Financial Express: Markets near the BOTTOM

Financial Express today reported that, markets are near bottom according Volatility Index (VIX) movement. According to FE reports, the VIX, has eased off to around 40%, from a stratospheric 90%, as the year draws to a close. This is the most significant indicator of calm returning to equity markets.

To get a feel of the change, compare what happened within hours of the collapse of Lehman Brothers on September 15: the Vix climbed to a nervous 63% within the day. As panic set in in US, EU and UK markets, the domestic Vix remained consistently above 60% and, even until last month, remained at an anxious over 80%. The Vix coming down to 40% levels does indicate that things will remain stable. A Vix above 70% depicts fear and panic in the market.

The market usually bottoms out when the Vix reaches about 30% The levels have been pegged at 9,300 for the BSE Sensex and 2,700 for the broader NSE Nifty.

Courtesy:
Financial Express

Condition of Indian Infrastructure

These below facts are from an article CREAKING & GROANING from THE ECONOMIST:

1. 1,000 Indian children die of diarrhoeal sickness every day

2. Ganga river contains 60,000 faecal coliform bacteria per 100 millilitres, 120 times more than is considered safe for bathing.

3. An estimated 700m Indians have no access to a proper toilet.

4. It takes an average of 21 days to clear import cargo in India; in Singapore it takes three. The Jawaharlal Nehru Port Trust in Mumbai, which handles 60% of India’s container traffic, has berths for nine cargo vessels; Singapore’s main port can handle 40.

5. India’s 3.3m km road network is the world’s second-biggest, but most of it is pitiful.

6. 8,000km, are dual carriageways, where as China by 2007 had some 53,600km of highways with four lanes or more.

7. Last year 130,000 people died on India’s roads, 60% more than in China, which has four times as many cars.

8. An even bigger worry is India’s shortage of power. Last year peak demand outstripped supply by almost 15%.

9. According to the World Bank, 9% of potential industrial output in India is lost to power cuts. Some 600m Indians have no mains electricity at all.

10. In 2001 only 65% of the population was literate, optimistically defined, compared with 90% in China.

11. Half of ten-year-olds could not read to the basic standard expected of six-year-olds. Over 60% could not do simple division. One reason is that, according to a World Bank study, only half of Indian teachers show up to work. Half of Indian children leave school by the age of 14.

Swaminathan's Article in TOI:IPI gas pipeline, RIP

Hi guys, I am back with a gap of 2-3 days due to so called exams and more over, I wasn't feeling well, I mean still not fully recovered, but somewhat okay now...

Here is article by Mr. Swaminathan in TOI about Iran-Pakistan-India gas pipeline. He has analyzed from present scenario, safety/insurance problem, political angle, leftists' view of foreign policy (means blindly going against US), the possible alternate solution...

The Iran-Pakistan-India (IPI) gas pipeline has been discussed for almost a decade, with its proponents arguing that it will promote our energy
security. After 26/11, the project is dead. No Indian government can proceed with a deal that will give Pakistan a knife at India's energy throat. Far from promoting our energy security, it would be a source of immense national insecurity.

Just suppose the pipeline was complete and functioning today. The pipeline contract would have required Pakistan to ensure the safety of supplies. But Baluch insurgents have been bowing up gas pipelines in Pakistan for ages, so Islamabad could easily connive in the blowing up of the India section of the pipeline, claiming it did not control non-state actors, and indeed is opposed to them. Just as it did after 26/11, Pakistan could claim that it was itself a victim of sabotage, that India must not indulge in finger pointing, and that Islamabad would investigate the incident provided India provided enough evidence!

Wouldn't a pipeline deal include insurance against disruption of gas supplies? Well, maybe some brave global insurance company would come forward initially, but it would surely have charged premiums so hefty as to undercut the entire economic rationale of the pipeline, which was supposed to be cheaper than the alternative, which is supply through tankers carrying liquefied natural gas from Iran. Besides, insurance contracts have "force majeure" clauses protecting the insurance company from liability in the event of war or civil conflict. So, the IPI pipeline would be an insecure project.

Why then have so many politicians and ideologues been canvassing the IPI pipeline with such vigour and passion? For two reasons. One, some naïve, optimistic politicians view India and Pakistan as natural partners separated by unwarranted mistrust, and they saw the pipeline as a way of building economic linkages, trust and friendship. Second, the entire left saw the pipeline as a way of spitting in the face of the US, and asserting India's independence in foreign policy.

The US opposed the pipeline on the ground that it would strengthen Iran's economy and enable that country to escape some of the economic sanctions penalties that the US has sought to impose on it. When India went slow on the IPI pipeline after the Bush-Manmohan Singh agreement of 2005, the left was livid at what it saw it as a foreign policy surrender of a junior partner in an unequal relationship. So obsessed was the Left with the need to combat US imperialism that it failed to see the threat that the pipeline would strengthen Pakistan.

At the time, most analysts agreed that the risk of an Indo-Pak war was remote. In the absence of war, many analysts felt that Pakistan was unlikely to cut the pipeline, for commercial and foreign policy reasons.

This analysis ignored risks involved in conflict at levels lower. Both countries have become nuclear powers, so open warfare is virtually impossible. For that very reason, each country needs to focus on strategies and pressure points other than war, which can be used as bargaining counters or for covert retaliation. So, the pipeline in its current form must be viewed as dead. Yet the fact remains that India will need massive gas imports in the future. Iran is not a reliable supplier-it reneged on an earlier low-cost LNG deal with India, so we must find alternative suppliers. Yet Iran is too big to be totally ignored.

So let's consider a different sort of pipeline. This will be a shallow offshore pipeline taking gas from Iran to the maritime boundary between India and Pakistan off Kutch. At this point, the pipeline can divide into two, with one section going north to Pakistan and the other going west to Kutch. Any sabotage of the main pipeline will hit Pakistan as badly as India -it will mean mutually assured destruction (MAD) of gas supply. The section going to each country from the maritime boundary will be in the territory of that country, under its own control.

In the Cold War, MAD was the basis of global security. By analogy, India and Pakistan need a MAD pipeline for security. Neither side will be able to hurt the other without hurting itself.

Banks reluctant to Corporate Lending

As we all in this financial crisis central bank RBI is trying all its cards (REPO/REVERSE REPO/SLR/CRR) for easing the liquidity problem after the international credit crunch happened. To help that inflation is also coming down due to recession in almost all developed world & developing countries.

But still Banks are reluctant to lend to even good rated corporates due many reasons like default risk, safer & better returns through REVERSE REPO & GOVERNMENT BONDS.

According recent RBI data, banks parked Rs 2.8 lakh crore in reverse repo. This is more than10% of the total non food credit made available by the banking sector to industry in 2008. In addition, the stock of money held as government paper has also ballooned by 400% between October and November to Rs 93,000 crore. As the inflation rate declines, the attraction of this avenue will increase further.

Due to this for the week ended November 30, it shows that commercial paper— short-term corporate borrowings with a maturity of less than one year—has been raised at rates in the 9.0-15.5% band. The lower end is less than the best rates offered by Indian banks to industry, which is close to 10% (the prime lendingrateis12.75-13.5%).Naturally, long-term debt paper floated by corporate India is available at even lower rates.

This unusual situation can be attributed to banks’ reluctance to lend to companies, post September. Matters have been made worse as RBI too has been unable to provoke them into lowering rates sufficiently. At present, the reverse repo rate is 5%, just below the rates available for government paper.This implies that banks can safely park their deposits with RBI or buy treasury paper to safe guard income.

Bottom Line:

Thats why RBI needs to lower the REPO & REVERSE REPO rate at least 50-100 basis points by looking at other conditions.

Source:
Financial express

Review of half year economic condition

Here is critical review from finance ministry of our economic conditions...





Source...
mint

Government needs RB I to loosen up (FE EDITORIAL)

T HE government tabledthemid-year review of the economy in Par its liament on Tuesday. By standards of government reports, the re view is quite honest. The most honest admission is that the government will not meet its fiscal targets this year. This was widely known and not news. But the government saying it in Parliament still matters. Worries about this are being tempered by the need for economic stimuli. This is a debate that will go into next year. What one isn’t sure of is whether the government has learnt the lesson: build a surplus or lower deficit in good times. The growth projection of 7% seems honest and reasonable enough, even if it is at the upper end of the forecasts made by independent analysts. Importantly, the government has taken note of the worldwide decline in commodity prices and has predicted that inflation will return to normal levels by March. But the review could have avoided making the useless distinction between being directly and indirectly hit by the global financial crisis.

Policy prescriptions to be gleaned from the review? All macroecnomic data calls for further lowering of interest rates. If growth is slowing, inflation is heading towards normal and fiscal policy is a constraint, then monetary policy must step in big time. Also, if banks and other corporate institutions are not facing insolvency or big bad asset problems, but are affected instead by factors like confidence and risk-averseness, lowering of rates substantially may stimulate both borrowing and lending. According to a report in The Indian Express on Tuesday, RBI, in the best conservative tradition of central banks, is reluctant to lower rates. Even the earlier cut in the repo rate to 6.5% and reverse repo to 5% earlier in December were apparently difficult decisions. The government is pressing RBI to cut rates more steeply, by 200 basis points or so. Current evidence suggests that banks continue to place a large amount of money with RBI as reverse repo remains attractive. This attraction should go. The economy desperately needs a kickstart and the interest rate policy has enough room for manouevre. RBI’s dithering in late 2008 could come at a high cost to the economy in 2009.

How the FED feeds India

Today when I was browsing through the papers I saw this article from Bhattacharya Saugata. Where in he has given the interlinkage between two countries in this globalised era. How a developed country's operations can hamper a country like ours... I am just providing the 2 paragraphs that article...

The Federal Reserve’s balance sheet operations will impact India’s growth prospects A fall of 20 percentage points in export growth in 2008-09 means a drop of Rs 2 lakh crore in potential income, far beyond anything that our stimulus packages envision
This last week, the US Federal Reserve cut its target rate more than expected to an unprecedented level close to zero. A few days later, the Bank of Japan sought to move in tandem and go on to Act 2 of its nineties’ quantitative easing (QE). What were the motives, why a shift in stance now, and what will be the consequences?

It might seem an academic exercise to analyse the Federal Reserve’s monetary policy actions last week, but it is not. It will have a deep impact on India’s economic future in the next year, even more than the measures now being taken by India’s policy authorities. Calculation shows that India’s exposure to global markets (exports of goods and services) in 2007-08 was $223 billion (or about Rs 11 lakh crore; India’s GDP was Rs 47 lakh crore, for reference). A fall of 20 percentage points in exports growth in 2008-09 means a drop of Rs 2 lakh crore in potential income, far beyond anything that our stimulus packages envision.

Bottom line:

By this we can say that no country can say that it is decoupled from the rest of the world at least at the time crisis!!!

Infrastructure is India’s biggest handicap

I got this article from economist.com.... Very good article with great facts & figures.. Have look at them..

TO KNOW why 1,000 Indian children die of diarrhoeal sickness every day, take a wary stroll along the Ganges in Varanasi. As it enters the city, Hinduism’s sacred river contains 60,000 faecal coliform bacteria per 100 millilitres, 120 times more than is considered safe for bathing. Four miles downstream, with inputs from 24 gushing sewers and 60,000 pilgrim-bathers, the concentration is 3,000 times over the safety limit. In places, the Ganges becomes black and septic. Corpses, of semi-cremated adults or enshrouded babies, drift slowly by.

India’s sanitation is execrable. By one estimate, only 13% of the sewage its 1.1 billion people produce is treated. An estimated 700m Indians have no access to a proper toilet. Water-borne diseases caused by poor sanitation are a big reason why India’s children are so malnourished. This might sound familiar. Almost a century ago Mohandas Gandhi disparaged a book about India by Katherine Mayo, an American novelist, as a “drain-inspector’s report”. India needs to follow a simple mantra: “Fewer inspectors, more drains”.

The general rottenness of India’s infrastructure has long been recognised as the likeliest constraint on the country’s economy. In the past year or two the problem has become extremely urgent. India’s ports, roads, railways and airports have been operating close to—or beyond—capacity. It takes an average of 21 days to clear import cargo in India; in Singapore it takes three. The Jawaharlal Nehru Port Trust in Mumbai, which handles 60% of India’s container traffic, has berths for nine cargo vessels; Singapore’s main port can handle 40. With the number of air passengers in India growing at 30% a year in the past two years, the creaking of its four main airports was almost audible.

India’s 3.3m km road network is the world’s second-biggest, but most of it is pitiful. Its prize national highways—a vaunted infrastructure success of the previous government—account for only 2% of the total, and only 12% of them, or 8,000km, are dual carriageways. By the end of 2007 China had some 53,600km of highways with four lanes or more. India’s urban roads are choked: the average speed in Delhi has fallen from 27kph (17mph) in 1997 to 10kph. All of the country’s roads are perilous, even before a million Nanos a year are added to them, as predicted by Tata, the car’s maker. Last year 130,000 people died on India’s roads, 60% more than in China, which has four times as many cars.

Business Standard: Fresh upside likely for Nifty

As expected, the Nifty January futures closed above 3,100 on Friday, while the December futures closed at 3,082 after hitting an intraday high of 3,117. The market is expected to remain firm next week as F&O traders were seen covering their short positions. The uptrend is expected to continue for the next three days as the current-month contracts will expire on December 24. Technical analysts expect the index to be on course at the 3,160-mark next week.

The Nifty December futures saw unwinding of short positions and profit-booking as they shed an open interest (OI) of 3.25 million shares, while their premium to the spot market declined from 16 to 8 points. The January futures added an OI of 3.51 million shares and closed at a 19-point premium over December Nifty futures, indicating a rollover of long positions.

The 3,000 and 3,100 call options were seen changing hands as traders, who had sold these calls initially, were seen unwinding the shorts on expectation of a further consolidation in the Nifty. Interestingly, despite only three trading days left for the expiry of the December series, a build-up of long positions was seen in 3,200 and 3,300 calls, mostly from operators who have taken up short positions in the Nifty. Traders were also seen writing the 3,100 strike put, indicating a fresh upside in the index.

Mr. Swaminathan Aiyar's STOI Article

In today's TOI I got this article of Mr. Swaminathan Aiyar, GOOD, BAD & UGLY. He has done good analysis of GDP forecast of three economists which predicted the same. Here is the copy of that article for you guys...

How hard will India’s economic growth be hit by the global financial crisis and recession? Widely varying forecasts for the next financial year, 2009-10 have been made by three leading economists — Arvind Virmani, chief economic advisor of the government; Raghuram Rajan, economic advisor to the prime minister; and Rajiv Kumar, head of the Indian Council for Research on International Economic Relations(ICRIER).

These forecasts can be dubbed the good, the bad and the ugly. I would opt for the second of these. I suspect the times ahead will be bad, rather than good or really ugly.

Virmani, an incorrigible optimist, sees good days ahead. He thinks that after decelerating to maybe 7.5% this fiscal year, growth will rebound strongly to 8.5% in 2009-10. Rajan, however, believes that bad days are ahead. He predicts a dip to between 5% and 7% next year. Rajiv Kumar paints a truly ugly scenario. Using a model that has proved accurate in the past, he warns that GDP growth could slow to just 3.9% in 2009-10. Ugh!

Let’s consider the three forecasts in detail. Virmani has done possibly more research than any other economist on sources of Indian growth. He says India’s growth is based essentially on investing its own savings, and so is relatively insulated from global finance and fashions. India’s savings rate has shot up from 23.5% in 2001-02 to 37.4% today, a phenomenal achievement.

Virmani thinks that high savings constitute a structural change that is here to stay. This will suffice to finance an investment rate of at least 36 % of GDP. So, given that output in India rises at roughly a quarter the rate of investment, he believes GDP growth of 9% should be sustainable.

Sceptics point out that India is now substantially integrated with the global economy. Exports plus imports are now 45% of GDP, so a global slowdown will surely hit India hard. Virmani, however, points out that India’s net exports are very low. Unlike China, India’s current account has more or less been in balance in the last five years. So, he thinks India can survive a fall in export demand, as it will be offset by a fall in imports too. Our top exports like gems and jewellery, textiles and petroleum products are based wholly or substantially on imported raw materials.

I have fears on two scores. First, savings tend to shoot up in good times and fall in bad times. In a boom, people don’t spend their entire increase in income, so savings increase. But they dip into these savings in bad times, ‘dissaving’ instead of saving. Corporate profits boom and bust along with the economic cycle, and so do government revenues. So, I fear that the sharp rise we have seen in India’s savings rate is more cyclical than structural, and that our savings will decline sharply in the global downswing.

Second, high investment does not automatically translate into high growth. It can also translate into excess capacity and bankrupt companies if the investment has been made in areas for which demand dries up, as happened during the Asian financial crisis. I do not think India can boom while the world economy is slumping. Virmani’s prediction of an Indian bounce-back depends on the US bouncing back within the next few months. The chances of this look slim.

Next, consider Raghuram Rajan’s forecast of 5-7% growth. This range is so wide that he has a good chance of proving right. If the world economy recovers in the next six months, the upper end of his range — 7% growth — looks feasible. This will mean little deceleration from the current year and hence, little additional pain. This scenario depends on a resumption of global growth early in the next fiscal year. This is unlikely.

More likely is a troubled, hobbled global economy for most or all of 2009. Even if there is a recovery, it may be feeble. In such circumstances, India’s growth may tend toward 5%, the bottom end of Rajan’s forecast.

Finally, things could get really ugly if we go by Rajiv Kumar’s ICRIER model, which predicts growth of just 3.9% in the first half of the next financial year. This model has some credibility: it predicted the 9% boom in 2007-08, and was among the first to indicate a slowdown this year. It is based on 10 leading economic indicators, including GDP growth in the US and Europe, factoring in the global slowdown.

How do I assess the good, bad and ugly forecasts? Chances of good times ahead — 10%. Chances of bad times — 75%. Chances of truly ugly times — 15%. I remain a long-term optimist, but the coming year will be tough.

Inflation/Deflation/Recession/Depression/Currency

As posted in my previous posting, inflation came down to 6.84% from 8%. From one angle its good thing that it’s coming down. But from other angle, I see there are two problems which may arise in near future.

Number one problem is what WPI (Whole Price Index) numbers what we are getting are not indicating the exactly what a common is paying for day to day life expenditure. Then you may ask why there is difference? First, WPI is not a retail customer cost driven number. Second is YoY (Year on Year) measurement. [In this method, presently they consider 1993-94 as the base year taking 100 as the base. Here they compare this year data with last year’s respective week’s data by ultimately comparing it to base year that is 93-93. And for calculation they use Laspeyre’s formula, for which base year should be changed frequently]. Take the example of present condition, almost from January/February 2008 our inflation started heading towards north direction. So now coming months that is January/February 2009 when they compare with last year’s rising data, obviously we get lesser value as WPI numbers. That may not be exact value even what the wholesale dealers are paying. Third is different products & weightage to them in the WPI list is not updated as per the current requirements & demands in the market. As I mentioned above, list of items/commodities of WPI series is updated in 93-94. In that not even a single service is added where as more than 50% of our present economy depends on the service sector. Out of 435 total items, WPI series is overloaded with 318 manufactured products with a Weightage of 57% to it. These are main problems due to which inflation (WPI) numbers are not depicting the present conditions. So for this I think government should think adapting to CPI (Consumer Price Index) with MoM (Month on Month) as base and modifying the list of items/commodities according to country’s GDP growth.

Now second problem regarding the inflation is the pace at which it is falling! As I mentioned in the above paragraph, due to base effect pace may increase and also widen in coming days. In addition to that there is possibility another round of price reduction in the Petrol, Diesel & Gas also this time (which have nearly 14% weightage in WPI series). If this happens WPI numbers may start giving DEFLATION instead of INFLATION numbers. And DEFLATION is very much possible in this kind of economic scenario where day by day economic contraction is happening.

Now coming to domestic demand, how government is going to improve the demand in the market. Looking at October month’s IIP (Index of Industrial Production) numbers of manufacturing sector and overall we are also facing the threat of recession. And exactly this is what Keynes said, PARADOX OF THRIFT. Means if everyone starts saving money during times of recession, then there is decrement in the consumption which leads to fall in the aggregate demand thus leads to a fall in economic growth. If this continues then there will be downsizings & mass layoffs which are already started, eventually it leads to stagnation in the savings of total population or even declined because of lower incomes and a weaker economy.

So how RBI or Government is going to handle condition? Only by using monetary policy that is by reducing the interest rates. From 1990s Japan is using this tool to come out of its economic crisis but without success. BoJ (Bank of Japan) kept its main rate at 0 from 2001 to 2006 while flooding the banking system with extra cash to encourage lending, spur growth and overcome deflation. But what’s the success? Again it’s in recession now. Its stock market (Nikkei 225) hasn’t able to retrace back the peak level what it achieved in 1990 that is 40000 levels, which is presently trading around 8500 levels.

Or fiscal policies like stimulus packages which again can be questionable in terms of implementation and immediate relief they are going to provide?

Now apart from above mentioned problems, country may face the problem of rupee appreciation near future! As we all know 2 largest economies US & Japan have reduced their interest rates to almost zero. And many more are following in that direction only to avoid the depression as recession has already started in their countries. And above all there is possibility that large stimulus package as much as $ 850 Billion from US and $ 990 Billion from Japan. Think about the vulnerability their fiscal deficit in percentage terms of their respective GDPs. So obviously there is possibility of INTEREST RATE PARITY which in turn cause the rupee appreciation which already started from 50+ to around 47 a US $. Rupee depreciation/appreciation is a very sensitive issue which linked to country’s BOP in terms of export & imports. In this crisis time where export oriented firms are facing the heat of contraction in their orders and this rupee appreciation add to their pain. So what would be the RBI/Government’s stand in this case? Whether will it go FOREX RESERVE CONTENT or CURRENCY MAINTAINANCE? How they are going to maintain GDP growth in spite of reduction in export orders.

Problem will not end here, even if somehow RBI/Government maintains everything in balance, problem of using the inflow of funds effectively! Because of this problem only ASIAN CURRENCY CRISIS originated.


Bottom-line:

In an economy each and everything is interlinked. We can call it VICIOUS CIRCLE. Even if one thing changes then there will be changes in all the links in that CIRCLE. So RBI/Government needs to take balanced steps to avoid the near term problems and also keeping in mind the possibility problems arising in long term from these steps.

Inflation 6.84% vs 8%

Inflation for the week to December 6, came in at 6.84% agaisnt 8%.

Commodities Index down by 1.1% to 231.1

WPI for fuel and power index down 3.7%

Manufacturing Index Down 0.3%

Inflation Internals:

* Naphtha prices fall 23%
* Primary articles down 0.4%
* Petrol prices down 10%, diesel down 6%
* Furnace oil down 15%, aviation turbine fuel or ATF prices down 7%



Source...
CNBC

Importance of Higher Education

Couple of days back I had a privilege of attending the Sam Pitroda's NKC (National Knowledge Commission) series guest lecture. Unfortunately due to address confusion we reached the exact place quite late, almost 2/3 of Sam Pitroda's speech was over. Mainly his speech was about his committee's study & survey about the overall education system country including primary, middle, college, higher & Ph.D educations, recommendations to the central government & support and resistance their recommendations.

He & rest of the speakers talked about the importance of the higher education & English as global language with rich material for study in any stream & problem in its implementation due to importance to the regional language & political non interests. Pitroda specifically told that we need more IITs & more IIMs to become KNOWLEDGE SUPER POWER

So whenever we talk about the IITs & IIMs we tend to think that due to these institute there is BRAIN DRAIN in India. To small extent it may be true also due to their International Exposures & Placements. But according one survey each IITian has created 100 jobs. Here are the details of the survey...

1. In this survey more than 4500 IIT Alumni participated providing sufficient large sample.

2. Every IITian has created 100 jobs and that every rupee spent on an IIT-ian has 'created an economic impact of Rs 50 at the global level, half of which is India's share'.

3. IITians have been involved in the creation of over 2 crore (20 million) new jobs.

4. The survey says that IIT alumni in senior positions in industry and government, across the world today, have a budgetary responsibility for over $885 billion (Rs 40,00,000 crore).

5. When measured across industry, government, entrepreneurial activity and scientific/technological innovations, IIT alumni have been associated with over $450 billion (Rs 20,00,000 crore) of incremental economic value creation.

6. Of the IIT alumni who graduated prior to 2001, 40% are in top leadership roles in corporations, educational institutions, research labs, NGOs, governmental agencies, politics, and as entrepreneurial heads of their own companies. A majority of these top leaders believe they have contributed most through their personal impact on innovation relating to product, process, services, etc.

7. Among the IIT alumni who are in top leadership roles, almost 70% are currently based in India, with 20% of these being those who come back to India after careers in other parts of the world.

8. The study says that 54% of the top 500 Indian companies currently have at least one IIT alumnus on their board of directors, and these companies have cumulative revenue ten times greater than that of other companies on the list.

9. One in 10 IIT alumni has started their own companies, with over 40 per cent of them being serial entrepreneurs. Two-thirds of the companies founded are in India.

10. 20% of the IIT alumni work in research & education. About 75-80% of IIT alumni in research & education continue to work in science and technology related areas. Half of the IIT alumni in research & education are based in India, and of these 40 per cent those who returned to India after careers abroad.

11. 10% IIT alumni are currently engaged in social transformation working in NGOs, government administration or politics, on programs relating to education, the environment, or poverty reduction, etc. IIT alumni working in this area have founded over a 1,000 NGOs, the survey adds.

So it applies to all IIMs also...

So government needs to seriously think about this. And Pitroda also mentioned Governments alone cant do all the things. The problem with our Indian Government is POLITICIANS. First they may not be interested at all, and even if one person like Mr. Manmohan Singh interested also there is lack of support from rest of politicians inside/outside the HOUSE. Even if everything set in political place there is lack of resources from the government side. So at that should take PRIVATE PLAYERS should come into play. So through PPP it can be achieved.(about the PPP's success I already posted in my previous post about S.M. Krishna, Ex. Karnataka CM & Narayan Murthy's combination. According today's papers Karnataka is below almost all majority of the upcoming states in PRO-INDUSTRY ENVIRONMENT. Thanks to our Ex. PM Devegouda & his Sons and Yediyurappa) Actually for this also there opposition from scholars like Mr. Karat(who studied in JNU).

BOTTOM-LINE:

Sam Pitroda Set 25 years for successfully achieving this goal as Telecom reforms(which he started in Rajiv Gandhi's time) took 20 years. Lets hope to see that with all our contribution in one or the other way.


Reference...
Rediff.com

FOREX & ECONOMY

Couple of days or last week while browsing in net I got this article, I think in FINANCIAL EXPRESS (I am not sure). I thought its good article to share with you guys.

Any Indian economist traveling abroad now is likely to be asked 2 questions. First, what is the economic impact of terrorist strikes? Second, what is India’s role in resolving the global financial crisis, or for that matter, in the G-20? On the former, the answer certainly is, minimal and transient. On the second, the answer probably is, minimal and more permanent. After the G20 meeting, a newspaper reported that Saudi Arabia, China and Japan offered money, while India offered advice. That’s understandable. We aren’t in the same league. After the US-triggered crisis hit us, there has been some depletion in reserves. But cross-country figures are only available for 2007. Then, India’s reserves were $253bn, compared to $1905bn for China, $997bn for Japan, $555bn for the Euro-zone, $485bn for Russia and $343bn for Saudi Arabia.

Expressed as share of GDP, India’s (23%) forex reserves look even smaller, with 58.2% for China, 37.6% for Russia, 89.6% for Saudi Arabia, 73.6% for Taiwan and 108.7% for Singapore. Within WTO, India does matter. But outside WTO, the point is limited to East Asia. But tomorrow, given expected growth trajectories, South Asia, Latin America and even Africa will have to be factored in. Some economic problems China confronts today are symptomatic of what India may have to confront tomorrow.

First, there is the savings/investment mismatch. Before financial crisis hit the world, global macro economic imbalances had been talked about ad nauseam. This meant high savings rates in East Asia (and China), low savings rates in the US, current account deficits in the US and current account surpluses in East Asia. Each side blamed the other. But no one did anything as long as US consumption kept the world growth engine chugging along. There used to be talk of two models of development, China’s investment driven and India’s consumption-driven. However, there has been convergence. Not only have investment rates gone up to 36% of GDP in India. So have savings rates, to almost 34%, a function of demographic shifts and income growth. Consumption plateaus. A population ages. Hence, in countries where extensive social security doesn’t exist, savings rates inch up. If all goes well, there is no reason why India shouldn’t have large current account surpluses.

Where will we invest surpluses? In the US, in the Euro zone or in East Asia? Second, what will be our exchange rate policy? We have excess reserves because of mindsets about foreign exchange being scarce, crude imports, conditions imposed at times of borrowing by IMF and perceived lessons gleaned from 1990-91 and East Asian financial crisis. However, even allowing for uncertainty, we don’t need reserves more than $50bn. If a country performs well and grows, there is no way to prevent currency appreciation.

Intervention which prevents this isn’t cost-less, particularly when it is oneway non-transparent intervention. Forex markets don’t develop, people take one-way bets, there is excess liquidity and capital is driven abroad. That’s one reason why capital flowed to US, despite low interest rates there.

There is now talk of Bretton WoodsII. But no international institution barring WTO has any teeth. Nor will IMF have any teeth unless US and Europe let go of that institution, without suggesting creation of new institutions. One can’t have a world where fast growing developing economies have fixed exchange rates, while developed countries are on flexible ones. But when national sovereignty and policy making choice are perceived to be at stake, there is no international organization today that can push this agenda. That’s the reason we need to sort out these two issues (savings/investment and exchange rate) internally, without external triggers. Listing these two separately is also symptomatic of distortions we are starting with.

U.S. Stocks Rally, Led by Banks, as Fed Cuts Rate to Record Low

U.S. stocks and the S&P’s 500 Index rallied after the Federal Reserve cut its benchmark interest rate to a record low(which was more than expected by the market) and said it will employ “all available tools” to revive the economy.

The S&P 500 added 5.1 percent to 913.16. The Dow Jones Industrial Average gained 359.61 points, or 4.2 percent, to 8,924.14.

The Federal Reserve cut the main U.S. interest rate to as low as zero and said it will buy debt as the next step in combating the longest recession in a quarter-century and reviving credit.

The Fed “will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability,” the FOMC (Federal Open Market Committee) said today.

9 rate cuts in the prior 14 months and $1.4 trillion in emergency lending failed to reverse the economic downturn. Today, the Fed said it will target a federal funds rate of between zero and 0.25 percent.

“The focus of the committee’s policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve’s balance sheet at a high level,” the FOMC said.

Fed lowered the rate on direct loans to banks and securities dealers to 0.5 percent. It set the payment on the reserves that commercial banks hold at the Fed at 0.25 percent, down from 1 percent.

The Bank of Japan has been the only major central bank in modern times to mix a policy of steep rate reductions with quantitative easing, or the strategy of injecting more reserves into the banking system than needed to keep the target rate at zero.

Japan’s central bank kept its main rate at zero from 2001 to 2006 while flooding the banking system with extra cash to encourage lending, spur growth and overcome deflation.

FED in Dilemma

Presently FED(whose meeting is going on now) may be Dilemma!!!

Again whether to go for FED rate reduction or not?

There are 2 ways of looking at it.

One is why they need to reduce the rates? There are many answers for this to avoid the deflation, to boost the market sentiments and etc.

Second is why they should not? Because of possibility LIQUIDITY TRAP, about which I already posted so will not discuss same again.

Today they may reduce the FED rate by 25 or 50 basis points. Since their CPI of November month fell by 1.7%, surpassing the previous record decline of 1% set in October. It was the largest one-month decline dating to February 1947. A record plunge in consumer prices in November puts pressure on the Federal Reserve to act decisively to guard against a possibility of deflation.

Contraction in the whole world economy

As you guys can in the above graph, almost whole world is on verge of recessionary period which may lead to another GREAT DEPRESSION.

China is the only exception in that list which is showing 8.2% growth on YoY. Where as rest of the world are showing -ve growth in the Industrial Production in the October month. Just check in the contraction level in the developed countries like US, UK & Japan, they are showing the figures -4, -5 & -7 respectively. By these figures you can assume the level of intensity with which it affecting the whole world. If this speed continues with the same intensity, I doubt MOTHER OF ALL EXPORTS, CHINA, may also end up in -ve growth rate.

October was the worst month for almost all kinds of market, due to credit crunch & mass layoffs from almost all sectors, which is leading to less spending from the people which is affecting all the sectors of the economy mainly manufacturing sectors. You can see the effect in the below graph.



This is first time in 13 years where in India is facing the -ve IIP(Index of Industrial Production) numbers & overall second time in Indian economic history.

By looking at Bond market & stock market movements, markets are expecting one more round monetary policy support from RBI policies. And lets look forward for 2nd round of economy boosting package from the government which will be announced by next week.

BOTTOM LINE:

Considering the fact of -ve IIP numbers of October, we may get some relief in November IIP numbers, but there will not be substantial changes in the basic economy until unless there is easy flow credit!!!

INDIA’s WARREN BUFFETT - Rakesh Jhunjhunwala sees Sensex rising on valuations

Investor Rakesh Jhunjhunwala, who predicted Indian stocks would fall two months before the benchmark sensitive index peaked in January, says the worst may be over for Asia’s fourth biggest equity market.

Stocks are poised to recover from their biggest annual decline because companies in the benchmark index are valued at less than half their four year average, said Jhunjhunwala, who was named India’s Warren Buffett by Forbes magazine in March. Investors will look beyond last months terror attacks because the country is growing faster than almost every other market, he said.

India will see the mother of all bull runs in the next four or five years, boosted by double digit economic growth and increased investment by domestic investors, including pension and insurance funds, Jhunjhunwala, 48, said.

The Sensex rose 7% since the three-day attacks that started 26 November in Mumbai, trimming this years decline to 54%.

The slump left the index valued at 9.6 times the earnings of its 30 companies, compared with a four-year average of 19.2, according to data compiled by Bloomberg.

Indians as a society are not going to be bogged down by these terror attacks; the nations tolerance, skill set and democracy will prevail, said Jhunjhunwala.

Stock sales International investors sold a record $13.5 billion (Rs65,475 crore) in Indian equities this year as of 5 December, according to data from the Securities and Exchange Board of India (Sebi), as global credit losses and write downs approached $1 trillion. Investors bought a record $17.4 billion in 2007. India’s $573 billion stock market is the region’s fourth-largest after Japan, China and Hong Kong.

Dead Cat Bounce Back

Hi guys I am back with a gap of 2-3 days, that too with my favorite topic charts, I mean Technical Analysis.

The topic is Dead cat bounce back. First question you may ask is What is DEAD CAT BOUNCE BACK?

Answer is very simple, and its there in the name itself. If you through a dead cat from say a multistoried building, even though cat is dead is it will bounce back. Like that, now market is also fully oversold. In October month itself lost around 30%. So there will be little bit relief in bear rally.

Second question is why I am calling it as so?

As almost everybody know what is happening in the world economy. So whatever bad news is coming from any part of the world is going to factor into the market immediately in bear run unlike bull run where bad news of big countries also may not factor into the market immediately(for example when sub prime problems broke out in US in last August or september, we had bull in full swing which didnt affect our market rally, @ that everybody started speaking DECOUPLING THEORY). Due to collapse of very big institutions starting with Lehman Brothers, Asian markets particularly Chinese & Indian markets were completely devastated. FIIs were the major sellers & domestic & retailer investors just became the mute spectators. Now due to many reasons (like bailouts, interest rate cuts, boosting packages, over-sold market conditions in/from almost every part of the world) market is facing some relief rally in bear market. But it may or may not sustain this rally! Since we still have to check out the 3rd quarter results & according to many reports & news they may be very dismal. So market may not sustain this rally.

But for the time being, for short term traders people like me market is looking +ve. Check out in the above chart, for the 1st time 20DMA is showing some +ve news in almost 4-5 months. See the marked circles where market is above 20 DMA which is very first indication. In addition to that check out the volume support this rally has. And also check out the MACD & Stochastic charts showing +ve & above 60 point indication respectively. If 10 DMA (blue line) crosses over 20 DMA (red line) & comes on top of it then it will be strong indication of a relief pullback rally.

Now question comes whether market retests the October levels? That I think I can not
predict! But check out in the marked circle & beside that where market is trying stabilize @ 9000 levels and RESISTANCE BECOMING A KIND OF SUPPORT. So in short term 9000 level will act like a SUPPORT now.

But if global & local condition gets worst, I mean goes beyond control both Dow Jones & SENSEX have the MAJOR SUPPORT @ 7500 levels.

I hope it may not!!!

Govt to pump in Rs 300,000 crore to boost economy

The Government on Sunday announced a Rs 300,000 crore ($60 billion) package to boost the economy with specific measures for various sectors and contain the impact of the global financial crisis on India.

The amount is to be spent over the remaining four months on a host of areas and stake holders such as exporters, housing, infrastructure and textiles. A 4% cut in Value Added Tax has also been announced to help the corporate sector in general.

These measures were overseen by Prime Minister Manmohan Singh himself, in consultations with now Home Minister P Chidambaram, Planning Commission Deputy Chairman Montek Singh Ahluwalia and Commerce Minister Kamal Nath.

The measures for exporters, who saw a decline in shipments in October for the first time in five years, include an interest support of 2% for labour intensive sectors like textiles, handicraft and handloom.

This apart, additional allocation has been made towards various incentives for exporters, guarantee of export credit, full refund of service tax to foreign agents and refund of service tax under the duty drawback scheme.

Instructions have also been given to state-run banks to unveil a scheme under which borrowers for houses under two categories—up to Rs, 500,000 and up to Rs.2 million—will get special incentives.

For small and micro enterprises, the limits under the credit guarantee scheme which gives access to working capital and other financial needs, have been doubled to Rs.10 million.

The lock in period for loans covered under the existing credit guarantee scheme is also being reduced from 24 to 18 months to encourage banks to extend more loans under the credit guarantee scheme.

The government has also authorised the India Infrastructure Finance Co Ltd (IIFCL) to raise Rs.100 billion ($2 billion) through tax-free bonds to support financing of government-financed infrastructure projects.

In a push to the automobile sector, government departments have been allowed to replace vehicles within the allowed budget, with a major relaxation in the time-consuming procedures.

This apart, import duty on naphtha for use by the power sector is being reduced to zero, while export duty on iron ore fines will be eliminated, and reduced to five percent for lumps.


Response of India Inc to this Package

As an immediate reaction to the package conceived by Prime Minister Manmohan Singh, who is also holding Finance portfolio, major auto companies including the market leader Maruti announced to cut prices by four per cent to pass on the tax benefits to the customers.

The realty players including DLF and Unitech said the measures would have a good impact, particularly in the non-metros by way of a demand-boost for houses, but felt that the package for home loans by banks should have been for borrowings up to Rs 50 lakh instead of the prescribed limit of Rs 20 lakh.

FICCI's Secretary General Amit Mitra said, "The package has enough punch to restart the overall economic activity through its massive Rs 3,00,000 crore in balance four months of the fiscal.... It also seeks to create additional demand through a cut in Cenvat.... It has taken a number of steps to support exports in the face of sagging global demand".

Unsatisfied by 'Rs 20,000 crore emergent package', Assocham President Sajjan Jindal said, "The industry was anticipating the demand booster package of Rs 70,000 crore" and hoped that the government would take more drastic measures to create the demand and ensure that the economy bounces back to its previous growth speed.

The apex chambers of commerce and industry, however, felt that incentives for the infrastructure projects as also the auto sector, should have been more.


Sources..
IBN
TOI

RBI Moves and Probable Impacts

Source...
Business standard

Mehra’s Comments (or Mehra’s 4 points)…

Hi, Naveen and Tenzin

To start with what Naveen told that yes anybody cant predict what will happen looking to the present scenario, however, nobody cant predict what amount and to what intensity will it happen and effect the economies (yes starting with the U.S. where the epicenter lies!!), that's nobody is stating and predicting that is it over yet or still to go? (read the losses)

Now, moving towards Naveen's 4 point solution (I call it his, as he introduced it to us..!!), I have another view to that, our RBI Governor and PM are going ahead with reducing the interest rates and thus boosting more liquidity in the system. I agree that it will not create inflation. However, consider these facts:

1. RBI as a regulator can only reduce the rates and advice the banks to follow the same, however, it cannot force the banks to reduce the interest rates at their end. Will the banks pass this benefits to its customers? The banks are more cautious towards credit now. Only a few banks have reduced the PLR.

2. To justify the above point, as of today the RBI received few or no bids for it LAF (first or second) for repo rates, however, it received 14 bids for LAF (first and second) for reverse repo rates to the tune of approx. Rs.23000cr. This means the banks are parking money with the RBI to earn interest of the idle money lying with the banks with no credit creation.

3. Yes, the government has reduced the fuel prices to ease the burden on the common public; however, it is as we all know a political gimmick by the government in view of the coming elections. I think the government (or I should say our profound PM, a well-known economist) should have not reduced the fuel prices. It should have used this for eradicating with the deficits of the OMC's and cutting down on the taxes which contribute most to the fuel prices. How long will a government postpone this activity, until it creates a serious situation of deficits?

What I feel is, fuel prices will surely spike again and haunt us, however, are we prepared for that? Slowly, reduce the subsidies; pass on the burden of prices to public, at some point of time we have to face the reality of increased prices with no other option left to the government but to increase the prices, than to see the OMC's falling and then bailing them out..!!! Hence, reduce the subsidies and simultaneously reduce the taxes on fuel to adjust some price change. Accumulate the reserves of oil at these reduced prices for future.

4. Closely, looking to the inflation figures till now, it is clearly evident that its the fall in fuel or energy index that is bringing down the inflation from double-digits to single-digit, however, the food index is heading upwards. Yes, the additional rate cuts will increase the liquidity and people will have disposable income in their hands (unless they are not handed Pink Slips..!!), however, don't you think the increase in the prices of food articles will eat up their budgets and people will tend to save in CASH rather than banks (yes you read it correctly. If a person keeps the money with the banks for 350-400 days as fixed deposit, as the banks currently are offering a handsome interest of around 11% and thus locking the funds when they might need it for current consumption).

Hence, folks that are my side of 4 pointers, hope Mr. Naveen is not fuming while reading this and carry on with discussion further.. .

Oops!! the Bottom Line:

Yes, the government have good set of cards with it to combat the present situation, however, its the U.S. JOKER which is still be fooling our every move.

--
Thanks and Regards,

Udit Mehra


My response…

First I would like to appreciate Mehra’s effort to read all my postings regularly and in addition to that he has taken VALUABLE time to respond to my previous posting (Where I replied to Tenzin’s query).

I completely I agree with all his 4 POINTS. But in this type of crisis time government needs to take steps which are in its control. Like RBI reducing CRR, Repo & Reverse Repo, LAFs, Refinancing facility (what RBI did today for reality sector/housing sector by inducing 4000 crore rupees). Otherwise we may end up in DEPRESSION due to RECESSION.

1. I don’t have a single word against his 1st point. He is right; RBI is a regulator not an AUTHORITY to reduce the interest rates of the banks. But in this type of crisis it can requests banks to do so. 1930s GREAT DEPRESSION happened/worsened not because lack liquidity/credit but because of lack lending & lack of trust. Finally what happened, through out the world, 9000 banks ended up in collapsing. So in this time of crisis government/RBI has to interfere or request. And that’s what Mr. Manmohan Singh is doing by urging industry personalities in terms of reduction of rates or avoiding mass lay offs & etc.

2. My reply to his 2nd point simple one line. TODAY RBI REDUCED THE REVERSE REPO BY 100 BASIS POINTS FROM 6% TO 5%. In simple terms, RBI wants liquidity to rotate in the economy instead of lying with itself. And why RBI didn’t receive any/few bids for LAF for repo rates. That’s because nobody is borrowing from them @ this high level of interest rates and that too in this kind crisis situation. Everybody is expecting to rates to cut. So when expectation didn’t meet, then markets starts shrinking. Why nobody is borrowing from banks? That’s because of shrinkage in the whole economy. And exactly at time markets needs government & central banks needs to act & act smartly. That’s what Mr. Keynes & Mr. Milton proposed in terms of rate cuts, boost packages, tax cuts & helicopter money respectively. So point 1 & 2 are interrelated.

3. Yes Oil price reduction is a Political Gimmick. I also want government to think about the OMC’s conditions. I also want government to pass on the burden to common man. I asked same question to VK. He told me that Manmohan Singh was the economic advisor of Indira Gandhi when whole world faced Oil shock (wherein crude oil price quadrupled) in 1970s. She directly passed on the burden to common people. At that time inflation shot above 20%. So Manmohan Singh can’t take that risk that too on verge of completion of his tenure now. But I still believe in burden should be passed on to common man. And it will be done only when all parties have their Manmohan Singhs, Chidambarams, Montek Singhs, Sam Pitrodas!!!

4. Yes I completely agree with Mehra’s 4th point. Query in his 4th point can be addressed by better supply chain management in terms of effective Public Distribution System (PDS) and that is done by better infrastructure to our rural areas from where we get all our food particles. And its complex & circuitous thing.

Bottom line:

Mehra I think in your 4 point you talked only about the MONETARY SIDE. You didn’t talk about FISCAL POLICIES, BOOSTING PACKAGES & so on. And you didn’t mention any solution about the handling of this kind of crisis situation. I think you forgot that. No problem, some other time…

Tenzin’s Response to Liquidity Trap

hi naveen,

wow... you were right.... you did infact predict the future..!!!

well so now that you i know us is eading towards liquidity trap.. and if this happens obviously every other country also is going to suffer...

so what is the solution to this? what should the us or any other country do to safe gaurd themselves??

regards,

Tenzin


My reply…

Hey buddy, don’t pull my leg!!!

It’s not about predicting the future. Anybody who follows the current economical condition with some additional interest in economics can say these things…

The effects are already started to cause the problems for the rest of the world including US. So there is no country, which is isolated from this crisis. Every country is associated with one or the other country. So it’s a ripple effect. We can’t say that we are safe guarded ourselves. We can only minimize the effects!!!

Solutions???

Even though I am not an expert, I am giving some input from what I have read/reading from past economist’s works.

As I posted in my earlier posts like 4 point solutions recently(23rd November)& some other articles which talks about the handling this kind of situation.

In 4 point article I mentioned that RBI should go ahead with reduction in the interest rates on subsequent basis without worrying about inflation. Because in the time of crisis people will not spend, so when there is no demand, then there is no inflation. Even if in worst case demand increases also, then because of low interest rate industry will be in position take the money and cater the required the demand. So money should reach the people’s hands. So it’s all about boosting the sentiments of the people. Which creates rotation of money which leads to productivity & employment will be taken care of automatically.

Now there is a possibility that RBI may reduce the repo & reverse repo & CRR tomorrow or in coming days to boost the rate cuts & in turn economic activities.

But only monetary policy cant work in this kind of situation. Government has to act like CATALYST. Like should start spending more on public activities like infrastructure building, employment creation schemes, export boosting policies, encouraging private investment, reduction in tax rates & etc demand boosting activities. Of course due to this government may run under fiscal deficit for sometime but that cant avoidable.

This what Mr. Manmohan Singh will do tomorrow by announcing the some boosting packages. And this midnight petrol & diesel rates also slashed Rs. 5 & 2. Again that's also good sign.

But government must use these techniques very carefully, since due to money multiplier effect may lead to excessive demand which may lead to inflation in the medium term and even bubbles like housing bubbles in US which started from 2001 where in interest rates were reduced 1% to combat 2001 stock market crash.

Bottom line:

According to me, in economics there are no hard and fast or fixed rules for crisis handling or solution. Depending upon the situation we have to use Monetary, Fiscal, Forex, tax & etc CARDS...

I hope I answered your query Mr. LITTLE TENZIN!!!

Liquidity Trap

Guys, from nearly two months, I am writing in my blog that US may be heading for liquidity trap. Also many time I mentioned about helicopter money.

Today, in Financial Express, Editor also expressed the same thing. Here is what Financial Express says…

ECONOMIC recession is usually defined in textbooks as two consecutive quarters of declining output. On Monday, the NBER (National Bureau of Economic Research) has said that the US has actually been in recession since the end of 2007. What is worse is the consistent decline in economic performance despite a slew of proactive policy measures—fiscal and monetary—initiated by the US government.

There is now a serious danger of the US being in a liquidity trap, where interest rates and monetary policy lose all potency. Interest rates have been slashed to as low as 1% and there isn’t long to go before they hit zero. Still, borrowing and lending are in a stall. People are simply hoarding up on cash in a low-confidence environment. Japan suffered for almost a whole decade because of a liquidity trap. The US and the rest of the world can ill-afford such a prolonged slowdown in the world’s largest economy. In the absence of monetary policy—we are yet to see Ben Bernanke offload helicopters of money to ward off a liquidity trap—fiscal policy gains additional importance. Unfortunately, the US presidential transition has come at a bad time from an economic point of view. The new President and his team don’t take office until January 20, 2009, still a month-and-a-half away. The current government doesn’t have the authority to plan and implement a large fiscal stimulus. Under the circumstances, things could deteriorate rapidly in the interim if a fiscal package is not announced. In the meanwhile, there is no consensus on the future of Detroit’s carmakers either. Given the extraordinary circumstances, American politicians from across the aisle in Congress and across two presidencies must get their act together faster. The global economy may pay a heavy price for US inaction.

On 27/09/2008 I expressed the same thing in blog. Here is what I said at that time…

Day before yesterday I said that now RBI should start thinking about interest reduction. What do you think about US guys? What FED should do? Whether to keep it same as of present 2% or increase or decrease? Since while browsing through Bloomberg, I read that FED Chief Mr. Bernanke is hinting about reduction in Fed rate.

But I don’t think it’s a good move. Already they have reduced nearly 300-350 basis points. Presently Fed rate is 2%. By reducing the Fed rate he wants to boost the sentiments of the investors and Wall Street participants. But in this kind of situation it may act as negative news to the markets. First their financial institutions are bleeding like anything due to lack of strict regulations. Companies which are as old as 100 -200 years are going bankrupt due to excessive leveraging nearly 30-40 times of their assets. Yesterday Washington Mutual Inc. a holding company for the savings and loan that became the biggest U.S. bank to fail filed for bankruptcy protection along with its unit WMI Investment Corp.

Due to all this, whole world stock markets are crashed from their peak level for example Chinese market crashed nearly 45%, India almost 40% and so on. Now my point is they can’t reduce interest too low which may lead to possibility of liquidity trap.

Okay let me give brief idea about what is liquidity trap!!!

In economics, a liquidity trap occurs when the nominal interest rate is close to zero, and the monetary authority is unable to stimulate the economy with traditional monetary policy tools. In this kind of situation, people do not expect high returns on physical or financial investments, so they start hoarding their assets rather than making long-term investments. This makes the recession even more severe, and can contribute to deflation also.

In normal times, the monetary authorities can stimulate the economy by lowering interest rates or increasing the monetary base. Either action should increase borrowing and lending, consumption, and fixed investment. When the relevant interest rate is already at or near zero, the monetary authority cannot lower it to stimulate the economy.

Keynes is usually considered as the inventor of the liquidity-trap theory. In his view, financial participants fear the possibility of suffering capital losses on non-money assets and thus hold money instead. For example, the fear of default on loans can inhibit lenders from lending except to extremely credit-worthy customers. These fears are most likely after a financial crisis such as that associated with the Stock Market Crash of 1929. Further, if nominal interest rates are extremely low, there is no place for them to go but up. That implies that bond prices will likely fall in the near future, causing capital losses. Bond rates down means no (or less) long term investments. If investment start reducing then development will be hampered which leads to less demand leading to less production and overall leading to deflation

Zimbabwe to issue 100m dollar note!

Hi guys, many times I posted about Inflation & Hyperinflation and particularly Zimbabwe's case. Here is fresh news of Zimbabwe's hyperinflation and their currency issuance.

Once described as a model economy and a regional breadbasket, Zimbabwe's economy has collapsed over the past decade and there are now shortages of basic foodstuffs like sugar and cooking oil.

Twenty-seven new currency denominations have been introduced in Zimbabwe this year alone.

Zimbabwe has issued three new denominations of banknotes, including a one-hundred-million-dollar note, as the impoverished country struggles to cope with runaway inflation, state media reported on Wednesday. The limit has been revised upwards to 50 million Zimbabwe dollars for individuals and 100 million for company account holder. The new move comes less than a month after the central bank introduced one million, 500,000 and 100,000 notes, to deal with the skyrocketing prices of basic goods.

The 100,000 banknote is worth only one US dollar on the widely-used parallel black market and is only half the amount needed to buy a loaf of bread.

Below is the table which shows Zimbabwe's monthly & yearly inflation rate. Zimbabwe is the first country in the 21st century to hyperinflate. In February 2007, Zimbabwe’s inflation rate topped 50% per month, the minimum rate required to qualify as a hyperinflation. The last official inflation data were released for July and are hopelessly outdated. The Reserve Bank of Zimbabwe has been even less forthcoming with money supply data.

Absent current official money supply and inflation data, it is difficult to quantify the depth and breadth of the still-growing crisis in Zimbabwe. To overcome this problem, Cato Senior Fellow Steve Hanke has developed the Hanke Hyperinflation Index for Zimbabwe (HHIZ). This new metric is derived from market-based price data and is presented in the accompanying table for the January 2007 to present period. As of 14 November 2008, Zimbabwe’s annual inflation rate was 89.7 Sextillion (10^21) percent.



If you are not able to see the table, then open it on another tab & you can check.


Sources...

TOI
Cato.org

BETA may not be good measure for Indian Markets: ET

ET Intelligence Group tries to find out how powerful is the forecasting ability of beta in the context of the Indian stock market. Our sample comprises stocks of 44 companies, which have performed most consistently over the past decade.

It includes companies like Reliance Industries, Tata Steel, HDFC, Hindustan Unilever and Colgate-Palmolive from the fast-moving consumer goods (FMCG) sector; Ambuja Cements and ACC from the cement sector; auto majors like Mahindra & Mahindra and Tata Motors; engineering giants like ABB, L&T and Siemens; besides leading stocks from pharma, financial services, hospitality and information technology sectors. This has been done to ensure that all sectors in the economy are duly represented in the sample.

To check its effectiveness, we have taken the beta at the start of a year and then observed how the stock fared vis-Ã -vis the Nifty in that year. For instance, the beta of ABB was 0.76 on December 31, 1998.

This indicates that ABB's stock was expected to rise less than the Nifty and fall less than the Nifty. In 1999, ABB's stock price fell by 49.7%, while the Nifty was up by 66.2%. The beta logic did not hold in this case because if the beta is positive, both the stock and Nifty should move in the same direction, instead of the opposite direction. The exercise was repeated for 44 stocks over 10 years from the start of calendar year 1999 to '08 till date.

We ended up with 440 observations, as there are 44 stocks over the course of 10 years. The logic of beta holds for only 172 of such observations, which implies a success rate of 39%. This shows that the odds are against the investor if he takes a call based on beta. In some cases, the success rate can be even worse. For ABB, the basic rule of beta holds good only for one year out of 10. Beta is positive for all 10 years. The beta logic does not hold in years '01 to '08 because though the beta is less than 1, ABB's stock has shown higher volatility. This shows that estimating one-year returns considering the beta at the start of the year can be a self-defeating exercise.

Upon further analysing data, we found that stocks with a beta higher than 1 ' i.e. stocks which rise more with every rise in the market and fall more with every fall in the market ' have given close to three times the returns of stocks with beta less than 1. To establish this, we made two portfolios of stocks: Portfolio 1 includes stocks which had a beta higher than 1 for a major part of the past 10 years. It includes stocks like Reliance Industries, Larsen & Toubro, Tata Steel, ACC, Tata Motors, Wipro et al.

Portfolio 2 includes stocks which had a beta of less than 1 during most years in the past decade. It includes stocks like Asian Paints, Hindustan Unilever, Hero Honda, Colgate-Palmolive and Indian Hotels.

While the high beta portfolio has yielded a return of 19.7% per annum on an average, the low beta portfolio has given only 7.1% return per annum in the past 10 years.

Pak blackmails US & India:TOI

In what is turning out to be an elaborate chess game in the region, Islamabad on Saturday made its "Afghan move" to counter the US-India pincer, telling Washington that it will have to withdraw some 100,000 Pakistani troops posted on its western borders to fight the al-Qaida-Taliban and move them east to the Indian front if New Delhi makes any aggressive moves.

In Washington, Pakistan's ambassador to the US Hussain Haqqani said there is no movement of Pakistani troops right now, but if India makes any aggressive moves, "Pakistan will have no choice but to take appropriate measures."

Stripped of complexities, Pakistan is conveying the following message to the US: If you don't get India to back down, Pakistan will stop cooperating with US in the war against terror. Consequently, this also means Pakistan will use US dependence on its cooperation to wage a low-grade, asymmetric, terrorism-backed war against India.

In fact, some experts surmise that the terror strike on Mumbai may have been aimed at precisely this - taking the pressure off Pakistan on its Afghan front, where it is getting a battering from US predators and causing a civilian uprising on its border, and allowing Islamabad to return to its traditional hostile posture against India on its eastern front.

The weakness of Pakistan's civilian leadership was fully exposed on Saturday when the country’s army chief once again overruled a civilian government decision - this time to send the Director General of its spy agency ISI to India to coordinate the investigation into the latest terror attack on Mumbai.

Pakistan’s President Asif Ali Zardari explained it away saying there was a miscommunication and Islamabad only meant to send a ''Director'' and not Director-General, at Prime Minister Manmohan Singh’s request. But no one was fooled by the ''clarification'' -- the reversal of the earlier decision came after a midnight meeting Pakistan’s Army Chief Pervez Kiyani, a former ISI chief himself, had with Zardari and Prime Minister Gilani.

Pakistan’s threat about troop withdrawals from the Afghan front also followed the Zardari-Kiyani-Gilani meeting, leaving little doubt about the real power center in Islamabad despite the recent return to democratic rule.

Hardliners in Pakistan's military and strategic circles, who resent what they see as the country's civilian government doing Washington's bidding and fighting what they argue is a US war, are against this. The terror strike on Mumbai evidently has several objectives - one of them being to cause a rift between Washington and New Delhi and damage US-India ties.

Already, many Pakistanis are starting to question the relevance of a country where more people are killed in intra-religious warfare between Shias and Sunnis than in Hindu-Muslim communal riots in India. Two of Pakistan's four territories are wracked by insurgencies, and the intelligence community's reading is that resurrecting the hostile posture against India is one way the hard-line elements in Pakistan hope to contain this domestic conflagration.

While Pakistan is playing its one desperate Afghan card, both India and US can separately bring Pakistan to its knees in no time. The US and its allies are dependent on Pakistan for supplies to its troops in Afghanistan, but they can also plug the economic plug on the country and cause it to collapse in no time. India controls Pakistan's lifeline and jugular with river waters that originate in India and flow into Pakistan.

But punishing Pakistan with this levers would also throw the country into absolute chaos and bring extremists elements to the fore leading to a Somalia kind of situation -- with nuclear weapons in the mix. This is the fear that Pakistan is exploiting to stay afloat and stave off sanctions from the west and punishment from India.

The solution, analysts say, is to get Pakistan's civilian leadership to exert control over its hard-line military and intelligence which functions on its own existential agenda.

This is easier said than done. America's foremost strategic guru Henry Kissinger told Fareed Zakaria's GPS program on CNN, which devoted an entire hour to the crisis, that Pakistan's civilian government had made good statements vis-à-vis ties with India,"but its capacity to implement them is questionable."

Market looks positive for next week: Business Standard

Last week, the Sensex moved in an extremely narrow range of 553 points, between a high of 9,183 and a low of 8,649. The index, which witnessed undecided activity in the first two trading days, bounced back smartly on Wednesday to close with a gain of over 300 points.

While the markets remain closed on Thursday, following the terror attacks in Mumbai, the index on Friday made a steady progress to 9,093, up 178 points for the week. However, in the process, the Sensex has ended lower for the third straight month, down 695 points in November.

The broader view for December suggests that if the index is able to sustain above 9,435, it may move up to its next resistance level of around 10,200 and 10,730, respectively. On the downside, the index has a near-term support around 8,680, below which the index may slip to 8,125. While the sentiment continues to remain subdued, a 15-18 per cent rally up to 10,730 cannot be ruled out.

Market analysts expect a technical rally next week, if the Nifty manages to sustain around 2,700 and close above the 2780-level. F&O participants are anticipating a pullback next week and this was indicated by short positions they covered on the expiry day of the November series and initiated long positions in the Nifty and key stock futures.

Foreign institutional investors (FIIs) were net buyers in the Nifty futures throughout the last week. They squared off short positions on the last day of expiry.

Bottom line:

Buying of 2,800-3,000 calls and selling of 2,400-2,700 puts suggest that the derivatives participants expect the index to move in a wide range of 2,400 to 3,000 with support at 2,400 and resistance at 3,000. However, even if the index manages to move above the 3,000-level, it will face strong resistance at 3,200.

Why US $ is Appreciating Against Indian Rs. Despite Present Financial Crisis

Couple of days back, Tenzin asked me why Indian Rs. is depreciating with respect to US $ and not against the UK Pound that too when US is the center of the crisis. At that time, I tried my best to explain it to him whatever I know know!

Today while browsing, I got this audio link wherein Mr. Ajay Shah(one of my favorite blogger, whose blog I daily track) has given an interview to mint.

In that he has explained beautifully

1. how & why US $ is appreciating with respect to Indian Rs.

2. The role of the RBI in controlling the FOREX RATES.

3. Strengths of US & its economy with respect to Euro Zone, Japan & UK.

4. Implications of Rs. appreciation & depreciation.

5. Relation between Interest rates & their parity(Indian & US), capital flows, risk perception (VIX), global credit condition & Indian economy.

Here is the link for that audio...

http://www.livemint.com/2008/11/26184742/Just-to-Clarify-Episode-3.html

Mkts should have functioned today: Rakesh Jhunjhunwala (CNBC)

Actually, I thought of not to post anything today, but I couldn't resist! Here is what Rakesh Jhunjhunwala says...

Q: Is it the right thing to do to shut the markets in the light of what’s happened?

A: In the circumstances, you couldn’t function properly. So, given the choice it would have been better if it had been open.

Q: Do you think so?

A: During any terrorist operation, we have to indicate that we are working normally. We should not let terrorist activity affect us in any way. But now that it is closed, let us not discuss it.

Q: We have been getting several calls through the day about what the situation is and what is happening. Do you sense that this time around there is a more heightened sense of panic among traders, investors, and brokers?

A: I don’t have any sense of panic. I saw this during the 1993 blast. I was myself in the BSE then. As a nation, a killing of more than 100 people is not going to affect this country in any way. Having said that, we have to take steps to have better security and at least hang those people who attacked our Parliament.

As an Indian, I hang my head in shame that the Supreme Court has convicted the person who has attacked Parliament. But in this country, we don’t hang that person. We cannot take a lenient attitude toward terrorism. Having said that, I don’t think there is going to be any panic. If there is panic, it is going to be an opportunity to buy.

Q: Were you around that area last night?

A: I was in my office 10.15 pm yesteyday and couldn't get out, so ended up staying in office the entire night. It was happening next to my office and I could hear all the shooting. I could hear the blasts and the sound. But as a nation, we got to get together and face this. The first thing is that we have to show no sign of panic.

So let us send a message to the terrorists that do what you may but as a nation, we are not going to be affected. That is the best way to counter terrorism. If you allow them to affect us, they are successful. Do you think trade in India is going to stop, do you think commerce is going to stop? This is something that happened in London, Spain, and New York, and everybody bounced back.

Q: In the very near term, any concerns on ripple affects over the next few days because expiry has been postponed to tomorrow? Do you expect markets to be a bit uncertain while this whole process is underway?

A: It is difficult to predict but I would say that any fall in this market because of this attack is an opportunity. That is my personal view. The way the world market has rebounded, the Dow has gained continuously for four days, I am hopeful we will gain here also.

India to recover fastest among global economies: CB Bhave

Many of my friends ask me whether the market still go down or when it start consolidating or start to surge? But being a newbie of just one year old how can I judge when people like our PM Mr. Manmohan Singh, and SEBI chairman C. B. Bhave are not able to say anything. Yes market is like that. Everyday we are facing some new crisis, new bailout, job cuts, recessions, drop in interest rates & etc. So nobody can predict the market movements in this kind of crisis time. So here is what Mr. Bhave is saying...

Let me begin with the problems that the world is facing today. In August 2007, the United States (US) and the European markets had discovered that their financial institutions were carrying on their books assets which came to be known as sub-prime assets of which they had no idea of how to value.

The whole thing came up when one of the banks in its quarterly report said, “I do not know how to value my book.”

That created a fear in investor’s minds that all these balance sheets and profit and loss accounts may just be a story and which required more reading into. They feared these numbers did not reflect the actual state of affairs.

After August 2007, till January 2008 Indian market kept booming. So a theory developed around that time that we were decoupled from the Western economies and India was relatively in isolation and would charter its own cost.

Our focus of attention was essentially on the stock markets. Then the market had some shocks in January then saw some recovery and in subsequent months saw a fall again and so on. Till September 15, when one of the biggest US financial institution, Lehman Brothers was allowed to go bankrupt, we had not realized how closely linked with the world we were.

Even on September 15 Indian did not realize the profound effect it would have on the economy. Interestingly even the Western regulators did not see this recession.

This effect was not on the stock markets, the effect was on the credit markets.

One of the things we probably missed out is the importance of credit markets in the world.

As Lehman went down – there was already this fear for a period of one year in the minds of investors of whether balance sheets portrayed a true picture of the bank properly or not. Then, another peculiar thing happened i.e. institutions stopped trusting each other.

So if a bank doesn’t trust another bank then credit markets cannot function and if credit markets don’t function then trade and commerce is impossible.

It took us about 15-20 days to realize how closely interlinked with the world we were through the credit markets because our trade credit got affected, some of the companies were raising even their working capital requirements on the international markets. We started having the phenomena of these companies wanting to raise the same money in the Indian markets and we had a huge liquidity squeeze and two shocks in October when we went through a liquidity squeeze.


This resulted in an impact on the mutual fund industry because all corporates then wanted to withdraw from the liquid schemes of mutual funds.

The mutual funds in turn found that their underlying assets had no markets because nobody had money, so nobody was going to buy these assets. So we had to take some emergency action. The basic point I want to make here is that we are very closely interlinked with the world even though we are not a capital account convertible country and therefore the capital linkage is not so much but the linkage through trade is tremendous.

Since short-term capital got affected in this manner and credit market seized, the question for us to ask is why did something similar not happened in the equity markets? Why did people not lose faith in each other and why did they not stop transacting? The answer takes us back to the question that probably equity markets are organized far better.

These are exchange traded markets and these markets have what all called clearing entities. These clearing entities take the counter party risks.

Therefore when a broker puts a trade on a stock exchange, he does not worry as to who the counterparty broker is. He knows that at the end of that day, the clearing corporation is my counterparty and that clearing corporation holds enough money by way of margins and a guarantee fund to be able to complete that transaction.

It is through building this infrastructure, these clearing corporations didn’t exist in our markets ten years ago, it is in the last ten years that this country has acidulously built these clearing corporations, the regulator has required and the market has responded by adequately creating big enough settlement guarantee funds and the ability to give this counterparty guarantee a margin mechanism which hasn’t failed despite the fact that more than 50% of the index is off.

The point I want to make with reference to this crisis is that this is an opportunity for us to study what went wrong not because we want to pin the blame on X, Y or Z or be happy that some developed markets made mistakes and we are great. But to study this phenomenon in order to learn as to what do we need to do when we become as big as them. Do we have the institutional capacity to handle these things and if we don’t what efforts do we need to make?

The bank said ‘I do not know how to value the assets in my book’. So when there are over-the-counter trades as opposed to exchange trades, prices are not transparent and when prices are not transparent, it is not possible to create a clearing agency which will clear this trades with the guarantee that irrespective of who your counter party is I will put this trade through.

So to my mind our effort as regulators, as systems, as market player should be to see that we take as many financial products as possible on to an exchange traded market.

One of the small beginnings that we have made in this direction is to bring currency futures on to the exchange traded platform.

As far as what investors need to do in such markets; the first principle of markets is that if they are really true markets then nobody can predict how low or how high these markets will go. So if somebody tells you that I always knew that this market will go up to 21,000 in the month of January and thereafter fall then he is only being wise after the event.

If he was asked in January whether this will happen, he wouldn’t have been able to predict. If you ask him today how low the market is going to go and when and when will it start rising, again we do not have an answer. Many times we tend to forget this.

Nobody can predict whether the market will go up or down tomorrow.

So, in short, equity investment is a risky investment. When you say that this is risky investment, what is the first thing you do as an investor? The first thing is, please do not put all your savings into the equity market.

Since you do not know when it going to go up or go down, you also cannot time the market. So, that means do not put that money that might be required by you for an emergency, because if you put that money into this market, you might have to withdraw it at a wrong point from your perspective. You might have to book losses and withdraw that money.

Last but not the least, do not leverage yourself and invest into the market. This is precisely what happens when the market is going up. When the market is going up and we see it going up every day for months together, we think that it is a one-way bet.

If I bet Rs 10 on this market, in one-month I’ll get Rs 11. That sounds like a fantastic return. I have Rs 10 in my pocket. But then I see, if I borrow Rs 90 more and put Rs 100 in this market that would be even more fantastic returns. I’ll earn Rs 10. So, on my Rs 10 I have a return of Rs 10. I would be a very wise person.

But you forget in the process of leveraging that if you had a loss of Rs 10, then your entire contribution is wiped out. The remaining Rs 90 would have to be returned to the person who lent you that money. This is not just for retail investors. Retail investors should certainly not do it. But even institutions should not get into this. That is the second lesson we have learnt from what happened in the western markets.

You must have read that the five biggest firms in the US went in 2004 to the Securities and Exchange Commission (SEC) and asked the committee to relax the net capital rule for them because they are big institutions. They said they knew how to conduct our risk management practices. The Commission was convinced and it made an exception in the case of these firms. Those firms took their leveraging to 1:30. Now we are being told that the deleveraging process is on and therefore money is being withdrawn from global markets and not just our markets.

So, leveraging is a very dangerous thing. Trade and commerce cannot run unless you leverage yourself. So, the trick is in balancing.

Every crisis is an opportunity. We have learnt a lot during the month of October. We should use this opportunity to improve our system. When the chips are down, we must build for the future, and not just be unhappy that the chips are down, because this country will recover most probably amongst the fastest in the world. We will feel the effect of what is going on in the world but we will be amongst the first few that recover. When we do recover, our weight in the world will be more than what it was before the crisis.