Intellectual Thoughts by Sanjay Panda: March 2007

RBI tigtening monetary policy to contain inflation

The Reserve Bank of India (RBI) today abandoned its monetary policy stance of equal emphasis on price stability and growth, and decided to remain solely focussed on inflation containment.As part of its further monetary tightening, the central bank raised the cash reserve ratio (CRR) for third time since December 2006 by 50 basis points to 6.50% with effect from April 28 and also raised the repo rate by 25 basis points to 7.75%, the rate at which it lends to banks against securities.“The stance of monetary policy has progressively shifted from an equal emphasis on price stability along with growth, to one of reinforcing price stability with immediate monetary measures, and to take recourse to all possible measures promptly in response to evolving circum stances,”RBI said.
The central bank’s monetary tightening measures came even as the banking system was reeling under severe liquidity strain, with call rates having in recent days shot up to ridiculously high rates of 70-80% and year-on-year inflation at around 6.5% for the third week in succession up to March 17, 2007.Since the February 13 measures, when CRR was raised by 50 basis points, RBI said data has shown that industrial production increased by 11% during April 2006-January 2007 as against 8% a year earlier and the year-on-year money supply (M3) growth up to March 16, 2007 was 22% as against 16.9% a year ago.At a disaggregated level, prices of primary articles, fuel group and manufactured products registered a year-on-year increase of 12%, 1% and 6.6% as on March 17, 2007 as against 3.7%, 8.9% and 1.7% a year ago.The year-on-year growth in non-food bank credit of scheduled commercial banks (SCBs) was 29.5% as on March 16, 2007 as against 32.7% a year ago.The third increase in CRR in five months will drain Rs 43,000 crore from the banking system. The RBI has also reduced the interest it will pay on CRR balances 0.50% from 1%.The RBI release issued this evening:In the recent period, monetary policy has been engaged in managing the transition to a higher growth path while ensuring that pressures on actual inflation and inflation expectations are contained. At this juncture, it is important to reinforce the measures already taken for maintaining price stability and anchoring inflation expectations in order to sustain the growth momentum. The role of monetary policy is to maintain stability and so contribute to growth on an enduring basis.As indicated in the Third Quarter Review of the Annual Statement on Monetary Policy for the year 2006-07, "the outlook for inflation assumes criticality in terms of policy monitoring and action" (paragraph 76). Furthermore, "a judicious balancing of weights assigned to monetary policy objectives would accord priority to stability in order to support growth on a sustained basis" (paragraph 82). Accordingly, it is necessary to reinforce the emphasis on price stability and well-anchored inflation expectations, as set out in the stance of the Third Quarter Review, with a demonstrated commitment in terms of credible policy monitoring and actions. The conduct of monetary policy should continue to demonstrate that inflation beyond the tolerance threshold of the Reserve Bank is unacceptable and that the resolve to ensure price stability is always backed by timely and appropriate policy responses.
In recognition of the cumulative and lagged effects of monetary policy, the Reserve Bank began a graduated withdrawal of accommodation in mid-2004. Since September, 2004 repo/reverse repo rates have been increased by 150 basis points each, the CRR has been raised by 100 basis points, risk weights have been raised in the case of housing loans (from 50 per cent to 75 per cent), commercial real estate (from 100 per cent to 150 per cent) and consumer credit (from 100 per cent to 125 per cent) and general provisioning requirement for standard advances in specific sectors has been raised to 1.0 per cent of standard advances. On February 13, 2007 a further two-stage increase of 25 basis points each in the CRR was announced, effective from the fortnights beginning February 17 and March 3, 2007. Liquidity management was modified on March 2, 2007 to put in place an augmented programme of issuance under the market stabilisation scheme (MSS) with a mix of treasury bills and dated securities in a more flexible manner. In view of the enhanced MSS programme and the need to conduct LAF as a facility for equilibrating very short-term mismatches, daily reverse repo absorptions were limited to a maximum of Rs.3,000 crore, effective March 5, 2007. The stance of monetary policy has progressively shifted from an equal emphasis on price stability along with growth to one of reinforcing price stability with immediate monetary measures and to take recourse to all possible measures promptly in response to evolving circumstancesSince the monetary measures that were announced on February 13, 2007 there have been some notable developments, namely,
(a) The general index of industrial production increased by 11.0 per cent during April 2006 to January 2007 as against 8.0 per cent a year ago, as per the release of the Central Statistical Organisation (CSO) of March 12, 2007.
(b) Year-on-year inflation based on the wholesale price index (WPI), has ruled around 6.5 per cent for the third week in succession up to March 17, 2007 as per the data released today. At a disaggregated level, prices of primary articles, fuel group and manufactured products registered a year-on-year increase of 12.0 per cent, 1.0 per cent and 6.6 per cent as on March 17, 2007 as against 3.7 per cent, 8.9 per cent and 1.7 per cent a year ago.
(c) inflation based on the consumer price index for industrial workers (CPI-IW), urban non-manual employees (CPI-UNME), agricultural labourers (CPI-AL) and rural labourers (CPI-RL) showed year-on-year increase to 7.6 per cent, 7.8 per cent, 9.8 per cent and 9.5 per cent in February 2007, respectively, from 5.0 per cent, 4.8 per cent and 5.0 per cent and 4.7 per cent, a year ago.
(d) The year-on-year growth in non-food bank credit of scheduled commercial banks (SCBs) was 29.5 per cent as on March 16, 2007 as against 32.7 per cent a year ago.
(e) The year-on-year growth in aggregate deposits of SCBs was 24.8 per cent as on March 16, 2007, over and above 18.0 per cent a year ago.
(f) The year-on-year money supply (M3) growth up to March 16, 2007 was 22.0 per cent as against 16.9 per cent a year ago.
(g) Continuation of accelerated external inflows has resulted in accretion of US $ 18.6 billion to the foreign exchange reserves, taking their level from US $ 179.1 billion at the end of January, 2007 to US $ 197.7 billion on March 23, 2007.
(h) Additional liquidity amounting to Rs.23,894 crore was absorbed under the market stabilisation scheme (MSS) during February 1 - March 30, 2007.
(i) Globally, the process of withdrawal of accommodation in monetary policy is being vigorously pursued. Since mid-February, 2007 among the leading central banks, the European Central Bank and the Bank of Japan have raised key policy rates by 25 basis points each, while the People’s Bank of China raised one year lending rates by 27 basis points and the reserve requirements by 50 basis points. There has been no change in the policy rates of the US Federal Reserve, the Bank of England, the Bank of Canada, the Reserve Bank of Australia and the Reserve Bank of New Zealand all of which had undertaken prior policy action.
In the light of the current macroeconomic, monetary and anticipated liquidity conditions, and with a view to containing inflation expectations, it is critical to take demonstrable and determined action on an urgent basis. Accordingly, the following monetary measures are being taken consistent with the stance of the monetary policy:
i) It has been decided to increase the fixed repo rate under the LAF by 25 basis points from 7.50 per cent to 7.75 per cent with immediate effect.
ii) The other arrangements regarding the operations of LAF announced on March 2, 2007 will continue until further notice.
iii) The policy of withdrawal of semi-durable and durable elements of liquidity through treasury bills and dated securities under MSS will continue. Accordingly, the Reserve Bank would, subject to variations in liquidity conditions, announce auctions of MSS covering issuances of treasury bills and dated securities on a weekly basis. The auction for Treasury bills under MSS would continue to take place by notifying the amounts under MSS every week along with the regular auction calendar as has been the existing practice. The Reserve Bank would retain the flexibility of reviewing the schedule of auctions under the MSS from time to time, in response to evolving circumstances.
iv) The cash reserve ratio (CRR) of scheduled commercial banks (SCBs), regional rural banks (RRBs), scheduled co-operative banks and scheduled primary (urban) co-operative banks is being increased by one-half of one percentage point of their net demand and time liabilities (NDTL) in two stages, effective from the fortnights indicated below:
Effective Date (i.e., the fortnight beginning from)CRR on net demand and time liabilities (per cent)
April 14, 2007 6.25%
April 28, 2007 6.50%
As a result of the above increase in the CRR, an amount of Rs.15,500 crore of resources of banks would be absorbed.v) The interest rate applicable on eligible CRR balances (i.e., the amount of reserves between the statutory minimum CRR and the CRR prescribed by the RBI) shall be reduced to 0.5 per cent per annum from the present 1.0 per cent per annum with effect from the fortnight beginning April 14, 2007.Active monitoring of macroeconomic, overall monetary and liquidity conditions will continue and all monetary policy actions would be considered in response to the evolving situation.

Abbott Dissolving Stent, Xience Product Show Promise

Abbott Laboratories' experimental heart stents may threaten the market dominance of Boston Scientific Corp. and Johnson & Johnson based on positive results from two studies released today.A new form of stent made by Abbott that dissolves in arteries after it's been implanted for about three years delivered a promising finding in its first human trial. Separately, Abbott's Xience, a permanent drug-coated stent marketed in Europe, was found superior to Boston Scientific's Taxus, the top U.S. seller, at keeping treated vessels open.
The findings, presented at a science meeting in New Orleans, position Xience at the front edge of new technology in the $5.4 billion-a-year drug-coated stent market, where devices seen as easier and safer to use are needed to help revive faltering sales. Patients getting Xience had fewer cardiac deaths, heart attacks and repeat procedures months later.
Xience patients ``were less likely to have blockages recur at eight months,'' said lead researcher Gregg Stone, director of cardiovascular research at Columbia University Medical Center, in an interview. ``What that means for the patient is better long-term outcomes without recurrent heart problems.''The results were presented at the annual meeting of the American College of Cardiology.

Stents are mesh tubes placed in arteries to keep them from re-closing after angioplasty, a procedure in which a balloon- tipped catheter is inflated to reopen a clogged blood vessel.

Coated Stents

Drug-coated stents release medicine to prevent scar-tissue formation. Boston Scientific and J&J's devices are made of polymer-covered metal and remain permanently in the vessel after the drug is gone. Bioabsorbable stents dissolve in about three years, leaving behind nothing but a healed blood vessel.

The dissolving devices are made from lactic acid molecules linked to form the stent, said John Ormiston, an investigator on the Abbott study and a researcher at Auckland City Hospital in New Zealand. Lactic acid is a chemical naturally produced when a person exercises. Other devices, including absorbable screws and stitches, are also made using lactic acid.

Sales have fallen for coated forms of the devices since European researchers last September tied them to formation of potentially deadly blood clots years after they were implanted.

The market for the devices peaked at $5.4 billion in 2006, below Wall Street's earlier expectations. The shares of Boston Scientific, based in Natick, Massachusetts, have fallen 36 percent in the past month to $15.22 as of yesterday in New York Stock Exchange composite trading. New Brunswick, New Jersey- based J&J shares are down 5 percent in the period to $60.51.

Some Skepticism

In the most recent studies, patients with the dissolving stents were followed for six months, while the Xience patients were monitored for nine months.Some doctors are skeptical about prospects for the dissolving stents.

``It's the devil you know versus the devil you don't,'' said William Maisel, a Harvard University heart specialist and chairman of a U.S. Food and Drug Administration advisory panel on heart devices, in a telephone interview. ``There's no replacing long-term follow-up.''

Positive results should help Xience gain market share in Europe, where the Abbott Park, Illinois-based company introduced it in October, said Phil Nalbone, an analyst at RBC Capital Markets Corp. in San Francisco in a March 21 note to investors. They also help lay groundwork for introduction of the device in the U.S., expected in the first half of 2008, he said.

Boston Scientific

Some analysts said a Xience advantage in the study would hurt Boston Scientific. When that company bought Guidant Corp. and Xience last year, it sold the vascular products division to Abbott and kept rights to use the technology in its own products.

As part of the agreement, though, Boston Scientific will market the Xience stent under a different name, Promus. Sales of that device may erode those of Taxus, which generates higher margins for that company, Nalbone wrote.

Boston Scientific's chief executive office, Paul LaViolette, said he sees the study as a win-win. ``There are two stents in that study, and we have them both,'' LaViolette said in a telephone interview.

Maisel's FDA advisory panel said in December that drug- coated stents, which have been on the market since 2003, could cause blood clots and fatal heart attacks years in one of every 200 patients after implantation. As a result, patients are being told by many physicians to take a blood thinner, such as Bristol-Myers Squibb Co.'s Plavix, for a year or more after they have a device implanted.

Dissolving Stents

Stents that dissolve after they've done their job have long been discussed as an option to the current use of permanent metal devices. The study announced today on Abbott's product is one of the earliest to show results.

In that study, Ormiston and Patrick Serruys of Erasmus Medical Center in Rotterdam followed 30 patients for six months and saw no blood clots. One patient needed a repeat procedure to reopen a vessel, and there were no deaths or heart attacks.

``The potential is to allow the patient's vessel to return to a more natural state without the permanent implantation of a mechanical structure,'' said James Capek, senior vice president of Abbott's vascular division, in a telephone interview.

Johnson & Johnson is working on a metal stent with a fully coating that will dissolve after the suppression drug has been delivered, leaving a bare-metal stent behind, company spokesman Chris Allman said.

Other competitors aren't convinced bioabsorbable stents will be safe.

Striking a Chord

``Some chord is struck with physicians who have the notion that the metallic implant seems unnatural and that it seems potentially desirable to have them go away,'' said Boston Scientific's LaViolette. ``It's an idea that has been interesting but always debated and always disappointing. The materials just never seem to be ideal.''Just the same, all stent manufacturers, including Boston Scientific, are pursuing bioabsorbable products, Maisel said.
``If it plays out that this is the way to go, they don't want to get caught with their pants down,'' he said. ``But they're not going to abandon developing metal stents.''


Stock market/Finance - Global Market turmoil

USA the world’s biggest and most liquid stockmarkets, and it has long been a cliché that when it sneezes the rest of the world catches a cold. But as other markets mature and capital moves more fluidly across the globe, the risk of infection spreading the other way grows.when shares dipped around the world after China’s stockmarket suffered its biggest drop in a decade (before rebounding somewhat on Wednesday). America saw its steepest points fall since the markets reopened after the terrorist attacks of September 11th 2001—and the end of its longest run without a 2% daily drop since the 1950s.
All eyes were on America on Wednesday. Shortly before the markets opened, the Bureau of Economic Analysis revised its estimates of fourth quarter GDP growth sharply downward, to 2.2% compared with a previous estimate of 3.5%. American traders shrugged off this bad news, however, and markets recovered slightly. By noon, the Dow Jones Industrial Average was up by over 50 points, while the NASDAQ and the S&P 500 had posted single-digit gains over the previous close. Shanghai also rebounded, but other markets in Asia were weak. European indices also lost ground, with the FTSE 100 giving up almost all the year’s gains by the end of day.
Tuesday's rout began when mainland China’s biggest market, in Shanghai, ended the day down almost 9%, as investors there became spooked that the authorities would clamp down on the irrational exuberance that has taken hold there in recent months. This triggered falls in Europe, where markets ended down by 2-3% (the FTSE Eurofirst 300 index fell by 2.86%). The Dow Jones Industrial Average dropped on its opening and continued to fall through the day, at one point plummeting more than 200 points in a couple of minutes.
There was much surprise that China could have had such an impact, despite its fast-growing influence on the world economy. In truth, it was merely one of several catalysts. Investors are becoming more worried about the state of America’s mortgage market—particularly “subprime” lending to less creditworthy borrowers—and the fast-proliferating derivatives linked to it; they were also unnerved by a warning from Alan Greenspan, former chairman of the Fed, that America could possibly be sliding towards recession; a fall in durable-goods orders added to broader economic concerns (though the latest consumer-confidence figures were good).
The resulting sell-off was nothing like the panic that gripped Wall Street on “Black Monday” in October 1987, when the Dow fell by 22.6% in one day. But it looked nasty compared with the long period of steadily rising share prices and low volatility that preceded it. Banks may be cutting their teams on the New York Stock Exchange’s trading floor, but activity was frenzied as volume soared to a record. The Dow ended the day down 416 points, or 3.3%, at 12,216.24. The Nasdaq Composite Index dropped 96.66, or 3.9%, to 2407.86, with 11 fallers for every gainer. It was its biggest percentage fall since December 2002. This sudden reassessment of risk sent investors flocking into ultra-safe Treasury bonds. The price of the benchmark shot up, pushing yields down to levels not seen since mid-December.
The worst point of the day was during a few mad minutes at around 3pm. The Dow, down by a little over 200 points at the time, suddenly plummeted by another couple of hundred points in less than a minute—a rate of decline that traders said was unprecedented. (It soon emerged that the suddenness of the fall was down to a delay in tabulating the index, itself caused by the massive volume of trading.) The Dow hit a low of 546 points below its starting point, before recovering somewhat.
The underlying fall may have been exacerbated by various factors. The NYSE runs a hybrid market: part “open outcry”, part electronic. There may have been a disconnect between the two bits, with traders on the floor reportedly struggling to keep up with computer orders. The popularity of exchange-traded funds—tradable baskets of stocks linked to an index—may also have played a part. Short-selling of these is thought to have added to the downward pressure during the day. Volatility, as measured by the VIX index, leapt by more than 60%, its biggest one-day rise since 1991.One concern is that the heavy wiring in the markets could not keep up with the rapid changes. Another is the rapid growth of derivatives. The problems in the subprime mortgage sector have focused attention on the slicing and dicing of risk using sophisticated instrument such as collateralised debt obligations and credit default swaps. Banks have used these to shed credit risk, but it is not clear where all that risk now lies. Financial shares were hit particularly hard on Tuesday, suggesting that nerves are starting to jangle over this uncertainty. Shares in Goldman Sachs, perhaps the smartest of the financial alchemists, ended down 6.6%. This was partly due to its Asian exposure (it owns a stake in a big Chinese bank).Now the bond market scam news just spreading & if the rumors are found to be true then no prize for guessing where the market is heading at least in the short term.

Indian Patent Law and the new turn

The legal challenge to India’s patent laws from Swiss drug giant Novartis has taken a knock with a crucial report that it is banking on being withdrawn by its authors. In an unprecedented move, R.A. Mashelkar, former director-general of the Council of Scientific and Industrial Research (CSIR), asked the government on 19 February to withdraw the report of the Technical Expert Group (TEG) that he had headed on account of “certain technical inaccuracies … that have inadvertently crept in”.
India’s chief boffin, who submitted the report before demitting office last December, offered his “unconditional apologies” to the government while taking full responsibility for “this unfortunate development”. Mashelkar has been accused by lawyers and health activists of pandering to the multinational drug lobby after Novartis submitted the TEG report to the Madras High Court on 15 February. Novartis is challenging a specific prohibition in the law, Section 3 (d), which restricts the grant of patents.
The Lawyers Collective, which is fighting the Novartis petition on behalf of the Cancer Patients Aid Association, had accused the TEG of lifting verbatim a paragraph from a 2006 report on limiting patentability by the Intellectual Property Institute (IPI), a UK-based think-tank that had submitted its position to the group. The Lawyers Collective pointed out that the report was authored by Shamnad Basheer, a doctoral student and an associate at the Oxford Intellectual Property Research Centre, University of Oxford, had been crowing on his website about his coup in getting the critical paragraph in the TEG report. They allege Basheer’s research was commissioned by the IPI and financially supported by Interpat, a Swiss association of major European, Japanese and US research-based drug companies committed to the improvement of intellectual property laws around the world.
Basheer had last month hailed the TEG’s recommendations, which support the contention of Novartis, as “a very sensible suggestion to me — not least because these conclusions were extracted from a report that I submitted to the committee”. Basheer had said it “flatters one to know that the extraction happened verbatim, though I would have been happier had the committee cited the source”.Mashelkar appears to have been left with little choice after the expose. However, his contention that he would submit a new report in three months after rectifying the errors, begs a question. Can a discredited committee be allowed to make a fresh submission without a new mandate? Top officials of the department of industrial policy and promotions (DIPP), which is looking at the report, were unavailable for comment. The government, meanwhile, is under pressure from the Indian drug industry to appoint a proper defence team to counter the challenge to its patent law.