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Editorial
Season’s Greetings!
In this edition we have Mr. Ritesh Kumar – MD & CEO, HDFC Ergo, articulating his
thoughts on General Insurance industry and its increasing penetration. We thank Mr.
Kumar for his contribution to the newsletter.
For this month, APAS column cover various facets of differentiated banking in India and
globally.
The economic indicators showed signs of mixed performance. Manufacturing PMI fell
from 52.4 in March to 50.5 in April. India’s core sector accelerated to 17-month high at
8.5% in April. The growth in Index of Industrial Production (IIP) for the month of March
decreased to 0.1% versus 2% in February 2016. PMI services and composite PMI were
at 53.7 and 52.8 in April, from 54.3 each in March. Inflation rose to 5.39% in April from
4.83 % (final) in March. WPI moved upwards to 0.34% in April after remaining in a
negative zone for a long time. It was (-) 0.85% in March 2016.
The Reserve Bank of India issued draft guidelines on relaxation of banking license
requirements (draft guidelines for ‘on tap’ licensing of universal banks in the private
sector). It also issued a consultation paper on peer to peer lending which talks about
P2P lending globally and in India. Cabinet approved MoU between RBI and Central Bank
of UAE. RBI tightened Rules for Large Corporate Borrowers. Lok Sabha gave its approval
on the new bankruptcy law, “Insolvency and Bankruptcy code, 2015”. RBI tweaked
shareholding norms for private sector banks. RBI released its Second Bi-monthly
Monetary Policy Statement, 2016-17 keeping the rates unchanged.
IRDAI released comprehensive guidelines on corporate governance for insurers in
India. Also the authority has proposed to issue the following amendment to IRDAI
(Registration of Indian Insurance Companies) (Eighth Amendment) Regulations, 2016.
Government of India cleared railway projects worth Rs. 10,736 crore to improve
infrastructure. Also, India and Iran signed Chabahar port deal on 23rd May, 2016.
SEBI (Securities and Exchange Board of India) tightened registration norms for offshore
derivative instruments.
We hope that this newsletter is insightful and welcome your inputs and thoughts and
encourage you to share them with us.
Ashvin Parekh
Table of Contents
Guest Column
Mr. Ritesh Kumar – MD and CEO – HDFC Ergo
APAS Team
Differentiated Banking
Economy
IIP update – March
Inflation update – April
PMI update – April
Core Sector update – April
Banking Sector
Draft guidelines for ‘on tap’ licensing of Universal Banks in the private sector
Peer to peer lending
MoU between RBI and Central Bank of UAE
Tightening of rules for large corporate borrowers
Insolvency and Bankruptcy code, 2015
Shareholding norms for private sector banks
Second Bi-monthly Monetary Policy Statement, 2016-17
Insurance
Corporate governance for insurers in India
Amendments to IRDAI (Registration of Indian Insurance Companies) (Eighth Amendment) Regulations, 2016.
Infrastructure
Clearance of railway projects
Signing of Chabahar port
National Capital Goods Policy
Announcement of new smart cities
Capital Markets
Tightening of registration norms for offshore derivative instruments
Capital Market Snapshot
Economic Data Snapshot
Ashvin Parekh – Managing Partner, APAS
The general insurance industry has been in a state of
evolution ever since the industry opened up in 2001.
Though it has grown almost 10 times over the last 15
years, the general insurance penetration in the
country continues to be abysmally low at about 0.8%
of GDP. The rural penetration is even lower and
stands at below 0.2%. As the Regulator’s gives effect
to changes necessitated by the Insurance
Amendment Bill, there is increased effort on their part
to improve insurance penetration in India. It is equally
important to be mindful of these measures in the
context of the developments that are taking place in
the larger ecosystem and the evolving consumer
behavior.
Distribution trends
When we look at some of the regulatory interventions
in the recent past, it is apparent that a strong
framework is being created for insurance distribution
to reach out to a larger customer base. These include,
allowing Banks to sell insurance products for multiple
insurers, a new category of intermediaries called
Insurance Marketing Firms who can sell for two
insurers each; point of sale persons (PoSP) and
insurance distribution through CSCs. With the
framework in place, coming years will see multiple
channels reaching out to everyone who is insurable.
Last few years has also seen a huge push from the
Government to increase insurance penetration in the
country. Rashtriya Swasthya Bima Yojna, a program to
provide medical insurance to the weaker sections of
the society has been there for a while. We are
completing the first anniversary of the Pradhan
Mantri Suraksha Bima Yojna, a program to ensure
personal accident policies for all. A comprehensive
crop insurance program in the form of Pradhan
Mantri Fasal Bima Yojna has been launched earlier
this year with a view to increase crop insurance
penetration from presently 22% to 50% over the next
2 years.
Mr. Ritesh Kumar, Managing Director & CEO – HDFC Ergo
The regulatory and Government’s initiatives will
effectively take insurance to the remotest corners of
the country bringing all sections of the society within
the insurance net. Insurance inclusion is as important
as financial inclusion.
Evolved Customer making informed decisions
Today's customer is smart and would like to have and
analyze all possible information before making a
purchase decision. The technology today enables him
to do so. Today business models empower the
customer to have all required information before
making a purchase, platform are built for the
customers to be able to not just compare products
and prices but also be able to design the products and
price combination that matches their requirements.
The web aggregator model is one such example. With
so many companies and brokers competing for the
business, the customer is really spoilt for choice.
Product reforms with focus on value driven
insurance solutions
The insurers on their part are becoming more and
more customer focused. In the past, insurance was
just a risk transfer mechanism, but today it's so much
more. Services like cashless claims payment to
hospitals and garages have become essential part of
the product offering which means service network
management has become one of the core functions
for an insurance company. In the past most of the
claims were serviced on reimbursement basis. Today,
roadside assistance, ambulance services etc. are all
standard expectation and thus necessary part of the
product offering.
After de-tariffing, there has been a spate of new
product features in the market. The simplest of
products such as motor and health today are not
standard anymore. For example in motor, zero
depreciation has become the most popular cover with
host of add ons. In health segment, as compared to
the standard “mediclaim”, today we have hospital
cash, critical illness, top up etc. as standard product
supplements.
With the implementation of “Use & File” regime the
market will witness major change in the product
landscape in insurance. While the speed to market
will significantly improve, even the product contours
will undergo a major shift especially on the corporate
side. The provision to launch ‘Pilot Products” is likely
to encourage companies to test and market new
products with increasing frequency. Multi-year
products and premium collection in installments
would gain acceptance.
IT and social media
Information technology and social media are playing
a significant role in shaping customer choice and
product & service delivery. Through the internet, the
entire ecosystem is getting connected which has
infinite possibilities. Online purchase of policies and
claims payments are passé, the future lies in the
connected world. Connected information backed with
strong analytics and service networks will define the
new paradigm of insurance in the brave new world.
Today online purchase of insurance products has
become a standard practice. Through enabled
platform, the customer can design the product per his
needs and the transaction can be closed on the net.
Today in case of a claim, loss prevention sensor driven
devices can be activated to control the damage and
message is flashed to the service network to provide
on the spot assistance, survey, repair and payment of
loss. In such a scenario, one can imagine that
information, analytics, strong and connected network
of service providers will play a key role.
With economy showing signs of recovery and backed
by the above initiatives and developments,, the
industry growth rate this year is expected to be around
25% as compared to 13.8% for FY16 – this would make
FY17 potentially as the year with the highest ever
growth rate for the general insurance industry. This
trend of increasing penetration is going to be a very
strong theme for quite some time.
Financial sector reforms in 1991 rejuvenated Indian
economy and contributed greatly to the progress that
India has achieved today. Much later in 2014, a set of
recommendations which aimed at financial inclusion
were set forth by RBI-constituted Nachiket Mor
committee. The committee recommended
establishing differentiated banks meant for providing
banking access to the poor and the unbanked. Hence,
the foundation stones for differentiated banking were
laid.
Similar trends in the banking industry have been
observed around the globe. USA, Australia, Singapore,
Hong Kong, London and Indonesia, practice
differentiated Bank licensing model. In these
economies, the purposes of issuing differentiated
banking licenses are anchored either to capital
conditions or to the activity being financed.
Differentiated banking has existed in India in past, in
the form of regional rural banks and local area banks.
However, they were not very successful owing to
various reasons. The purview of regulations
applicable to all these entities have been different.
NBFCs, regional rural banks and local area banks have
traditionally been under the scope of RBI and Banking
regulations act, 1949, while, co-operative banks are
disciplined by state co-operative society act.
RBI has been encouraging various financial entities to
convert into differentiated banks, thereby increasing
financial inclusion and bringing them under the
expanse of RBI.
Every entity being established under the
differentiated banking umbrella, follow regulations
set by RBI. RBI has to adopt a sophisticated approach
in drafting regulations. These regulations will have to
differentially use the main tools of micro-prudential
regulation – capital adequacy and reserve
requirements, regulatory audits, reporting and
compliance – so as to achieve the desired results,
while recognizing differences in business models. RBI
will also have to ensure that there is no regulatory
arbitrage that is created across different types of
banks.
Some leeway in terms of capital required and other
regulatory capital is allowed and the rationale behind
providing leeway to these banks can be attributed to
the fact that these banks are meant for servicing loans
of lower ticket sizes and also operate in small
geographic areas.
Differentiated banks are signs of government and
RBI’s efforts towards financial inclusion of masses. In
order to induce habit of saving and switching to
formal sources of credit among the unbanked
population, many of the recently introduced benefit
transfer schemes like direct benefit transfer scheme,
etc. require mandatory ownership of bank accounts
to receive the benefits. Close proximity of
differentiated banks like small finance banks,
especially in rural areas, would ease the process of
transmission of benefits to the unprivileged. Better
asset-liability management and stronger regulatory
structure under RBI would help differentiated banks
fundamentally achieve more success than earlier
versions of differentiated banks like co-operative
banks.
Differentiated banking licenses have caught the
attention of foreign banks as well. Foreign banks have
been engaged in specialized banking business, despite
having been allotted a universal banking license, due
to restrictions in guidelines on sub standardization.
Hence, they may decide to opt for a differentiated
banking license and maintain focus on their core
activity.
Creation of small finance and payment banks is likely
to promote better utilization of financial resources,
bring depth to core activities, and allow institutions to
focus on specific needs and customer segments.
Announcing that RBI shall soon provide universal bank
licenses on tap is a step furthering the financial
inclusion.
The launch of differentiated banking models are part
of a revolution in the Indian economy and certainly
seems to be a good idea. However, the question that
- will India remain receptive and positive to the
change, still prevails. The success of the differentiated
bank idea will herald a major change in the banking
arena.
-APAS
IIP (Index of Industrial Production) – March
The growth in industrial output, measured by index of
industrial production (IIP) for March, decreased
sharply to 0.1% versus 2% in February 2016 as
manufacturing growth contracted by 1.2% as against
0.7% in February.
In March, the IIP was boosted solely by electricity
generation, which rose by 11% from the 9.6% rise seen
in the previous month. Annual growth in electricity
generation however moderated to 5.6% from the 8.4%
growth seen in the previous year.
On the other hand, mining output contracted by 0.1%
in March, a sharp fall considering the 5% witnessed in
February. Mining growth increased by 2.2% in the last
financial year as compared to a 1.4% rise in 2014-15.
Among product categories, radio, TV and
communication equipment registered the highest
growth at 36.5%, followed by Tobacco products at
19.8%. Electrical machinery & apparatus on the other
hand, continued to fall by the largest margin at 36.2%.
Cable, Rubber Insulated, continued its long streak in
contributing the most to the contraction in the index.
Also commercial vehicles and telephone instruments
were the positive contributors to growth. On the use
based classification, capital goods, considered a proxy
of investment demand, continued to contract sharply,
going down by 15.4% after a 9.8% slide in the
preceding month. Annually, it went down by 2.9% after
a 6.3% rise in the previous financial year. This
contraction has consistently acted as the big drag on
the performance of the IIP Index.
On the demand side, decline in consumer non-
durables accelerated to 4.4% from the 4.2% fall in the
previous month. Growth in consumer durables
however increased by 8.7% after growing by 9.7% in
February. In March, 13 out of the top 25 products
within manufacturing showed growth, down from 19
last month.
-3.2
-1.2-1.5
2.0
0.1
Nov-15 Dec-15 Jan-16 Feb-16 Mar-16
IIP (%YoY)
Quarterly evaluation of IIP
3.83
1.13
0.43
3.233.53
4.73
1.80
0.20
Q1 14-15Q2 14-15Q3 14-15Q4 14-15Q1 15-16Q2 15-16Q3 15-16Q4 15-16
IIP
%
Quarter
IIP Trend Mining activity recovered during 2014-15 from a
three-year slump, buoyed by a sharp increase in
the production of coal. Weakness in consumer
spending, sluggish investment activity and poor
external demand operated as drags on
manufacturing activity during 2014-15.
During April - June 2015, however, the growth in
IIP decelerated mainly on account of a sluggish
performance in capital goods, electricity and
food products.
IIP has experienced a downfall from 3.83% in Q1
to 0.43% in Q3 (14-15) respectively. Further IIP
rose to the level of 4.73% in 2015-16. Following
which it fell to the extent of 0.20% in Q4 of 2015-
16. Manufacturing sector has recorded a
marginal growth in the Q4 as compared to
mining and electricity sectors which grew slightly
better.
Consumer Price Index - April
Retail inflation, as measured by the consumer price
index (CPI) for April accelerated to 5.39% (Provisional)
as compared to 4.83% in March (Final).
Food inflation picked up to 6.32% in April from 5.21%
in the previous month. This was the first pickup in
retail inflation since January 2016. The pace of price
gains in April was driven mainly by higher food costs.
An early summer heat wave led to an increase of 3.8%
in month-on-month prices for staple vegetables. Price
of pulses surged 34.1% in April, while sugar and
confectionary rose 11.2% year-on-year during the
month.
Rural and Urban inflation rose to 6.09% and 4.68% in
April (Provisional) from 5.7% and 3.95% in March
(Final) respectively.
Quarterly evaluation of CPI
4.4
4.6
4.8
5
5.2
5.4
5.6
5.8
Dec-15 Jan-16 Feb-16 Mar-16 Apr-16
CPI
The inflation rate eased for the second straight
month, reaching the lowest figure since
September 2015 and compared to market
expectations of 5% as food prices rose at a slower
pace. Inflation Rate in India averaged 7.79% from
2012 until 2016, reaching an all-time high of
11.16% in November of 2013 and a record low of
3.69% in July of 2015.
CPI rose in December 2015, reaching the highest
since September 2014, in line with market
expectations.
For Q1 of 2015-16, CPI inflation remained at
5.09%. Thereafter falling to 3.95% for Q2.
Post that CPI inflation rose back to 5.34% in Q3. It
continues to be relatively high and “sticky”,
despite the sharp fall in commodity prices
globally, especially crude oil.
Even after a sharp rise in food inflation, CPI has
fallen from 5.34% in the Q3 of 2015-16 to 5.26%
in Q4 of 2015-16 due to ease in rural and urban
inflation respectively.
8.117.38
4.97 5.22 5.09
3.95
5.34 5.26
Q1 14-15 Q2 14-15 Q3 14-15 Q4 14-15 Q1 15-16 Q2 15-16 Q3 15-16 Q4 15-16
CP
I %
Quarter
CPI Trend
WPI (Wholesale Price Index) – April
India's annual wholesale price index (WPI)
accelerated into the positive terrain after staying in
negative zone for 17 straight months. The
annual WPI moved up to 0.34% for April, from (-)
0.85% in March and (-) 2.43% during the
corresponding month of the previous year. The
upward movement in WPI mainly occurred on the
back of a rise in the prices of pulses, potatoes, sugar,
edible oils, egg, meat, fish and milk.
On a year-on-year basis, the April data disclosed that
prices of primary articles rose 2.34%, whereas the
manufactured product edged up by 0.71%. Food
articles inflation jumped to 4.23% due to higher prices
of tea, pulses, poultry and fruits and vegetables.
Other food items such as wheat and vegetables
recorded modest price increases. Wheat was dearer
by 2.22%, and vegetables by 2.21%. Even under the
manufactured products category, prices of
commodities pertaining to processed food rose –
especially sugar that was higher by 16.07%, followed
by food products which were up by 8.01%. The edible
oil prices increased by 5.61%.
Notwithstanding the upward price trend, fuels prices
fell. The fuel and power index was down 4.83% --
petrol was cheaper by 4.18% and diesel by 3.94%.
Cost of cooking gas fell by 18.4%.
Quarterly evaluation of WPI
Wholesale prices in India averaged 7.36%
from 1969 until 2016, reaching an all-time
high of 34.68% in September of 1974 and a
record low of -11.31% in May of 1976.
During the Q1 of 2014-15, WPI inflation stood
at 5.8% as mainly food and fuel prices were
high. In the second and third quarters of
2014-15, WPI inflation declined to 3.8% and
0.5% respectively. The WPI inflation even
breached the psychological level of 0% in
November, 2014 and January, 2015. The
decline was majorly caused by lower food and
fuel prices.
However in 2015-16, WPI has been in
negative zone for all the four quarters.
5.62
3.77
0.53-1.59 -2.47
-4.51
-2.18-0.88
Q1 14-15 Q2 14-15 Q3 14-15 Q4 14-15 Q1 15-16 Q2 15-16 Q3 15-16 Q4 15-16
WP
I %
Quarter
WPI Trend
-1
-0.8
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
Dec-15 Jan-16 Feb-16 Mar-16 Apr-16
WPI
PMI update
Service PMI – April
The seasonally adjusted Nikkei India Composite PMI
Output Index dropped from 54.3 in March (37- month
high) to 52.8 in April. It pointed a softer expansion in
private sector activity across the country. Slower
increases were seen at both goods producers and
service providers.
Down from 54.3 in March to 53.7 in April, the
seasonally adjusted Nikkei Services Business Activity
Index pointed a solid, although softer, expansion in
activity. The latest increase in output was supported
by growth in the Financial Intermediation, Post &
Telecommunication and Transport & Storage sub-
sectors.
New business at services firms rose for the tenth
straight month in April. Despite easing since March,
the rate of expansion was solid overall. Although the
demand improved, there were mentions of
competitive pressures. Incoming new work in the
private sector as a whole increased at a moderate and
weaker rate, weighed on by stagnant order books
among manufacturers. April data highlighted a lack of
pressure on the capacity of Indian service providers,
as unfinished business declined. The latest fall was the
third in as many months, but the weakest in this
sequence and fractional overall. In contrast to this,
manufacturers accumulated backlogs.
Quarterly evaluation of Service PMI
Services PMI in India averaged 51.56 Index
Points from 2012 until 2016, reaching an all-
time high of 57.50 Index Points in January of
2013 and a record low of 44.60 Index Points in
September of 2013. The rate of backlog
depletion was sharp and the most
pronounced for the fourth quarter ended
March 2016, since March 2009.
The trend in employment showed little-
change through much of 2015-16. Except for
last July where hiring among service providers
was mild, a broadly stagnant labour market
was seen for the past two years. Input costs
across the private sector meanwhile rose at
the quickest rate in three months and inflation
likewise accelerated.
The average of Service PMI was seen rising
from Q3 ended December 2015 to Q4 ended
March 2016 (52.13 to 53.33). The main reason
being sharper increase in new business
spurring activity growth in service sectors.
Having accelerated to the fastest in over three
years during March, activity growth across
India’s private sector took a step back in April.
Source: www.tradingeconomics.com
Manufacturing PMI - April
The seasonally adjusted Nikkei India Manufacturing
Purchasing Managers Index fell from 52.4 in March to
50.5 in April. This meant weakest improvement in
business conditions in the current four-month
sequence. Indian manufacturers saw incoming new
orders broadly stagnate in April, following three
consecutive months of growth.
New work from abroad continued to increase.
Nonetheless, new export orders expanded at the
slowest pace since last October. In spite of the
stagnation in new work, goods production increased
in April. The rate of expansion was only slight and
softened since March, however. Meanwhile, buying
levels rose for the fourth successive month, which in
turn resulted in a further accumulation in stocks of
raw materials and semi-finished products. April saw
manufacturing employment in India remain broadly
unchanged, a trend that has been evident for almost
two years.
Quarterly evaluation of Manufacturing PMI
Manufacturing PMI in India averaged 51.93
from 2012 until 2016, reaching an all-time
high of 55 in June of 2012 and a record low
of 48.50 in August of 2013. As a consequence
of rising purchasing activity, preproduction
inventories expanded. A softer overall
increase in output prices meanwhile suggests
a strongly competitive environment, as cost
inflation in fact accelerated to the fastest
since May 2015.
The rate of accumulation was slight overall
and in line with those seen throughout the
current four-month sequence of growth.
Manufacturing PMI kept fluctuating for the
first two quarters of 2015-16. Further it
slowed down in the Q3 ended December
2015. The average being 50.03 for that
quarter. However, the average for the Q4
ended March 2016 rose to 51.53. The reason
for this rise was expansion of output at an
accelerated rate. New orders were also
welcomed. There was an improved demand
from both domestic and external clients.
Source: www.tradingeconomics.com
Core Sector Growth – April
Core sector production continued on its positive
trajectory for the fifth straight month, with April
growth accelerating the fastest in 17 months at 8.5%.
This was due to a low base and better performance by
petroleum refinery, fertilizer, steel, cement and
electricity sectors. This is the highest since the 8.54%
growth recorded in November 2014.
Petroleum refinery production rose 17.9% in April
2016 (as against -2.9% in April 2015) while fertilizer
output increased by 7.8% (-0.04% in April 2015) and
steel production jumped 6.1% (0.01% in April 2015).
Cement output went up by 4.4% (-1.4% in April 2015)
while electricity generation increased by 14.7% (-0.5%
in April 2015).
The areas of concern included coal production that
shrank 0.9% (8.1% in April 2015) and crude oil
production that contracted by 2.3% ( -2.5% in April
2015). Natural gas production also decreased by 6.8%
(-3.6% in April 2015). The core sector output had
slipped into the negative territory in November 2015
when it shrunk by 1.3%.
Monthly evaluation of Core Sector
Core Sector continued to expand for six months,
before it contracted in Nov 2015 to a negative 1.3%
mainly driven by a decline in steel production.
During April-December 2015 period this fiscal, the
output of these eight sectors slowed to a 1.9%
growth from 5.7% growth in the same period last
fiscal.
From December 2015 onwards, core sector output
has grown from 0.9% to 6.4% in March 2016. This
growth was due to increase in output of electricity,
cement, fertilizers and refinery products. Also coal
output was seen to increase in December 2015 and
January 2016 which led to an overall growth.
Thereafter, it showed highest growth in April 2016
(8.5%).
Petroleum refinery products and cement have
shown excellent growth (in April) due to extremely
low base. Growth in electricity output remains the
bright spot. Even growth in cement output is
encouraging and appears to be benefiting from the
revival of road sector.
-0.42
4.4
3
1.1
2.63.2 3.2
-1.3
0.9
2.9
5.76.4
8.5
Co
re s
ect
or
dat
a %
Month
Core sector Trend - Monthwise
Relaxation of Banking License requirements
The Reserve Bank of India (RBI) issued proposals for
the relaxation of requirements for banking licenses.
This was done as an effort to boost a sector struggling
with $100 billion of stressed debt that is choking the
financial system and hitting economic growth. These
are called Draft guidelines for ‘on tap’ licensing of
Universal Banks in the Private sector.
Only about half of India's population is having access
to financial services, particularly in rural areas.
Hence, RBI has been keen to extend the sector's
reach.
The draft guidelines include a move to allow large
industrial companies to buy up to 10% stakes in new
lenders. Resident individuals and professionals
having 10 years of experience in banking and finance
will be eligible to promote universal banks. Non-
Operative Financial Holding Company (NOFHC) has
now been made non-mandatory in case of promoters
being individuals or standalone
promoting/converting entities who/which do not
have other group entities.
The central bank proposed a lowering of the
minimum ownership level for companies or people
setting up lenders under a financial holding structure
to 51% from 100%. Existing specialized activities have
been permitted to be continued from a separate
entity proposed to be held under the NOFHC subject
to prior approval from the Reserve Bank and subject
to it being ensured that similar activities are not
conducted through the bank as well.
Key features of the guidelines have been stated.
These include eligibility of the promoters, ‘Fit and
Proper criteria’, corporate structure, minimum
capital requirement, foreign shareholding in the
bank, corporate governance prudential and exposure
norms, business plan for the bank, other conditions
and the procedure to be followed by the banks for
application.
Banking is a highly leveraged business. Hence,
licenses shall be issued on a very selective basis to
those who conform to the above requirements, who
have an impeccable track record and who are likely
to conform to the best international and domestic
standards of customer service and efficacy.
Peer to peer lending
Peer to Peer lending is a form of crowd-funding which
can be defined as the use of an online platform that
matches lenders with borrowers in order to provide
unsecured loans. The borrower can either be an
individual or a business requiring a loan. The lender
can also be a natural or a legal person. Fee is paid to
the platform by both the lender as well as the
borrower. At present, there is no clear regulatory
framework in India governing the functioning of the
Peer to Peer lending platforms. There are many
variants of Peer to Peer lending platforms. Nature
and extent of services provided by them and global
regulatory practices also vary.
The Reserve Bank of India released the Consultation
Paper on Peer to Peer Lending. It talks about P2P
lending globally and India, arguments for and against
regulating this sector and the way forward.
RBI said it would be “prudent” to regulate the
business because of “the impact it can have on
traditional banking channels” and NBFCs and its
“potential to disrupt the financial sector and throw
up surprises”.
As per the media reports, in 2015, around 20 new
online P2P lending companies were launched in India.
At present, there are around 30 start-ups in the P2P
lending business in India.
However, the contours of regulating Peer to Peer
Lending will be decided in consultation with the
Securities and Exchange Board of India (SEBI).
Cabinet approved MoU between RBI and Central Bank of UAE
The Union Cabinet approved the memorandum of understanding (MoU) between the Reserve Bank and the Central Bank of United Arab Emirates (UAE) on co-operation on currency swap agreement. As per the MoU signed in February, RBI and the Central Bank of UAE will consider signing a bilateral Currency Swap Agreement on mutually agreed terms
and conditions after undertaking technical deliberations, subject to concurrence of respective governments.
This will further strengthen the economic relations
between India and UAE.
RBI tightened Rules for Large Corporate Borrowers
The Reserve Bank of India today placed on its website
the Discussion Paper (DP) on Framework for
enhancing Credit Supply for Large Borrowers through
Market Mechanism.
This aimed at mitigating the risk posed to the banking
system on account of large aggregate lending to a
single corporate. Absence of an overarching ceiling
on total bank borrowing by a corporate entity from
the banking system has resulted in banks collectively
having very high exposures to some of the large
corporates. The proposed Framework will come into
effect from the financial year 2017-18 and will be
applicable to all banks in India as well as branches of
Indian banks abroad.
Insolvency and Bankruptcy code, 2015
India has moved a step closer to adopting a new
bankruptcy law after the Lok Sabha passed the
legislation. After the approval in Rajya Sabha, the law
will ensure time-bound settlement of insolvency. This
will enable faster turnaround of businesses and
create a data base of serial defaulters. This is critical
in resolving India’s bad debt problem which has
crippled bank lending.
The lower house passed The Insolvency and
Bankruptcy Code, 2016, with all the amendments
proposed by the joint parliamentary committee
being accepted by the government. Bankruptcy
applications will now have to be filed within three
months rather than the earlier six months.
The new code will replace the existing bankruptcy
laws and cover individuals, companies, limited
liability partnerships and partnership firms. It will
amend laws, including The Companies Act, to
become the overarching legislation to deal with
corporate insolvency. And, it will also help creditors
recover debt faster. Enactment of this legislation
before 31st May this year will help India improve its
position in the World Bank’s ease of doing business
ranking, where it is currently ranked 130.
According to the World Bank, at present it takes more
than four years to resolve bankruptcy in India.
However, this code seeks to reduce the time frame to
less than a year. The law restores the balance of
power between promoters and creditors.
The Panel had submitted a number of changes like
provisions to address cross-border insolvency
through bilateral agreements with other countries
and shorter time frames for every step in the
insolvency process—right from filing a bankruptcy
application to the time available for filing claims and
appeals in the debt recovery tribunals (DRTs),
National Company Law Tribunals (NCLTs) and courts.
To protect workers’ interests, the committee
proposed that the money due to workers and
employees from the provident fund, the pension
fund and gratuity fund shouldn’t be included in the
estate of the bankrupt company or individual.
Further, workers’ salaries for up to 24 months will get
first priority in case of liquidation of assets of a
company, ahead of secured creditors.
There are also provisions that disqualify anyone
declared bankrupt from holding public office, thereby
ensuring that politicians and government officials
cannot hold any public office if declared bankrupt.
The bill proposed the creation of a new class of
insolvency professionals that will specialize in helping
sick companies.
It also provides for creation of information utilities
that will collate all information about debtors to
prevent serial defaulters from misusing the system.
The information utilities will be regulated by the
bankruptcy board which will have eminent people.
The bill proposed to set up the Insolvency and
Bankruptcy Board of India, to act as a regulator for
these utilities and professionals.
RBI tweaked shareholding norms for private sector banks
The Reserve Bank of India has issued new guidelines
on ownership in private sector banks by bundling
shareholding patterns into two broad categories of
individuals (natural persons) and legal
entities/institutions. However, it retained the cap on
foreign ownership at 74%. The new norms, which
envisage diversified shareholding in private sector
banks by a single entity/corporate entity/group of
related entities, are aimed at helping them meet the
additional capital under the Basel-III regulations.
RBI has stipulated separate limits for non-financial
and financial institutions. For all existing banks, the
permitted promoter/promoter group shareholding
will be in line with what has been permitted in the
February 22, 2013 guidelines on licensing of universal
banks at 15%.
In case any promoter/promoter group is eligible for
higher shareholding as per the licensing guidelines,
the same will apply. The limits prescribed for all
shareholders in the long run will not apply.
In case of financial institutions that are owned to the
extent of 50% or more or controlled by individuals,
the shareholding would be deemed to be by a natural
person and the shareholding will be capped at 10%.
Under the new norms, RBI has retained the provision
of seeking its prior mandate if someone wants to
increase shareholding/voting rights to 5% or more.
The 'fit and proper' criterion for acquisition of
shareholding in a private bank beyond 5% will
continue to apply.
Acquisition of shareholding in a private sector bank
by foreign entities will continue to be subject to the
extant FDI policy, and the aggregate foreign
ownership through FDI, FII/NRIs cannot exceed 74%
of paid-up capital. At all times, at least 26% of the
paid-up share capital of the private sector banks will
have to be held by resident Indians.
Banks, including foreign ones having branch presence
here, can continue to acquire stake in a bank's equity
shares up to 10% of the investee bank's equity
capital. But in case of exceptional circumstances,
such as restructuring of problem/weak banks or in
the interest of consolidation in the banking sector,
RBI may permit them a higher level of shareholding.
In those banks where there are no major regulatory/
supervisory concerns, a person may be permitted to
acquire higher shareholding, if the same is supported
by the board. In such banks, hostile takeover will not
be allowed. Whereas, in banks where there are
regulatory/supervisory concerns and, if RBI feels that
there is a need for a change in the
ownership/management of the bank in the interests
of the depositors of the bank, RBI may permit a
person to acquire higher shareholding, even if the
existing board does not support the same. Such a
person may or may not be an existing shareholder.
In case of an existing private sector banks, where
specific orders have been passed by RBI relating to
dilution of shareholding by persons/entities/groups,
those orders will continue to apply for such
shareholding. Where specific approvals have been
granted by RBI for promoters/entities/groups to have
shareholding in excess of 10%, they could continue to
hold such shareholding in the banks up to the
specified period. Where any promoter/promoter
group has shareholding in excess of 15% and
timelines have already been stipulated by RBI for
bringing it down to 10%, such timelines shall continue
to apply for bringing the shareholding down to 15%.
Second Bi-monthly Monetary Policy Statement, 2016-17
In its Second Bi-monthly Monetary Policy Statement,
2016-17, RBI kept key policy rates unchanged,
expressing concerns over rising inflation. The repo
and reverse repo rate remained at 6.5% and 6%
respectively. Also, CRR remained unchanged at 4%.
The marginal standing facility (MSF) rate and the
Bank Rate was retained at 7.0%. It has also been
decided to provide liquidity as required but
progressively lower the average ex ante liquidity
deficit in the system from one per cent of NDTL to a
position closer to neutrality.
The bi-monthly monetary policy has been assessed considering the following factors -
World trade softened in an environment of weak demand. In the United States, growth was slow once again in Q1. This was due to contraction in industrial activity and exports.
In the Euro area, by contrast, Q1 GDP rose strongly on the back of robust consumer spending. In Japan, growth surprised on the upside in Q1, with the economy escaping a technical recession. But the industrial activity remained weak. GDP growth slowed sequentially in China in Q1 along with which retail sales, industrial production and fixed investment showed signs of weakness in recent months.
Global financial markets have recorded gains
throughout the Q2 of 2016. The crude prices
that set in around mid-March has been
supported in subsequent weeks by some
temporary reductions in global supply. Gold
prices remain elevated on safe haven
demand.
The policy maintained gross value added
(GVA) growth projection for 2016-17 at 7.6%
with risks evenly balanced.
Domestic conditions for growth are
improving gradually, mainly driven by
consumption demand, which is expected to
strengthen with a normal monsoon and the
implementation of the Seventh Pay
Commission award.
The introduction of the electronic national
agriculture market (e-NAM) trading portal,
should moderate unanticipated flares of food
inflation.
Exports declined for the seventeenth
consecutive month in April in US dollar terms
in spite of a modest increase in volume. The
fall in crude oil prices led to lower export
realizations from petroleum products (POL),
although the volume of shipments of
petroleum products is estimated to have
picked up modestly.
RBI pushed for more monetary transmission
from banks to support the revival of growth.
Timely capital infusions into constrained
public sector banks will also aid credit
flow. The Reserve Bank injected liquidity
through purchases under open market
operations (OMOs) of ₹ 700 billion during
April-May.
The Reserve Bank will monitor macroeconomic and
financial developments for any further scope for
policy action.
Corporate Governance for insurers in India
Insurance Regulatory and Development Authority of
India (IRDAI) has released comprehensive Corporate
governance guidelines including a cap on salary of
CEOs and policy on whistle blowers.
It aims to strengthen the boards of insurance
companies. The Board will look at a broad range of
areas such as overall direction of business of the
insurance company, including policies, strategies and
risk management across all functions. It would also
look into projections of capital requirements,
revenue streams, expenses and profitability. All
compliance to the Insurance Act would rest with the
Board. The Board is also required to set up
committees like audit committee, risk management
committee, policyholder protection committee,
investment committee, nomination and
remuneration committee and CSR committee.
The revised guidelines laid down the corporate
governance norms for appointments of managing
director/CEO/whole-time director and also some
other key positions. It is also applied to appointments
of statutory auditors of insurers. The rules laid down
in the guidelines will be applicable from 2016-17.
Insurers will have to set up a ‘whistle blower’ policy,
where-by there existed mechanisms for employees
to raise concerns internally about possible
irregularities, governance weaknesses, financial
reporting issues or other such matters. IRDAI’s
responsibility is to protect the interests of
policyholder’s demands.
These guidelines shall be applicable to all insurers
granted registration by the Authority except that:
Reinsurance companies may not be required
to have the Policyholders’ Protection
Committee; and
Branches of foreign reinsurers in India may
not be required to constitute the Board and
its mandatory committees as indicated
herein.
This sound corporate governance in the insurance
sector will prevent and ensure financial stability.
Insurance Regulatory and Development Authority of India (Registration of Indian Insurance Companies)
(Eighth Amendment) Regulations, 2016
The Authority has notified the IRDAI (Registration of
Indian Insurance Companies) (Seventh Amendment)
Regulations, 2016.
The manner of computation of equity capital which is
held by the foreign investors is provided under
Regulation 11 of the said Regulations. These
regulations cover both direct and indirect holding in
the Indian promoter and Indian investor. The Indian
promoter / Indian investor is not a bank or public
financial institution.
It has been indicated by the insurers, that it would be
difficult to monitor the indirect holding, more so as
companies are intending to go public.
The Authority has examined the representations and
it is proposed to issue the following amendment to
IRDAI (Registration of Indian Insurance Companies)
(Eighth Amendment) Regulations, 2016.
At the end of Regulation 11 (1), a proviso is proposed
to be inserted;
Provided further that the clause (ii) shall not be
applicable to any Indian promoter or Indian investor
of a listed Indian insurance company where such
Indian promoter and /or Indian investor are
regulated by Reserve Bank of India, Security
Exchange Board of India and /or National Housing
Bank.
.
Government cleared Railway Projects worth Rs. 10,736 Crore to improve infrastructure
The Union cabinet chaired by Prime Minister
Narendra Modi approved an investment of Rs. 10,736
crore in five railway projects involving decongestion
of the existing network, through doubling and tripling
of existing lines.
The doubling and tripling projects would benefit
multiple states including Gujarat, Maharashtra, Uttar
Pradesh, Odisha and Andhra Pradesh. The funds for
implementing the projects would be sourced through
a combination of Gross Budgetary Support (GBS)
from the finance ministry and Extra Budgetary
Resources (EBR).
The projects included doubling of the 467-kilometer
Pune-Miraj-Londa line in Maharashtra at a cost of Rs.
3,627 crore; doubling of 116-Km Surendranagar-
Rajkot project in Gujarat at a cost of Rs. 1,002 crore
and doubling of 180-Km Roza-Sitapur-Burhwal broad
gauge single line in Uttar Pradesh at an estimated
cost of Rs. 1,295 crore.
The cabinet also approved laying 264-Km
Vizianagaram and Titlagarh third line project at a cost
of Rs. 2,335 crore. This link opens an alternative route
to oversaturated Kharagpur - Jharsuguda section
Howrah-Mumbai Grand Trunk Route and Howrah-
Chennai section main line. Districts in Odisha and
Andhra Pradesh would be benefitted through this
project.
The Cabinet Committee on Economic Affairs (CCEA)
also gave its approval for taking up Bina-Katni third
line project involving an investment of Rs.2,478
crore. The 278-km long railway line is likely to ease
passenger flow and freight traffic in Sagar, Damoh
and Katni districts in Madhya Pradesh.
.
India and Iran sign 'historic' Chabahar port deal
India signed a historic deal to develop the strategic
port of Chabahar in Iran and agreed on a three-nation
pact to build a transport-and-trade corridor through
Afghanistan that could help halve the time and cost
of doing business with Central Asia and Europe. This
major effort would boost economic growth in the
region.
India would invest $500m (£344m) to develop the
port. From Chabahar port, the existing Iranian road
network can link up to Zaranj in Afghanistan. This
road can then connect to the 218-km Zaranj-Delaram
road -- constructed by India in 2009 at a cost of Rs 680
crore – and finally to Afghanistan’s Garland highway.
This will give India road access to four major cities;
Afghanistan-Herat, Kandahar, Kabul and Mazar-e-
Sharif but Kabul has already warned New Delhi to be
ready for possible attacks by Pakistan-backed
elements to delay the project. Future plan include an
International North-South Transport Corridor
through Iran to Russia and Europe.
India and Iran share centuries-old cultural and
linguistic ties, but their relations have suffered
several setbacks in recent years. Iran was unhappy
when India supported an International Atomic Energy
Agency resolution condemning Tehran's nuclear
programme in 2009. India also reduced its oil imports
from Iran in the following years.
Indian companies now see the country as a great
investment destination after international sanctions
were lifted against Iran last year.
National Capital Goods Policy
The Cabinet approved National Capital Goods Policy,
which aimed at increasing production to Rs. 7.5 lakh
crore by 2025. Apart from tripling the sector's
production from Rs. 2.3 lakh crore now, the policy
aims to increase direct and
indirect employment from 8.4 million to at least 30
million by 2025.
The Department of Heavy Industry had earlier stated
that capital goods production could boost the
domestic economy. Capital goods act as inputs for
the manufacture of other goods. Likewise, capital
goods production, which forms 8.8% of the Index of
Industrial Production, is considered a proxy for
industrial and investment demand. It contracted for
the fifth straight month till March, this year.
The government also aims to increase the share of
domestic production in India's capital goods demand
to 80% by 2025. Currently, at 60%, the large scale
influx of low-duty goods from foreign shores has
been blamed. The erstwhile Planning
Commission had targeted a growth rate of 16.8% per
annum for the sector during the XII five-year Plan
period.
The aim of the policy is to create game changing
strategies for the capital goods sector. Some of the
key issues addressed include availability of finance,
raw material, innovation and technology,
productivity, quality and environment friendly
manufacturing practices, promoting exports and
creating domestic demand.
.
Announcement of new Smart cities
Urban Development Minister Venkaiah Naidu
announced the list of 13 more cities selected in the
second batch to be developed as "smart
cities". Lucknow topped the list of winners of the Fast
Track competition conducted for 23 cities from as
many states and union territories. Lucknow that
missed the list of first 20 smart cities improved the
quality of its smart city plan by 19% to make it to the
select list.
Besides Lucknow, Warangal (Telangana),
Dharamshala (Himachal Pradesh), Chandigarh,
Raipur (Chhatisgarh), New Town Kolkata (West
Bengal), Bhagalpur (Bihar), Panaji (Goa), Port Blair
(Andaman and Nicobar Islands), Imphal (Manipur),
Ranchi (Jharkhand), Agartala (Tripura) and Faridabad
(Harayana) make it to the list of cities that will be
developed as smart cities.
With the selection of these 13 cities, 25 states and
union territories now covered under the Smart City
Mission. This 13 smart cities those are selected and
the 20 cities announced earlier will involve an
investment of Rs 80,789 crore. These 13 cities were
selected based on the marks scored by them in the
Fast Track competition and the bench marks set by
the top performers in the first round of Smart City
Challenge competition in which the first 20 cities
were selected from among 98 mission cities. To
resolve the election deadlock, government will allow
Jammu and Kashmir’s Jammu and Srinagar cities
along with and UP’s Raebareli and Meerut to
compete for Smart Cities.
Shri Venkaiah Naidu informed that the new urban
sector initiatives of PMAY (Urban), Atal Mission for
Rejuvenation and Urban Transformation (AMRUT),
Start City Mission, Swachh Bharat Mission and
Heritage Development and Augmentation Yojana
(HRIDAY) have a total investment potential of Rs. 18
lakh crore. Of this, an investment of Rs.1,48,093 crore
has already been approved. This include; Affordable
housing - Rs.43,922 crore, Atal Mission - Rs.20,882
crore, Smart City Mission - Rs.80,789 crore, Swachh
Bharat Mission - Rs.2,000 crore and HRIDAY - Rs.500
crore.
.
SEBI tightened registration norms for offshore derivative instruments
SEBI vide circular dated January 17, 2011 introduced
comprehensive reporting framework for Offshore
Derivative Instruments (ODI) issuers, whereby ODI
issuers are required to provide reports on monthly
basis in a prescribed format containing detailed
information pertaining to their ODI activities such as
name and jurisdiction of the end beneficial owner,
details of underlying trade in the Indian market, etc.
On 19th May, 2016, after the conclusion of its
quarterly board meeting held at Mumbai, the
regulator announced that issuers
of offshore derivative instruments, would need to
register their investors under the current know-your-
customer process in a bid to prevent suspected illegal
funds from flowing into the country.
The Securities and Exchange Board of India (SEBI)
also tightened rules for transferring ownership of
these offshore instruments to other investors while
mandating that issuers must report suspicious
transactions with regulators. Earlier ODI subscribers
were not required to take prior permission of the ODI
Issuer for transfer of ODIs to another investor
offshore. In order to tighten the ODI regime and have
more control over issuance and transfer of ODIs, it
has been decided that the ODI subscribers will have
to seek prior permission of the original ODI issuer for
further/onward issuance/transfer of ODIs. It was also
decided to capture the details of all the transfers of
the ODIs. The Board decided that in the monthly
reports on ODIs all the intermediate transfers during
the month would also be required to be reported.
ODI Issuers shall be required to put in place necessary
systems and carry out a periodical review and
evaluation of its controls, systems and procedures
with respect to the ODIs.
Sources: National Stock Exchange
Sources: Bombay Stock Exchange
Sensex reported 1,000 points rise on penultimate working
day of May on account of global cues and over 1,000
companies posting their March-quarter earnings.
Smaller double-digit growth for companies which have
reported their earnings till now was also a reason for the
huge rise in Sensex and was seen as an encouraging and
healthy sign.
The rupee broke its 3-day rising trend and retreated from
its one-week high to close at 67.16. Renewed strength in
dollar which climbed to a two-month high against other
major currencies predominantly pressurized the local
unit. However, expectations of strong capital inflows amid
surging local equities helped the domestic currency in
recouping some losses.
Sources: APAS Business Research Team
Sources: APAS Business Research Team
Sources: APAS Business Research Team
66.56 66.6066.76
67.4467.63 67.14
67.21
65.50
66.00
66.50
67.00
67.50
68.00
1-M
ay-1
6
3-M
ay-1
6
5-M
ay-1
6
7-M
ay-1
6
9-M
ay-1
6
11
-May
-16
13
-May
-16
15
-May
-16
17
-May
-16
19
-May
-16
21
-May
-16
23
-May
-16
25
-May
-16
27
-May
-16
29
-May
-16
31
-May
-16
$/₹ (May-2016)
7.44
7.44
7.427.43
7.42
7.467.46
7.477.47
7.47
7.46
7.47
7.38
7.40
7.42
7.44
7.46
7.48
7.50
2-M
ay-1
6
4-M
ay-1
6
6-M
ay-1
6
8-M
ay-1
6
10
-May
-16
12
-May
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14
-May
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16
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18
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20
-May
-16
22
-May
-16
24
-May
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26
-May
-16
28
-May
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30
-May
-16
GIND10Y (May-2016)
7747
7736
7888 7861
7731
8070 81798160
2-M
ay-1
6
4-M
ay-1
6
6-M
ay-1
6
8-M
ay-1
6
10
-May
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12
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14
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16
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18
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20
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22
-May
-16
24
-May
-16
26
-May
-16
28
-May
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30
-May
-16
CNX Nifty (May-2016)
25230
25229
2559725774
25400 25305
26654 2672626668
2-M
ay-1
6
4-M
ay-1
6
6-M
ay-1
6
8-M
ay-1
6
10
-May
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12
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14
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16
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18
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22
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24
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26
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28
-May
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30
-May
-16
BSE Sensex (May-2016)
17.46
16.95 1716.1615.33
15.9816.05
0.00
5.00
10.00
15.00
20.00
25.00
Indian VIX (May-2016)
* The Economist poll or Economist Intelligence Unit estimate/forecast; ^ 5 year yield
Quarter represents a three month period of a financial year
Countries GDP CPI Current Account
Balance Budget Balance
Interest Rates
Latest 2016* 2017* Latest 2016* % of GDP, 2016* % of GDP,
2016* (10YGov), Latest
Brazil -5.9Q4 -3.7 0.6 9.3 April 8.3 -1.6 -5.4 12.9
Russia -1.2 Q1 -1.3 1.2 7.2 April 8.2 3.7 -2.2 8.97
India 7.3 Q4 7.5 7.1 5.4 April 5.2 -1.0 -3.7 7.46
China 6.7 Q1 6.5 5.9 2.3 April 1.8 2.8 -3.0 2.76^
S Africa 0.5 Q4 0.8 1.4 6.2 April 6.4 -4.1 -3.3 9.43
USA 2.0 Q1 1.8 2.1 1.1 April 1.2 -2.7 -2.5 1.88
Canada 0.5 Q4 1.6 2.0 1.7 April 1.5 -2.8 -1.4 1.39
Mexico 2.6 Q1 2.4 2.7 2.5 April 3.1 -2.8 -3.0 6.17
Euro Area 1.5 Q1 1.5 1.6 -0.2 April 0.2 2.8 -1.9 0.16
Germany 1.6 Q1 1.5 1.6 -0.1 April 0.3 7.6 0.4 0.16
Britain 2.1 Q1 1.9 2.1 0.3 April 0.6 -4.7 -3.6 1.57
Australia 3.0 Q4 2.5 2.8 1.3 Q1 1.7 -4.1 -2.0 2.31
Indonesia 4.9 Q1 5.1 5.3 3.6 April 4.3 -2.4 -1.9 7.58
Malaysia 4.2 Q1 5.5 5.4 2.1 April 2.9 2.7 -3.7 3.86
Singapore 1.8 Q1 2.8 3.4 -0.5 April 1.3 20.4 0.9 2.17
S Korea 2.7 Q1 2.5 2.5 1.0 April 1.3 7.3 0.5 1.78
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