Relian120m shares issued to promoters for US$3.6bn; Retain Buy

Reliance Industries (RIL) has issued 120m shares to its promoters at

Rs1,402/share. The shares were issued on the exercise of options attached to the

120m warrants issued preferentially to the promoters in April 2007. The promoters

had paid US$400m, 10% of the total consideration, in April 2007. The balance

US$3.2bn was to be paid on the issue of shares. We had already factored in

consequent equity dilution in our earnings and valuation. We retain Buy on RIL.

Promoters’ stake 42.4%; 54.99% including treasury shares

RIL’s outstanding shares are up to 1,574m shares. The promoter’s stake in RIL is

now up to 42.4% from 37.6% after issue of 120m shares. Another 12.6% of

treasury shares are controlled by RIL management and held for benefit of all

shareholders. Including treasury shares the stake controlled by promoters is up to

54.99% from 51.28% before issue of 120m shares.

0.1% stake sale prevents promoter’s stake rising to 55.07%

RIL’s quarterly share holding statement dated September 30, 2008 shows that

promoters have sold 1.26m shares, which is 0.1% of RIL’s equity. If promoters

had not sold their stake in RIL, their stake including treasury shares, would have

been up to 55.07% on the issue of the 120m shares.

SEBI requires open offer for 20% stake if it goes over 55%

The reason for the small stake sale in July-September 2008 appears to be to

prevent the promoter’s stake including treasury shares from rising to over 55%.

As per regulations of market regulator SEBI, an open offer to acquire another

20% needs to be made if stake rises over 55%.

Company Description

India's largest petchem and second largest refining

company, Reliance, owns a 660kbpd refinery. Along

with RPL, its total refining capacity would be

1.2mbpd by 2009. It also has a 900ktpa cracker,

1mtpa polyester, 1.9mtpa polymer and over 3mtpa

of fibre intermediate capacities. Refining contributes

55% to revenues with petchem contributing 43%.

The company has discovered gas with initial inplace

r eserves of over 40tcf on the East Coast.

Investment Thesis

Share price drivers are (1) two-year EPS CAGR of

45pct to FY10E, (2) large reserve accretion

potential, and (3) upside to valuation on

diversification into organized retail (valued at

Rs102/share) and SEZ (not valued). RIL's 2P

reserves and resources of 4.7bn boe are from

exploration of just 5pct of its Indian acreage. It is

embarking on a US$4bn exploration program of its

highly prospective acreage and we believe positive

news flow by way of more discoveries and reserve

a ccretion will continue.

Stock Data

Shares / GDR 2.00

P rice to Book Value 2.6x

Promoters stake in RIL up to 42.4%

120m shares issued to promoters

Exercise of 120m warrants issued to promoter in April 2007

On October 3, RIL issued a press release that 120m shares had been issued to

the promoters. These shares were issued on the exercise of options attached to

the 120m warrants issued preferentially to the promoters in April 2007. The last

date for exercise was in October 2008.

US$3.2bn paid now; US$400m paid in April 2007

Exercise price of Rs1,402/share is 20% discount to market price

The 120m shares were issued at a price Rs1,402/share, which is at 20% discount

to RIL’s closing market price of Rs1,750/share. The issue price was fixed at the

time of the issue of the warrants in line with guidelines of regulator SEBI for

preferential issue of shares.

Rs168bn (US$3.6bn) is the cost of 120m shares at Rs1,402/share. As required

by SEBI regulations Rs16.8bn (US$400m), which is 10% of the amount, was

already paid on the allotment of warrants in April 2007. The balance Rs151bn

(US$3.2bn) must have been paid now when the 120m shares were issued.

8.3% equity dilution; outstanding shares up to 1,574m

Dilution already reflected in our forecast

Following the issue of 120m shares RIL's outstanding shares are up by 8.3% to

1,574m. We are already assuming outstanding shares rising to 1,574m in our

earnings forecast.

Promoter’s stake up to 42.4% from 37.6%

RIL management also controls treasury shares, which is 12.6% of equity

The promoter’s equity stake in RIL is now up to 42.4% from 37.6% with the issue

of 120m shares. The RIL management also controls another 199m shares, which

are treasury shares created at the time of merger of erstwhile Reliance Petroleum

(RPL) and IPCL with RIL. These 199m treasury shares are 12.6% of RIL’s equity.Ltd.

Promoters’ stake including treasury shares is 54.99%

Promoters’ stake including treasury shares up from 51.28%

The treasury shares are held by the RIL management for the benefit of all

shareholders of RIL. Including 12.6% of treasury shares the stake controlled by

promoters is up to 54.99% from 51.28% before issue of 120m shares on

October 3, 2008.

Promoters sold 1.26m shares (just 0.1%) in Jul-Sept'08

RIL’s quarterly share holding statement dated September 30, 2008 shows that

promoters have sold 1.26m shares. The promoters’ stake has consequently

declined from 37.7% as of June 30, 2008 to 37.6% as of September 2008. The

promoters thus sold 0.1% of RIL’s equity in July-September 2008.

Stake sale helped keep stake including treasury below 55%

Promoters’ stake including treasury shares 55.07% if not for stake sale

If the promoters had not sold their stake in RIL, their stake including treasury

shares, would have been up to 55.07% on issue of 120m shares. The 0.1% stake

sale in July-September 2008 helped keep promoters’ stake including treasury

shares at 54.99% on exercise of 120m warrants.

SEBI regulations - open offer for 20% if stake over 55%

Small stake sale appears to be to prevent open offer for 20% stake

As per SEBI (Substantial Acquisition of Shares and Takeovers) Regulations,

1997 open offer to acquire another 20% equity stake needs to be made if stake

rises over 55%.

The reason for the small stake sale in July-September 2008 thus appears to be to

prevent promoter’s stake including treasury shares from rising to over 55%. The

issue of 120m shares against warrants would have taken the promoters’ stake

including treasury shares over 55%. It would have required the promoters to

make open offer to acquire another 20% stake from minority shareholders.

Thus the small stake sale appears to have been done to ensure promoters' stake

remains below 55% and thereby no open offer has to be made for additional 20%

stake.

Press reports indicating 6.6% promoter stake sale incorrect

Stake held by subsidiaries in RIL reclassified as held by “others”

Some press reports suggest that promoters' holding in RIL has dropped from

51.37% as reported on June 30, 2008 to 44.8% as reported on Sept 30, 2008.

This suggests promoters have offloaded 6.6% stake in RIL. However this is

entirely incorrect.

RIL group companies, which held 6.5% stake in RIL, have now become its

subsidiaries. These group companies held shares in erstwhile RPL and IPCL and

got RIL shares in lieu of RPL and IPCL shares when they were merged with RIL.

In case of group companies holding RPL shares before merger, RIL held

optionally fully convertible debentures. These debentures appear to have been

converted thereby making these companies RIL’s subsidiaries.

The stake held in RIL by the group companies was being classified as promoters'

stake until June 2008. It has been shown as shares held by "Others" in

shareholding pattern as of September 2008. It has been specified as "Shares

held by Subsidiary Companies on which no voting rights are exercisable" in the

September 2008 shareholding pattern on BSE website.

We retain Buy on RIL

2-year EPS CAGR of 40%; attractive valuation

We expect 2-year EPS CAGR in FY08-FY10E) to be 40%. RIL has one of the

strongest earnings growth in our global universe. KG D6 oil and gas (0.6m boepd

of output at peak) and RPL refinery (0.58m bpd) will be main earnings drivers.

RIL’s valuation is compelling now at 8.5x on FY10E EPS and PEG of 0.21x.

Positive news flow on E&P to continue

Positive news flow on E&P in terms of discoveries and reserves accretion is likely

to continue. RIL is scheduled to drill in at least 3 highly prospective blocks (KG

D6, KG D9 and Mahanadi D4) in the next 12 months.

Strong growth prospects beyond FY10E, too

We believe RIL has strong growth prospects even beyond FY10E. Prospects

beyond FY10E will be driven by (i) 2 large petrochemical projects (ii) rise in gas

reserves and production (iii) organized retail (iv) SEZ

Some main risks also appear to be receding

There are indications that some of the main risks like no tax holiday for gas

production and windfall tax are receding.

We retain Buy on RIL.

Price objective basis & risk

Reliance Inds (XRELF / RLNIY)

Our PO of Rs2,910 (GDR US$149.23) is based on an SOTP valuation. The value

of the core refining and petrochemical business has been calculated on DCF

using WACC of 11.8pct. The value of its investment in Reliance Petroleum (RPL)

is calculated by applying the DCF value of RPL to RIL's holding in RPL. We have

a scenario-based valuation approach for valuing stake in RPL, with equal

weighting being given to each of the four scenarios assumed. Oil and gas

reserves and resources, as well as its retail business, are also valued on a DCF

basis. Refining and marketing, including investment in RPL, is 31pct of PO, E&P

valuation (Rs1,397) 48pct, petrochemicals 18pct and organized retail 4pct. At our

PO FY09E PE is 25.2x, which may appear expensive. However, RIL offers 40pct

EPS CAGR during FY08E-10E, which is far higher than peers. It is the cheapest

among its peer group on a PEG basis. Risks are (1) Decline in refining and

petrochemical margins being steeper than expected, (2) huge disappointments on

the E&P front as we have valued even resources and exploration upside,

(3) failure in the retail business, and (4) changes in government policies (eg,

withdrawal of the tax holiday) which may have a direct impact on the business,

cashflow and profit.

Analyst Certification

I, Vidyadhar Ginde, hereby certify that the views expressed in this research report

accurately reflect my personal views about the subject securities and issuers.

I also certify that no part of my compensation was, is, or will be, directly or

indirectly, related to the specific recommendations or view expressed in this

research report.

Special Disclosures

In accordance with the SEBI (Foreign Institutional Investors) Regulations and with

guidelines issued by the Securities and Exchange Board of India (SEBI), foreign

investors (individuals as well as institutional) that wish to transact the common

stock of Indian companies must have applied to, and have been approved by

SEBI and the Reserve Bank of India (RBI). Each investor who transacts common

stock of Indian companies will be required to certify approval as a foreign

institutional investor or as a sub-account of a foreign institutional investor by SEBI

and RBI. Certain other entities are also entitled to transact common stock of

Indian companies under the Indian laws relating to investment by foreigners.

Merrill Lynch reserves the right to refuse copy of research on common stock of

Indian companies to a person not resident in India. American Depositary Receipts

(ADR) representing such common stock are not subject to these Indian law

restrictions and may be transacted by investors in accordance with the applicable

laws of the relevant jurisdiction. Global Depository Receipts (GDR) and the

Global Depository Shares of Indian companies, Indian limited liability

corporations, have not been registered under the U.S. Securities Act of 1933, as

amended, and may only be transacted by persons in the United States who are

Qualified Institutional Buyers (QIBs) within the meaning of Rule 144A under the

Securities Act. Accordingly, no copy of any research report on Indian companies'

GDRs will be made available to persons who are not QIBs.

In what signals a major shift in the oil and gas business strategy of Reliance Industries Ltd (Ltd), the country’s largest private sector company has decided to focus more on overseas acquisitions instead of developing fresh domestic exploration blocks.
“The shift in RIL’s strategy will bring better balance to its oil and gas portfolio. We plan to do some value buying that can bring synergies to the rest of our oil and gas business,” RIL president & chief executive officer (oil & gas) PMS Prasad told FE.
At present, RIL has 40 exploration blocks in India, won under various New Exploration Licensing Policy (Nelp) rounds, besides 15 blocks overseas in seven countries: Peru, Australia, Iraq, Yemen, East Timor, Oman and Columbia.
Prasad explained that up until now, RIL was averse to acquisitions and had concentrated largely on its exploration assets. As these projects come on stream—as in the case of the Krishna-Godavari basin D6 block—RIL will be looking to acquire some major proven and producing assets, which could also include mid-size exploration & production companies.
Production from RIL’s offshore D6 block on the east coast will change the country’s whole energy scenario, as its output of 550,000 barrels of oil and oil equivalent by 2010 will account for 40% of India’s entire production of hydrocarbons. In monetary terms, this production at current prices would earn RIL Rs 86,000 crore.
   
However, while attractive global destinations are Russia, West Africa and Central Asia, RIL has decided to scout for assets in Latin America, the Middle East and the Far East.
Latin America is clearly a major investment destination for RIL. “Heavy oil (found in Latin America) is good for our refineries. So, we will focus on good properties there,” Prasad said.
The shift in RIL’s oil and gas business strategy is also evident from the manner in which it bid under the recent Nelp-VII round. From being an aggressive bidder in previous rounds, RIL was seen submitting bids selectively under the last round. Of the 57 exploration blocks on offer, RIL bid for only two deep-water blocks (with British Petroleum), one shallow water and four on-land blocks. It was awarded only one deep-water block under that round.
Reliance recently teamed up with state-owned China National Petroleum Corporation (CNPC) and bagged a gas block in Peru. RIL’s overseas arm— Reliance Exploration & Production DMCC—along with CNPC and Argentina’s Grupo Pluspetrol also recently won rights to prospect for gas in Block 155 in the southern highland province of Puno, along Peru’s border with Bolivia.
On June 29, RIL acquired a 10% stake in another exploration block, Lot 39, in northern Peru from Burlington Resources Inc. In May, it had teamed up with Woodside Petroleum to acquire 50% in Pluspetrol Energy SA’s Block 108 in Peru. Of that stake, Reliance received 30%, while Woodside received 20%. Pluspetrol Energy will retain the remaining 50%.
RIL also acquired a 90% stake in Block 141 in Peru from Pan Andean Resources Plc in April this year. Besides Peru, Reliance has one block in the Bonaparte Basin of Western Australia, two blocks in Iraq, three in Yemen, one in East Timor and two each in Oman and Columbia.
Prasad, however, clarified that the shift in RIL’s focus towards acquiring proven and producing oil and gas properties did not mean the company would stop looking at exploration blocks. “We will continue to look at exploration blocks, but selectively—only those which are lucrative and can bring some value addition,” he said

Read Full Story on Financial Express

This is a race against time to prevent a global financial collapse, and on Tuesday, the clock was ticking louder than ever. Markets went into a tumble — with Wall Street slumping more than 4%, its worst loss since the immediate aftermath of 9/11, seven years ago. Policymakers went into a huddle. And investment bankers gathered in droves — on social networking sites and at offline watering holes — to rage against the seismic change in their fortunes from ‘masters of the universe’ (to quote bestselling author Tom Wolfe) to a tribe living in fear of the pink slip.
   Already shaken by the bankruptcy of Lehman Brothers and the sale of Merrill Lynch, markets tanked further as major credit rating agencies downgraded US’ largest insurer American International Group (AIG), leaving it fighting for survival. The company, whose stock plummeted 61% to $4.76 in New York on Monday, is such a big player in insuring risk for institutions around the world that the prospect of it going under raised fears of a cross-border meltdown.The London and Tokyo markets tumbled more than 4% on Tuesday, hitting their lowest levels for more than three years.
   Central banks hit back,
with the Federal Reserve, European Central Bank, Bank of England and Bank of Japan together injecting $210bn into money markets. But the Fed stunned the market by holding interest rates steady, dashing rate cut hopes and sending the Dow sliding again. The Dow had earlier steadied on hopes that the government would bail out AIG and that Barclays would buy some US assets of Lehman.
   In India, AIG has two insurance joint ventures with the Tatas — Tata-AIG — one for life and another for general. IRDA on Tuesday said according to accounts on March 31, 2008, both companies ‘‘have satisfactory solvency margins which are adequate to meet their liabilities’’, but following the US crisis, it has asked them to submit reports.
   The fear of a global slowdown drove oil prices to below $90 a barrel, down almost 40% from the record high of above $147 per barrel in July. Unfortunately, the declining rupee means this benefit is unlikely to reach consumers.
   The rupee seems to have gone into free fall, all but touching 47 in the course of the day. It posted its
   sharpest fall in a
   decade on Tuesday, closing another 82 paise lower against the dollar, at 46.88, after touching a low of 46.99. RBI late Tuesday evening issued a statement saying it ‘‘stands ready to take such pre-emptive action as may be necessary to contain excess volatility in the domestic financial markets’’. It vowed it would continue to sell dollars and intervene directly in the forex market even as it announced a slew of measures like increasing interest rates on foreign currency deposits.
    A finance ministry official was quoted as saying the US crisis could impact FII inflows. There are other indications that the American storm could rain on India Inc’s parade. ICICI Bank is in danger of taking a Rs 375-crore hit due to Lehman Brothers going bankrupt. Banking sources claimed SBI and PNB had also suffered losses, though the banks did not confirm this.
   With Lehman, Merrill Lynch and AIG having substantial exposures to real estate in India, realty companies might find themselves even more cash-strapped. With some large projects at risk of being put on hold, a price correction might be seen in some major Indian cities.

GLOBAL WARNING


   Dow drops over 500 points on Monday night, steadies on hopes of a govt bailout of AIG, then plunges as Fed keeps rates steady
   IRDA asks Tata AIG ventures to submit reports about solvency. Policy-holders seem to be safe for now
   Rupee drops to 46.88 against $. RBI says it’s ready to do whatever it takes to stem fall
   Crude prices drop below $90/barrel, but Re decline makes oil price cut unlikely
   Real estate firms could struggle to raise cash. Price correction may be on cards

India Inc's growth story got a further jolt on Tuesday, with business sentiment and investment climate set to take a big knock in the wake of the financial turmoil in US. After the US financial market turned upside down on Monday, with Lehman Brothers filing for bankruptcy, AIG scurrying to find fund to stay afloat and Merrill Lynch being sold out to Bank of America, the implications of the crisis were still sinking in here.
   As a direct impact of the US meltdown, the access to funds for domestic companies across sectors will get adversely affected, while plans to raise capital through initial public offering as well as foreign exchange debt will be put on the back burner.
   "The impact of the US financial markets has a direct co-relation to our banking system. Therefore, liquidity, growth rate, appetite for risk and ability to borrow in India will all be impacted. In US, there will be a liquidity crunch, risk aversion and cross border transaction. This would have a definite, though short term, impact on business and financial sectors with demand for investment, flows and investment confidence hitting a low," Ficci president Rajeev Chandrasekhar told TOI.
   "While the business sentiment here has on a low for a while, the fears of a slowdown got accelerated today further. Across all sectors, access to liquidity has been significantly impacted by the ongoing financial crisis. This will affect growth plans of corporates, business investment, jobs, real estate and economic growth," added Sujay Shetty financial advisory services, PricewaterhouseCoopers India.
   Sectors likely to be hit hard on account of lack of funds are power, infrastructure and real estate, which were planning huge expansion projects, banking experts said. "In the short-term, capital will become scarce. It will slow down expansion and acquisition by India Inc," said Ravi Sardana, senior V-P, ICICI-Securities India.
   Also, the days of big-ticket acquisitions for India Inc are over for some time. India Inc, which had been on an acquisition spree over the last couple of years, may find it difficult to go in for organic growth. Most companies said that they would adopt a wait-and-watch strategy going forward. According to Future group chairman Kishore Biyani "We will only go in for acquisitions which make sense and present a good opportunity."
   Glenmark Pharma director finance Rajesh Desai said: "Even though the pharma industry is relatively recession proof and valuations will be more reasonable, going forward, I think the global liquidity crunch will put pressure on big ticket acquisitions. However with valuations becoming more reasonable, I think Indian companies will continue to look out for smaller companies or niche acquisitions depending on their strategy.
   To add to the woes, the rupee ended at a twoyear low of 46.89 against the dollar on concerns of asset outflows from the equity markets in emerging economies on Tuesday. Companies, which have borrowed in dollars will find it challenging to service their debt, with their interest payments rising substantially, putting further pressure on their profitability.

The fate of Tata group's foreign insurance partner American International Group's India operations hangs in balance with its US-based parent body — the world's largest insurer — itself looking for protection cover.
   AIG has stated that it would sell its assets to raise $20 billion but its survival depends on additional funding. This, however, is difficult to come by thanks to the raging global financial crisis. It remains to be seen whether India would be a part of this sale process. AIG first entered India through its private equity business 15 years ago, followed by insurance in 2001 and later expanded into asset management, software development, consumer finance and real estate fund.
   It holds controlling interest in most of its businesses except insurance, where it is a minority stakeholder with 26%. The Tata group holds 74% each in the life and non-life insurance venture.
   Unlike AIG officials, Tata AIG executives seem to be unfazed, despite the churning at AIG's global headquarters. This is because, a Tata-AIG executive says, of the strong support of the Tata group.
   In a similar but unrelated development, the Tata group had bought out its foreign partner T D Waterhouse's stake in the securities venture in the early 2000s when the financial group decided to concentrate on its main markets and not India. 

   Tata AIG Life and Tata AIG General Insurance--both regulated by IRDA--are well capitalized and completely solvent, said a market source. The insurance venture is AIG India's biggest business. The solvency margin, which stands at 150%, determines the insurer's ability to pay claims.
   If additional capital is required to maintain the solvency margin and AIG is not in a position to meet it, then the Indian venture could see a change in structure. Also it would be interesting to see what stand AIG would take if FDI were increased to 49%.
   AIG also has a JV with National Housing Bank, International Finance Corporation and Asian Development Bank to set up a mortgage guarantee company and has even applied to the RBI for the same. Industry sources said expansion across various business segments, including future of the mortgage guarantee firm, would depend on AIG getting a financial aid. AIG group employs 11,500 people, including its Chennai-based BPO outfit. AIG's PE fund has made investments of $700-750 million, while AIG Global Real Estate has invested close to $250 million in India.

Are you a software professional...       then you have to know the current Software industry position........in India.....

THE STRENGTHENING of rupee, imminent recession in US, sub prime mortgagee crisis in US and its worldwide coupling effect - it seems that everything is going against Indian software industry. On one side, due to slowdown in US economy and effect of sub prime crisis in US as well as in Europe, search of new clients and increasing the contracted rates are becoming tough for software companies and on the other side, whatever income realization these companies are getting, the strong rupee has eaten it by more than 10 per cent.

Indian software companies are taking tough decisions in tough business environment for survival in this difficult time. The decisions are ranging from mild wage cut to as stiff as axing from job. On January 30, India's largest software company Tata Consultancy Company (TCS) has announced to cut the variable component of its employee and on an average, the cut will affect the employee's salary by anywhere between 1.5 – two per cent less this month and onwards. Though 1.5 – two per cent cut does not look very huge in the industry, which is suffering, but getting less salary is certainly pinching the employee. But it appears that the company may not have any other choice keeping in view that they have maintained the same level of salary despite appreciation of rupee since last one year. It is also correct that if a company's stake holder and shareholder are facing lower returns (in the form of depreciated value of the company share), then some brunt should also be borne by the employee.

It is not that only employees of Indian software companies are in tough water, yesterday news has come that International Business Machines (IBM - the multinational software giant) is also trimming its payroll list. An estimated 700 fresher employees have been given the 'pink slip' (an American practice of retrenching people when notice of termination is given on a pink paper and wrapped in an envelope). Most of such employees are Entry Level Trainee Programmers (ELTPs). IBM is claiming that the layoff is based on the performance of the employee but sudden retrenchment, it seems, is an after effect of the poor performance of its India operations. It may be learnt that IBM does not have its own developed software as companies like TCS or Infosys do. Rather IBM provides complete software (for the software of TCS or Infosys or I-flex companies etc) solution package and it is something like contract services. So naturally, if the software companies will be affected then IBM performance also will be affected.

The hiring spree of the software companies is also at low ebb. It may be evident by the less number of recruitment advertisements appearing in the newspapers. Already so many software companies are suffering due to increasing number of attrition.

Though big companies are managing their profit during the year by hedging their overseas income through forward contract, the real acid test is for small and medium-sized companies who do not have a big established full-fledged treasury department. The small companies are really facing the worst time, as going for search of new customers and new currency (Euro) in Europe would be a tough task owing to wide spread sub prime crisis effect.

The share prices of all Indian software companies are at the lowest level in the near past. This shows that even Dalal Street is also not coming to rescue with software companies in tough times. Once a blue-eyed boy of Dalal Street, Infosys is showing lowered strength in each session of trading at the bourses. Most of the software companies are trading at year-low prices. 

Reserve bank of India Governor Dr. Yaga Venugopal Reddy had reviewed the market changes in the last few days and announced interest rates will be unchanged that be rewarded as “Standstill policy”. Cash ratio and CRR repo and reverse repo rates and bank rates will be changed in the upcoming days. Reserve repo at 6% and CRR at 7.5 % and the inflation target for 07-08 also remain at 4 to 4.5 % levels and 3% in medium terms. For maintaining the price stability RBI keep it self away from hawkish stance and second quarter credit policy unveiled on Tuesday. GDP forecast has reached at 8.5%. The repurchase rate was held at 7.75 percent, the Reserve Bank of India said in a statement in Mumbai today. The Reserve Bank of India left its reverse repurchase rate, or the overnight borrowing rate, at 6 percent and the cash reserve ratio, or the proportion of deposits banks must hold as reserves, at 7.5 percent. Reddy makes the decision himself after consulting with senior central bank officials.

NEW DELHI (Reuters) - Finance Minister Palaniappan Chidambaram said on Tuesday the Reserve Bank of India’s decision to leave all interest rates unchanged at a review marked a "standstill" policy that could be calibrated later to meet global developments.

Chidambaram said the government would discuss with the RBI further policy actions that could be taken at the next review in April.

"Developments in global financial markets in the context of the subprime crisis would warrant more intensified monitoring and swift responses with all available instruments to preserve and maintain macroeconomic and financial stability," the RBI official statement .

Downfall in the interest rates in US makes the Indian market to complicate the monetary and currency management by Indian rupees and exports rise. So there are some restrictions are necessary in the the context of the management of volatile and large movements in capital flow.

Apart from monitoring forex flows , market sources not ruled out forex flows and reversal on global sentiment. RBI governor warned banks for not lowering interest rates despite of easy easy liquidity conditions and the fact that credit has moderated.

“Usually most banks see hardening of rates in the last quarter (Jan-Mach) of the year, but the fact that it has not happened this year means that banks have taken into account the liquidity positions. RBI’s response is a measured one given the uncertainties in the global. It has to take note of inflation but at the same time it also has to keep liquidity in mind. Most banks will watch their liquidity positions in the February-March timeframe and go in for interest rate re-structuring only in the next quarter,” said Chanda Kochhar, Joint Managing Director, ICICI Bank.

The rupee stood at 39.39/40 per dollar, holding steady after the Indian central bank's decision, while the yield on the 10-year benchmark bond rose 2 basis points to 7.52 per cent.

Given the RBI’s decision to leave the rates untouched on Tuesday, the interest rate differential between India and the United States widened to 4.25 percentage points, its widest in three years, after the Fed slashed the fed funds rate last week. The Fed is also expected to make a further cut in rates on Wednesday.