Bet your bottom dollar

The Fed's last two rate cuts helped send the greenback drastically lower. But experts say the worst may be over for the dollar even if the Fed cuts again.

Wall Street is betting that the Federal Reserve will deliver another rate cut at its policy meeting Tuesday, but that may not necessarily spell more doom for the dollar.

Currency experts argue that the greenback's steep decline this year has come too far, too fast and that investors have factored in one, if not more, rates cut by the Fed in the coming months.

"At these levels quite a bit of interest rate reduction is already priced into the dollar," said Shaun Osborne, chief currency strategist in Toronto at TD Securities Inc.

The dollar has managed a modest recovery in recent weeks, but is still sharply lower for the year against a number of currencies, most notably the euro and the British pound.

The U.S. Dollar Index, which measures the currency's performance against six of its biggest trading partners, is down more than 8 percent so far this year, after hitting a record low late last month.

Much of the dollar's recent decline can be blamed on the Fed's recent policy actions. In October, the central bank cut the key federal funds rate, which affects the rate at which consumers borrow on a variety of loans, by a quarter of a percentage point. That followed a half-point cut in September.

A rate cut puts pressure on the dollar since it makes dollar-denominated investments less attractive to outside investors.

Although a weak dollar also typically drives domestic and overseas demand for U.S. goods, it also poses an inflationary risk to the economy by limiting consumers' buying power overseas and pushing up the price of commodities such as oil and gold.

Traders are split as to whether the Fed will lower the federal funds rate by a quarter-point or a half-point on Tuesday.

But Tom Fitzpatrick, global head of currency strategy at Citigroup in New York, said that if the Fed cuts by a half-point, he thinks there would be "quite a sharp reaction in terms of dollar selling."

With a rate cut all but certain though, Fitzpatrick and other currency experts said investors are likely to pay close attention to what the Fed says in its statement.

At its October meeting, policymakers said that the risks of inflation and economic growth were roughly in balance. If they stick to that same script, that could bode well for the dollar, said Nick Bennenbroek, head currency strategist at Wells Fargo Bank in New York.

"The key question is whether they feel comfortable or bold enough to repeat that assertion," said Bennenbroek. "If that statement is there, then we might see the dollar stabilize or even move higher."

Whatever action the Fed takes on Tuesday, there have been encouraging signs for the U.S. economy - a bullish indicator for the greenback.

Last Friday, the Labor Department reported that the economy added 94,000 jobs in November, while the unemployment rate held steady, suggesting that the U.S. economy was unlikely to enter a recession in 2008.

Source - CNN Money

India's Rupee Falls in Longest Losing Streak Since August 2006

India's rupee fell for a fifth day, extending its losing streak to the longest since August 2006, on concern a slide in local stocks will spur investors to take money out of the country.

The currency declined the most in a month after data from the capital markets regulator showed funds based overseas increased sales of local equities this month. The rupee also weakened on concern a rally in oil prices will lift import costs, widening the trade deficit.

The rupee's trend is now closely linked to movements in the stock market, said Paresh Nayar, chief foreign exchange dealer at the Development Credit Bank Ltd. in Mumbai. The rupee has been a bit weak this week as stocks fell and flows turned negative.

The rupee declined 0.4 percent to 39.535 per dollar as of the 5 p.m. close in Mumbai, according to data compiled by Bloomberg. That is the biggest decline since Oct. 22.

The local currency is Asia's second-best performer this year, gaining 12.1 percent. It may rise to 39.25 by year-end and 39 by the end of March 2008, according to the median estimate in a Bloomberg News survey.

The Bombay Stock Exchange's Sensitive Index today declined 0.4 percent to the lowest in almost a month, after falling the most since Oct. 18 yesterday. The MSCI Asia Pacific Index slid 0.6 percent.

Overseas funds sold $951.9 million more Indian shares than they bought this month, after making net purchases of $5.1 billion in October and $4 billion in September, according to the Securities & Exchange Board of India.

Selling Rupees

The Reserve Bank of India has been selling rupees for dollars to stem a rally in the local currency that threatened exports. The dollar purchases boosted its foreign-exchange reserves to a record $270.2 billion on Nov. 9. The central bank bought a record $11.9 billion of foreign currency in September, its 11th straight month of purchases, it said on Nov. 13.

We do intervene in the market, but we would like the exchange rate to be market-determined, central bank Deputy Governor Rakesh Mohan said today in New Delhi.

Growth in merchandise exports slowed to an average 14.4 percent in the eight months to August from 22.4 percent a year ago, government data show.

The rupee also weakened as oil importers bought dollars, Development Credit's Nayar said. The South Asian nation depends on imports to meet as much as three-quarters of its energy needs.

Demand for dollars to pay for imports from refiners such as Indian Oil Corp. may have increased as oil rose to a record high this week. India's state-run refiners need to be protected from rising oil prices, Montek Singh Ahluwalia, deputy chairman of India's Planning Commission, said today in New Delhi.

Crude oil rose as high as $99.29 a barrel in New York yesterday as a weakening dollar boosted demand for commodities. Oil has rallied 50 percent in the past six months, according to data compiled by Bloomberg.

India's trade shortfall averaged $6.2 billion a month in the fiscal year started in April, from $4.3 billion in the year- earlier period, according to government data.

Source - Bloomberg

IMF cautions India against curbs on capital inflows

The International Monetary Fund (IMF) has cautioned India that curbing capital inflows too much could undermine confidence in the country’s very brilliant economy with consequences beyond India itself.

The warning came Friday from the new IMF chief Dominique Strauss-Kahn a day after the former French finance minister took over as the financial institution’s managing director.

It was important to enhance the transparency of the capital flowing into the country but limiting it may not always be good, he said at a press conference. The problem of this kind of thing is it may undermine the confidence in the Indian economy.

It will have an influence certainly on capital inflows but not always a good influence. I think the Indian authorities should think over several times before implementing this kind of instrument, Strauss-Kahn said.

The rupee’s appreciation to record highs this week reflected strong economic fundamentals and a keen interest by foreigners to invest in the country, he said, suggesting: The appreciation of the rupee is driven by a lot of international capital flow to India, and that is the good news.

So an inevitable consequence of that, an unavoidable consequence of that, you have an important inflow of capital to India with a consequence on the rupee, Strauss-Kahn said.

A lot of countries want to invest in India, a lot of companies want to have not only their back office now but much more than that, research labs and so on in India, and that reflects the way the Indian economy has grown and developed during the last years.

Even if it is not always easy to deal with an appreciation of your currency, as a European I can tell you, nevertheless it reflects good fundamentals, he said.

You do not have to do anything which will in one way or another undermine this good luck or the good appreciation, good forecast on your national economy, he said.

Noting that he had taken the job promising reforms, Strauss-Kahn said: There are definite questions which are at stake for the institution, namely ... what are we going to do in a changing world and how can we do that.

Those changes, he noted, have been brought on by the fast rise of emerging powers such as China and India that are now sources of economic growth and stability while the US and Europe grapple with slowing economic growth and the effects of recent credit and liquidity problems in world markets.

But that shift has never been reflected in the voting power of the 185-member fund, Strauss-Kahn said, suggesting the IMF’s reform had to go beyond simply increasing the stake of emerging economies.

A shift has to be significant from the developed and rich countries to the low-income and emerging market countries, that is clear, he said.

But it is not enough and so on my agenda we cannot stop with only the quota question, the legitimacy of the institution must go much further.

Source - Economic Times

MMTC ousts Infy from top 10 m-cap club

An unfavourable business environment owing to a buoyant rupee has taken the sheen off information technology stocks. Reflecting the underlying market sentiment, industry bellwether Infosys Technologies on Tuesday was ousted by the state-owned metal giant, MMTC, from the Top 10 market capitalisation list.

The m-cap list, which featured Infosys for nine years (since 1999), on Tuesday does not figure a single IT stock.

DETHRONED
Name	M-cap in Rs crore
	Oct 15, 07	Oct 16, 07
Reliance Ind	3,71,252	3,69,043
ONGC	2,54,742	2,51,587
Bharti Airtel	2,13,824	2,10,608
NTPC	1,87,008	1,90,677
DLF	1,52,882	1,56,599
Reliance Comm	1,53,899	1,55,524
ICICI Bank	1,21,952	1,28,629
NMDC	1,13,017	1,18,667
BHEL	1,18,111	1,17,274
MMTC	1,07,286	1,12,650
Infosys Tech	1,10,325	1,06,864

Compare this with the technology boom in 2000, where six stocks figured in the list. In 2006, the number fell to three Infosys Technologies, Tata Consultancy Services and Wipro.

On Tuesday, MMTC replaced Infosys with a market capitalisation of Rs 112,650 crore, as the stock went up by 5 per cent. Infosys was the largest loser among Sensex stocks. It fell by 3.14 per cent to Rs 1,868.25. As a result, its market capitalisation plummeted by Rs 3,461 crore to Rs 106,714 crore on the BSE.

The decline in net profit growth rate owing to the rupee appreciation has been the culprit behind the re-rating of technology stocks.

The net profit growth rate of the sector almost halved from 90 per cent in FY2000 to 40 per in FY2007. The rupee has appreciated almost 20 per cent from Rs 49.05 in May 2002 to Rs 39.38 in October 2007.

Infosys Technologies, which recorded an over 100 per cent growth in net profit till FY2001, reported a 56 per cent growth in 2006-07.

The company posted a 26 per cent rise in the first half of FY08. And even though the Sensex is hitting new highs everyday, the BSE IT Index has discounted 47 per cent from its lifetime high of 8,678, seen in February 2000.

The IT index is the largest loser, falling 1.77 per cent (83.34 points) to close at 4,629.09 on Tuesday compared with the marginal 6.81 points drop in the Sensex.

The IT sector, which accounted for 24 per cent share of the total market capitalisation of the BSE, declined to 12 per cent in 2006 and, currently, stands below 10 per cent at 6.79 per cent.

Reliance Industries, Oil and Natural Gas Corporation, Bharti Airtel, DLF, ICICI Bank, and BHEL are the others in the Top 10 club.

Source - Business Standard

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.

Source - domain-b

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.

Source - domain-b

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.

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.

Source - Business standard

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?

- Compiled from various sources

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

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.

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.

Source - The Associated Press