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.
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Sunday, October 14, 2007
Inflation rate dips to a five-year low at 3.26 percent
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.
Oracle Offers to Buy BEA Systems for $6.7 Billion
Oracle Corp., the third-largest software company, made a hostile $6.7 billion bid to buy BEA Systems Inc., sending shares of the business-program maker above the offer price on speculation rival suitors will emerge.
BEA stock jumped as much as 36 percent to $18.56, topping the $17-a-share cash bid. Oracle's proposal is 25 percent more than yesterday's closing price as Chief Executive Officer Larry Ellison pursues growth through acquisitions. BEA rejected the offer, saying it ``significantly'' undervalued the company.
Ellison's interest may draw International Business Machines Corp. or SAP AG into the contest, analysts said. Billionaire shareholder activist Carl Icahn last month started to push BEA to sell, and a deal would bolster Oracle's efforts to compete with IBM in so-called middleware software that connects servers with databases and programs that manage Internet transactions.
``This is too much of a crown jewel to let go without a fight,'' said Ray Wang, a Forrester Research Inc. analyst in Foster City, California. ``There are a number of vendors, including SAP, IBM and H-P, that need BEA more than Oracle does. It's definitely not over.''
Hewlett-Packard may be able to pay $25 a share, RBC Capital Markets analyst Thomas Curlin said. Before today, BEA shares had gained 15 percent in Nasdaq Stock Market trading since Icahn announced his stake in August. Oracle rose 10 cents to $22.56.
SAP spokesman Frank Hartmann, Hewlett-Packard's Emma McCulloch and IBM's James Sciales declined to comment. Oracle's Bob Wynne didn't return a call seeking comment.
Serious Proposal
If he succeeds, Ellison's 35 takeovers will total more than $31 billion in three years. Oracle said it has had ``repeated'' conversations with BEA management over the past several years and delivered the proposal to its rival's board Oct. 9.
The purchase, which would be its biggest since PeopleSoft Inc. in 2005, would give Redwood City, California-based Oracle lucrative maintenance fees. BEA once dominated the market for programs that deliver applications over the Web.
While new software sales slipped and it now trails IBM in that market, BEA still brings in support fees that totaled $714.9 million in the four quarters ended July 31.
``We have made a serious proposal including a substantial premium for BEA,'' Oracle President Charles Phillips said in a statement today. ``We look forward to completing a friendly transaction as soon as possible.''
BEA can't consider any long, ``open-ended'' process because it competes with Oracle and that could damage its business and stock price, according to a letter to Phillips dated yesterday that BEA released with its statement today.
Icahn's Efforts
Icahn, who owns 13.2 percent of BEA and is now the largest shareholder, is pushing the company to seek a buyer whose larger sales organization may spur revenue growth. BEA's software license sales fell 9 percent last quarter.
He told CNBC today that BEA is still ``undervalued'' and that he wants other bidders. BEA would be ``great'' for four or five companies, including Hewlett-Packard and IBM, he said.
Icahn said last month he planned to meet with other investors and may nominate his own board candidates. BEA, which is restating results from 1998 through the first quarter of 2007, can't hold a shareholders meeting until its filings are current.
Forcing It
Oracle, which trails Microsoft Corp. and IBM in software sales, would be paying more than seven times next year's maintenance revenue, valuing BEA at more than what Oracle paid for PeopleSoft and Siebel Systems Inc., said Chris Hickey, an analyst at Atlantic Equities in London.
``It shows they want to get this deal done and want to force BEA's hands,'' he said. UBS AG's Heather Bellini in New York, the top-ranked software analyst by to Institutional Investor, had estimated BEA may fetch as much as $16 a share.
Bloomberg calculated the total value of the deal based on 392 million BEA shares outstanding as of May 2006 because BEA hasn't issued updated figures while it works to restate results.
BEA said this week its restatement will cut profit by $425 million before taxes, exceeding its earlier estimate. The company is correcting results to account for misdated options grants and severance contracts, which hid some costs.
Buying BEA would help Oracle undermine IBM in the middleware market, said Peter Kuper, a Morgan Stanley analyst in Boston.
``With BEA, Oracle eventually could offer a wider variety of products that work together, potentially at a significant discount,'' he said. ``IBM has the most to lose.''
Oracle's offer comes after SAP this week agreed to buy Business Objects SA for 4.8 billion euros ($6.7 billion). SAP, the No. 4 software seller and the leader in business-management programs, gains software that tracks corporate databases.
An Oracle-BEA combination may prompt some BEA customers to switch to Oracle from Walldorf, Germany-based SAP, said Richard Williams at Summit Analytic Partners LLC in Summit, New Jersey. That may draw a rival offer from SAP.
``A week ago I would have said that SAP wouldn't make that big an acquisition,'' he said. ``But since they bought Business Objects, you have to think that maybe they will.''
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.
