Investors lose Rs 11 trillion in stock market since Diwali

Investors have lost a whopping amount of nearly Rs 11,00,000 crore in the stock market in less than three months since Diwali last year, with over Rs 3 lakh crore being wiped out in the past three days alone.

The stock market today plunged to its lowest level in nearly five months after three consecutive days of fall -- a period during which the benchmark Sensex plummetted by about 755 points, including a 288-point dip witnessed today.

Total investor wealth, measured in terms of cumulative market value of all listed stocks, today itself fell by over Rs 1,32,000 crore -- taking the loss for past three days to over Rs 3,00,000 crore amid macro-economic concerns emanating from inflationary and governance deficit related factors.

Experts said that downward pressures in the market extended well beyond the past three days and heavy selling pressure has continued for over two months now, primarily due to heavy outflows by overseas and domestic investors keeping away in the absence of any positive triggers.

In the process, the total investor wealth has fallen to near Rs 66,00,900 crore -- a huge dip of close to Rs 11,00,000 crore since last Diwali on November 5, 2010, the day when the Sensex scaled its record closing level of 21,004.96 points.

The Sensex has now fallen to 18,395.97 points -- marking a plunge of over 2,600 points since Diwali.

So far in 2011, the investor wealth has fallen by nearly Rs 9,00,000 crore, while nearly Rs 2,00,000 crore was lost during the last two months of 2010.

Experts said that a huge dip in investor confidence is also corroborated by a considerable plunge in the trading turnover at the bourses.

The average daily cash market turnover at the bourses have fallen to nearly Rs 15,000 crore, marking a decline of over one-third from approximately Rs 23,000 crore in October-November 2010.

The current level of turnover is not even one-third of the record level of business volume witnessed in mid-2009, when the daily average turnover was close to Rs 50,000 crore.

The intensity of current downward rally on the bourses can be gauged from the fact that only four stocks out of the 50 top blue-chips that make the Nifty index have given a positive return in the past one month. Even the gains of these four stocks -- namely HCL Tech, TCS, Sesa Goa and PowerGrid -- are only nominal between 0.6-7.3 per cent.


Source: ET

Govt to disinvest in 10 loss-making PSUs, wind up 3

Karnataka has decided to disinvest in 10 loss making public sector undertakings (PSUs) and close down at least three by this year-end as part of its public enterprise reforms programme.

The government has, for the first time, officially prepared a list of sick public sector units to determine the future course of action for these financially troubled enterprises.

“The exercise is part of government strategy to track and rate their performance on a regular basis. We will now look at devising a plan of action for such chronically ill companies,’’ said V P Baligar, principal secretary, department of commerce and industries.

The department of public enterprises, the nodal body for policy formulation for stateowned firms, has listed 42 state public sector enterprises as sick and loss-making. The list was prepared as part of the revised format for categorizing state public sector units on the basis of their performance and respective fields of operation. The new classification, which broadens the existing grouping of firms into 12 categories, will be made applicable from 2011-12.

“There is no alternative for the state than to go ahead with public enterprise reforms involving restructuring and disinvestments,’’ said a senior official, indicating the hurry the government is in disinvesting loss-making companies.

NETAS TO BLAME

Political interference is the reason for several PSUs incurring losses, say experts. Top jobs in PSUs have become attractive berths for political personalities who head them as chairpersons. They not only make use of the office for political gain but also fail to play a catalyst role in taking the corporations forward.

“Not many chairpersons have bothered to initiate steps to plug the prevailing loss, forget making profits,’’ said a concerned industrialist. Though disinvestments and reforms process were initiated as early as in 2002 during the tenure of S M Krishna (now external affairs minister), there had been widespread protest against the move. Succumbing to pressure, previous governments too delayed the process by announcing plans for “rejuvenation of PSUs’’, including those on the verge of closure. Will the BJP government show that it is different?

Companies shortlisted for privatization

Karnataka Power Corporation
Karnataka Silk Industries Corporation
Karnataka Soaps and Detergents
Mysore Electrical Industries Ltd
Karnataka Vidyuth Karkhane
Mysore Minerals Ltd (MML)
Mysore Sugar Company
Mysore Paper Mills Ltd
Sree Kanteerava Studios Ltd
Karnataka Handloom Development Corporation

Non-working PSUs facing closure

Karnataka Fisheries Development Corporation
Karnataka Compost Development Corporation
Karnataka Leather Industries Development Corporation
Karnataka Cashew Development Corporation
Karnataka Coir Board Development Corporation
Karnataka Tur Dal Development Corporation
D Devaraj Urs Truck Terminals Corporation
Karnataka Sheep, Wool Development Corporation


Source : ET

Early US recovery could prompt FIIs to pull money out of India

The Reserve Bank of India (RBI) warned that a sooner-than-expected recovery in developed economies could impact foreign fund flows into India. The central bank on Tuesday, in a veiled reference to the improving US economy, echoed the worries of fund managers, who recently cautioned about the likelihood of a drop in foreign fund investments into India’s stock markets in the event of US’ turnaround.

“Faster-than-expected global recovery may enhance the attractiveness of investment opportunities in advanced economies, which may impact capital flows to India,” the central bank said.

Foreign funds poured $29 billion into Indian stocks in 2010, the highest-ever yearly inflow, driving up the BSE’s Sensex by 17% and the broader BSE-500 index by 16%. The unrelenting recession in developed economies and near-zero interest rates in the US encouraged investors to borrow and pump money into fast-growing emerging markets, including India. Now, with inflation threatening to affect corporate earnings growth and consumption —the basis of India’s economic growth — brokers expect foreign investors to scout for markets with cheaper valuations.

“We believe CY2011 may not be as robust since we expect majority of the incremental flows would go value-hunting in other emerging markets and gradually recovering developed western markets,” said a note prepared by Rakesh Arora and Arjun Bhattacharya of Macquarie Capital Securities. So far in 2011, FIIs have pulled out close to `6,000 crore, according to the BSE data.

India’s Sensex is valued at a price-to-earnings ratio of 18 times estimated earnings, China’s Shanghai Composite at 12.7 times, Russia’s RTS at 7.45 times and Brazil’s Bovespa at 11 times.

Global investors will closely watch US Federal Reserve chairman Ben Bernanke’s comments on the economy’s prospects and inflation during the rate-setting Federal Open Market Committee meet ending on Wednesday. Bond yields in the US have been rising, while stock prices are firming up, suggesting investors expect a recovery in the US this year.

Some fund managers said worries about an outflow from Indian stocks due to a US recovery are overblown.

“I do not think that US recovery could trigger an outflow from Indian equities. It is possible that new flows into India are moderated but to forecast net FII outflows over the year is being too pessimistic,” said Samir Arora of Singapore-based Helios Capital Management. “Every year, the world is generating new savings and the global money in India is still too less to have this effect,” he said.

Macquarie analysts said, “While a readjustment of flows may lead to a short-term correction in the market, the downside would likely be limited and money would eventually find its way back into the Indian growth story.”

The BSE’s Sensex has fallen about 8%, while BSE’s 500 index has dropped 7% so far in 2011. Sharp foreign fund outflows from Indian stocks will be triggered by political instability rather than economic worries, said V Anantha Nageswaran, chief investment officer of Bank Julius Baer.

“Foreign investors would be more worried about the likelihood of a major political upheaval rather than economic factors specific to India,” he said. “Investors would not like to see a change in political personalities, who have been the face of India’s growth story in recent years.


Source : ET

India needs solution to $1.5 trillion puzzle

India needs a solution to a $1.5 trillion-plus puzzle. That's what it will need to invest in infrastructure over the next decade if it is to have any hope of achieving its aspiration of 10 percent GDP growth. The government and banks, India's traditional sources of infrastructure funding, won't be able to carry that load on their own. Financial liberalisation, something the country has hitherto shied away from, could help fill the gap.

Poor infrastructure is one of the main things holding India back. Poor logistics cause waste equivalent to 5 percent of GDP, according to McKinsey. Roads such as the "golden quadrilateral", joining the country's biggest four conurbations, are being laid down, but not rapidly enough. No wonder the roads minister was shifted in a cabinet reshuffle earlier this month.

An estimated one-third of all fresh produce spoils before it reaches the market, and most of the country's railways predate independence in 1947. There are chronic electricity shortages in most states. And then there are the heaving cities, suffering from poor sanitation and virtually bereft of mass public transport.

The government and its planners see the problem. The ongoing five-year plan called for $500 billion of infrastructure investment. The next, which runs until 2017, will argue for $1 trillion. With India's public debt at over 60 percent of GDP, and a current account deficit touching 4 percent, plans to put up half of that from public finances seem less than ideal.

Foreign direct investment can play only a small role. FDI was $24 billion in 2010, according to the International Monetary Fund, only a quarter the amount China attracted, and not all of India's inflows went to infrastructure. Foreign investors are still largely deterred from building projects because of uncertainty over policy logjams and ever-present corruption.

Don't bank on it

Meanwhile, India's banks are also financially constrained. Part of the problem is that the banking industry, much of which is state-controlled, needs more capital to keep up with India's rapid growth. To finance real GDP growth of 10 percent, given inflation of say 5 percent (which is less than India currently experiences), loans probably need to increase by something over 20 percent a year.

Of course, the banks can go to the market and raise the necessary capital indeed, a rash of equity issues is expected this year. But if the state wishes to maintain its stakes in the banks, it will need to dig into its own, bare pockets. Even if it can find the cash this year, it may need to see itself diluted in the longer term, and that will require changes to the law, a tricky proposition given that India's corrupt politicians see state banks as their playthings.

It would also be easier to finance lending growth if the banking industry was opened up to more new entrants. Foreign banks want a bigger slice of the cake, but they have to beg to get every single extra branch. India's non-banks are also lobbying to be allowed to get into the market. Liberalisation may happen, the authorities are examining the issue, but the existing players have a strong vested interest in preventing more competition


Source : ET

Money management: What it involves and how a good financial planner can help

With salaries on the rise, it is easy for a person to be lulled into a false sense of security when it comes to financial matters. Most people often forget that record levels of inflation are currently taking a big bite out of these salaries. Regardless of the state of one’s finances, there is never a bad time to create a personal financial plan - a road map that details various life goals and ways to achieve them.

These goals may vary depending on the stage of life a person is in and his or her priorities. They usually consist of saving for a home, retirement, children’s education, vacations, or a variety of other life contingencies.

The financial planning process allows you to step back and take a `big picture` look at where you stand money-wise and to gauge what types of adjustments need to be made to take you closer to your goals.

If you are tackling the exercise actively for the first time, there are a few important points to consider as you get the process off the ground.
Prioritize: Remember that not all financial goals are created equal. Scenarios that are around the corner (e.g. a child`s education) may call for more focused planning and budgeting than those that are in the distant horizon (e.g. caring for an ageing parent).
Prioritizing your goals by their order of importance is also helpful. For example, you may have a second car on your wish list, but can choose to postpone buying this while you save up for a down payment on a home.
Create a budget: A realistic and detailed budget is an excellent tool to keep your financial plan on track on monthly basis. It gives you visibility into your main expense categories and allows you to calibrate your spending levels as required.
Set a target savings rate: `Pay yourself first` is a useful maxim to live by; one that will keep you from overshooting your spending limits while making sure these are in line with your goals.
Review your insurance coverage: How much insurance coverage, such as medical and life, does one really need? The answer depends on a set of variables that includes age, health, number of dependents, and liabilities. An objective review of these factors will enable you to maintain coverage levels that are right for you.
Keep good records: Many people miss out on important tax breaks because they fail to keep records of deductible expenses. Meticulous record keeping will allow you to maximize your deductions and lower your tax bills.
Review your investment options: Combine your propensity for risk with your future cash flow requirements to select investment vehicles that are right for you. A thorough analysis of your own situation will help you create a balanced financial portfolio.

While it is possible to personally tackle some or all of these activities, it requires discipline and a substantial time commitment to make it work. A good financial planner can help you, not just in setting goals, but also in achieving them.

Experienced planners possess a comprehensive understanding of a wide range of investment opportunities. They can study your financial situation, risk tolerance, goals, future cash flow requirements, insurance needs, and investment options before coming up with recommendations and a comprehensive plan tailored to your needs. Their expertise is likely to cover several aspects of financial management, of which the main ones are:
Risk analysis and planning: To evaluate a client`s risk exposure and select appropriate risk management tools that include general, life, medical and disability insurance.
Retirement planning: To help the client with retirement planning, review their retirement employee benefits (e.g. EPF, PPF) and make recommendations to keep their contributions in line with their retirement needs.
Investment planning: To assess the client`s investment needs and risk tolerance and provide suitable solutions aimed at wealth creation.
Tax and estate planning: To guide the client through the nuances of personal taxation and estate planning, including the creation of wills, gifting schemes and joint property ownership.
Advanced financial planning: To incorporate all the aspects of a client`s financial situation in order to create a comprehensive and achievable plan.

`Caveat Emptor` or `Buyer Beware` is a guideline that applies to the hiring of financial planners, as it does in working with other professionals. While there are individuals in the field who operate based on inflated qualifications, there are also many others who truly have the credentials - recognized industry certification, relevant education and work experience, and a clean reputation - to manage your money and make it work harder for you.
The article is contributed by Ashish Prasad, director & chief executive officer (CEO), Indian Institute of Job-oriented Training [IIJT].

Foreigners Pulling Back on India

In a sign that some foreign investors are losing their enthusiasm for India, they have pulled out more than $1 billion from Indian stocks in the past 12 trading sessions. 

The Bombay Stock Exchange's 30-share Sensex was essentially flat on Friday but is down 7.8% for the year through Friday, at 19,007.53. Foreign institutional investors have been net sellers over the last two-and-a-half weeks, with a net withdrawal of $1.17 billion

In contrast, last year foreign investors had poured $29 billion into Indian stocks according to data from the Securities and Exchange Board of India. These flows had helped push the Sensex to a 17% gain.

This year investors are increasingly concerned about India's growth, and are at the same time encouraged by an improving economic outlook for the developed world.

Some global money managers are expecting Indian stocks to fare worse this year than some other Asian and emerging countries. A recent survey of global emerging market fund managers released by Bank of America Merrill Lynch this week found that a third were underweight on Indian stocks, meaning they are holding less than their benchmark. This is up from just 10% of the managers being underweight India in November, according to a similar survey.

Foreign investors "are looking to buy more either U.S. stocks, or stocks of countries which benefit from U.S. recovery," says Rakesh Arora, head of equity research at Macquarie Capital Securities (India) Pvt. Ltd.

For instance, South Korean and Taiwanese companies that export products to the U.S. would benefit from U.S. growth, so they may be more attractive options. The Korea Composite Stock Price Index or Kospi is up 2.7% through Thursday while the Taiwan Weighted Index is up 0.5%.

India has been plagued by a range of issues that have created uncertainty about its economic growth. "Inflation is the biggest one," says Prabhat Awasthi, head of equity research at securities firm Nomura Financial Advisory & Securities (India) Pvt. Ltd .

India's food inflation has been rising for several months. Inflation of primary articles rose 17% from the previous year for the week ending Jan 8. Meanwhile, rising oil prices globally are adding to India's inflation woes because it is a large importer of oil.

Rising inflation will likely curb consumer expenditure and ultimately lower sales for Indian companies. On the other hand, as India's central bank raises interest rates to curb inflation, it will become more costly for companies to borrow money for their business. Together, these factors could crimp profits for Indian companies this year.

Nomura expects Indian stocks to provide a "below-average return" of around 12%, according to a report published in December.

Meanwhile, India's political picture has also recently become fuzzy. The federal government has come under pressure in recent months due allegations of corruption related to the telecommunications sector. That and other controversies have distracted the government from pushing reforms. Investors have been disappointed that the government has not invested in infrastructure development as much as they had hoped.

"For the next one month, these uncertainties are going to rule," says Shrikant Chouhan, senior vice president of equity research at Kotak Securities Ltd. Investors will be looking to the federal government's budget to be announced in February to give some clues about the government's plans.

Until then, many analysts expect Indian stocks to remain volatile. However, further losses could make Indians stocks cheap enough to attract some foreign investors back.



Source : WSJ

Pay 2% commission for mobile banking transactions

Customers wanting to operate their accounts through cellphones must shell out a 2% commission to the bank, a government panel set up to frame rules for mobile banking has said. Any cellphone customer can create a ‘mobile linked no frill’ account to deposit, withdraw and transfer money, and execute the transactions through a mobile-based m-PIN system or through micro ATMs run by telecom service providers, said the inter-ministerial group’s report, which was circulated to all stakeholders, including the Reserve Bank, last week.

Franchises or own outlets of telecom companies could serve as retail points for the customer. The group’s financial inclusion recommendations, which aim to link the accounts to the unique identification number, or UID, can become policy only after they have been approved by the RBI. “To promote adoption, government payments under various schemes will be directly credited to these mobile linked no-frills accounts once the citizen registers with the government agency providing such benefits,” the report adds.

The report said banks, in turn, must pay the telco a minimum of Rs 2.25 per transaction or 1.4% of the total amount which should be gradually reduced to 1% over five years. And if the telco were to set up mini ATMs then banks must pay a minimum of Rs 3 per transaction or 2.25% of the amount. The tech vendor setting up the IT network linking the bank, the telecom company and the UID can be paid a maximum of Rs 1 per transaction by the bank.

The panel was confident that banks would still make a profit by operating the model even after providing for various operational costs and call centre operations.

Last week, Bharti Airtel , the country’s largest mobile phone company by both customers and revenues, formed a 49:51 joint venture with State Bank of India , and Vodafone Essar, majority owned by UK’s Vodafone, formed a JV with ICICI Bank , to provide mobile-banking and other financial services. Other mobile service providers are also slated to announce similar tie-ups over the next couple of months.

All cellphone users will be able to access mobile banking by opening a no-frills account with SBI at a nominal cost, its chairman OP Bhatt had said.

SBI-Airtel is targeting two million such accounts a year which would be easily scaled up to five million accounts owing to the bank’s wide reach and Airtel’s 1.5 million touch points, Bhatt added. Similarly, ICICI said it plans to take use the strength of Vodafone, which also has over 1.5 million retail points, for acquiring customers and servicing them. India has over 700 million mobile connections with a penetration of more than 60%. In comparison, a significant majority of the country’s population does not have access to banking services. Only 50,000 of the 600,000 villages in the country have access to finance, according to latest RBI estimates.

Last year, RBI had allowed banks to appoint “banking correspondents” which can include “for profit” companies, including mobile service providers, non-governmental organisations, cooperative societies and post offices, to handle a range of financial services. In the case of Bharti & Vodafone, these will act as the banking correspondents for SBI and ICICI, respectively.

The report also stated that tie-ups between telcos and banks for financial services on the mobile platform, must provide a minimum of five services: balance enquiry, cash deposits, withdrawals, money transfers (person to person and also transfers for purchase of goods and services) and credit accounts where customers can transfer money from their bank account to this ‘no-frills mobile linked amount’.




Source : ET

China has $1.5 trillion in hidden debt

Billions of dollars of debt racked up by local Chinese governments during their investment sprees are likely to sour as the projects they finance near completion, Yin Zhongqing, a prominent Chinese lawmaker, said this week.

In an interview with Reuters Insider, Yin said local governments had incurred at least 10 trillion yuan ($1.5 trillion) of "hidden" debt, which they have concealed by creating thousands of investment vehicles that serve as borrowers.

Yin said it is not yet clear which loans will sour because they do not have to be repaid until the projects are completed.

"The large amount of debt that local governments took on since the end of 2008 to battle the impact of the global financial crisis will become a heavy burden for our development going forward," said Yin, who is a member of the finance and economic affairs committee in China's parliament.

He highlighted the high risk of default in the low-level county governments, which Yin said have little financial resources.

"Seventy percent of the loans from these investment and financing platforms in 2009 and 2010 were generated at the county level, where governments don't have much assets, and some cannot even afford to pay their staff," he said.

"Debts accumulated from these platforms, even with government financial guarantees, simply cannot be paid back. In other words, when they borrowed the money, local governments did not plan to pay it back."

Local Chinese governments are barred by law from borrowing directly. To pay for their ambitious growth plans for cities, they set up investment vehicles that take out bank loans backed by assets, typically land, or implicit government guarantees.

They do not show up in official central government debt accounts. But Yin said these debts will ultimately have to be written off by Chinese banks and Beijing. "In 2009 and 2010, we encouraged them (local governments) to increase debt and run deficits to stimulate investment. Local governments' debt problems will come to light in 2011," Yin said.

He said local Chinese governments were still pursuing breakneck growth rates despite pleas from Beijing to slow down to let the economy tread a more steady and sustainable path. "We need to use macro controls to pull it back and lower it to a reasonable level," Yin said.

While the problem of "hidden" debt among local governments is not new to China, its massive three-year stimulus programme in the wake of the 2008 financial crisis exacerbated the issue. China's bank regulator estimated last year that local governments have racked up 7.66 trillion yuan in debt as of June 2010, of which 26 percent is unlikely to be repaid.

But the regulator put a brave face on the problem by saying the risks are under control since most loans can eventually be repaid using income earned from their investment. It also said banks are well protected against defaults because they have already set aside adequate provisions.

Yin warned against complacency, however, and said China's debt ratio was much higher than what official data suggests. Beijing has said its fiscal deficit will fall below 2.2 percent of gross domestic product (GDP) in 2010, while its total debt will be less than 20 percent of GDP.

"China's rapid development has covered up many problems. But once economic growth slows down, these problems will emerge as stones rise when water levels fall," Yin said.


Source : ET

Bond redemptions, govt spending to ease crunch

A combination of higher government spending, redemptions of bonds and better deposit mobilization by banks offering higher interest rates is expected to improve liquidity in banking system in the March quarter and reduce the bond market’s dependence on liquidity support from the Reserve Bank of India (RBI), analysts said a day before the RBI holds the last of its four-phase Rs. 48,000 crore bond buyback programme on Wednesday.

The bond buy-back programme was introduced in December to provide liquidity to tide over the cash crunch in the wake of large advance tax payments and equity outflow from large initial and follow-on public offerings such as the Rs. 14,970.20 crore one from Coal India Ltd. Besides, the government’s reluctance to spend also added to the tightness.

A Prasanna, senior vice-president, ICICI Securities Primary Dealership Ltd, a firm that buys and sells government bonds, said liquidity has improved in the last two weeks, pointing out that banks borrowed an average of Rs. 60,000 -65,000 crore daily from the central bank in the last week against around Rs. 1-1.6 trillion daily in three months between October and December 2010.

“With expected government spending in March and bond redemptions in January-February, we expect the bond market will likely be comfortable this quarter,” Prasanna added.

The government was sitting on a cash balance of Rs. 1.50 trillion on 31 December, which it is expected to spend before the end of the fiscal year in March, according to Deepali Bhargava, economist at ING Vysya Bank Ltd.
Bonds worth Rs. 19,000 crore are also awaiting redemption, in two tranches. The first such redemption will take place in end of January and the second in end of February.

“Rise in government spending and a drop in currency circulation will support gradual improvement of liquidity,” Bhargava said.

Currency in circulation or currency with the public rose by Rs. 60,000 crore in two months, she said. Since this money is not kept with banks, it does not add to the liquidity in the system. Typically, during festivals people tend to keep money in the wallet to spend.

Bhargava expects December’s headline inflation to rise to 8.4%, from 7.48% in November. The latest inflation data is expected on Friday.
However, more money in the system is unlikely to lead to a massive improvement in bond market sentiment because of a likely interest rate hike by RBI in its third quarter monetary policy review on 25 January.
Once this happens, bond prices will drop and yields will rise. The yield on 2020 benchmark government bond closed at 8.21% on Tuesday, lower than Monday’s 8.26% closing, its eight-month high, according to data from Clearing Corp. of India Ltd’s website.

Bond yields have been rising in past few days due to inflation worries and expectations of key policy rate hikes on RBI’s policy review meeting.
“The downward pressure on the bond market may continue till the (expectations of) a rate hike are over (at the RBI policy meeting on 25 January). Bonds will be bearish due to volatile equities impacting the bond market and the lack of positive macroeconomic triggers,” said G.A. Tadas, managing director and CEO of IDBI Gilts Ltd, a primary dealer.
RBI is expected to hike repo rates—the rate at which it lends to banks—by 25 basis points to 6.5%, to fight inflation. One basis point is one-hundredth of a percentage point.

Tadas also said deposit rate hikes by banks will support bank fund mobilization and, hence, improve liquidity.

Samiran Chakraborty, chief economist at Standard Chartered Bank Plc, expects RBI to hike rates by 25 basis points in January and by an identical margin in March as well.

“The 10-year benchmark may touch 8.5% yield levels by March end,” he said. Chakraborty expects liquidity may improve by March end.
RBI has raised its key policy rate five times in 2010 but left it untouched in its December review of monetary policy.


Article By Sushita.P

Variety of market-shaking bubbles might inflate in 2011

Welcome to the year of the bubble. It may seem an odd assertion at a time when many key economies are in, or on the verge of, recession. Yet near-zero interest rates in Washington, Tokyo and Frankfurt have a way of wreaking havoc with markets and human psychology. It's not a reach to say we have a bubble in bubbles. A variety of market-shaking bubbles might inflate before our eyes - some in asset markets, others in flawed perceptions. Here are eight.

Hot money: It's terrific the MSCI AC Asia Pacific Index jumped 14% last year, outpacing MSCI's broader indexes. It would be better, though, if the gains had more to do with fundamentals and less with ultra-low rates. The Bank of Japan's largess has long seeped overseas to boost stock, bond and property prices near and far. The yen-carry trade - borrowing cheaply in yen and using the funds for riskier bets overseas - was the forerunner of a similar dollar trade. Federal Reserve policies sent tidal waves of liquidity toward Asia in 2010. It could reach disastrous proportions, leaving a trail of ruin in its wake.

Decoupling theory: The bubble here is the unsustainable belief that Asia can grow rapidly no matter what happens among the biggest economies. Don't bet on it. It's great China is growing 9.6% and India at 8.9%. But, nothing would serve Asia better than a rebound in growth in the US , euro zone, Japan and the UK, which combined make up $34 trillion in annual output. Developing economies may live for a couple of years without the majors. Good luck keeping up that performance in the years ahead.

Food prices: A January 3 Times of India headline raised a question in many minds: "Can government do nothing legally to check prices?" The answer is: not much. The UN Food and Agriculture Organization predicts the global cost of importing foodstuffs totalled $1.026 trillion in 2010, compared with $893 billion in 2009. Imbalances in supply and demand and regional trade rigidities will accelerate the trend, swamping developing nations with the most basic of problems: Filling the bellies of those powering their economic rise.

Income inequality: The trajectory of everyday prices is a fast-developing setback to Asia's efforts to narrow its gaping rich-poor divide. Rising costs for cooking-oil and rice may mean little to a Goldman Sachs Group Inc staffer. To a family living on $3 a day and already spending two-thirds of income on food, they are devastating. Rising wealth disparities could foreshadow a year of tensions, as failed harvests and inflation cause famines, riots, hoarding and trade wars worldwide. The bubble here would be one in human suffering.

Wacky weather: A few months ago, drought was imperiling Australia's economic outlook. Today floods that some characterise as "biblical" have economists calculating the implications for commodity prices. Forget temperatures and focus on the increasing frequency of freaky weather patterns from Miami to Mumbai.

Currency reserves: Why any economy needs $2.7 trillion of them is beyond me. It's not just China that is trapped into adding to its currency stockpile to keep its existing holdings from losing value. Japan has more than $1 trillion, while Taiwan, South Korea, Hong Kong, Singapore and Thailand have a combined $1.3 trillion. Talk about an unproductive use of wealth - and a risk that's growing by the day with no easy fix in sight.

Geopolitical risks: Leave it to Kim Jong-Il to remind investors that the biggest surprises won't be from economic or corporate reports, but rogue regimes. Expect a bull market in territorial disputes. Faced with growing uncertainty, governments are desperate to placate the masses. The desire to unify the home population may lead to rifts between neighbours. Those seeking shelter from these brewing storms explains why gold is almost $1,400 an ounce.

Group of 20: Any optimism that European officials can avert disaster might be seen as irrational. The same goes for the belief that China can grow 10% annually forever or that Japan's leaders can defeat deflation. The real perceptions bubble is that a disparate grouping of 20 nations can tame out-of-whack markets and imbalances that were decades in the making. The year ahead might turn any, or all, of these accepted wisdoms on their head.

Source : ET

Timeline of Bofors scandal

Following is the chronology of events in the Bofors Howitzer pay-off scandal:

March 24, 1986: A $15 billion contract between the Indian government and Swedish arms company AB Bofors is signed for supply of over 400 155mm Howitzer field guns.

April 16, 1987: Swedish Radio claims Bofors paid kickbacks to top Indian politicians and key defence officials to secure the deal.

April 20, 1987: Then Prime Minister Rajiv Gandhi assures the Lok Sabha that no middleman was involved and no kickbacks were paid

Aug 6, 1987: Joint Parliamentary Committee (JPC) set up under B Shankaranand to probe allegations of kickbacks.

July 18, 1989: JPC report presented to Parliament.

November 1989: Congress defeated in Lok Sabha election.

Dec 26, 1989: Prime Minister V.P. Singh's government bars Bofors from entering into any defence contract with India.

Jan 22, 1990: Central Bureau of Investigation (CBI) registers complaint in the case.

Jan 26, 1990: Swiss authorities freeze bank accounts of Svenska and AE Services, which allegedly received unauthorised commissions for the deal.

Feb 17, 1992: Journalist Bo Anderson's sensational report on the Bofors payoffs case published.

December 1992: Supreme Court reverses a Delhi High Court decision quashing the complaint in the case.

Feb 9, 1993: Supreme Court rejects former Bofors agent Win Chadha's plea for quashing the letters rogatory sent by the trial court to its counterpart in Sweden seeking assistance in the case.

July 12, 1993: Swiss federal court rules that India was entitled to Swiss bank documents pertaining to kickbacks.

July 29/30, 1993: Italian businessman Ottavio Quattrocchi, who represented Italian fertiliser firm Snam Progetti for years, leaves India to avoid arrest.

Jan 21, 1997: After four years of legal wrangles, secret documents running into over 500 pages given to Indian authorities in Berne.

Jan 30, 1997: CBI sets up special investigation team for the case.

Feb 10, 1997: CBI questions ex-army chief Gen Krishnaswamy Sundarji.

Feb 12, 1997: Letters rogatory issued to Malaysia and United Arab Emirates (UAE) seeking arrest of Quattrocchi and Win Chadha.

May 1998: Delhi High Court rejects Quattrocchi's plea for quashing of 'red corner' notice issued by Interpol at CBI request.

Oct 22, 1999: CBI files first chargesheet naming Win Chadha, Quattrocchi, former Indian defence secretary S K Bhatnagar, former Bofors chief Martin Ardbo and Bofors company. Rajiv Gandhi's name figures as "an accused not sent for trial" -- as he was assassinated in 1991.

Nov 7, 1999: Trial court issues arrest warrants against Quattrocchi, while summoning other four accused.

Dec 13, 1999: CBI team goes to Malaysia to seek extradition of Quattrocchi; fails.

Early 2000: Quattrocchi approaches Supreme Court to quash arrest warrant against him. The court asks him to appear before the CBI for interrogation while protecting him from being arrested. Quattrocchi refuses to accept the order.

March 18, 2000: Chadha comes to India to face trial.

July 29, 2000: Trial court issues "open non-bailable arrest warrants" against Ardbo.

Sep 4, 2000: Chadha moves Supreme Court for permission to go to Dubai for treatment. Supreme Court rejects plea.

Sep 29, 2000: Hindujas issue statement saying funds received by them from Bofors had no connection with the gun deal.

Oct 9, 2000: CBI files supplementary chargesheet naming Hinduja brothers as accused.

Dec 20, 2000: Quattrocchi arrested in Malaysia, gets bail but is asked to stay in the country.

Aug 6, 2001: Former defence secretary Bhatnagar dies of cancer.

Oct 24, 2001: Win Chadha dies of heart attack.

Nov 15, 2002: Hinduja brothers formally charged with cheating, criminal conspiracy and corruption.

Dec 2, 2002: Malaysian court denies India's request for Quattrocchi's extradition.

July 28, 2003: Britain freezes Quattrocchi's bank accounts.

Jan 4, 2004: Swiss authorities agree to consider CBI request to provide Quattrocchi's bank details.

Feb 4, 2004: Delhi High Court clears Rajiv Gandhi of involvement in scandal.

May 31, 2005: Delhi High Court clears Hindujas of involvement.

Dec 31, 2005: CBI tells Crown Prosecution Service (CPS), London, that it has not been able to link the money in two accounts of Quattrocchi with Bofors kickbacks.

Jan 7, 2006: Two accounts of Quattrocchi in London banks containing 3 million euros and $1 million are defreezed after then additional solicitor general B. Dutta met CPS lawyers.

Feb 6, 2007: Quattrocchi detained in Argentina on Interpol lookout notice.

Feb 13, 2007: CBI writes to ministry of external affairs for Argentinean Extradition Act and tells Interpol that documentation are being prepared for extradition proceedings.

Feb 24, 2007: Fresh arrest warrant against Quattrocchi obtained from Delhi court.

Feb 26, 2007: Quattrochhi released on bail with condition that he does not leave Argentina.

Feb 28, 2007: Two-member CBI team leaves for Argentina.

March 1, 2007: Argentinean judge examines CBI application seeking Quattrocchi's extradition.

March 23, 2007: Hearing of extradition plea begins in Argentine court.

June 8, 2007: Court in El Dorado rejects extradition request.

October 2008: Attorney General Milon Banerjee opines that CBI can withdraw Red Corner Notice against Quattrocchi.

Nov 25, 2008: Red Corner Notice withdrawn.

April 30, 2009: CBI seeks time from trial court to decide future course of action against Quattrocchi.

Sep 8, 2009: CBI seeks two weeks' time from trial court to explore options against Quattrocchi.

Sep 29, 2009: Government tells Supreme Court about decision to withdraw case against Quattrocchi.

Dec 14, 2010: A Delhi court reserves order till January 4, 2011 on a plea of CBI seeking to drop criminal proceedings against Quattrocchi.

Jan 3, 2011: An Income Tax tribunal rules that commission in violation of Indian laws was indeed paid to Quattrochi and Chadha in the gun deal that cost the national exchequer Rs. 412.4 million some 23 years ago.


Source: NDTV

Some global factors you need to track in 2011

This is the beginning of a new year and decade. Last year, the world came out of an economic slowdown and there were many ups and downs. Many factors indicated a possible double-dip recession. However, the threat has subsided and this year is expected to be a year of consolidation for the global economy.

There is plenty of economic stimulus action from policymakers, but going forward, these actions are expected to come down, and the economy should stand on its own legs. Therefore, this year is crucial for consolidation in the global economy.

These are some of the significant factors that will have an impact on global sentiment in medium to long terms this year:

Quantitative easing in US

The US Federal Reserve (Fed) initiated a couple of quantitative easing (QE) packages - QE1 and QE2. QE1 involved the purchase of about USD 1.7 trillion of mostly mortgagerelated assets from banks. The objective was to reduce the risk exposure of banks by removing their distressed assets and simultaneously providing them with the liquidity needed to fund new loans. QE1 has been successful in improving the financial conditions of large banks in the US.

QE2 was announced in the November last year. It was a package of USD 600 billion. QE2 was meant to buy treasury bonds of around USD 75 billion per month for the next eight months to increase money supply in the system as part of this QE. This massive package was expected to increase money supply in the system, as excess reserves of the banking system will go up. The objective of QE2 is to maintain the low interest rates, and further stimulate borrowing and spending activity in the economy.

QE2 is expected to weaken the dollar. This will facilitate an increase in exports for the US. As far as emerging markets are concerned, QE2 is expected to result in further foreign institutional investor (FII) inflows this year and therefore more challenges in terms of high liquidity and inflation. Fresh FII inflows will keep the emerging markets upbeat. However, higher inflation and more liquidity will call for further tightening in the monetary policy in emerging markets this year.

The sovereign debt crisis in Europe

Sovereign debt crisis in Europe uncovered during the middle of last year due to a huge fiscal deficit in some nations - Greece, Portugal, Ireland and Spain - was addressed by creating a large fiscal bail-out package by large European nations in association with IMF. However, the basic problem of these countries is still prevailing and the crisis is yet to be fully resolved.

More European countries are being added to this list due to their large fiscal debts. The unemployment rates in these countries are very high and the presence of the common Euro currency limits their chances of devaluating their local currencies, and raise competitiveness.

This is another important factor to track in the current year as the Europe crisis can play havoc in the overall markets, especially in sectors that have a direct exposure to the Euro region

Crude oil price rise

The price of crude oil in the international market is another significant factor to track in the current year. The price of crude oil has been quite volatile over the last few years and oil being one of the prime sources of energy it can make or break the growth of the global economy.

Crude oil price is on the rise since the last few months due to the weakness in the dollar, speculative trading and rising demand from emerging markets such India and China.

Investors in the domestic markets should track the movements in crude oil price closely. A sharp upward price movement from the current level can result in a rise in the fiscal deficit and inflation, and hence dent the economic growth story as India relies on import for most of its crude oil requirement.

Unemployment in developed countries

Last year, there has been a recovery in most of the global economies, triggered by the stimulus spends and soft monetary policies adopted. However, the overall number of new jobs created remained quite subdued, and as a result, the unemployment rate remained quite high in most of the developed countries including US, UK, Japan and some European countries.

The creation of new jobs is very important for a sustained recovery in the economy after a phase of stimulus package and quantitative easing gets over. The news and developments on the rate of unemployment is another important factor to track, going forward, this year.

Chinese news and developments

The Chinese economy is the second-largest and fastestgrowing economy in the world. It has done quite well over the last few years and has recovered quickly from the global economic slowdown. However, there are certain issues that threaten to slow down the Chinese growth story.

China has a huge trade surplus and analysts believe it is due to the Chinese policy of keeping its currency under-valued and not setting it free to determine its valuation in the markets. China is under pressure to re-value its currency in line with market forces. This will result in a sharp appreciation in its currency and hence impact its export-oriented businesses.

On the other hand, a soft monetary policy in China has resulted in high commodity prices and inflation. There are chances of an asset bubble forming in certain areas. China has already started tightening its monetary policy slowly and analysts believe there will be many more rate hikes in China this year. Higher interest rates may slowdown the growth in the Chinese economy, going forward.

A slowdown in the Chinese economic growth rate can impact the global economic growth rate, commodity prices etc, and hence will be an important factor to track.

FII inflows to emerging markets

Last year, FIIs invested a lot of money in emerging markets, including India. The main reason for the strong FII inflows include the soft monetary policies and limited investment opportunities in the developed countries, and the fast pace of recovery and growth in the emerging markets.

Although the valuations in the emerging markets are no longer cheap, FIIs are expected to pump in more money to the emerging markets due to the extension of the soft monetary policy in the developed countries. It will have a major impact on the economies of emerging markets in terms of commodity price rise, high liquidity, escalation in market valuations and inflation.

Fluctuations in global currency values

There has been a lot of movement in the major world currencies. The dollar, euro and British pound had sharp market swings last year due to economic uncertainties prevailing in the developed countries. Sharp movements in cross currency rates are not good for global businesses as they restrict their ability to plan, and that results in a loss due to cross currency transactions.

Analysts believe the currency market will remain volatile with plenty of cross currency movements in the short to medium terms.

Commodity market

Last year, the commodity market remained quite volatile due to turbulence in the global markets. Agricultural commodities are going through price fluctuations due to various reasons including monsoon, demand-supply mismatch and high liquidity. Analysts believe the volatility will remain high in commodities this year as well.

Gold, silver and crude oil are expected to do well due to investments and hedging by large global players in response to uncertainty at the global level. On the other hand, the price movements in industrial commodities will depend on the macroeconomic growth in the world economy. Financial turbulence in China, demand from European nations etc are some relevant factors

Monetary policy in India

Containing the inflation rate was on top of the agenda of financial policymakers here last year. The price escalation that started with food and primary articles spilled over to other essential items. The Wholesale Price Index (WPI) based inflation went up to double digits in the middle of last year.

The Reserve Bank of India (RBI) has done well to control the rising inflation rate by implementing monetary policy tightening actions. The inflation rate has come down from alarming levels. However, it is still ruling beyond the comfortable range of 5-6 percent.

Going forward, this year, the challenge is to maintain the rate of inflation and reduce it further given the expected FII inflows and rise in global commodity prices (especially crude oil). The use of the monetary policy as a tool to control the inflation rate has limitations as it will start hurting the economic growth rate if the rates go up significantly

Fiscal deficit in India

The government has done well to raise money from various areas such as 3G license auctions, disinvestment in public sector undertakings etc and contain the fiscal deficit. However, going forward, it will be challenge to contain the fiscal deficit given the sharp rise in crude oil price and reduced avenues for the government to generate extra funds.

The crude oil price will be a key factor to track this year as it could impact the overall economic growth adversely

Soft monetary policies

Soft monetary policies are being implemented in many parts of the world. As the global economy is slowing getting back on the growth path, it is important to tighten the monetary policies gradually.

The timing and quantum of these tightening steps would be important as any abrupt tightening will increase the risk of an economic recession again.

On the other hand, if the soft policies are continued for long, there is a risk of high inflation, quick-rising debts and asset bubbles forming.


Artcile By Vikas Agarwal