Praveen Saanker

IMD forecasts ‘normal’ rain fall

 

India Meteorological Department’s (IMD) first official long-range forecast predicts a normal South-West (SW) monsoon (June-September) for the country in 2011. This is the first of the two-stage forecast that IMD releases for SW monsoon; a detailed update will follow in June, presenting breakdown of seasonal rainfall over four geographical regions.

 However, in the past, there have been several instances of large deviations between IMD’s projected and actual rainfall.

US Fed remains accomodative

 

Fed has maintained an accommodative stance in its monetary policy, given its view that:

(1) the pace of economic recovery is moderate;

 (2) rising headline inflation is transitory;

 (3) core inflation is subdued;

(4) inflation expectation is anchored.

Going forward, QE3 is unlikely, given that current macroeconomic backdrop is relatively better than the one prevailing during August 2010 when Fed first hinted at QE2. However, I do expect re-investment of treasuries will continue beyond June.

Budget promises to again go unfulfilled...

The Finance Minister's Union Budget-2011 was received with gaiety. The budget promised several things which would all lead to better economic growth for the country. A big promise that was made was to bring down the country's fiscal deficit to 4.6% of GDP from the 2010 level of 5.1%. And another was to provide all support so that the economic growth continues at the higher trajectory.

 However, as time has progressed, the key promises of the Union Budget 2011 appear to be getting challenged. The reason- higher crude oil prices. Since the budget was announced in February this year, crude oil prices have increased substantially. In fact, crude oil has touched US$ 125 per barrel. This is way higher than the Budget estimate of US$ 95 per barrel. This has put substantial pressure on the Government's fuel subsidy bill particularly with respect to diesel which forms nearly 60% of the total fuel subsidy.

 As a result, the government has come under pressure to increase the prices of diesel. If it decides to follow this path, then it adds to the risk of higher inflation. The inflation would be compounded in the event of a failure in monsoons or any other global turmoil that leads to higher commodity prices. In addition, diesel pricing is a sensitive issue for electoral votes.

 Therefore, the government now stands on crossroads. If it decides to take the path of increasing diesel prices, it risks higher inflation. This would lead to further pressures in the economy in the form of higher interest rates as well as slowing economic growth. If it decides to do nothing and allow diesel prices to remain where they are, then it risks a higher subsidy bill. This would lead to a burgeoning fiscal deficit. In either case, the promises made in the Union Budget appear to be in danger of remaining on paper. However, it is important to remember that reading too much into short-term economic forecasts can be very risky for investment decisions.

Source:- Equity Master

RBI's FY12 monetary policy

1. RBI raises short term LAF rates and savings bank rate by 50bp
2. Operating procedure changed, a new borrowing facility (MSF) at 100bp higher than repo
3. FY12 growth seen at 8% while Mar-12 inflation at 6% with upward bias
4. Expect 50bp+ increase in the entire interest rate structure and further 50bp hike in policy rates in 1HFY11
5. Expect savings deposit rate hike to be passed on
6. Tighter provisioning norms to have marginal impact as banks are carrying excess provisions

Gold ETF's...What now ???

 

Gold has seen its prices touch new highs. And along with it the gold Exchange Traded Funds (ETFs) have also seen their prices spiraling upwards. But the rise in prices of the latter has become a cause of concern for all. A large part of the price increase in ETFs is due to the huge amounts invested in them by the hedge funds. And these hedge funds tend to book profits when their targets are realized. Whenever this would happen, it would lead a decline in the prices of these ETFs. The worrisome factor is that the pricing of these ETFs is linked to the pricing of gold. Experts around the world, including IMF (International Monetary Fund) are concerned that any exodus of funds from the ETFs would lead to a decline in the prices of gold. However, the fund houses that have la unched these commodity based ETF s have stated that they do have adequate mechanisms in place to prevent this from happening. Even commodity experts feel that any decline in ETF prices would not lead to a decline in gold prices. It is actually the other way round.

Courtesy: Equity Master

 

Scams and Scandals in India

 

Scams and scandals in India have accelerated in the past one year. Hence, it would surprise some to know that as per CMS (Centre for Media Studies) Corruption Study 2010, there has been a marked decline in corruption rates in India from the levels seen in the year 2005. The study surveyed rural households in twelve states across the country. The results reflect that the households that paid bribes have halved from 56% to 28%. However, the rate is still alarming in states like Chhattisgarh, Bihar, Kerala and Maharashtra. The percentage of households that feel corruption has increased in public services involving the common man has come down by 25% from the levels seen in 2005. The picture is not all that bright though. As per this study, rural households that access PDS (public distribution system) have declined by 10%. However, the government figures reflect a PDS food grain off take of 90%. This points to the diversion of PDS food grains to open markets despite strict laws in place. Nonetheless, the outcome of the survey comes as a breather. Hit by a slew of corruption scams, the timing for an image makeover for India could not have been better.

                                                                                                                                               Courtesy: Equity Master

US Dollar

The US dollar is now close to slipping to all time lows. It has lost 8% of its value against major currencies this year. Now while this makes goods exported from the US cheaper, this decline has huge negative ramifications for the US as well as the rest of the world. A weaker dollar and the Fed's loose interest rate policy have two major effects.

Firstly, the near zero interest rates have been fueling asset prices across the world. Gold, silver, oil have all hit record levels. It has also pushed up inflation in emerging economies like India and Brazil, forcing these countries to either raise interest rates or to limit capital inflows.
Secondly, a weaker dollar makes imports, including oil costlier for US consumers. Higher input and borrowing costs could hurt demand and economic growth. Either way, the Fed and the US government needs to take a long, hard look at its problems. It needs to slash its bourgeoning budget deficit, and increase interest rates. If things continue the way they are currently, the US will have a long, rocky road to climb back into recovery.

courtesy:-Equity Master

The forthcoming annual review of the monetary policy will be conducted against the backdrop of surge in core inflation, high crude and other commodity prices, moderation in domestic industrial activity, slowdown in investment activity, and lingering uncertainties in the global economy. Clearly, the monetary policy dilemma is becoming apparent. However, price stabilization is expected to remain RBI’s dominant concern.
On the annual review of the monetary policy on May 3, 2011, I
expect the Reserve Bank of India (RBI) to raise repo and reverse repo rates by atleast 25bps each. There has been a notable deterioration in inflation dynamics, with drivers of inflation shifting from food to manufacturing categories, reflecting building demand-side pressures.