Indian Finance Blog Finance News Blog from India

There is some real good news for all the non-resident citizens of India as SBI and many other public banks have hiked their rate of interest on foreign currency non-resident (B) account deposits and non resident external (NRE) term deposits with effect from September 17, 2008. According to the new rates, FCNR (B) deposits in US Dollars which have maturity period of 1-2 years will attract a rate of 2.96 per cent of interest as against the earlier rate of 2.46 per cent.

As a resident of the country, this move gives me immense pleasure as this would definitely mean a very good growth for the Indian economy on a whole. The first step towards the same has already been achieved with sharp increase in the valuation of the rupee. The Indian rupee recently rose sharply after facing its biggest single day fall in a decade. This move by the SBI has contributed immensely to the cause and has also been supported by many economists. Other currencies which have also achieved the same feat include Euro and Pound.

Further, even traders have supported the move and the entire nation seems to be very happy with the constant endeavors of the Reserve bank Of India (RBI) to help the Indian rupee gain strength on the world pedestal. I personally feel that the move has come in order to infuse some immediate liquidity in the market. Through this the SBI is probably seeking an inflow of foreign currencies into its accounts like other banks who have taken up similar steps.

This also means that now, you can sell your foreign currency at a higher rate and buy them for a lesser one. The s changes in rates depending upon the maturity period can be given as follows:

The bankruptcy of the Lehman Brothers- the US based firm has been major news in the international market for the last few days. This has had a deep rooted impact on the economies of many nations across the world. Even the Indian Economy is largely going to be affected by this incident. This is mainly due to the active role played by the Lehman Brothers in the Indian realty sector. The effect of this incident has already been felt in the form of a fall in the BSE realty index by 7.65%.

In fact, no one has escaped the wrath of the incident. The news could also have a severe impact on me and my colleagues. This is because the organization that I am currently working for has invested 40% equity in the Lehman Brothers’ company. Like my colleagues, I am also worried about the consequences of this event in the near future. I just hope that the sale likely to be followed from the Lehman’s side after their bankruptcy does not pose any threat to the existence of our company.

Apart from this, I am also worried about the future of the realty sector in India. This is because until recently, many realty firms including big names such as DLF and Unitech largely depended on the huge investments made by Lehman Brothers for their dream projects in the realty sector. Many of their future projects have also been planned on the basis of the financial resources to be brought in by the Lehman Brothers. So, you can actually get an idea of the impact that this incident is going to spell out for the Indian developers. The Indian real estate sector has already been fighting against all odds such as tightening credit, rising cost of construction and fall in demand for properties. The situation is expected to worsen even more following this incident.

However, there are also many optimists, who are seeing a brighter side of the whole incident. According to them, as the global investors buy out Lehman’s stake in some of the Indian companies, they may divert some fresh funds to the existing assets. Well, this will be really good for companies like ours. This will give these companies a good scope to plan better for future growth. However, the real problem remains the same. The Indian real estate sector is going to be adversely affected by the Lehman’s collapse. In the absence of Lehman Brothers, it is going to be a hard job for the Indian real estate players to raise funds for their future projects.

The rupee has been depreciated to 44.72 per dollar in Aug, 2008, its lowest since 21^st Dec, 2006 when it was 44.35 per dollar. This has been mainly because of the pull out of foreign investors from the Indian financial market. By selling about $7.3 billion worth local shares, the foreign investors have pushed down the stock market.

As an Economics student, I have always studied that devaluation of national currency is one of the policy prescriptions aiming at huge foreign currency inflow in the form of higher export earnings. Another result of such a policy is a saving in hard earned foreign exchange due to lower imports. The rationale behind it is that once our national currency depreciates in value against some foreign currency such as dollar, exporters get an initiative to do more business abroad as they would earn more in home currency for every dollar that they earn outside. On the other hand, importers will cut down on their imports as they would have to pay more in national currency for every dollar included in the price of their import items. Now, many of you might apply the same principle to the recent devaluation of Indian rupee against dollars. But, this may not be the case in reality. This is because, every year, India needs to import sophisticated industrial tools and machineries and also many consumer goods from abroad. This means we are already paying a substantial import bill in foreign currency. The depreciation in Rupee has not caused any significant fall in our import figures. As a result, we may head to another foreign exchange reserve crunch as we continue to pay our heavy import bills. The problem will be aggravated even more, if our export sector does not come up to earn foreign currency by doing more business abroad. As a sign of real worry you can note that out trade deficit (imports more than exports) has already touched the figure $10.8 billion in July 08 from $9.8 billion in June,08.

The widening trade deficit may force the Indian Government to borrow foreign currency in near future from international financial institutions and foreign governments. This is truly a major issue of concern, which our policy makers should try to resolve at the earliest. There needs to be a strong environment created for foreign investors to invest in India like the way they have been doing so far.

It was June 25 and I had to reach Delhi from a remote place in Assam for an entrance examination the very next day. However, that night every news channel flashed the news of considerable hike in petrol prices and with immediate effect, many flights to and from the remote areas such as mine were canceled. I was devastated, I missed my entrance. And I realized that this was just the beginning, there was much more to come. In the forth coming days, not only budget airlines like Air Deccan and Spicejet, even the top rated aviation companies had started to pull out many flights which ran less frequently to some remote areas of the country.

The effects of fuel price rise did not come in the form of only flight cancellations. There were other after effects that I felt, when I boarded a flight from Delhi to Frankfurt the very next month. The baggage charges seemed sky high apart from the increased ticket prices.

These were the few methods that airlines had employed to battle the surging ATF (Aviation Turbine Fuel) prices. Out of the three methods that I mentioned here, that is hiked up traveling and baggage charges, cancellation of flights to remote destinations, I think it is the last one which has had the worst effect on airline companies word wide. In other words, thousands of layoffs, hundreds of grounded planes and 21categories of price increases may not prove enough to save the embattled airline industry from the damaging effects of high fuel prices. The situation, according to many leading economists, might just render some of biggest names in the aviation industry completely bankrupt. 

Further, I think airlines face a great threat from public displeasure also as initially, general public was assured that the condition would not have an adverse effect on their pockets. However, it was a promise that was not fulfilled. If we consider the current situation, airlines are nearing a state of catastrophe which is expected to pull down many major companies in the trade.  The failure of just one airline could interrupt travel for 200,000 to 300,000 daily passengers and cause between 30,000 and 75,000 immediate job losses.