Deflating the Inflating Economies......

And we are the Back!!!!
After a long break we are back.
Lot had been happening in and around India these days. In this post I try to cover and explain each of the events in a simplified manner.

I have been getting feedback that the articles I write, go over the head. (OHT). I request the readers, to comment on the part that they din understand and I promise I will get back to them with proper explanation.

Pre Script: This one is large but keep reading u will find it very informative.

Oh My God Oil has come down to 102?????????
Fannie and Freddie takeover??
Wholesale Price index slipping these days???
NSG Waiver!!!!Boon for India???
TATAs out of Singur???
Introduction of new derivatives!!!Currency derivates, Interest rate futures and Credit derivatives???
Duvurri Subbarao new governor, RBI!!

So much have we missed.......

Oil plunged as concerns that Hurricane Gustav would cause severe damage to the US oil sector eased after the storm weakened i.e. investors discounted the potential damage from the storm and due to continuous strengthening of dollar against all currencies on account of increased risk aversion by investors. The other reason includes Sustained dollar demand from oil companies in the light of low crude oil prices and inadequate dollar supplies that weighed on the rupee sentiment. Rupee fell down to its two year low of 45.39 a dollar.

India's crude oil import price has dropped to below $100 a barrel, first time since April, but a cut in domestic retail prices is a distant possibility given the fact that state-run oil firms are still losing money on fuel sales. A cut in petrol and diesel prices may not be economically feasible as Indian Oil, Bharat Petroleum and Hindustan Petroleum are projected to lose Rs 1,65,300 crore on fuel sales this fiscal. IOC, BPCL and HPCL together are losing about Rs 400 crore per day on fuel sales
IOC, the company that controls about 54 per cent of the market, is projected to lose Rs 90,630 crore on fuel sales this fiscal. Fuel prices in India are pegged at $68 per barrel, much lower than $99 a barrel so The government has to make good half of this revenue loss by issue of oil bonds. The Finance Ministry has already taken an over Rs 22,000 crore hit in revenues by way of duty cuts announced in June and a price reduction at this stage may upset its applecart. Retailers are at present losing Rs 6.31 per litre on petrol, Rs 13.69 on diesel, Rs 31.39 on kerosene and Rs 312.58 per 14.2-kg LPG cylinder. The government is also all set to introduce dual prices for diesel, the largest consumed petroleum fuel in the country. Bulk buyers like industrial consumers, power plants, defence establishments and SEZs may have to pay a market price which would be around Rs 22/ litre costlier than the subsidised diesel.

The Wholesale price Index continues its declining streak for the third continuous week down to 12.1% from a high of 12.6. All credit to the respite provided by softening of global crude prices. Now we can finally say that the government’s supply side measures have begun to work and so is the case with RBI’s tight monetary policies. A further interest rate hike by RBI can be seen in its October review of monetary policies as this cool off might be temporary, inflation might peak to high of 13% in the third quarter of this fiscal due to increase in prices of food items. This year yield has not been to the mark owing to the lousy monsoon. However decreasing crude oil prices coupled with good monsoon would stabilise the inflation in near future. The major concern for the ministry and RBI being Inflation and as seen in the recent past they are ready to trade well between growth and Economy.

Duvvuri Subbarao, the new RBI Governor sounded positive on growth, though.
He said “ Origins of Inflation lie largely in prices of food, metals and crude. Food is an annual, if not bi-annual, phenomenon and responses have already kicked in. Even in metals such as steel although the supply response is lumpy, I think both around the world and in our country, supply response has kicked in. The movement in crude prices have been in response to the supply-demand factors and US situation and the position of the dollar. So these responses have also come in.”


Nothing seems to be positive even in the global Front except for the news of Freddie Mac and Frannie Mae, US ailing mortgage giants, bailout be the US government. China and Japan the biggest buyers of Freddie Mac and Frannie Mae bonds praised the US government for its rescue. This might no doubt stabilize the current MBS( Mortgage backed securities) market in the US and the global financial market and will help Japan, Europe and United Kingdom remove one source of anxiety that has plagued markets and helped push them towards recession but this move more or less seems to be sign of the perilous state of the global financial system than of a imminent recovery. I find it difficult to see how it is bullish that the heavy hand of government is needed to such an extent. This takeover of Fannie and Freddie is a testament to how broken the financial system is at this time. Financial firms have posted over $500 billion credit losses and write-downs since credit markets seized up a year ago after the defaults on US home loans. This risk of collapse of the lenders and a US housing firm though are just one of the threats looming over the world economy. What we see is the US government not putting in immediate cash but putting its credibility on the line, its a tremendous help but it might not solve any problems.
All in all the global sentiment seems pretty negative.

Mukesh Ambani Group firm Reliance Industries' market capitalisation fell below the Rs 3 trillion mark, as its shares were battered and slipped below Rs 2,000 on the BSE.

Even Tata Motors haven’t been doing well. All seems to be not so well at Singur front. The dhaar na undertaken by Mamta Banerjee and her agitators had forced the TATA’s to stop work on NANO plant. The demand of the agitators is the return of the land to the farmers who had to give up in order to accommodate the car plant. Even after the so called solution drawn between the TATA’s and the Mamta Banerjee, Trinamool Congress chief, by the in power CPI government’s governor, Gopal Krishna Gandhi, the stalemate continues as vendors like Sona Kayo, Rico, Lumax, Endurance, Caparo Engineering, Sharda Motors, Exide have put on hold further investment in singur. If critical suppliers are not near the mother plant, singur, of NANO, it will affect the pricing of the ultra low cost car.

But as we believe not even the turmoil in singur could cast a shadow on India’s potential to attract overseas investment. One example (singur) cannot be example for the whole country. This kind of problem one can face in any country. Of course the event provides us with something to learn. The recent NSG waiver can discount this tumult.

Nuclear supplier nations adopted by consensus a US initiative to lift a 34-year-old embargo on nuclear trade with India. NSG( Nuclear Supplier's Group) rules ban nuclear trading with India because it refuses to sign the Non-Proliferation Treaty, developed atomic bombs in secret and conducted its first nuclear test in 1974.
The United States wants a special waiver from NSG rules for India, so it can share civilian nuclear technology with New Delhi. The United States argues the deal would bring India into the NPT( Non-Proliferation treaty) fold and help combat global warming by allowing it to develop low-polluting nuclear energy.
Critics say the deal undermines international non-proliferation efforts and accuse the nuclear powers of pursuing commercial and political gains.
There had been three main sticking points: termination of trade if India tests, no transfer of enrichment and reprocessing technology and an annual review of the agreement.
But the crunch issue appeared to be nuclear testing, since New Delhi has not signed the Comprehensive Test Ban Treaty.
Overall this NSG waiver has lifted obstacles to India buying products and technologies associated with civilian uses of nuclear technology (and selling these to) most significant nuclear powers save the US. The implications are not just for nuclear energy alone- our existing reactors running short of fuel would be able to run at full capacity and we would be able to set up new nuclear plants. Vital sectors of economy stand to benefit from access to a range of products and technologies that had, till now, been outside India’s reach. Many advances in materials, technologies, communications, computing, signaling, chemical processing, avionics etc. are deemed sensitive technologies not accessible to nuclear have-nots. Access to these technologies will improve efficiencies across the board of India from weather forecasting to oil refining. Sectors that stand to gain are power, Defence, IT, Insurance and Pharma. IT can help in terms of software services, data management and control & automation. Also, the R&D skills from Pharma may play a crucial role in handling the sensitive technologies which India will get access to. They may even be useful in handling of chemical transformations and temperature controls in the nuclear plants. This NSG clearance has opened up business opportunities worth Rs. 1,20,000 crore in the next 15 years adding around 18-20 nuclear reactors at the cost of Rs 5000- 6000 crore each. The Nuclear deal will also enable addition of new capacity and help fulfill the target of adding 63,000 MW by 2030. These developments sholud benefit Infrastructure and power companies such as NTPC, Jindal, L & T, Tata Power and Reliance Power. Other companies that have traditionally not been in this field may also make a foray in this sector given the magnitude of the business potential. This deal would open gates for huge private investments by international companies and players into the Indian Economy.

Further, adding to these set of good news, there might be soon a materialization of the proposal on introduction of new derivatives like currency derivatives, interest rate futures and credit derivatives.

Do comment....

Compiled BY Riddhiman Jain