attacks.
• Reliance Food & grocery business has been in the line of fire because of popular perception
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that Reliance is the most ‘powerful’ business company in the country. This is very evident from
the fact that before reliance there were already some players like Subhiksha and Spencer’s, but
the protests started only after Reliance came into the picture
Mittal planning to tie up with HPCL for an oil hunt
Steel Czar LN Mittal is now trying to get into Oil and gas Exploration business. Mittal group can be
prospective partner in HPCL’s exploration arm Prize Petroleum Company (PPCL), which is planning a
rights issue. Mittal has recently acquired 49% stake in HPCL’s Bhatinda refinery and is in talks for
participating in HPCL’s Vizag refinery –cum‐petroleum complex.
Favorable Conditions for the Deal
• Prize petroleum is planning a rights issue to increase its equity capital from Rs 20 crore.
• ICICI, the current stakeholder is willing to renounce its rights issue in favor of a strategic Third
Party. A stake in E&P will help Mittal into the Exploration Space.
• Petroleum minister Murli Deora wants to take Mittal to take part in this
WORTH A READ
Is real estate sector overrated?
Property prices across the country have gone sky high raising fears of overheating and property stocks
are getting astronomical valuations. Lately RBI has been warning banks about rising real estate prices
and asking them to be prudent in lending to the real estate sector. Therefore the million dollar question
to be asked is whether these are signs of overheating? The property prices in the big cities have gone up
with growth in some cases touching 40 per cent annually for the last few years. The developers have
moved into smaller cities, where the rise in prices is not so steep. So is the real estate sector overrated
in terms of its growth potential?
Real Estate – Country’s growth engine
The importance of the real estate sector can be gauged from the fact that it is the second largest
employer next only to agriculture. The size of the real estate industry in India is estimated to be around
US$ 12 billion. This is growing at a pace of 30% for the last few years. Almost 80 % of real estate
developed in India is residential space. The rest comprise of office, shopping malls, hotels and hospitals.
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The real estate sector also influences the development of over 250 other industries. For every Indian
rupee invested in the construction of houses in India, INR 0.78 is added to the gross domestic product.
Therefore the policy makers of the country have begun to emphasize on developing the adequate
infrastructure.
Promising future
Growth in commercial office space is led by the burgeoning outsourcing and information technology (IT)
industry. By 2010 it is estimated that the IT sector alone will require 150 million sq.ft. of space across
major cities. It is also estimated that in the residential sector there is a housing shortage of 19.4 million
units out of which 6.7 million are in urban India. The investment required for constructing the houses
and related infrastructure in this period would be to the order of US $ 666 billion at roughly US $ 33
billion to US $ 44 billion per year. The increase in purchasing power and the organised retail formats has
redefined the consumption pattern. As a result retail projects have been mushrooming all over the
country. The retail market is expected to grow at around 35 per cent. This growth is facilitated by
favourable demographics, increasing purchasing power, existence of customer‐friendly banks and
housing finance companies.
FDI in real estate
Policy changes introduced by the Government allowed 100 per cent foreign investments in construction
projects with fast‐track approvals. The real attraction for foreign investors is potential investment
returns of 25 per cent in India as compared to low returns in US and Western Europe. Major global fund
managers like Goldman Sachs, Merrill Lynch, Morgan Stanley and Lehman Brothers are all bullish on the
Indian realty market. In mid‐2007, Morgan Stanley closed a deal worth about US$ 150 million with
Oberoi Constructions in Mumbai. The Nakheel Group in Dubai entered into a US$ 10 billion deal with
DLF for residential projects in Tier I and II cities.
The Roadblock – Reforms issue
Though the real estate sector in India is proclaimed to be the most promising sector, it is hugely plagued
by market uncertainties and inhibitions. This is manifested by an abysmally low mortgage penetration.
In India the mortgage to GDP ratio is about 2% in comparison to a mortgage to GDP ratio of over 51% in
USA and 15‐20% for South East Asian countries. Thus the penetration level of mortgages is miniscule
when compared with the shortage of housing units. The availability of land for housing projects is
constrained by a variety of archaic laws like the Rent Control Act and Urban Land Ceiling and Regulation
Act. The land acquisition act 1894 which governs the procurement of land puts the burden on state and
central governments and hampers direct procurement of land from farmers and other land owners. The
stamp duties in some states continue to be as high as 15‐20%. The duties are not only high but are
applicable for every subsequent transactions as well. Finally there are concerns about the regulatory
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opaqueness for real estate ventures, bureaucratic red tape and the absence of title insurance. All of
these factors are hampering investors' appetites for the real estate.
The Verdict
The property market today is rife with uncertainties. Prices as well as interest rates have been rising.
The long term outlook however is quite promising propelled by the high economic growth in the
country. The future of the real estate sector is going to be guided by two important factors ‐ Foreign
Direct Investment (FDI) and the abolition of service tax and reduction in the stamp duties.
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