Dec 24 ::Grey market premium, IPO, Bond

IPO	Opening Dt	Closing Dt	Band	Retail Discount	Grey Market Premium
Rural Electrification (REC) NCD	3-Dec-12	10-Dec-12	1000	0	50
CARE	7-Dec-12	11-Dec-12	750	0	140
PC Jeweller Limited	10-Dec-12	12-Dec-12	135	5	5
BHARTI INFRATEL LIMITED	11-Dec-12	14-Dec-12	220	10	Discount
PFC NCD	14-Dec-12	27-Dec-12	1000	0	20
IIFCL	26-Dec-12	11-Jan-13	1000	0	60

How RBI’s policy actions affect you :: Business Line

Last Tuesday, the markets waited with bated breath to see whether the Reserve Bank of India would cut the repo rate and the cash reserve ratio (CRR). But it finally turned out to be a non-event.

The central bank did not oblige and maintained status quo on both the repo rate (at 8 per cent) and the CRR (at 4.25 per cent). So, what exactly are these rates and how do they impact the aam aadmi?

Let us first understand the fundamentals. The RBI is the nation’s banker. Its most important task is to maintain price stability, regulate the financial markets, and ensure adequate flow of credit.

The RBI controls all this by various monetary policy tools such as the repo rate, the reverse repo rate and the cash reserve ratio.

The repo rate is the rate at which the RBI lends money to commercial banks. If the RBI wants to flood funds into the system, it lowers the repo rate.

The reverse repo rate is the rate at which the RBI borrows money from commercial banks. Increasing this rate drains excess funds out of the banking system. The cash reserve ratio (CRR) is the amount of funds banks have to keep with the RBI. If the central bank increases the CRR, the amount available with the banks to lend comes down.

But why should we worry about these policies?

Increases or decreases in the repo rate impact the interest rate on loans, mortgages and deposits. How? This is where we need to understand the concept of “base rate,” that is, the minimum rate at which banks can lend.

Each bank sets its base rate depending on the cost of deposits, administrative costs, its profitability and other parameters. Loan rates are based on this. So, when the repo rate goes down, banks can obtain funds at a lower rate. This benefit may be passed on to customers, in the form of reduced interest rates on loans.

So next time experts are concerned about the RBI’s inaction on bringing down the repo rates, you must worry too.

Where does the CRR fit into all this? While loans are not directly linked to CRR, changes in the ration may impact interest rates.

When the CRR is raised, banks have to increase the funds they keep with the RBI. As the CRR earns no interest, banks may have to recoup costs through other lending.

They may also have a lower amount available to lend. This may result in interest rates going up. Remember, a CRR change does not always warrant a change in a bank’s base rate.

Hence, the RBI’s status quo on its policy this week means no change in your economics too. With expectations of a rate cut in January, that is when your pocket may get fatter.

Did policy matter? :: Business Line

The pharma sector is a case where the expected policy change — price controls on more drugs — was expected to be adverse. But these stocks soared.

Ask the man on the street what made the Sensex zoom by 25 per cent in 2012, and he will probably reply: ‘Reforms’. Most people now believe that the market rise, and the deluge of foreign money that fuelled it, came because of the government shaking off its notorious policy ‘paralysis’.

But delving deeper into the sectors and stocks that gained suggests that the link between policy change and corporate prospects was, in many cases, tenuous.

Take the banking sector, a top gainer for the year. The steep interest rate cuts that the sector was hoping for from the beginning of the year never materialised.

Instead, the RBI reduced the Cash Reserve Ratio and pushed through regulatory changes that actually tightened capital and provisioning norms for banks. This kept costs for the sector quite high, at a time when corporate defaults were rising too.