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MARKET ECONOMY
US, global growth concerns behind Fed rate move: Rajan
Raghuram Rajan, governor of the Reserve of India. - Bloomberg file picture
MUMBAI: Reserve Bank of India (RBI) Governor Rahguram Rajan on Saturday said that the US Federal Reserve was impelled to hold near-zero rates again due to the emerging threat to the global economy as well as its concern over health of the American economy. “If we look around the world today, it doesn’t present a pretty picture. Industrial countries are still struggling, with a few exceptions, to grow and the uncertainty about growth in the US as well the world is probably what impelled the Fed to stay on hold yesterday,” Rajan said here.
and price stability, the Fed committee on Friday reaffirmed its view that the current 0 to 1/4 per cent target range for the federal funds rate remains appropriate,” Federal Reserve chair Janet Yellen said after a two-day meeting in Washington. In New Delhi, Economic Affairs Secretary Shaktikanta Das said the US Fed decision gives more room to emerging markets for policy adjustment. “The Fed has given a clear signal that any increase would be calibrated,” Das said in first official response to the Fed decision.
The Governor was making his opening remarks before delivering the CK Prahalad memorial lecture here this morning. Global credit crisis In what could be termed as the most-awaited Fed meeting since the 2008 global credit crisis, the world’s most powerful central bank again postponed its intended decision to increase the rates from 0.00-.025 per cent till the end of the year, giving a big relief to India and other developing countries. “To support continued progress toward maximum employment
Bank of Japan brainstorms massive stimulus overhaul one of them said on condition of anonymity.
Sources familiar with the BOJ’s thinking say stepping up its $665b per year asset buying remains its go-to option if deflationary pressures persist, given a limited arsenal of obvious policy alternatives.
TOKYO: Sources say the Bank of Japan (BOJ) has been quietly brainstorming the idea of overhauling its massive monetary stimulus programme over time, casting doubt on officials’ confident assertions that it can keep buying up government bonds for several more years. Sources familiar with the BOJ’s thinking say stepping up its 80 trillion yen ($665 billion) per year asset buying remains its go-to option if deflationary pressures persist, given a limited arsenal
of obvious policy alternatives. But they say the central bank isn’t ruling out breaking with the money-printing programme over the longer term, as it has had little success in accelerating inflation toward its two per cent target since it began in April 2013. Senior BOJ officials have been involved in preliminary talks discussing the longer-term options, the sources said. “If the medicine isn’t working, you wonder whether it makes sense to keep prescribing more,”
QQE programme Another source quoted a senior BOJ official as saying that if the so-called quantitative and qualitative easing (QQE) programme fails to accelerate inflation for too long, a revamp of the framework may become an option. “QQE is not a programme intended to last another five, 10 years,” said a former BOJ policymaker with knowledge of current monetary policy deliberations. The BOJ has pumped 180 trillion yen into the economy since adopting QQE and each month gobbles up government bonds equivalent to about one per cent of Japan’s GDP. While the stimulus has boosted exporters’ profits by weakening the yen, its broader impact has been weak as firms remain wary of increasing wages and investment. Inflation has ground to a halt on falling oil costs and soft consumption, rekindling market expecta-
tions the BOJ might step up easing as early as next month. But with borrowing costs near zero, some BOJ officials doubt whether expanding QQE would help the economy much and some worry they might eventually run out of sellers if they accelerate the programme. The BOJ already holds about a quarter of Japanese government bonds (JGB) in the market, and that would rise to nearly 40 percent by the end of 2016 at the current pace of buying. BOJ technocrats say they can keep buying as long as they offer high prices, but BOJ board member Takehiro Sato, a former bond analyst, has argued that there are limits because financial institutions need a certain level of JGBs for collateral. The International Monetary Fund agrees. “Given the pace of the BOJ’s purchases under the QQE programme that is under way ... you could run out of willing sellers of JGBs by the end of 2017,” said
Kalpana Kochhar, the IMF’s mission chief for Japan. That would not just make the bond market dysfunctional, it would also prevent the bank from hitting its monetary base target. Revert to rate target? For now, there is no consensus within the BOJ on what any overhaul to the programme might look like. Many policymakers still cling to hope that inflation will rise enough to allow them to consider phasing out QQE around 2017. But with a sales tax hike looming that year, many analysts doubt the BOJ can withdraw stimulus so soon. If the BOJ bumps into trouble buying JGBs, some analysts say it could abandon the 0.1 per cent interest the central bank pays on reserves the financial institutions park in BOJ accounts, or even charge a fee for them. That might particularly hurt regional banks, which are already struggling with thin margins on bond investments. — Reuters
B I L AT E R A L T R A D E
Chinese firms sign key deal for high-speed rail link in US BEIJING: A unit of China’s CRRC Corp., the world’s biggest train maker by revenue, on Thursday joined a group of its domestic peers in agreeing a deal to help build a high-speed link from Las Vegas to Los Angeles, underlining the rail giant’s lofty overseas ambitions. Announced in a joint statement by the Chinese firms and US partner XpressWest at a government forum in Beijing, the deal is the latest in a series of deeper Sino-American business ties to be unveiled before President Xi Jinping visits the United States next week. Computer maker Dell said it will invest $125 billion in China, and new bilateral investment treaty offers have been exchanged. CRRC, formed from a statedriven merger of China’s two largest train makers, is among a large group of the country’s rail firms that has inked an accord for the project with XpressWest, a venture set up by Las Vegasbased hotel and casino developer Marnell Companies. Investment terms weren’t disclosed. Gary Wong, a Hong Kongbased analyst at brokerage Guotai Junan, estimated that the project could be worth $5 billion. He said that although it would likely offer the many Chinese firms involved little financial
benefit, it was significant for their long-term goals. “If this opens up the US market for them, opportunities for future expansion will increase. And if (their technology) is used in the United States, it will be easier for them to sell to other countries,” he said. CRRC is leading China’s aggressive pursuit of overseas high-speed rail deals in competition with traditional suppliers such as Germany’s Siemens AG and France’s Alstom SA . Beijing recently clinched contracts in Russia, although it has faced hurdles in Mexico and Indonesia due to bureaucratic flip-flops in those countries. US potential The United States is a key target for China’s rail industry, even though policymakers have been split over the need for highspeed rail and some have taken a dim view of Chinese involvement in potentially strategic deals. Most of a dozen or so US projects lined up have struggled to gain traction, leaving the country far behind Europe and Asia in this area. XpressWest won the green light for the 230-mile high-speed line linking Los Angeles to Las Vegas in 2011 and applied for a federal loan in 2010, according
to the company’s website. It did not say whether its loan application had been successful. The US company didn’t respond to calls or emails seeking comment on the project after the partnership deal with the Chinese firms — grouped in a Nevada-based venture called China Railway International USA- was announced. XpressWest XpressWest and the Chinese firms said in their statement that the accord would help accelerate the project without disclosing details of how it would achieve that. Additional regulatory approvals will be required before the construction begins, expected early as September 2016. “The United States market is huge because the fact is that their railway tracks and facilities are ageing and need upgrading,” Cao Gangcai, CRRC’s vice chief economist, told Reuters in an interview on Wednesday, before the XpressWest deal was announced. The company plans to grow its share of revenue from work overseas to 30 per cent within the next five years, he said. Having completed its merger in May, it booked first-half revenue of 91.8 billion yuan ($14.42 billion), only 12 per cent of which was booked overseas. — Reuters
The market anticipates that Rajan will cut rates at the September 29 meeting. It can be noted that the world’s second largest economy China has been in perils since beginning of the year, which pulled down global commodity prices to near record lows. The Fed said it anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labour market and is reasonably confident that inflation will move back to its two per cent objective over the medium-term. — PTI EUROPEAN UNION
Matteo Renzi. — Bloomberg News
Italy’s Renzi gambles on EU backing for budget ROME: Prime Minister Matteo Renzi was on Friday putting the final touches to a budget which could inject 27 billion euros into Italy’s sickly economy next year — if he can get it past Brussels. The plan for an ambitious programme of tax cuts and investment financed partly through an increased deficit represents Renzi’s biggest challenge yet to the way in which the European Commission applies the eurozone’s supposedly strict budget rules. Economists are sceptical that Renzi will be granted all the leeway he wants, which he says could potentially free up some 17 billion euros for measures to promote jobs and growth. “Brussels will allow some fiscal slippage, but not 17 billion euros,” Holger Schmieding, chief economist at Berenberg Bank, told AFP. But the centre-left premier bullishly insists that his plans are both within the rules and vital to secure the growth Italy needs to put its public finances in order. “We cannot cut the deficit purely by cutting spending, that is foolish,” he said earlier this week. On top of the funds released by the EU rules being applied flexibly, Renzi is counting on higher growth to finance his plans. The budget due to be approved by Renzi’s cabinet on Friday evening includes revised GDP growth predictions of 0.9 per cent for this year and around 1.6 per cent for 2016. Pierre Moscovici, the European Commissioner in charge of overseeing the finances of eurozone commissioners, was in Rome on Friday to begin the haggling over the detail of the Italian tax and spending plans. There is concern in Brussels that Renzi’s widely-trailed plans will slow the pace at which Rome reduces its 2.2-trillion-euro debt mountain — equivalent to more than 130 per cent of the country’s entire annual economic output. Moscovici diplomatically rejected suggestions that Renzi was regarded as the naughtiest boy in the euro class. “I would not define Italy as being under special surveillance,” the former French finance minister told Corriere della Sera. — AFP
AV I AT I O N
Lufthansa set to start premium economy flights from Mumbai NEW DELHI: German carrier Lufthansa on Friday announced rolling out of premium economy class on its flights to Frankfurt and Munich from Mumbai, starting next week and offered special promotional fares for the new cabin class for a limited period. Mumbai is the third city to have such an offering from Lufthansa, after Delhi and Bengaluru.
The new cabin class on the Mumbai-Frankfurt-Mumbai route is being introduced from September 23 while the same for Mumbai-Munich-Mumbai sector would be launched from September 25, Lufthansa said. It also said that passengers can avail an upgrade to higher class by paying an additional fee. The premium economy passengers can
also access business class lounge facilities at a nominal cost. The new product rolled out for the fliers from Mumbai comes with on-board as well as onground features including 50 per cent extra legroom as compared to the economy class, it said. “Mumbai is India’s financial and corporate hub and a very important market for Lufthansa. — PTI