Food Inflation in India May Climb as Government Raises Minimum Crop Prices

Food-price inflation in India, Asia’s third-largest economy, may accelerate after the government raised the prices it pays farmers for food grains and oilseeds, making crops more expensive, economists said.

The minimum prices for monsoon-sown crops including paddy, soybeans and corn were increased to help boost planting, the farm ministry said in New Delhi yesterday. The federal government sets the crop prices to assure farmers’ incomes, while selling subsidized grains and cooking oils to the poor.

An increase in food prices would add to inflationary pressures in India, where the central bank has boosted interest rates nine times since March 2010. Global food prices reached an all-time high in February driven by stronger demand and harvest disruptions, according to a United Nations gauge.

The higher crop prices in India will “raise the floor price of agricultural commodities,” Shubhada Rao, chief economist at Mumbai-based Yes Bank Ltd., said in an interview yesterday. “It will definitely add to food inflation.”

An index measuring wholesale prices of agricultural products advanced 9.01 percent in the week ended May 28 from a year earlier, the trade ministry said yesterday. Overall inflation in India has been above 8 percent for 16 months.

The jump in global food costs has pushed 44 million more people into poverty since June 2010, according to a World Bank estimate. Higher prices helped spark the riots across northern Africathis year, toppling Tunisian President Zine El Abidine.

Policy Concern

Food costs in India have been a concern for the last two years, Reserve Bank of India Deputy Governor Subir Gokarn said on June 2. Inflation needs to be curbed to boost economic growth, Reserve Bank Governor Duvvuri Subbarao said on May 18.

India, the world’s second-biggest rice producer, increased the minimum purchase price of the so-called common variety of raw rice to 1,080 rupees ($24) per 100 kilograms (220 pounds), from 1,000 rupees, the farm ministry said. The price of soybeans was raised 17.4 percent to 1,690 rupees per 100 kilograms and for peanuts by the same amount to 2,700 rupees.

India’s food inflation may accelerate from October when new crops, affected by higher farming costs and rising oil prices, arrive in the market, Ashok Gulati, chairman of the commission that recommends minimum prices to the government, said in May.

Monsoon-sown crops are planted from this month, with harvesting starting in October. The annual weather pattern, which accounts for more than 70 percent on India’s rainfall, may be 98 percent of the average, a level deemed normal, the Indian Meteorological Department said in April.

“Although the hike in minimum support price is valid for rice and wheat for procurement purposes, it serves as a benchmark for other crops, feeding inflation,” said Madan Sabnavis, chief economist at Mumbai-based CARE Ratings. “This year, the rains are expected to be good and the crop is likely to be better. But there will be no relief for inflation as on one hand the government tries to protect the consumers and on the other hand, the farmers.”....

BSE allows trading in 135 more stocks in F&O

MUMBAI: The Bombay Stock Exchange (BSE) will add 135 stocks to its futures and options segment from August 2011, following a recent regulatory move to allow bourses to offer incentives to brokers for generating volumes in illiquid derivatives contracts. The step has raised hopes of reviving the BSE's near-dormant F&O segment. 

"With recent positive developments designed to augment trading in F&O, we are working towards making the BSE market-ready for increased participation in our equity derivatives business," said the exchange's CEO, Madhu Kannan, in a release. 

The BSE has 84 stocks in addition to a few indices in its F&O segment, which clocked an average daily turnover of Rs 18 crore in the past one month. In comparison, the NSE's average daily turnover was Rs 1 lakh crore in the period. 

Brokers said the so-called liquidity enhancement scheme presents an opportunity for the BSE to capture a portion of its rival's dominant market share. 

"The chance of a revival of the BSE's equity derivatives segment has been enchanced 100-fold after the introduction of the liquidity enhancement scheme," said Rajesh Baheti, MD, Crosseas Capital. "Though the scheme may not be a success immediately, it is certainly promising as liquidity begets liquidity," he said. Brokers said even the NSE may benefit from the liquidity enhancement schemes....

IRDA notifies M&A guidelines for general insurers

Insurance regulator IRDA has notified the merger and acquisition guidelines for general insurance companies thereby paving way for consolidation in the sector.

The Regulation -- Insurance Regulatory and Development Authority (Scheme of Amalgamation and Transfer of General Insurance Business) Regulations, 2011 -- would apply to all private general insurance companies with immediate effect.

With more than 10 years after opening up of the insurance sector, the regulations would pave way for M&As between 20 private sector players, most of who have foreign investment that is capped at 26%.

Following this, the general insurers would now have to file the draft agreement of the proposed merger with the Irda and also the respective balance sheet while seeking approval from the regulator.

The regulator has retained with itself the power to vet the valuations arrived at by the companies involved in M&As, saying that the Authority would carry out an independent valuation of the insurance business of the transacting parties
to arrive at the valuation.

In order to safeguard the policyholders' interest, the Irda has mandated the insurers to inform their respective customers about the deal, it said.

Besides Irda, an acquirer would need to have approvals from the Reserve Bank and the finance ministry, in case it has foreign direct investment. It also needs to have clearance of the Sebi and the Competition Commission of India (CCI).

According to industry players, most of the private sector general insurance companies require fresh infusion of capital which may come from foreign partners, who have been constrained by the FDI cap. The Bill to raise the FDI ceiling is pending in Parliament.

The general insurance business has remained loss making for want of capital, which is constrained due cap on foreign capital infusion.

Till now, the Insurance Act provided for the M&As only for life insurance companies........

Bank fixed deposits still attractive than proposed rates of small savings

NEW DELHI: Bank fixed deposits would continue to remain more attractive for savers than long-term deposits under small savings schemes of post office despite the hike in interest rates proposed by the government panel. 

At the current market condition, the term deposit rates are as much as 50 basis points higher than the returns offered by small savings scheme as recommended by the Committee headed by RBI Deputy Governor Shyamala Gopinath. 

For instance, five-year fixed deposit rate under small savings scheme will fetch 8 per cent if the government accepts the suggestion of the panel. However, interest rates offered by the banks for same maturity period is about 8.5 per cent, 50 basis points higher than what has been recommended by the panel recently. 

Currently, five-year term deposits in the post offices earn 7.5 per cent. 

At the same time, 10-year National Savings Certificate (NSC), a new category proposed by the panel, will provide a return of 8.4 per cent to the depositors, compared to 8.75 per cent offered by the country's largest lender State Bank of India (SBI) for the same maturity. 

Interestingly, the difference of rates is wider when it comes to less than five-year fixed deposits. 

SBI fixed deposit between three years and five years offers a card rate of 8.25 per cent as against 7.5 per cent to be offered by the product under the small savings scheme. 

For two-year term deposits, banks are offering as much as 8.75 per cent as compared to 7.2 per cent proposed under the small savings scheme. 

Lower returns provided by small savings scheme has resulted in the shift towards the bank fixed deposit schemes. This is evident from the fact that rate of growth of bank deposits are higher than the small savings scheme. 

For example, bank deposit rate registered a growth of 17.2 per cent and the outstanding deposit stood at Rs 44,92,826 crore in 2009-10 as against 8.8 per cent growth witnessed under the small savings scheme in the same year. 

The outstanding deposit was 7,28,447 crore at the end of March 2010. 

"In the past, state governments used to also remunerate the agents. Most of the state governments have now abolished agency commission at their end," the report said. 

The Committee had said that while the commission under PPF should be abolished, in case of Post Office Recurring Deposits Scheme it should be brought down from 4 per cent to one per cent within three years. 

In the case of SAS, it recommended abolition of commission for Senior Citizens Savings Scheme, which currently stands at 0.5 per cent. For the other schemes, it recommended brining the rate down to 0.5 per cent from the existing one per cent. 

The small savings schemes are operated through the countrywide network of about 1.5 lakh post offices, more than 8,000 branches of the public sector banks and select private sector banks. 

About 90 per cent of the postal branches are located in rural areas. While post offices run all the schemes, the scheme of PPF and the Senior Citizens Savings Scheme are also operated through the banks..........