The Federal Reserve cut its benchmark interest rate by a quarter point to 4.5 percent to cushion the U.S. economy from the housing recession that officials predict will extend into next year.
Today's action, combined with the policy action taken in September, should help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets, the Federal Open Market Committee said in a statement after the meeting today in Washington. The committee judges that, after this action, the upside risks to inflation roughly balance the downside risks to growth.
Policy makers lowered borrowing costs for a second month even after reports today showed the economy expanded more than forecast last quarter and companies stepped up hiring. Chairman Ben S. Bernanke emphasized this month that the outlook is uncertain and housing will constrain growth into 2008.
Economic growth was solid in the third quarter, and strains in financial markets have eased somewhat on balance, the Fed said. However, the pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction.
Discount Rate
The Fed also lowered the discount rate, the cost of direct loans to banks, by 25 basis points to 5 percent, from 5.25 percent. A basis point is 0.01 percentage point.
Policy makers said in the statement that inflation risks remain and the committee will continue to monitor inflation developments carefully.
Economists anticipated the decision, according to the median of 108 forecasts in a Bloomberg News survey. Futures contracts on the Chicago Board of Trade showed traders also expected a quarter-point move.
Economists and former officials said before the meeting that the central bank would want to preserve leeway to take back the rate cuts should the economy weather the risks from credit and housing markets. Vice Chairman Donald Kohn said Oct. 5 the Fed must be nimble in adjusting policy to promote both growth and price stability.
Bernanke, 53, and other officials in speeches this month have described the importance of taking out insurance to protect the economy from risks when the outlook is difficult to judge.
Consumer-price increases have slowed, while a falling dollar and rising oil costs threaten a renewed acceleration. The Fed's preferred gauge, the personal consumption expenditures price index excluding food and energy, probably rose 1.8 percent in September from a year ago, according to the median forecast. The Commerce Department reports the figures tomorrow.
The index remained below 2 percent from June to August. Bernanke, before taking the Fed's helm, said his comfort range for the measure was 1 percent to 2 percent.
The Commerce Department said today that the expansion picked up in the third quarter, though economists surveyed by Bloomberg predict a slowing this quarter. A private report showed companies hired 106,000 this month after creating 61,000 jobs in September.
The economy grew at a 3.9 percent annual rate in July to September, up from 3.8 percent in the previous three months, Commerce figures showed. It will slow to a 1.8 percent pace in the current period, according to the median estimate in a survey published Oct. 10.
Housing figures this month showed the industry has yet to find a bottom. A private survey yesterday showed home values in 20 metropolitan areas slid the most in at least six years. Sales of previously owned homes fell to the lowest level since National Association of Realtors began keeping records in 1999, and government figures recorded a 14-year low for housing starts.
Continued stress in credit markets may lengthen the housing recession and temper business investment plans. The world's largest banks and securities firms announced more than $30 billion of third-quarter charges.
Citigroup Inc. the biggest U.S. bank, said Oct. 15 that earnings fell 57 percent as loan losses increased. Merrill Lynch & Co. last week wrote down the value of subprime mortgages, asset-backed debt and leveraged loans by $8.4 billion.
The benchmark rate is now at the lowest level since January 2006. Bernanke took office the following month, and continued a series of rate increases that lifted the federal funds rate to 5.25 percent by June last year.
Buy Microsoft Products with us and Save upto 60%
Wednesday, October 31, 2007
Fed Lowers Benchmark Rate by a Quarter Point to 4.5 Percent
Friday, October 19, 2007
Brutal selloff on Wall Street
Dow down almost 367 points, its third worst day of the year, on fears about credit and housing sector, earnings, record-high oil prices, slide in dollar, what the Fed will do next.
Stocks tumbled Friday as record-high oil prices, more problems in the bank sector and slower corporate earnings growth revived worries about an economic slowdown.
The Dow Jones industrial average lost around 367 points, seeing its third-biggest point loss of the year, its worst since the steep selloff in early August in the midst of the credit and mortgage market mess.
The decline Friday left the blue-chip indicator at its lowest point since Sept. 17, the day before the Federal Reserve cut interest rates for the first time in 4 years, triggering a rally that was cut short this week.
The S&P 500 index lost 2.6 percent and the Nasdaq composite gave up 2.7 percent.
Disappointing earnings from Caterpillar, Honeywell and others exacerbated concerns about weak third-quarter profits. Meanwhile, Wachovia became the latest financial services firm to reveal how the credit and mortgage market crisis had hit its profits.
Oil prices ended lower Friday, but not before hitting an all-time high of $90.07 a barrel in electronic trading. The dollar fell to a new record low against the euro and also slipped versus the yen. Treasury prices surged, as investors sought safety in the comparably safe haven of bonds.
The declines reflect a certain shifting in perspective, said Ram Kolluri, president at Global Investment Management.
"We have fully come to the queasy realization that the U.S. economy may slow down considerably," Kolluri said.
He said that this realization has been driven by the ongoing problems in the real estate market, rise in gold and other commodity prices, and especially $90 a barrel oil - all of which is hitting Corporate America, and the consumer.
Consumer spending fuels roughly two-thirds of economic growth, and after a lot of predictions, actually does seem to be slowing substantially.
Stocks have had a tough week as investors digested a batch of lackluster earnings reports and tried to put into context what the run up in oil prices could mean for consumer spending and the economy.
"We're seeing this kind of selloff because of where oil is and because the banks are reminding people that we have a lot further to go before we get to the bottom of the real estate issue," said John Forelli, portfolio manager at Independence Investments.
Forelli said that this marks a change in thinking from earlier in the month, when a rash of billion-dollar writedowns from big banks seemed to give investors a "the worst is behind us" perception.
The run up in oil prices was also significant in that it revives fears about whether it will drive up inflationary pressures enough to limit the Federal Reserve's ability to cut interest rates further, even if the economic growth deteriorates enough to warrant more cuts.
Market breadth was negative. On the New York Stock Exchange, losers beat winners by more than 5 to 1 on volume of 1.79 billion shares. On the Nasdaq, decliners topped advancers 5 to 1 on volume of 2.41 billion shares.
Stock declines were broad based, with all 30 Dow stocks slumping.
Thursday, October 18, 2007
China's market capitalisation swells to $3.37 trillion, emerges world's fourth largest
China has emerged fourth in the world in equity market capitalisation with a volume of 25.32 trillion yuan ($3.37 trillion) as of September 30 this year, accounting for about 5.7 per cent of the world's total.
A total of 1,517 companies went public on the stock markets of the mainland by the end of September, official media said.
The overall volume at Shanghai and Shenzhen bourses was around 4 trillion yuan at the end of 2002, ranking China the fourth largest in Asia, data furnished by a delegation of the central financial authorities to the ongoing communist party congress showed.
China's equity markets raised a total of 425.04 billion yuan ($56.7 billion) through initial and secondary public offers in the first nine months of this year, surpassing the combined funds from 2002 to 2006, the China Securities Journal reported.
In September alone, money raised through 15 initial public offers (IPO) amounted to 149 billion yuan, or half of the money raised through IPOs so far this year. China Shenhua, the nation's biggest coal producer, raised 66.58 billion yuan from IPO, refreshing the 58.05 billion yuan record set by the China Construction Bank.
China securities regulatory commission chairman Shang Fulin cited shareholder reform initiated in 2005 to float non-tradeable state owned shares, tighter market supervision on insider trading and the clean-up of the securities sector as factors leading to the bull run on the stock market.
He said the stock market is playing a better part acting as a barometer of china's economy.
Institutional investors control 46 per cent of the market equity, reports quoted Shang as saying.
The market was also driven by sufficient liquidity, rapid economic growth and the return of heavyweight state-owned enterprises from overseas bourses to domestic share markets.
Wednesday, October 17, 2007
SEBI's mooted curbs on PN (P-Notes) flows causes BSE, Nifty to hit lower circuit
Curbing the flow of hot money into the country has side effects. Bulls discovered this to their cost, when market regulator SEBI placed limits on participatory notes.
What is participatory notes?
Participatory notes (PNs) are instruments used by investors or hedge funds that are not registered with the SEBI (Securities & Exchange Board of India) to invest in Indian securities. Indian based brokerages buy Indian-based securities and then issue PNs to foreign investors. Any dividends or capital gains collected from the underlying securities go back to the investors.
Participatory notes are instruments used for making investments in the stock markets. However, they are not used within the country. They are used outside India for making investments in shares listed in that country. That is why they are also called offshore derivative instruments.
Like any other derivative instruments, their value is determined on the basis of the underlying asset. In the case of participatory notes, the underlying assets are shares listed on the stock exchanges.
In the Indian context, foreign institutional investors (FIIs) and their sub-accounts mostly use these instruments for facilitating the participation of their overseas clients, who are not interested in participating directly in the Indian stock market. According to one estimate, participatory notes constitute more than 25% of the cumulative net investments in equities by FIIs.
Today's fall
India's stock market benchmark Sensex crashed by 1,743 points within the first few minutes of opening this morning (17 October 2007), prompting the suspension of trade for an hour.
This is fallout of market regulator Securities and Exchange Board of India (SEBI) clamping down on anonymous participatory notes (PNs) to arrest the flood of foreign inflows. The fall came just days after finance minister P Chidambaram expressed surprise at shooting stock prices - the Sensex had shot up by 5,000 points in less than two months - and hoped that things would cool down.
Soon after the stock markets closed on hitting the down-circuit, Chidambaram said in a live telecast that the government was neither against PNs, nor was it banning them. Proposals to moderate portfolio investment by foreign investors were part of a series of steps to moderate capital inflows, he emphasised.
Earlier, on Tuesday, SEBI proposed partial restrictions on investment through offshore derivative instruments, including participatory notes (PNs), equity linked notes and capped return notes.
SEBI issued a discussion paper suggesting that FIIs and their sub-accounts should not issue or renew offshore derivative instruments (ODIs) with underlying derivatives, with immediate effect. "They are required to wind up the current position over 18 months, during which period SEBI will review the position from time to time," the paper said, inviting comments from the public about the new proposals.
FIIs currently issuing ODIs the with notional value of PNs outstanding (excluding derivatives) as a percentage of their assets under custody (AUC) in India of less than 40 per cent should be allowed to issue further ODIs only at an incremental rate of 5 per cent of their AUC in India.
Those FIIs with a notional value of PNs outstanding (excluding derivatives) as a percentage of their AUC in India of more than 40 per cent should issue PNs only against cancellation or redemption or closing out of the existing PNs of at least equivalent amount.
Though only a proposal, the SEBI move effectively halted the FII-led rally. FIIs invested over $5.45 billion in October alone, taking their total investment for 2007 to $17.69 billion.
The huge inflows have pushed up the value of the rupee against the dollar. The year-on-year increase in ODIs, the anonymity that it provides to investors, and the copious inflows into the country from foreign investors have been areas of concern for the government and regulators like the Reserve Bank of India (RBI) and SEBI.
Earlier, the High Level Committee on Capital Markets (HLCC), as well as various committees set up by the government and regulators had made recommendations that included issuing of PNs only to regulated entities subject to know-your-customer (KYC) requirements.
Main causes for concern
The notional value of PNs outstanding, which was Rs31,875 crore (20 per cent of AUC) in March 2004 has grown over 10 times to Rs3,53,484 crore (51.6 per cent of AUC) by August 2007
The value of outstanding ODIs with underlying derivatives is Rs1,17,071 crore - about 30 per cent of total PNs outstanding
The notional value of outstanding PNs - excluding those with underlying derivatives - as a percentage of the AUC was 34.5 per cent in August 2007
At present, 34 FIIs and sub-accounts issue offshore derivative instruments (ODIs), against 14 in March 2004
Sunday, October 14, 2007
Inflation rate dips to a five-year low at 3.26 percent
Annual rate of inflation based on the wholesale price index (WPI) declined to 3.26 per cent - a five-year low - for the week ended September 29, compared to 3.42 per cent in the previous week.
The annual rate of inflation stood at 5.41 per cent during the comparable period a year-ago.
The decline in inflation is attributed to a fall in prices of pulses and some food articles. The prices of pulses like moong and urad declined by 1 per cent during the week. Besides, a fall in tea prices, which declined by 4 per cent and edible oils (0.1 per cent), also helped to bring down the inflation rate.
The prices of vegetables, however, rose by 0.6 per cent, and fruit and milk prices remained unchanged during the week.
The index of fuel, power, light and lubricants, which have a weight of 14.23 per cent in the WPI, remained unaltered at its previous week's level of 322.
Manufactured products, which have a weight of 63.75 per cent in WPI, rose marginally by 0.1 per cent during the week.
It would be the seventh straight week inflation has been below 4 per cent and the 17th week it has been under 5 per cent, the RBI's upper floor for the 2007-08 fiscal year.
Annual inflation rose to a two-year high of 6.69 per cent in January, but softened after the central bank tightened policy and the government cut duties on a slew of items to cool prices.
Rupee futures volume in Dubai climbs 68 per cent in September
Rupee futures volume on the Dubai Gold and Commodities Exchange (DGCX) surged 68 per cent in September while the currency continued to trade below 40-a-dollar level on the domestic foreign exchange market.
The value of the total number of contracts traded on DGCX since inception now stands at $40.53 billion, of which gold contracts account for $20.87 billion.
Traders switched to currency futures and preferred to tread cautiously in the commodity markets following increased price volatility that drove gold, crude oil prices to their highest levels in several decades, a statement from the exchange said.
The exchange began trading the world's first Indian rupee contracts in June.
Gold futures prices recorded a massive jump of nearly 10 per cent, climbing to their highest levels in almost 28 years while Euro jumped by 4.45 per cent to reach an all-time high against the US dollar. Silver futures registered a big jump of 13.61 per cent during September.
Of the total traded volume (68,558 contracts) during September, gold futures remained in the forefront, contributing 42,323 contracts.
The British pound contract led the table accounting for a volume of 21,783 contracts out of a total of 25,692 contracts traded.
Euro futures volume saw a rise of nearly 7 per cent over the previous month while the traded volume in the Indian Rupee futures leapt by 68 per cent.
An unprecedented foreign investment flow into the rapidly growing economy has pushed the rupee higher into an "uncomfortable" zone, according to finance minister P Chidambaram.
"We must find ways to manage a competitive exchange rate without hurting investments," Chidambaram told a conference in Mumbai. The rupee is in an "uncomfortable zone," he said.
The rupee's rise was aided by a tide of overseas money into domestic shares following a cut in US interest rates last month.
The rupee finished the week (Friday) flat at 39.3 against the dollar, a nine-and-a-half year high. Some analysts expect the rupee to touch 38 to the dollar or even lower by the middle of next year.
The rupee has already risen by over 11 per cent this year against the dollar, making it Asia's best performing currency.
The Reserve Bank of India has been buying dollars to check the rupee's rally and protect slowing exports.
The rupee is expected to gain further as foreign investors buy shares and pour money into plants and infrastructure projects to exploit the booming economy.
Friday, October 12, 2007
What on earth have the markets been smoking lately?
A lot of, power, telecom and capital goods laced with a bundle of gas over some oil stocks.
What on earth is going on here? That must have been the reaction of most observers watching the vertical climb of our stock market indices, ever since Ben Bernanke decided to lower interest rates for inter-bank overnight borrowings in the US.
But stock market traders across the globe have reacted as if he has handed them a lottery with only one ticket to draw from. They reckon that Ben is a jolly good fellow who will keep on giving them lollies, every time they cry after making fools of themselves in the market.
It is no longer certain that Bernanke will be in a very benevolent mood when he sits down next to consider more gifts to market traders. It seems Uncle Sam, who put Bernanke in his chair, tricked him into handing out a big lolly last time by claiming that jobs were being lost. It has now turned out that Uncle Sam was bluffing, jobs were being added at a good pace.
Credit markets have stabilised and crude oil prices remain high, which may push up inflation -- more reasons for Bernanke to be less benevolent in future. But, global markets seem to be least bothered. They still seem to believe that there will be a pack of lollies at every corner.
We in India have been among the most exuberant in recent weeks. Except for a short blip when our politicians in Delhi seemed all set to challenge each other for a face off in a general election, our stock indices have been running on steroids. And the omnipotent Ambani brothers have led the charge and how!
Reliance Bubble?
As the Sensex moved past 18000, the Ambanis crossed another milestone - that of the richest family on earth. The combined wealth of Mukesh and Anil is now over $90 billion, more than the net worth of Walton family promoters of Wal-Mart. Now consider this, only 53 countries had GDP of over $90 billion in 2006 as per World Bank data!
Reliance Industries, Mukesh's flagship, is the best performing large-cap index stock anywhere in the world this year by a wide margin. The stock has been on a relentless up-move, triggered by speculation on pricing of natural gas from its KG Basin fields and expectations of fast expanding retail operations. The gas pricing has now been finalised and it is a fair deal to Reliance. High crude oil prices will ensure record refining margins at its refinery and the petrochemicals businesses are also doing very well.
But, do all these factors many of them known even earlier warrant a more than doubling of the stock price? Reliance's much talked about retail rollout is slowing down as the company is facing resistance in many states.
Given the uncertain political scenario at the centre and possibility of an early election, it is unlikely that state governments will move in favour of the company - though it has every right to receive protection from violent protestors.
Even if the company manages to expand its network, using the famous Reliance ability to work the system, how profitable are these stores going to be given the rush of new players into retail and prohibitive property costs? The small neighbourhood I live in already has seven modern branded retail stores on one street, including a Reliance Fresh! It is doubtful if anyone other than the landlords are going to make any money out of the retail revolution anytime soon.
Reliance Petroleum, the latest jewel in Mukesh's crown, now boasts of a market capitalisation of close to Rs78,000 crore. This is for a company, which is setting up an oil refinery and may start operations in another two years if all goes well. Many things can go wrong in between; the US economy may cool off further, which will lower fuel demand and bring down prices.
Margins are already under pressure despite record crude oil prices, though Reliance Petroleum will enjoy higher than industry margins by processing heavier crude oil. The US dollar may weaken further, making exports of refined products less lucrative. Domestic demand is not rising fast enough to absorb the possible surplus capacity.
RPL's market value of Rs78,000 crore seems even more incredible when the total project cost of the refinery is Rs27,000 crore! So, even when the project is at the implementation stage, the company is enjoying a value of nearly thrice the total cost. Once the refinery becomes operational, imagine the future value it must generate to justify these valuations!
To put it in another way, RPL's current valuation is nearly two-thirds of Infosys. That much wealth was created without even 5 per cent of the effort Murthy, Nilekani and thousands of Infosys employees put in over the last 25 years to make Infosys what it is today. Reminds you of website valuations in the late '90s? Wait until you hear about the miracles that the Anil Ambani Group stocks have performed.
Not to be outpaced, Anil Ambani has also taken a leaf out of big brother Mukesh's 'wealth creation strategy'. If Mukesh can generate so much wealth just by taking a new project public, why can't Anil? So, he decided to take hive off the big power projects from Reliance Energy and announced the creation of Reliance Power. How much capacity is Reliance Power going to build? The sky is the limit it seems, as the company has announced plans for 12 projects with an aggregate capacity of more than 24,000 MW. That is more than the existing capacity of NTPC, the biggest power generation company in the business now. Impressive, indded.
What else can Reliance Power do? There is some market talk of huge cement plants, which will use the fly ash from its own power plants as raw material. Some reports suggest that the potential capacity may be more than the existing capacity of the entire cement industry in the country. Even more impressive! Where will the company sell all that cement? Please don't ask such dumb questions!
But how profitable are these projects likely to be? Reliance Power's flagship project will be the 4,000 MW ultra-mega power project at Sasan, which by the way is its only project that can be implemented anytime soon.
This project was awarded to Reliance Energy after the earlier awardee, Lanco-Globeleq, was disqualified. The tariff quoted by Reliance is Rs1.2 per unit, which must be among the lowest anywhere in the world. When the project was awarded to Lanco, many doubted whether the project would ever be profitable at such low tariffs. Now that the project is with Reliance, the markets have no doubt it will be a money-spinner.
All the troubles Reliance Energy continues to face on its 7,500 MW Dadri project in Uttar Pradesh have also been overlooked. Even nearly two years after announcing the project, it is still not clear if the company has completed its land acquisition. It does not help that the current Uttar Pradesh government is sending not very supportive signals over the project because of Anil Ambani's political interests. Nothing much has been heard about a similarly ambitious project proposed in Orissa, announced last year.
When the Reliance Energy stock was moving on all these fantastic news flows, came the announcement that the company would develop a huge township in Andhra Pradesh. The centrepiece of this township is to be a 100-story high-rise, the tallest in the country - no less. And the stock jumped another 12 per cent!
All these stories of fantastic valuations pale in comparison to Reliance Natural Resources or RNRL. Here is a company that was originally supposed to buy natural gas from Reliance Industries and supply it to various Reliance Energy projects. In other words nothing more than a gas trader. Then markets started to see infinite possibilities for the company in the entire energy space from exploring for oil and coal bed methane to city gas distribution. The company won three or four coal bed methane blocks in Rajasthan and a small oil block in Mizoram in the last round of NELP bidding.
These are all exploration blocks, mind you, and RNRL has to drill and find something under the ground. But the RNRL stock has behaved as if the company is already sitting on huge oil and gas reserves.
RNRL now boasts a market capitalisation of around Rs13,500 crore. Incredible as it may sound, the last leg of the surge came after the company applied for a licence just an application that might have cost a few thousand rupees for city gas distribution. That news pushed up its market value by around Rs3,000 crore in a single day. Indraprastha Gas, the leading city gas distributor in the country with a monopoly in Delhi and now expanding to other cities, has a market value of just Rs1,900 crore!!
Can't we do a China?
'This week Chinese stock market traders could not make any money because the markets were closed for holidays', was the opening line of a recent article in a major international financial newspaper. Yes, over the last year or so this was the simple rule for Chinese traders. If the market was open, they made a truckload because the only way for prices to move is up.
The way our markets are behaving, we seem to be in a hurry to absorb this 'Chinese doctrine' of stock market investing. Also, it may impress M/S Karat, Bardhan, Yechury & Co. that we are following the 'Chinese model' of 'market socialism' and not the evil capitalism promoted by Uncle Sam and its cronies. Then may be, they will spare our markets from their 'tough-talk' whenever there is a political crisis next. Given the current political undercurrents, that can be anytime.
If the Mainland Chinese index can trade at an earnings multiple of over 50, why should the Sensex limit itself to a multiple of just half of that? After all, Indian companies are supposed to have better earnings visibility, better and more transparent managements, global capabilities and all that. And of course the clincher, we are a democracy! So, don't we deserve a better valuation than even the Chinese?
Those who argue on the these lines often fail to consider many factors that make the Chinese stock markets, well, different. As most companies are government-owned, supply of stocks is highly limited. When too much money chases too few assets, prices obviously go through the roof. Provincial governments own many Chinese companies and it is in the interest of government officials to push up stock prices, whichever way they can. There is also talk of massive price rigging and insider trading in Chinese stocks.
Anyone who has ever visited a casino in a city with even a small Chinese population would readily agree that the Chinese are inveterate gamblers. Watching them gamble, it may appear is their most natural of all pastimes. No wonder that the Chinese territory of Macau has overtaken Las Vegas as the gambler's paradise. The trouble is, the Chinese seem to approach stock market trading just the way they do gambling.
Those of us who have observed the markets for the last two decades or so have seen phases where it was difficult to differentiate trading from gambling. When our very own pied pipers like Harshad Mehta and Ketan Parikh played the tunes of 'replacement values' in the early '90s and 'ICE' economy later, we swallowed it all only to lose everything and regret it later. One of the constants in these earlier phases of exuberance was that the big falls were preceded by swift and vertical surges. Are we in for another déjà vu?
Most seasoned and sensible investors have long argued that Chinese stocks are way past bubble levels. For the Chinese, it may be just one of the many bubbles as they are now in the midst of 'bubbles among bubbles' stock bubble, property bubble, export bubble, FDI bubble, name your bubble, and they have it.
While it may be creditable if we can catch up with them in many areas of economic activity, stock market valuations are definitely not one of them. We will be better off without this fancy for creating bubbles. When they eventually burst, we may not be able to absorb the pain the way Chinese gamblers in casinos do... by lighting the next smoke and ordering another drink.
Thursday, October 11, 2007
India's economy - A Himalayan challenge
India needs to tackle rigid labour laws to reach its full growth potential
THE Organisation for Economic Co-operation and Development (OECD) has long lectured its rich member countries about pursuing free trade, privatisation and flexible labour and product markets. It has now produced its first economic survey of India, which once had some of the world's most interventionist economic policies. India wins much praise for its reforms over the past two decades, but the OECD reckons that the country still has a long way to go: on many measures India scores badly relative to both member countries and the other emerging giants.
India's market reforms have brought big rewards. The OECD estimates that on today's polices, India can sustain annual growth of more than 8%, up from 3.5% during the three decades to 1980. The economy has been growing even faster, by more than 9%, over the past two years, but this has pushed up inflation, forcing the central bank to raise interest rates.
The OECD reckons that India cannot reach the government's medium-term growth target of 10% without further bold steps. These include reducing government meddling in the economy, labour-market reform and improving the infrastructure.
Take the labour market. India has by far the most restrictive employment-protection laws for collective dismissals, scoring much worse than China and Brazil as well as rich countries (see chart). Manufacturing firms need to obtain government permission to lay off workers from factories with more than 100 staff. This partly explains why most firms are so small: 87% of employment in Indian manufacturing is in firms with fewer than ten employees, compared with only 5% in China. Small firms cannot reap economies of scale or exploit the latest technology, and so suffer from lower productivity than big firms.
India's reforms have certainly boosted the productivity of many firms. The snag is that unprofitable companies, which should have been squeezed out by competition, have remained alive because it is so hard to fire workers. This reduces productivity across the economy. India's hiring and firing laws also explain why the growth in manufacturing has been weak compared with the boom in services, which are not covered by the same rules.
The OECD's indicator of product-market regulation (ie, the extent of state ownership, the red tape involved in setting up a business, and barriers to international trade and investment) again puts India at the bottom of the class. India has the second-highest government subsidies relative to GDP of all countries surveyed and the highest import tariffs.
There is compelling evidence that further reforms would boost India's growth. Industries in which the government has eased regulation and encouraged competition, such as telecommunications and IT services, have grown fast. State-owned firms still account for 38% of output in the formal non-farm business sector, yet the OECD estimates that private firms are on average one-third more productive than public-sector ones. States with looser labour- and product-market regulations enjoy higher labour productivity.
Sadly, further bold reform is currently blocked by the communist parties on which the coalition government depends for its majority. In an economy where income per person used to rise by barely 1% a year, today's growth rates feel like a miracle. But to eliminate India's vast poverty the country must try harder.
Wednesday, October 10, 2007
Fed explains the big rate cut
The Federal Reserve cited an "exceptionally weak" housing market and concerns that this summer's credit crunch could lead to a pullback in consumer and corporate spending as reasons for its decision to cut interest rates by a half percentage point on Sept. 18, according to minutes from the meeting released Tuesday.
The minutes showed just how seriously the Fed viewed the mortgage meltdown, which caused massive bouts of volatility in the stock and debt markets over the past few months.
The Fed said that a half-point rate cut, rather than the more conservative quarter-point cut that some investors were expecting, was "the most prudent course of action" in order to "help forestall some of the adverse effects on the economy that might otherwise arise" from deteriorating conditions in the credit markets.
However, it is uncertain what the Fed's next move will be when it meets again to discuss interest rates later this month.
Quincy Krosby, chief investment strategist for The Hartford, said that those in the "one and done" rate cut camp can point to the Fed's comments about inflation as a sign that the central bank wants to hold pat instead of cutting rates again.
At the same time, Krosby said it was telling that the Fed pointed out it felt "further slowing of employment growth was likely." That could be an indication the Fed is more worried about weaker economic growth than it is about inflation - signaling a reason to lower rates.
The government reported last week that the unemployment rate in September ticked up to 4.7 percent. Since labor costs are a major factor in determining inflation, it seems that the Fed would have less reason to be worried about pricing pressures in the coming months.
"The Fed acknowledged that the employment situation is slowing and that the economy is not producing as many jobs," Krosby said. "That gave some people hope that further easing is in the cards."
Last month, the Fed lowered its federal funds rate, a key overnight bank lending rate that determines what consumers pay on various types of loans, to 4.75 percent.
The central bank's policy making committee will announce at the conclusion of its next meeting, a two-day session that ends on Oct. 31, whether or not it will once again lower the federal funds rates.
According to futures listed on the Chicago Board of Trade, investors are pricing in the strong likelihood of at least one quarter of a percentage point rate cut between now and the end of the year. The Fed's final meeting is scheduled for Dec. 11.
However, the probability of a rate cut is not as high now as it was immediately after the Fed cut on Sept. 18. At that time, investors were pricing in a nearly 100 percent likelihood of a rate cut on Oct. 31.
Joe Balestrino, a senior portfolio manager for fixed income investments at Federated Investors in Pittsburgh, said that bond investors seem to be indicating that another rate cut before the end of the year is no longer "a lock" since the Fed also indicated in the minutes that is continuing to keep a close watch on inflation.
This might not be a bad thing though, he continued. He said investors may be coming to the realization that the Fed's half-point cut may keep the economy from sliding into a housing-induced recession and that the worst may be over.
"One could conclude that order has been restored to the financial markets. This may be just a growth slowdown with modest inflation," Balestrino said, adding that this is a "quasi Goldilocks" scenario similar to the mid-1990s.
In 1994, bonds and stocks had a rough year due to what Balestrino called "fears of a recession that never happened." The markets went on to experience several strong years of growth for the rest of the decade before tech stocks crashed in 2000.
Brian Stine, investment strategist with Allegiant Asset Management Co. in Cleveland, agreed that this could be similar to the mid-1990s. He said the main reason the stock market rallied on the Fed minutes is because it seems that the Fed has things under control.
"On the one hand, the Fed seemed to indicate that we're not headed for a recession but that they also think the outlook on inflation has improved. This is the path the Fed wants us to go on - moderate economic activity with inflation abating," Stine said.
Still, some are holding out hope for at least one more rate cut by year's end.
Matthew Smith, president and chief investment officer with Smith Affiliated Capital, an investment advisory firm based in New York with $1.7 billion in assets under management, said another reason investors may have taken comfort from the minutes is because another rate cut could mean that the dollar will remain relatively weak versus other currencies.
And while this would be a bad thing for bonds - a weak dollar makes Treasurys less attractive to international investors - the weak dollar should boost stocks, Smith said. That's because international investors will be drawn to large U.S. firms with significant operations overseas that will see profits rise.
"A weakening dollar is a positive for stocks since you get foreign investors coming in and there is a potential boost to earnings for multinational companies," Smith said.
Tuesday, October 9, 2007
Cabinet clears sugar industry sops
The government today announced a slew of measures aimed at helping the sugar industry.
These include subsidised loans to sugar mills to help them clear dues of farmers and making mandatory the blending of 5 per cent ethanol in petrol with immediate effect across the country, barring the North East, Jammu and Kashmir and the island territories.
It also allowed sugar factories to produce ethanol directly from sugarcane juice to augment its availability and reduce oversupply of sugar.
At the same time, 10 per cent blending has been made optional from this year, but this would become mandatory from next October.
A uniform nation-wide purchase price of Rs 21.50 per litre (ex-factory) for supply of ethanol for the next three years was also decided at a meeting of the Cabinet Committee on Economic Affairs here today.
The Indian sugar industry is facing its worst crisis, with mills not even able to recover the cost of raw material. This year's production, at 28 million tonnes, is 45 per cent higher than last year's 19.2 million tonnes.
Consequently, sugar prices have dropped sharply and most companies have incurred losses in the last two quarters. Mills have not been able to pay the cane prices to farmers.
In other decisions, the Cabinet also approved conversion of outstanding loans on account of harvesting and transport charges and short margins on sugar stocks, as appearing in the books of the sugar mills on April 1, 2007, into term loans up to a maximum period of five years, without any reduction in the existing rate of interest, and to provide higher interest subvention from budgetary support to the tune of Rs 600 crore.
The CCEA today gave its approval for providing loans to sugar mills from the banks under special guidelines. They would be entitled to loans of an amount equivalent to central excise duty paid by them, Finance Minister P Chidambaram told reporters after the meeting.
The government also gave its approval to extend the moratorium on outstanding term loans as on April 1, 2005, announced in September 2005 for co-operative sugar mills, from two to up to five years (reckoned from April 1, 2005) and to include co-operative sugar mills, not included in the earlier package, for availing the benefits of the earlier package.
The CCEA also extended export subsidy by one more year from April 19, 2008 to April 18, 2009, to target an additional export of 3 million tonnes of sugar.
It also decided to reduce Customs duty on denatured alcohol from 7.5 per cent to 5 per cent and on molasses from 10 per cent to 5 per cent.
The measures will be implemented once the mandatory 5 per cent ethanol blending comes into effect. It also approved extending the export assistance scheme under Sugar Development Fund to April 2009.
Prices are expected to fall further with yet another record production, projected at over 30 million tonnes, in 2007-08. Annual domestic demand hovers around 20 million tonnes.
The Union government has already announced incentives such as creation of a 5 million tonnes buffer stock and export subsidy (at a rate of Rs 1,350 a tonne for coastal sugar mills and Rs 1,450 a tonne for the non-coastal mills) to help the beleaguered industry.
Carbon Trading - India Story
what is Carbon Trading?
Carbon Trading provides a way to reduce greenhouse gas emissions on an industrial scale by capping total annual emissions and letting the market assign a monetary value to any shortfall.
Let’s rewind to the Kyoto Protocol of 1997 by which all countries are required to reduce their greenhouse gas emissions by 5% from 1990 levels in the next ten years, ie 2008 and a subsequent 5 year review period until 2012 or pay a price to those that do. The idea was to make developed countries pay for their wild ways with emissions while at the same time monetarily rewarding countries with good behaviour in this regard. Since developing countries can start with clean technologies, they will be rewarded by those stuck with ‘dirty’ ones. Say a company in India can prove it has prevented the emission of x-tonnes of carbon, it can sell this good carbon-karma to a company in say, the US which has a bad karma. An environment-fundamentalist may say it’s all a bit like an indulgent epicure paying someone else to diet for him, but then that’s another story. Right now, there is a market opportunity for India but only till 2012. Closer to that clean-up date prices of carbon credits will rise and in the years leading up to it there will be a scramble to buy credits cheap. The World Bank has built itself a role in this market as a referee, broker and macro-manager of international fund flows. The scheme has been entitled Clean Development Mechanism [CDM] in 2000. Or more commonly, Carbon Trading.
How buying carbon credits attempts to reduce emissions?
Carbon credits create a market for reducing greenhouse emissions by giving a monetary value to the cost of polluting the air. This means that carbon becomes a cost of business and is seen like other inputs such as raw materials or labor.
By way of example, assume a factory produces 100,000 tonnes of greenhouse emissions in a year. The government then enacts a law that limits the maximum emissions a business can have. So the factory is given a quota of say 80,000 tonnes. The factory either reduces its emissions to 80,000 tonnes or is required to purchase carbon credits to offset the excess.
A business would buy the carbon credits on an open market from organizations that have been approved as being able to sell legitimate carbon credits. One seller might be a company that will plant so many trees for every carbon credit you buy from them. So, for this factory it might pollute a tonne, but is essentially now paying another group to go out and plant trees which will, say, draw a tonne of carbon dioxide from the atmosphere.
As emission levels are predicted to keep rising over time, it is envisioned that the number of companies wanting/needing to buy more credits will increase, which will push the market price up and encourage more groups to undertake environmentally friendly activities that create for them carbon credits to sell. Another model is that companies that use below their quota can sell their excess as 'carbon credits.' The possibilities are endless hence making it an open market.
Carbon credits and it's benefit to India
India being a developing country, is a major beneficiary of the carbon credit market. Indian companies have a strategic advantage as the cost of emission reduction in India is very low as compared to the developed countries. The many projects initiated by Indian companies after January 1, 2000, in diverse areas such as energy efficiency, co-generation, natural gas, alternative auto fuels and hydel power, will also add to the country’s dominance as a large seller in the carbon credit market.
Indian companies have mainly concentrated on renewable energy (biomass, wind power, etc.) or waste heat recovery projects that generate much less certified emission reductions (CERs) compared with the Chinese who have several projects in high CER-yielding HFC23 projects. Companies investing in windmills, Bio-Diesel, Co-Generation, Bio-Gas are the ones that will generate Carbon Credits for selling to the developed nations.
Figure above depicts some of the top Indian carbon traders
Sunday, October 7, 2007
Can Fed support another rate cut?
Global equity markets, especially emerging markets, have surged to lifetime highs after last month's US Fed rate cut. But many of these markets are close to bubble territory while investors are ignoring the growing risks.
Ben Bernanke did what any sensible central banker would do when faced with demand slowdown in the economy. Size of a rate cut is always debatable, but it is well accepted that such measures should surprise if monetary policy is to be effective. A full-blown crisis in the financial markets and tight liquidity would have worsened the already weak outlook for the US economy.
Nobody likes a recession, not even central bankers, especially ahead of a presidential election. As a columnist said in the Financial Times yesterday, "in democracies bad stuff is outlawed" if politicians want to be re-elected.
But a large interest rate cut is like giving first aid to an accident victim, which in this case is the US economy. First aid is delivered without knowing or checking the full extent of injuries and it is often difficult to predict whether the patient's condition will improve. All that is known is that the victim is injured and will take some time to recover.
If the economy is weak, with increasing risks of it turning even weaker, and emergency support has been given in the form of an interest rate cut, why are markets so bullish? Strange as it may sound, but it is because conditions may get even worse and more rate cuts may follow!
Rate cuts bring the omnipotent force called liquidity into the markets and everyone will be happy and more prosperous. Declining corporate performance in a weak economy and soaring stock valuations be damned.
On the other hand, The Federal Reserve's decision last month to cut interest rates by a larger-than-expected half-percent point sent the already-weakening dollar to an all-time record low against a basket of six major currencies. In the third quarter, the euro appreciated more than 5% against the dollar, most of the gains coming in September alone.
Weakness in the dollar means prices of imported goods, particularly oil, will go up, raising the risk of inflation. American consumers will be paying more soon, with the looming threat of paying even more later on.
"The inflation risk from higher import prices will be the dominant initial effect," said Howard Chernick, an economics professor at Hunter College in New York. "The most immediate effect is imports denominated in dollars -- mainly oil. We already saw a spike in oil prices. So a bit down the line, that's 10 to 15 cents more per gallon of gas at the pump."
A weaker dollar can help narrow the U.S. trade deficit by making America's exports more affordable abroad.
Yet it could also make funding those imbalances more difficult. The U.S. has to attract billions of dollars a day from foreign investors, and a weakening currency makes dollar-based assets less attractive because of the consequences it can have on their long-term value.
That fear of inflation came into focus on Friday when a top Fed official suggested policy-makers have already cuts rates enough, a view reinforced by fresh data showing U.S. employment grew at a steady clip in September.
Inflation, as the late economist Milton Friedman once wrote, is taxation without legislation. Rising prices rob consumers of purchasing power, destroying the value of their savings over time.
Inflation turns savers into losers, at a time when America desperately needs more savers to fund its imbalances -- particularly if foreign investment starts to taper off. But fears of rising prices will keep consumers cashing their paychecks and heading to the mall, rather than depositing the funds in accounts whose returns might lag the inflation rate.
Having said this, What if Ben Bernanke decides that financial markets have partied enough, and decides to focus more on his pet peeve — inflation? Then he may hike interest rates or keep them steady and the markets will be in for a huge disappointment. We all know what happens when markets are disappointed, especially when the indices are at lifetime highs — investors panic.
Let us wait to see what will Fed vote for a rate cut to save recession ahead of presidential election or to save inflation in the next meeting?
Wednesday, October 3, 2007
India Trade Deficit Widened to $6.8 Billion in August
India's trade deficit widened in August as companies stepped up imports of oil and machinery to meet demand in the world's second-fastest growing major economy.
The trade deficit jumped to $6.8 billion from $5 billion in July, the Ministry of Commerce and Industry said in a statement in New Delhi today. Imports rose 32.6 percent to $19.5 billion. Exports in August grew 18.9 percent to $12.6 billion.
Imports are climbing as General Motors Corp., Honda Motor Co. and other automakers build new factories in India to cash in on the nation's auto demand, while refiners are buying more crude oil to fuel power generation. Exports have been hurt by the fastest gain in the nation's currency in at least 33 years.
`India's trade deficit is a result of its unprecedented economic growth,'' said D.H. Pai Panandiker, president at RPG Foundation, an economic policy group in New Delhi. ``The deficit is also under pressure because exports turned weak after the strong gain in the currency.''
India's rupee, Asia's best performer, has climbed 11.4 percent this year as international capital flows to the world's second-fastest growing major economy after China. India's economy grew 9.3 percent in the three months to June 30.
Non-oil imports in the April-August period rose 42.9 percent to $66 billion and oil imports gained 8.3 percent to $25.9 billion, today's report said. The trade deficit between April and August widened to $32.5 billion from $19.9 billion in the same period last year.
Rising salaries and borrowing from commercial banks have fueled spending by consumers in the world's second-most populous nation. Hewitt Associates Inc. forecasts salaries in India will climb an average 14.5 percent in 2007, the steepest gain in Asia for the second straight year.
General Motors, Honda, Volkswagen AG and half a dozen other companies plan to spend at least $6.6 billion on new factories. All are betting on a country where 7 people in 1,000 own a car, compared with 450 per 1,000 in the U.S. and 500 per 1,000 in Western Europe.
India's manufacturing growth accelerated in September as rising incomes spurred consumer spending, ABN Amro Bank NV said today. Manufacturing makes up a fifth of India's $854 billion economy.
The bank said its purchasing managers' index rose to 59.1 last month, the highest level since October 2006, from 57.9 in August. A reading above 50 indicates factory output gained.
Source - Bloomberg
Monday, October 1, 2007
Indian crude oil basket hits $78.46 a barrel
The basket of crude oil that Indian refiners buy hit another all-time high of $78.46 a barrel on Friday, the latest day for which data is available.
The high prices have pushed up revenue losses of the country’s three oil marketing companies to Rs 210 crore per day from Rs 190 crore a day in the first 15 days of September.
The government is, however, still sticking to its guns by not increasing retail selling prices of petrol and diesel. There is very less chance of a hike in prices of petrol and diesel. The government is under huge political pressure, and could face mid-term elections, said a senior official of the petroleum ministry. Fuel prices are more about politics than economics, the official added.
The official, however, said the Cabinet was closely observing the movement of the price of the Indian crude oil basket. We are keeping the Cabinet updated all the time, the official said.
The Indian basket, which comprises Oman-Dubai sour (high sulphur) grade crude oil and Brent dated sweet (low sulphur) crude oil in a 59.8:40.2 ratio, averaged $74.83 a barrel in September. In August the average price of the basket was $69.03 a barrel.
The prices of petrol and diesel were last increased in June 2006 when the average price of the crude oil basket was at $67 a barrel. The rupee was then valued at around 45 per dollar.
Since then, the value of rupee has risen to below 40 per dollar. This effectively makes the value of the crude oil basket around $72 a barrel, as the oil marketing companies are now paying lesser in terms of rupee for the crude oil they buy.
Friday, September 28, 2007
Recession chatter gets louder
The fear factor has spiked in recent weeks as a series of indicators signal that Wall Street's troubles are starting to spread to Main Street.
Housing price declines. Slowing job creation. Profit warnings from the country's biggest retailers. To an Econ 101 student, those are telltale signs of an imminent recession. Not surprisingly, the R-word has dominated talk among bankers for weeks.
"We're very close to stall speed in the economy," says Paul Kasriel, director of economic research at Northern Trust. And it's not just the usual Chicken Littles talking about it: Everyone from top auto executives to normally ebullient tech venture capitalists are making noises about the slowing economy. Former Treasury Secretary Larry Summers, now at hedge fund D. E. Shaw, is adamant that there's a greater than 50% chance of a recession.
So what's really happening? By most economists' terms, a recession is defined as two or more consecutive quarters of GDP decline -- something we haven't seen since 1991. By that narrow definition we're not even close. Of 50-plus economists surveyed by research firm Blue Chip Economic Indicators, not one is predicting a recession. They still expect GDP to grow 2.6% next year.
But the broader definition, one put out by the National Bureau of Economic Research, is simply a "significant decline in economic activity, spread across the economy, lasting more than a few months." By that measure, many say the sky is falling.
Until now, problems with the economy have remained within the financial sector, with most of the pain hitting mortgage companies and investment banks. But in recent weeks a few key signs show that Wall Street's problems are seeping into the rest of the economy.
Of course, the biggest driver has been the downturn in the real estate market. After 15 years of rising home prices, a cooldown was expected. But the sharp price drops this summer showed that the downturn is deeper and broader than previously thought. In July home prices fell 4.5% from a year earlier.
Housing is closely tied to overall consumer spending. With homeowners facing growing mortgage headaches, there's been a simmering fear that they will curtail discretionary spending. Many retailers had already warned that the second half of the year would fall short of expectations. Then, in a one-two punch in late September, Target (Charts, Fortune 500) and Lowe's (Charts, Fortune 500) issued profit warnings on the same day - news that sent retail stocks plummeting and created new fears of a broader slowdown.
Another key metric is employment. The unemployment rate, at 4.6%, is not a worry so far. But when August figures showed the number of Americans with jobs had fallen for the first time in four years, it raised fears that the weakness in the economy had spread -- and was probably the main factor behind the Fed's Sept. 18 rate cut.
In fact, that rate cut is one of the most telling differences between today's outlook and that of 1991. Typically recessions follow aggressive hikes in interest rates, a deliberate slamming on the brakes by the Federal Reserve designed to halt consumer price inflation. This time the Fed has raised rates gradually, from a very low level. But because of consumers' big debt binges in recent years, the slightest tightening of the money supply may simply have been too much.
To be sure, not everyone is saying a recession is coming. After all, the S&P 500, driven by tech stocks, is trading close to its all-time high. Dean Maki, chief economist for Barclays Capital, says a surprisingly large proportion of overall personal spending comes from the wealthy, who are not likely to dial back their conspicuous consumption.
So where is the economy really headed? Some cooler heads say the more likely effect is a pullback to slower GDP growth. "It's much harder to get into a recession than people understand," says Drew Matus, senior economist at Lehman Brothers.
Others say recessions are an inevitable outcome of prolonged periods of growth and a way to wring excesses out of the economy. As anyone who balked at paying $1 million for a two-bedroom condo in a hot market would agree, there's nothing wrong with the economy that a few months of stalled growth wouldn't fix.
Gold prices: Nowhere to go but up
The dollar is declining and inflation is lying in wait. Market conditions are waving red in the face of gold bulls.
So far this year, gold prices are up about 22 percent to nearly $750 an ounce - helped by the declining dollar and growing interest from institutional investors.
And given a confluence of factors, including heightened seasonal demand, analysts believe that prices for the precious metal will move higher still and are poised to shatter its all-time record.
Historically, gold has been considered a safe-haven for investors jittery about inflation or the economy.
With skittish investors diversifying their portfolios with commodities, demand for gold has shot up. During the summer's market meltdown, prices remained modestly higher compared to the start of the year before moving higher in recent weeks. Just last week, gold hit $744.80 an ounce - its highest level in 27 years.
Many analysts say the biggest driving factor has been the weakening dollar. A weaker greenback makes gold, which is priced in dollars, more attractive to buyers outside the United States.
At the same time, worries about inflation have also stoked gold prices, according to Jon Nadler, an analyst with Kitco.com.
Indeed, gold typically attracts investors looking for a hedge against inflation. That factor has become especially important now with oil prices near record highs and after the Federal Reserve cut interest rates last week for the first time in four years.
And gold could find even more support at the consumer level. Typically, the period from September through year's end sees demand for gold climb in the United States amid the holiday shopping season. Demand is also high in India, the world's largest consumer of gold, because the next few months are a popular time for weddings and mark the celebration of the Hindu new year.
Of course, if interest by institutional investors or hedge funds wanes or consumer demand for jewelry slackens amid weakened consumer spending, gold prices could move right back down, according to experts.
How high?
By some analysts' estimates, gold prices are headed for $750 an ounce by the end of the year.
Peter Spina, an analyst with GoldSeek.com, speculated the price could even top its all-time high of $850, set in January 1980.
Ethanol - India Story
WHAT IS FUEL ETHANOL
Ethanol (ethyl alcohol, grain alcohol, ETOH) is a clear, colorless liquid with a characteristic, agreeable odor. In dilute aqueous solution, it has a somewhat sweet flavor, but in more concentrated solutions it has a burning taste. Ethanol, CH3CH2OH, is an alcohol, a group of chemical compounds whose molecules contain a hydroxyl group, -OH, bonded to a carbon atom. The word alcohol derives from Arabic al-kuhul, which denotes a fine powder of antimony produced by distilling antimony and used as an eye makeup. Alcohol originally referred to any fine powder, but medieval alchemists later applied the term to the refined products of distillation, and this led to the current usage.
ETHANOL AS A FUEL
Ethanol is used as an automotive fuel by itself and can be mixed with gasoline to form what has been called "gasohol" FUEL ETHANOL- the most common blends contain 10% ethanol and 85% ethanol mixed with gasoline. Over 1 billion gallons of ethanol are blended with gasoline every year in the United States. Because the ethanol molecule contains oxygen, it allows the engine to more completely combust the fuel, resulting in fewer emissions. Since ethanol is produced from plants that harness the power of the sun, ethanol is also considered a renewable fuel. Therefore, ethanol has many advantages as an automotive fuel.
Most industrial ethanol is denatured to prevent its use as a beverage. Denatured ethanol contains small amounts, 1 or 2 percent each, of several different unpleasant or poisonous substances. The removal of all these substances would involve a series of treatments more expensive than the federal excise tax on alcoholic beverages (currently about $20 per gallon). These denaturants render ethanol unfit for some industrial uses. In such industries undenatured ethanol is used under close federal supervision.
Ethanol has been made since ancient times by the fermentation of sugars. All beverage ethanol and more than half of industrial ethanol is still made by this process. Simple sugars are the raw material. Zymase, an enzyme from yeast, changes the simple sugars into ethanol and carbon dioxide. The fermentation reaction, represented by the simple equation C6H12O6 2 CH3CH2OH + 2 CO2 is actually very complex, and impure cultures of yeast produce varying amounts of other substances, including glycerine and various organic acids. In the production of beverages, such as whiskey and brandy, the impurities supply the flavor. Starches from potatoes, corn, wheat, and other plants can also be used in the production of ethanol by fermentation. However, the starches must first be broken down into simple sugars. An enzyme released by germinating barley, diastase, converts starches into sugars. Thus, the germination of barley, called malting, is the first step in brewing beer from starchy plants, such as corn and wheat.
ETHANOL IN INDIA
India imports nearly 70% of its annual crude petroleum requirement, which is appox. 110 million tons. The prices are in the range of US$ 50-70 per barrel, and the expenditure on crude purchase is in the range of Rs.1600 billion per year, impacting in a big way, the country's foreign exchange reserves.( Oil Prices touched a record high of $76 per barrel )
The petroleum industry now looks very committed to the use of ethanol as fuel, as it is expected to benefit sugarcane farmers as well as the oil industry in the long run. Ethanol (FUEL ETHANOL) can also be produced from wheat, corn, beet, sweet sorghum etc. Ethanol is one of the best tools to fight vehicular pollution, contains 35% oxygen that helps complete combustion of fuel and thus reduces harmful tailpipe emissions. It also reduces particulate emissions that pose a health hazard.
10% blending from October 2008: The Government is serious of considering 5% doping mandatory with immediate effect & are willing to increase it to 10% from October 2008. This decision will be directly benefiting the sugar cane producing states like Uttar Pradesh, Maharashtra, Karnataka, Tamil Nadu, Andhra Pradesh, Gujrat & Bihar. As all these states are facing a serious problem of excess sugarcane cultivation for the current year and also could face the same in future too.
Hard Road Ahead: The policy is now clear but still the question of comfort zone of Oil Marketing Company is important. The ethanol producers should concentrate on the technologies by bringing the cost of production at lower end & here Brazil’s input is important.
The Indian Sugar Mills and the private stand-alone ethanol manufacturers should cut the cost of production by using good technologies requiring less utilities like steam, water and electricity and they should also concentrate on co-generation through effluent generated by Sugarcane Juice & Molasses Route. The lower cost of production can still bring the ethanol prices down from the current Rs. 21.50 per liter. Suppliers from Maharashtra are supplying at Rs. 19.50 per liter. The ethanol suppliers should now focus on producing large quantum as this could drop the production cost creating a Win-Win Situation.
ETHANOL WORLDWIDE
Other countries are either producing and using ethanol in large quantities or are providing incentives to expand ethanol production and use. Brazil and Sweden are using large quantities of ethanol as a fuel. Some Canadian provinces promote ethanol use as a fuel by offering subsidies of up to 45 cents per gallon of ethanol.
India is initiating the use of ethanol as an automotive fuel. A move has been made by distilleries in India to use surplus alcohol as a blending agent or an oxygenate in gasoline. Based on experiments by the Indian Institute of Petroleum, a 10 percent ethanol blend with gasoline and a 15 percent ethanol blend with diesel are being considered for use in vehicles in at least one state.
In France, ethanol is produced from grapes that are of insufficient quality for wine production. Prompted by the increase in oil prices in the 1970s, Brazil introduced a program to produce ethanol for use in automobiles in order to reduce oil imports. Brazilian ethanol is made mainly from sugar cane. Pure ethanol (100% ethanol) is used in approximately 40 percent of the cars in Brazil. The remaining vehicles use blends of 24 percent ethanol with 76 percent gasoline. Brazil consumes nearly 4 billion gallons of ethanol annually. In addition to consumption, Brazil also exports ethanol to other countries.
Sweden has used ethanol in chemical production for many years. As a result, Sweden’s crude oil consumption has been cut in half since 1980. During the same time period, the use of gasoline and diesel for transportation has also increased. Emissions have been reduced by placing catalytic converters in vehicle exhaust systems which decrease carbon monoxide, hydrocarbon, and nitrogen oxide emissions. To address global warming concerns, the amount of carbon dioxide produced while burning fossil fuels must be reduced. Ethanol-blended gasoline and ethanol-blended diesel are being considered as viable alternatives to further lower emission levels.
Benefit to Common People
Comparative Current prices as in Brazil (per gallon) -
1. Pure alcohol (95% purity) ethanol = 1.35 R$ = 29.70 RS.
2. Gasoline with 25% ethanol mandatory by law = 2.46 R$ = 54.12 RS.
3. Gasoline with 25% of ethanol + additives (octane boosters)= 2.56 R$ = 56.32 RS.
Thursday, September 27, 2007
The rising rupee, foreign trade & inflation
As the popular saying goes, the difference between a pessimist and an optimist is that whereas the former sees the glass as half-empty, the latter perceives it as half-full. The reality is the same; it is the inference that matters.
Take the figures for the first quarter of 2007-08 in regard to foreign trade. Exporters rightly crib about the lower realisations consequent to the appreciation of the rupee against the dollar - by more than 10% over the same quarter of last year. Imports have accelerated, and may be attributed to the cumulative impact of an economy growing at a robust rate and possibly the lower price tag for overseas goods in rupee terms, which has also fuelled demand.
To those who see these issues in perspective, what is a cause for concern is the sharp drop in the import purchasing power of exports - from 71% to 61% - during the latest three-monthly period over that of the previous fiscal. In another era, the burgeoning trade deficit that has nearly doubled to $21 billion may be viewed as very troubling; now the context is different; with forex assets at more than $200 billion and swelling weekly, we are in a position to make light of it.
However, there is another angle to the steady climb of the Indian currency against the greenback, namely the possibility that its impact on inflation may be benign. In its latest monetary policy review, the Reserve Bank of India drew comfort from the fact that the pass-through effect of monetary, fiscal and supply-side measures, in conjunction with seasonal factors has brought the inflation rate to below the stipulated threshold limit - 4.4% from 5.9% as of end-March 2007. Perhaps this assessment was too laconic to permit an elaboration of the role of strengthening rupee vis-à-vis the dollar in influencing the inflation rate on a downward course. We shall revert to this topic later.
Let us dwell upon the several strands of the issue one by one. Exports have fared badly during the April-June 2007 period, rising by a meagre 7% in rupee terms, though in dollar terms, the growth rate is definitely better at 18%. The setback in terms of rupees is easily explained; the foreign buyer, finding that he has to fork out more dollars to buy Indian rupee-dominated goods, has tuned to other markets seeking price advantage. This has adversely impacted on the export performance. The exporters too are despondent that the declining fortunes of the dollar have meant diminished earnings in terms of rupees. This trend is a distinctive to our export effort and to the realisation of the target of $125 billion set for 2007-08. But gyrations in the forex market must be taken in stride and overcome through conscious drive for quality and cost-cutting to retain and expand overseas markets.
The second point to note is that our imports have maintained a high order of increase during the first quarter of the current fiscal - 34% in dollar terms and 22% in rupee terms. Despite a negligible rise of 4% in oil imports when denominated in dollars -in our currency, oil imports have recorded a negative growth rate -it is the non-oil imports that have really soared - by 50% in rupee terms and much more in terms of dollars. This is possibly a sequel to the high rate of economic growth that has led to a keen demand for capital goods, non-ferrous metals and export-related imports such as pearls and precious stones, chemicals and cashew. With the dollar weakening against the rupee, imports also became cheaper and hence the boom in overseas purchases. Seen in this context, this development is not a cause for worry.
The third fall-out of the firming up of our currency against the dollar may well be the easing of inflationary pressures of late. Unfortunately, the nexus between the two has not been highlighted in the RBI policy statement. In reality, this is quite simple. When the rupee strengthens in the forex market, it means lower prices of imported goods in terms of our currency. In turn, the cost of imported items tends to fall in the home market. They figure as intermediaries, raw materials and capital goods for which, in rupee terms, we pay less now than, say a year ago. Of course, bulk consumption goods like pulses and edible oils too which figure in our imports, for which we pay less rupees per dollar. The cumulative impact of all these factors is the moderation in the inflation rate.
In sum, the strong showing of the rupee in relation to the dollar is not an unmitigated evil as it is made out to be. It is not and the taming of the beast of inflation may be a direct sequel to this trend.
Thursday, September 20, 2007
Indian rupee breaks through 40 per dollar level for 1st time since 1998
The Indian rupee rose to a nine-year high against the U.S. dollar Thursday amid strong demand from foreign funds investing in one of the world's fastest growing economies.
The rupee rose 0.7 percent to 39.88 per dollar, breaching the psychologically crucial 40-per-dollar mark for the first time since May 1998.
The rupee has appreciated more than 10 percent against the dollar so far this year as global investors have flocked to India, where the economy is growing about 9 percent annually and the stock market has been climbing to record highs.
Analysts expect the rupee to remain strong through this quarter, although that could hurt exporters, especially the country's hugely profitable outsourcing industry.
"It will stay around 40 for some time," said Agam Gupta, head of foreign exchange trading at Standard Chartered Bank in India.
The rupee's strength has come despite measures by the Reserve Bank of India to counter a surge in foreign money into the country that also has fueled inflation. Last month, the central bank installed several curbs on overseas borrowing by Indian companies and ordered banks to hold more cash in reserves.
But Gupta said the central bank can do little to stem the flow of money from other sources.
"A lot of inflows have been in the form of foreign direct investment and investments in stocks and bonds," he said. "Those inflows will continue."
Foreign institutional investors have bought US$10.1 billion in Indian stocks and bonds so far this year, according to the Securities and Exchange Board of India. That money is on top of a record US$16 billion India received as foreign direct investment in the last fiscal year that ended March 2007.
The rupee got a boost after the U.S. Federal Reserve made a bigger-than-expected cut its key interest rate Tuesday, stoking expectations that investors will bring in more dollars to take advantage of higher interest rates here and a bull run in the stock market. The rupee gained about 1 percent against the U.S. dollar in Wednesday's trading.
India's benchmark interest rate is now 7.75 percent, 3 percentage points higher that the Fed's key rate, and it's unlikely that the Indian central bank will cut rate soon.
Market players will likely revise their projections for the rupee-dollar rate following the Fed move, Gupta said. Most foreign exchange traders earlier expected the rupee-dollar rate to average around 41 during the October-December quarter.
That is bad news for exporters, whose overseas earnings are eroded by the strong rupee.
Indian Commerce and Industry Minister Kamal Nath said the rupee's strength was "a cause for concern" and the government may have to revise the export target of US$160 billion set for the current fiscal year.
Trade data released earlier this month showed exports growth have already begun to decelerate.
"It is a new situation and requires a new response," Nath said, adding the government would explore measures to help exporters tide over the impact of a stronger rupee.
Tuesday, September 18, 2007
Dollar drops after Fed cuts more than expected
The dollar fell against its major counterparts Tuesday, hitting a new record low against the euro, after the U.S. Federal Reserve cut its benchmark federal funds rate more than many investors had expected, thereby lowering the return on dollar-denominated assets.
The central bank cut the fed funds rate for the first time in more than four years to 4.75% from 5.25%, and also cut its discount rate by half a point. Most economists and investors had expected the Fed to trim its benchmark federal funds rate at least 25 basis points, with some predicting the 50-basis point reduction.
The dollar index, which tracks the greenback against a basket of six major currencies, was at 79.375, down from 79.645 before the announcement.
The pound sterling was at $2.0122, compared to $1.9982 earlier.
The dollar was up at 115.65 yen, down from 115.80 yen earlier.
While lower interest rates are dollar-negative in the long term, rallying stock prices after the Fed's policy decision provided daily support for the U.S. currency Tuesday.
"Expect further dollar weakness in the days to come and expect further strength in the stock market and carry trades," said Kathy Lien, chief strategist at Forex Capital Markets. Carry traders refer to the practice of borrowing funds in lower-yielding currencies and investing them in higher-yielding ones.
Stocks were trading solidly higher Tuesday, and surged after the Fed's announcement. See Market Snapshot.
Crude-oil futures were higher after the Fed move, after earlier touching a new front-month contract high of $81.50 a barrel on hopes that the expected interest rate cut will boost energy demand. See Futures Movers.
