Arab Spring

The term spring is coined as rebellion or uprising; here it means the recent revolts in the Arab regime in the quest of democracy.

New Delhi has a golden opportunity to assist in supporting democratic regimes in the Arab World.

The fall of Libya’s Muammar Gaddafi is the latest, most dramatic event in the explosive changes roiling today’s Middle East. As Libyans and their counterparts in Egypt, Tunisia, Yemen, and elsewhere—start down the difficult path of political change, India possesses a great opportunity. In recognition of its growing global role and its status as the world’s largest democracy, India can play a unique role in supporting the democratic forces that have produced the Arab Spring.

India had voted earlier in the year with other great powers on the UN Security Council to sanction Libya following Colonel Gaddafi’s brutal crackdown and New Delhi’s posture toward developments in countries like Syria and Iran are of increasing consequence for decision-makers and publics alike.

New Delhi hasn’t just a moral stake, but also a national interest in building on this record in the new Middle East to state Egypt, Tunisia, Libya, Yemen, Syria, and the Gulf states will need to establish the institutions of good governance, from strong political parties to independent judiciaries. New Delhi’s advice and assistance would make these countries better homes for Indian workers, better allies in stabilizing a region of great strategic importance to India’s development, more reliable energy suppliers, and more prosperous trade and investment partners.

The governance crisis in the Arab world presents an opportunity to strengthen US-India ties as well. Whether working independently or together with India on similar ends, the world’s largest democracies bring complementary strengths to the hard task of building a culture of democracy across the Arab world. 

By Arjun Chaudhuri

Weekly Digest

Govt admits $9 bn export gaffe

Fears about exports being shown on the higher aspect have come true with the govt. conceding today that it goofed up because the} numbers got inflated by USD $9 billion during April-November period of the fiscal.

Commerce Secretary Rahul Khullar  said that, There wasn't only mis-classifications but also "error in double counting and all kind of things" because of issues in the computer software which was recently upgraded. Having admitted mistakes, Khullar said that at least now "the notion that the govt is deliberately cooking up and telling lies...has got to stop.

The mismatch came about mainly because of over-estimation of engineering export, the growth of which had baffled economists as it was not in tandem with the growth of industrial production during the period.

While the index of industrial production (IIP) stood at 5 per cent for the April-September period, exports grew by 52.08 per cent during the same period.

Experts though, aired concerns over the veracity of the export data and the government had summarily brushed aside their arguments. “There was a misclassification of goods ... notwithstanding the misclassification, there were also errors like double counting and all other sorts...

Food inflation falls sharply to 6.6 percent

Food inflation has dropped sharply in the last one month giving the much needed relief to common people and the policymakers who have been struggling for almost the last two years to control the general price rise.

Onion became cheaper by 39.20 percent during the week under review, while price of potatoes declined by 15.75 percent. Wheat became cheaper by 4.70 percent year-on-year and price of vegetables dropped by 1.25 percent, according to data released by the commerce and industry ministry. The primary articles index, which has a 20.12 percent weightage in the wholesale price index, dropped to 6.92 percent for the week under review as compared to 7.74 percent in the previous week. It as at 10.39 percent for the week ended Nov 5.

The fuel and power index remained unchanged at 15.53 percent. The headline inflation based on the wholesale price index was recorded at 9.73 percent in October, according to the latest official data.

The Reserve Bank of India (RBI) has hiked key policy rates 13 times since the beginning of 2010 to control the price rise. The recent decline in inflationary pressure may give some comfort to the economic policymakers who have been struggling to control the price rise for the last two years, without much success.

The following are the yearly rise and fall in prices in the week under review of some main commodities that form the sub-index for food articles:

Onions: (-) 39.20 percent

Vegetables: (-) 1.25 percent

Fruits: 10.72 percent

Potatoes: (-) 15.72 percent

Eggs, meat, fish: 10.04 percent

Cereals: 1.68 percent

Rice: 2.34 percent

Wheat: (-) 4.70 percent

Pulses: 13.00 percent

CRISIL Research cuts 2011-12 GDP growth to 7.0%

Ratings agency Crisil on Thursday lowered its growth forecast for the Indian economy in 2011-12 to 7 per cent, from the earlier estimate of 7.6 per cent, due to global slowdown and weak domestic investment climate.

Crisil said said economic growth in the second half (October-March) of the current fiscal is likely to slip to 6.7 per cent, from 7.3 per cent in the first six months.

"This will restrict the overall GDP growth for 2011-12 at 7 per cent. This would be the second-lowest growth in the past nine years after 6.8 per cent in 2008-09, during the peak of global financial crisis," the report said.

The country's Gross Domestic Product (GDP) growth slipped to 6.9 per cent in the second quarter, the lowest in over two years.

The economic growth in 2010-11 stood at 8.5 per cent. Growth in eight core infrastructure industries dipped to 0.1 per cent in October, the lowest in five years.

RBI has already revised its growth projection for the Indian economy to 7.6 per cent, from 8 per cent earlier.

Finance Minister Pranab Mukherjee said last week that GDP growth in the current fiscal is likely to be around 7.5 per cent, far below the 9 per cent projection made by the government in its pre-Budget survey.

Crisil said, "The industry growth will remain constrained by lagged impact of RBI's interest rate hikes, weak exports due to slipping demand, particularly from Europe and growing bottlenecks in the mining sector,"

De-Jargonize

»   Bank run (run on the bank) – this is a crisis faced by banks when customers and investors feel the bank has become insolvent and cannot pay of its debts. The customers then tend to remove all their deposits from the bank which trips the bank towards bankruptcy and is called as run on the bank. Argentine crisis of 1999-2002.

»  Banking Panic- occurs when multiple banks simultaneously are facing bank runs hence triggering a collapse of faith in the banking system. This was one of the major reasons for the great depression of 1930’s.

»    Acid test (Quick Ratio) - is understood as on any given day the ability of the firm to clear its current liabilities. Hence cash or cash equivalents and highly liquid current assets are used e.g cash, marketable securities.

» Factors of Production - are any commodities or services used to produce goods and services. 'Factors of production' refers specifically to the primary factors, which are stocks including land, labor (the ability to work), and capital goods applied to production. The primary factors facilitate production but neither become part of the product (as with raw materials) nor become significantly transformed by the production process. Apart from the basic 3 factors human knowledge and state of technology are also considered factors.

»    Slippage – It is the difference between estimated transaction costs and the amount actually paid. Brokers may not always be effective enough at executing orders. Market-impact, liquidity, and frictional costs may also contribute. Algorithmic trading is often used to reduce slippage.

»    Golden Share – is an absolute share in terms of voting rights which is able to veto all other shares, generally held by government organizations.

»    Squeeze-Out - in a joint stock company a large group of share holders force a removal of other shareholders by giving them a cash compensation in exchange for their shares.

»    Iceberg Order – occurs when investors divide a large single order into smaller lots so as to hide their order quantity and by ordering those lots at different times can reduce price movements occurring due to the heavy demand or supply

»    To do a ‘Haircut’ – is when traders exchange at a price and re-exchange at a very small spread to insure higher returns as the trading is done in huge volumes.

»      Champagne Stock - term used to describe a stock that has appreciated dramatically. A champagne stock is one that has made shareholders a great deal of money. Usually seen in bubbled up stock such as the dotcom bubble of 2000’s

»      Bear hug - An offer made by one company to buy the shares of another for a much higher per-share price than what that company is worth. usually made when there is doubt that the target company's management will be willing to sell.

Weekly Digest

Indians pay more for petrol than neighbors

Petrol in India is costlier than in its neighboring countries and in the US, primarily because of high taxes.
Petrol in Delhi currently costs Rs 66.42 per liter as against Rs 44.88 a liter price in the US, minister of state for petroleum and natural gas RPN Singh told Rajya Sabha in a written reply to a question.

Even after this month's reduction of Rs 2.22 per liter in rates, petrol at Rs 66.42 a liter in Delhi is costlier than Rs 48.64 a liter in Pakistan.Whereas in Sri Lanka it is Rs 61.38 per liter, Rs 52.42 a liter in Bangladesh and Rs 65.26 per liter in landlocked Nepal. Incidentally, Nepal does not have a refinery and imports its entire requirement from India. However, petrol in Europe is costlier than in India. In the UK, it is priced at Rs 104.60 per liter.

Prime Minister Manmohan Singh said of the Rs 66.42 per litre price of petrol in Delhi includes Rs 26.59 a liter because of taxes (both central excise and local sales tax or VAT).The US has only Rs 5.32 per litre tax on petrol while it is Rs 62.47 a liter in UK.Petrol price in India has risen 39% or Rs 18.49 per liter, since April 2010.

Actually Petrol in Delhi cost Rs 47.63 per liter to in 2010.

The refinery price of petrol is just Rs 36.82 per litre, on top of which Rs 2.25 in inland freight and marketing cost and margin is added. Besides, Rs 14.78 per litre is the excise duty component and Rs 11.07 a litre is the sales tax that Delhi government charges. Another Rs 1.50 is the commission that petrol pump dealers earn

"Whenever there is an increase in retail selling prices of these petroleum products, the state governments' sales tax/VAT collection goes up correspondingly," Singh said.

Illustrating the states' increase in revenue due to hike in fuel prices, the minister said for every Re1 increase in petrol price per litre, the Delhi government raked in 20 paise as the VAT rate in Delhi was 20 percent.

Similarly, for every Re1 increase in price of a litre of diesel, the Delhi government raked in 12.5 paise in taxes as the VAT rate for the fuel was 12.5 percent.

Manmohan stays firm on FDI decision

Prime Minister Manmohan Singh on Tuesday said the government's decision to allow foreign equity in retail was not taken in haste but after a careful thought to how it would benefit the common man in India. "We didn't take the decision hastily. We have thought a lot and firmly believe that this decision will benefit us a lot," said Manmohan Singh, addressing a rally of elected Youth Congress leaders in New Delhi.

Manmohan Singh said foreign direct investment in India's retail sector would benefit farmers as "this will bring latest technology to India and improve its agriculture sector by saving farm produce from being destroyed. This will curb inflation and the common man can get daily essential commodities at lesser rates”.

He asked young leaders of the ruling Congress to help the government in sending a right message to the public about its intention behind the FDI in India. Manmohan Singh flayed the opposition for opposing the key decision on economic reforms, saying they were disrupting parliament and blocking crucial legislations needed for India's economic prosperity.

He said the world economic situation was affected by the US and European debt crisis. We weathered the storm of 2008 meltdown. We need new legislations and amendments to older ones now. We need parliament to work properly, but the opposition is not allowing it to happen. He said the government was trying to end the parliament logjam, triggered by various issues, including inflation, statehood for Telangana and now the FDI controversy.

He said the government has put certain conditions in the FDI decision so that small and medium enterprises were not affected by the proposed foreign equity. There will be no coercion. The states which think it is not fruitful can choose not to allow foreign shops in their states.

IMF Warns Japan on Threat of Debt

The IMF released a report warning that Japan’s debt is unsustainable.  True:  Japan has the highest debt to GDP ratio or any nation in the OECD.  However, Japan is vastly different from Europe in that its debt is internally financed by the Japanese people.  Furthermore, Japan’s unique case of deflation makes JGB the only investment vehicle in which someone can receive a positive return.  Japanese institutions and citizens will continue to roll over their bonds and buy new JGB.  The problem with Europe is not that their debt is too high (which it is) but that it is viewed as too risky for investors to roll over.  I do not see a massive liquidation of JGB by the Japanese people any time soon. 

Interest payments on this debt are so high (even with very low rates) that Japan must finance its government operations with ever higher borrowing.  There is no chance the central bank in Japan can raise rates at this point.  If you would like to know how Japan got into this trap, look at the United States today.  We are dutifully following them down the same path.  If we do not change course I would suspect a future U.S. debt crisis to look more like Japan than Europe.

Video:

http://online.wsj.com/public/page/0_0_WP_3001.html?currentPlayingLocation=37&currentlyPlayingCollection=News&currentlyPlayingVideoId={8FF3D298-2E74-40B1-872F-F0EF247D263A}

EUROZONE says "HELP!!!!"

The Greece crisis or to put more rightly the anchor for Euro crisis is seen as result of excess spends and no saving attributes of the country. The sore public spending, done blindly out of the borrowings, thus, leading to a crisis of unmanageable debt on such a large scale. Greece total Debt mounting to 329 Billion Euros and total debt in % of GDP being 165.6% , highest in the modern history.

Let us analyze some of the suggestions made by Financial Times columnist Martin Wolf: “Thinking through the unthinkable “

a) Restoration of external competitiveness and economic growth

One way to achieve it is through aggressive monetary easing, i.e., devaluating Euro to increase competitiveness. Weak Euro will raise exports. Strategically it will help core to move out of periphery into the international market to balance out the asymmetry caused by current euro crisis. Within the Periphery (PIGS nations) it is the structural imbalance which is major reason for widening productivity gaps. There is an urgent need for major structural reforms to fuel innovation and growth in public-sector productivity to meet its own domestic demands and not completely depending on Core for services and products.

b) Deflationary adjustments in periphery

Other important step on periphery front would be taking stringent austerity reforms to tackle the imbalance due to overspending within the country.

However the Austerity measures to contain spending should not affect the price directly like- higher interest rates as a reform measure. We know Interest rate changes should satisfy both high investments and high savings.

In current scenario direct price adjustments like increasing interest rates may be useful for periphery to control spending as:

·        Borrowing will become expensive,

·        Consumers will postpone consumption,

·        Thus containing the spending and raising the savings.

But dampening consumer demand will have adverse impact on core as supply will be affected directly driving out investments and thus decline in productivity.

Government needs to restrict the spending power through other cut measures like cutting nominal wages, scraping tax exemptions, imposing luxury levies, cutting down on benefits, cap on bonuses, pensions, reduction in subsidies ,etc. And these austerity reforms are needed across the board for everyone and not the bourgeoisie class only.

But drawback can be an unrecoverable spiral deflation which will further lead to sector shrinks, leading economy to collapse further.

c) Financing of the periphery by core

Looking at the third solution it is more idealistic assuming that financing alone will help periphery recover. The bailout “rescue packages” (so far 2 bailouts for Greece) has only proven not tackling the crisis, but only postponing the inevitable fall out.

d) Debt re-structuring and partial breakup of EU

Another solution seen can be ECB writing off debts and investing in the non- operational but productive assets to revive country’s economy. Will such action bring out the desired outcomes again doubtful itself, as apart from political wrangling and structural imbalance, growth is also slow because of loopholes in work rights enactments like generous pension benefits, unemployment allowances, etc. without any corresponding increasing productivity thus weakening the economy  further.

For sake say one other way of re-structuring is- Core like Germany proposing buyout. But “colonization” means Greece losing its sovereignty and in current scenario with Greece at advantage, it can rather choose to step out of euro Zone and other Eurozone countries may follow suit. While countries will move out of the Euro Zone easily, debt will still remain and pile up on ECB.

With no particular solution yet in hand to help resolve, Questions still remain wide open to be answered like:

Should Greece fiscal failure to be blamed solely or the EU Core (Germany, the Netherlands, Austria, and France) equally to be blamed for prompting and propelling the purchase power in periphery resulting in a crisis this big?

What are the Country specific solutions that are needed to answer the problem?

What  common solutions /measures on the whole inclusive of all EU countries needed to be undertaken which has  provisions to make sure that future defaults of other Eurozone countries could be contained in initial phase itself ?

Posted by: Malvika Marwah

Weekly digest (7/11/11 to 13/11/11)

DGCA to look into reasons behind cancellation of flights by Kingfisher

The Directorate-General of Civil Aviation (DGCA) will examine the reasons behind more and more cancellation of the Kingfisher flights. The airline has cancelled over 80 flights over past three days including nearly 30 on Wednesday itself.

The airline is believed to have grounded six aircraft. In this regard, the airline clarified that it has initiated reconfiguration of its aircraft. This exercise will require few of the aircraft to be out of service for the next few weeks, requiring a temporary modification of some of the flight schedules. Once the reconfiguration is complete, these aircraft will be pressed back into service, it added.

Reality check:

The airline, laden with huge debt, is facing problems from various vendors and service providers over payment. It is getting service on cash and carry basis from oil companies. Kingfisher has suffered a loss of Rs 1027 crore in 2010-11 and has a debt of over Rs 7057 crore. Kingfisher is trying to reduce expenditure as much as possible.

Aviation sources said the airline has grounded eight of its leased turboprop ATR aircraft. Airport operators, too, are putting pressure on the airline to clear their dues relating to airport and other charges.

Video:

http://ibnlive.in.com/videos/201105/cashstrapped-kingfisher-cancels-almost-80-flights.html

Moody's downgrades rating of Indian banks

Global ratings firm Moody's on Wednesday downgraded the entire Indian banking system's rating outlook from “stable” to “negative,” citing the likely deterioration in asset quality in the months ahead.

The ratings agency said monetary tightening and a slowdown in the economy would cut bank loan growth, while a recent liberalization of savings deposit rates by the central bank would pressurize lenders' profitability.

The BSE banking index fell on the news of the downgrade to 11,307.99 at 9:37 am, down 0.1 per cent, against a 0.2 per cent rise in the benchmark index.

Financial Services Secretary D.K. Mittal said, “We are not concerned. We are not affected by the downgrade. Looking at how the global banks are faring, we are much stronger and the ratings have no significance”.

SBI Chairman Pratip Chaudhuri pointed out that the health of Indian banks was much better compared to their global lenders. “Perhaps they [rating agencies] are stung by experience elsewhere. But otherwise I feel Indian banks are well-regulated. We don't deal in exotic products. Also, the amount of leveraging is low, we do 12-14 times while the best of European banks leverage up to 20 times,” he said.

The new Moody's report further concludes that bank ratings may come under downward pressure, although currently, the negative outlook on the banking system contrasts with the stable outlook assigned to the bank financial strength ratings of 14 of the 15 rated banks.

For those banks with weaker capital ratios on average and higher asset quality pressures relative their individual rating levels, their standalone ratings are likely to come under pressure as underscored by Moody's downgrade of the State Bank of India's BFSR to D+/Stable/Baa3 from C-/Stable/Baa2 on 4 October 2011.

Moody's expects the government to remain committed towards providing support to both public and private banks. Such potential support translates to an average one-notch uplift to the banks' debt and deposit ratings to Baa2, compared with their standalone base line credit assessment of Baa3.

Microfinance institutions may continue to face credit crunch

Exactly a year after the state government introduced a self-styled AP Micro Finance Institutions Act— a first in the country— MFIs are grappling to survive. Not only have repayments plunged from about 90 per cent to less than 10 per cent in the past year, fresh loan disbursements are few and far between.

The Act prevents MFIs from offering multiple loans and stipulates they cannot give loans without government permission.

Lending from banks has also dried up with MFIs coming under fire for allegedly charging exorbitant interest rates and pressurizing borrowers to repay loans.

Banks had stopped lending to microfinance institutions across the country after the Andhra Pradesh Government put in place a regulation in October last year.

According to a senior official of Indian Banks' Association, corporate debt restructuring of loans of major microfinance institutions early this year made banks aware of the ‘hollowness' in the asset quality.

It is important for banks to avoid a repeat of this situation and, hence, there is caution, he added.

As a result, operations have been hit hard and companies including top five players in the country chiefly SKS Microfinance Ltd, Bharatiya Samruddhi Finance of Basix Group, Spandana Spoorty, SHARE Microfin and Asmita Microfinance Ltd are now diversifying into other services such as offering insurance policies, gold loans and credit for buying mobiles.

 Dilli Raj, CFO, SKS Microfinance said, “We are not adding any new members this year. We’d rather focus on servicing existing customers. While micro loans will continue to be our activity, we are planning to seek a banking license so as to diversify our services. Besides, we are also conducting pilot programmes such as loans for mobile phones and facilitating kirana stores to buy goods on credit.

India’s Wants and Gains: G20 Summit Cannes, 2011

India was in an ebullient mood which was clearly visible when Mr. Manmohan Singh offered India’s help in solving the Eurozone crisis. It sought to push for increase in banking transparency and exchange of information to combat tax fraud and other illicit flow of capital across borders (The sarcasm is that India couldn’t trace money inside the economy). Cannes declaration urged all jurisdictions to adhere to the international standards in AML/CFT areas. It also asked Global forum (105 Signatories) to complete the first round of reviews and advance the next round. India could not initiate a discussion with other G20 members with regards to Financial Transaction Tax (FTT) for the development of the economy. India which was facing double digit food cost inflation this month can take solace from the fact that G20 has taken up the issue of price volatility in foods as a serious issue. However, G20 had not initiated any discussion on export restrictions on food commodities . The declaration also had no mention of regulatory regime global commodity prices. As, India was on the verge of becoming the fourth strongest economy in the G20 group it felt the need for greater representation of itself in the IMF board. To this extent it was disappointed when G20 declaration did not offer any firm commitments. While India has managed to play a key role in shaping the G20 agenda, the Cannes summit is bogged down by the Euro zone crisis. But going forward the Indian influence on G20 will depend on how India addresses its’ own problems. In such a scenario will India take up its issues in other world forums and are the countries all ears to what India is pitching for is still a question mark to Manmohan and Co.

Post by: Tandlum Suhash

What is China upto in the Eurozone??

Has this question hit you like a sudden burst of rain? The European Financial Stability Fund is expected to hit the 1 trillion euro mark and this will not be possible without Chinese support. It is interesting to consider how an emerging market which till the last decade was a closed economy (with trade barriers) today is the knight in shining armour for the developed world.

Chinese President Hu Jintao visit for the G 20 summit later this week is being touted by the Europeans as an opportunity to win him over and get China to support the bailout. China on the other hand would use this opportunity not just to generate goodwill but also to fulfill its colonial ambitions. Knowing fully well the motives of China, Europe is still willing to bend that extra bit. Will this redraw the global trade balances? Is this a paradigm shift in not just global wealth concentration but also in power centres? Do post your thoughts and watch out for India's stance at G 20 later this week..Lots to ponder about!!!

EUROZONE CRISIS

If you are not living under a rock there is a high probability that you  have heard of eurozone debt crisis and its resurfacing in 2011. It’s being billed as the Greek Debt Crisis by the media, but intelligent analysts, investors, and traders, understand that it is far beyond Greece. It is the European Debt Crisis. Here we will try and understand the causes and implications of the same.

Throughout the 90’s Greece historically faced high rates of inflation and extreamly high debts  and growing fiscal deficits because of its inefficient monetary policies ,so it was no surprise that with the formation of eurozone and floating of the euro as currency in late 90’s  Greece  and other European nations in similar condition like Portugal, Italy, Spain etc . were eager to join the club because:

1.    All member countries would use euro as the currency which would have a common  central bank (ECB in this case) backed by strong european economies such as France and Germany  which meant borrowing money from other nations  would be cheaper  for countries such as Greece (using euro) than using their current currencies (typical interest rate  on Greek drachma was  18% because of reasons stated above)

2.    The grand idea was  that  the  struggling european economies  could borrow  at cheap rates in order to economically develop their countries in a responsible manner. This would help them close the gap with stronger countries like Germany and France, and then all of Europe would grow more powerful.

So by 2000 Greece was allowed to join the EU and use euro as currency (though there were allegations that it cooked up  the figures to meet the stringent euro criteria) .on entering  of course Greece ( so did nations like Portugal, Spain, Italy, and Ireland )  borrowed money at very cheap interest rates (close to 3% as compared to 18%) but it is what they did with that money made things worse. Instead of govt expenditure on infrastructure  building and capacity generation  and paying up of accrued debts (as intended) the country went on a spending spree the wages of public sector employees nearly doubled, and it continued to fund one of  most generous pension systems  coupled with tax evasion endemic among the Greek  populations  resulted in non- payment of loans and debt spiraled to about  €300 billion, more than the entire value of its annual GDP.

That’s just one country take the example of Spain  which had the biggest housing bubble in the world.  Spain now has as many unsold homes as the United States, even though the US is six times bigger. Most of these new homes were financed with capital from abroad.

Thus these countries have spent so much money and developed such irresponsible fiscal agendas that they are now having trouble paying back all those loans. To make it worse, investors are now demanding more yield in order to hold the debt of these countries. That is making it even harder for the PIIGS (Portugal, Italy, Ireland, Greece, Spain) to pay back the money they owe resulting in a sustained crisis situation.

By Suddhasheel Bhattacharya

Weekly Digest

Below Poverty Line: 

With the downgrading of the credit rating of the biggest bank of the country SBI from c- to d+, bringing the broad sensex which is already in a bear grip below 16000 points. The reason cited by  the rating agency Moody is that the bank has collected a huge pile of nonperforming which will continue to grow with the rise in interest rates and a slow economy. Capital infusion by the government can be one of the solution to bring it out but is it possible. For more http://www.thehindubusinessline.com/todays-paper/article2512910.ece

Yuan  Surplus in China – Any Problem?

Strange but true! China’s foreign exchange reserves  have been continuously rising for the past few years and currently it stands at over $3 trillion. This surplus is being viewed next only to Euro Debt and US fiscal in terms of impact that it will have on the economies world over. The Chinese central bank has mopped up the liquidity it created while picking up the excess dollars from the market through the central bank's debt instruments and higher reserve ratios. Technically, this is called a sterilisation operation. To unwind its huge surplus China has started offering loans to all countries. However, for Chinese currency loans to be acceptable widely, China will have to do much more towards making its currency market-based, and not stick to its current practice of a managed peg. Besides, Yuan should be more freely tradable across wider geographies. In words, the current restrictions on the Chinese currency have to go. For more http://www.thehindubusinessline.com/opinion/article2512513.ece and http://www.marketoracle.co.uk/Article8320.html

Downgrade of the SBI stand-alone rating from ‘C-‘ to ‘D+

With the downgrading of the credit rating of the biggest bank of the country SBI from c- to d+, bringing the broad sensex which is already in a bear grip below 16000 points. The reason cited by  the rating agency Moody is that the bank has collected a huge pile of non-performing which will continue to grow with the rise in interest rates and a slow economy. Capital infusion by the government can be one of the solution to bring it out but is it possible.For more http://www.thehindubusinessline.com/todays-paper/article2512910.ece ::: By Ankur Sharman

Fuel for Thought …… THOUGHT for FUEL

With the repetitive up scaling of petrol prices there is huge worry as it goes out of the reach of the common man. India being one of the heaviest gas guzzling nations with the oil & gas commodity directly influencing everything, currently fears the worst if the periodic price rises become a trend. Just a few months ago I remember filling up a tank at 55 Rs/litre. Nowadays I travel by buses, trains and hired taxi-cabs. Petrol being such an important commodity has entered a volatile region where the sudden change of petrol prices is expected and no reaction is expressed by the public.

The most affected complementary good i.e. the automobile sector has already started shifting focus on diesel variants in anticipation of further price rise. Consequentially transport becoming costlier and the chain reaction continues to increasing manufacturing costs and more expense borne by the consumers.  There is no doubt that petrol is similar to blood for the Indian economy, but will this price rise lead to a transfusion of renewable energy sources which would also satisfy our regarding pollution, ecology and other green criteria? Is there a hidden benefit that it brings? or will it suffocate our rigid masses who are over dependent on commodities for daily activities?

De-Jargonize

Base rate:

Base Rate is the minimum rate at which a bank can lend to its customer with added cost.

Bank rate:

The rate at which the banks borrow money from the RBI without selling its securities. It is generally for a long period of time. The bank has to pay an interest on it.

CRR Rate:

Cash reserve Ratio (CRR) is the amount of funds that the banks have to keep with RBI. If RBI decides to increase the percent of this, the available amount with the banks comes down. RBI is using this method (increase of CRR rate), to drain out the excessive money from the banks(Current 6%).

SLR:

 Every bank is required to maintain at the close of business every day, a minimum proportion of their Net Demand and Time Liabilities as liquid assets in the form of cash, gold and un-encumbered approved securities. The ratio of liquid assets to demand and time liabilities is known as Statutory Liquidity Ratio (SLR).  RBI is empowered to increase this ratio up to 40%.  An increase in SLR  also restrict the bank’s leverage position to pump more money into the economy(Current 24%).

Repo rate:

 Is the rate at which a bank borrows money from the RBI for a short period of time by selling its securities (financial assets) with an agreement to repurchase it at a later date at a predetermined price.(Current 8.25%)

Reverse Repo rate:

The rate at which RBI takes a loan from the other banks. Over a short duration of time.(Current 7.25%)

Syndicated loans:

 It is a loan offered by a group of lenders (called as a syndicate) who work together to provide funds to the single borrower. The borrower can be a corporation, a large project or a government. This is done to spread the risk of borrower default across the multiple lenders or institutional investors

Letter Of Credit:

 A binding document that a buyer can request from his bank in order to guarantee that the payment for goods will be transferred to the seller. Basically, a letter of credit gives the seller reassurance that he will receive the payment for the goods. In order for the payment to occur, the seller has to present the bank with the necessary shipping documents confirming the shipment of goods within a given time frame. It is often used in international trade to eliminate risks such as unfamiliarity with the foreign country, customs, or political instability.

Zero coupon bonds:

Is a bond that (1) pays no interest but instead is sold at a deep discount on its par-value, or (2) an interest paying bond that has been stripped of its coupon which is sold separately as a security in its own right. Bondholder’s income is determined by the difference between the bond’s redemption on maturity and its purchase price. Also called non-interest bearing Bond, zero interest bonds, or zero rated bond. See also deep discount bond.

Non coupon bond:

There is no interest on these bonds. You only get the money when you sell the bond and their price keeps on fluctuating. They are available at a highly discounted rate. They are for a specific period. Also called as deep discount bond, non interest bearing bond, zero interest bond.

Capital reserve:

It is the reserve that is created to deal general and unspecified contingencies such as inflation and is not distributed as dividend to share holder

General reserve:

It is created by transferring certain amount of undistributed profit for funding expansion, acquisitions, paying of dividends, discharging of liabilities, redemption of securities .

Money at call and short notice:

Money at call is a loan that is repayable on demand.  Money at short notice is repayable within 14 days of serving a notice.

Concepts in the India Case

Disinvestment

A process where the government reduces its holding in business and moves out of doing so. It encourages private participation and divests its stake in business.

Deregulation

Price decontrols – moving from controlled and administered prices to a market driven, competitive price scenario.

Liberalization

A process of opening up the economy, freeing its market and allowing the competitive processes to function.

Economic Reforms

The process of transforming from a close, controlled economy to a market driven, competitive state. Reforms are in all sectors – goods and financial markets.

By, Dr. Archana Pillai, Shivam Bashin, Lakhan Thakkar