IMF Supporting Additional Fiscal Tapering To Stay Away From Over Heating

Emerging Asia is all set to continue leading global economic growth over the next couple of years but risks are increasing, particularly from a very high inflation and surging commodity prices amidst political unrest in some of the Middle East countries, said the International Monetary Fund (IMF) on Thursday.   Asian growth will continue to be driven by economic powerhouses China and India. The IMF expects the Chinese economy to grow 9.5% while India will expand about 8% over the next two years. However,  the multilateral  body also cautioned against pockets of overheating across the region as inflation increases rapidly and capacities face increasing pressure. Higher global oil and food prices were further adding fuel to the problem.

'Real policy rates are still negative in several regional economies, including China and India,' observed the IMF in its report titled 'Asia and Pacific: Managing the next phase of growth'. The agency added that even if signs of overheating are mixed, keeping real interest rates too low for too long could contribute to financial instability. As such, key Asian central banks, including the Reserve Bank of India (RBI) should look at more aggressive monetary tightening to ensure economy remained stable.  Inflation in India continues to remain higher despite the RBI hiking its key policy rates eight times in the last financial year. Headline inflation accelerated in last couple of months to 9% as the core inflation (price rise in non-food manufacturing

space) too accelerated. This has put the central bank into a tight corner. Clearly, somehow the policy makers have missed the underlying momentum of inflation.

The central bank has to think again now if it wanted to continue with a calibrated policy of hiking rates by 25 bps at a time or if it was time for more aggressive policy tightening. Most economists now expect inflation to remain at elevated levels in the current financial year as well as rising costs have not been fully passed on to consumers. For instance, even as the crude prices are ruling at around $120 a barrel, India's retail fuel prices continue to be aligned to crude prices of around $75 a barrel. However, the risk that RBI would face in the more aggressive tightening scenario is that growth is already showing some signs of moderation and rapid rate hikes from here on will risk a far greater slowdown than what might be needed to avoid overheating.  This is particularly  so because  in case of India the lag in monetary transmission is quite longer, running into a few quarters, and therefore the central bank would also have to work out how far the already implemented tightening has transmitted into the system.

Bond yields were trading range bound with positive bias since most of the traders preferred to stay on the sidelines ahead of the central bank's annual policy review on Tuesday. The market has priced in at least a 25 basis points increase at the central bank's policy review early next week, but there is a possibility the rise could be 50 bps. Further, dealers were also eying the results of Rs 6000 crore of cash management bills later on Friday.

The  yields  on  newly  issued  10-year  benchmark,  the  7.80%-2021  was higher at 8.13% from its previous close of 8.11%, ahead of policy decisions on Tuesday. The benchmark five-year interest rate swaps was up 1 basis point at 8.27% from its previous close of 8.26%.  The Reserve Bank of India has today announced the auction of 77-day Government of India Cash Management Bills for a notified amount of Rs. 6,000 crore. The auction will  be  conducted  on  April  29,  2011  using  'Multiple  Price  Auction' method.   While on the other hand The partially convertible rupee was currently  trading  at 44.39/40,  stronger  compared  with its Thursday's close of 44.43/44. The rupee opened at 44.42/43 and has touched a high and a low of 44.46/47 and 44.39/40 respectively. The index of the dollar against six major currencies was down 0.04 percent at 73.089 points. The May currency future was trading at 44.63/64 with a spread of 0.0025 and a volume of 600,124. The contract opened weaker at 44.78/79 against its previos closing of 44.66/67. The open interest (OI) stood at 892,337 up by 4.41% compared to its previous close of 854,615.

Equity Research Weekly Market Outlook Report By Mansukh 30th-April-2011

SNAPSHOT

Local Bourses prolonged their losses for the fifth straight session lacking support at higher levels, thereby snapping the week with loss of over 2%. Persistent selling pressure in view of sustained capital outflows by foreign institutional investors coupled with selling across the global equities led to the damage at Dalal Street. The 50 scrip index'Nifty --on National Stock Exchange plunged in trade thereby marking sluggish start for the new F&O expiry series on Friday as investors braced for a hawkish statement from the Reserve Bank when it releases its policy on Tuesday. Financials led the decline with the market expecting the Reserve Bank of India (RBI) to raise key short-term rates by at least 25 basis points to rein in high inflation. It would be the ninth increase since mid-March last year. India VIX, a gauge for market's short term expectation of volatility lost 6.40% at 19.58 from its previous close of 20.92 on Thursday. The S&P CNX Nifty lost 34.50 points or 0.60% to settle at 5,750.95. The index touched high and low of 5,804.30 and 5,706.05, respectively. 24 stocks advanced against 26 declining ones on the index.

WEEK GONE BY

Indian equity indices went through a turbulent week as they failed to negotiate a close above the neutral line for even a single session and eventually snapped the week with a cut of over two percent. The week largely remained characterized by choppiness because investors were reluctant to pile up positions and indulged largely in stock specific activities as

corporate India continued to divulge their fourth quarterly report card. Volatility gradually accelerated session after session as the April series Futures and Options settlement neared while quarterly earnings' announcements by RIL, Wipro, Bank of Baroda, Ambuja Cement, Crompton Greaves, TVS Motors were punished badly as they remained below Street's expectations. On one hand spiraling international crude oil prices become the headache of policymakers while on the other, worries over global economic recovery loomed large, given the fact that world's biggest economy continues to grow at a tepid pace. Updates from the 2G case trial kept hitting headlines through the week thereby weighing down sentiments and prompting investors to book profits in scam linked shares like RCom, Unitech and DB Realty. The April series F&O settlement day turned out to be another pathetic trading session for the Indian stock markets as the selling pressure gathered greater momentum after government released the disappointing food inflation numbers which stayed absolutely flat at 8.76% on annual basis during week-ended April 16 compared with 8.74% recorded in the previous week.

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IS GOLD STILL AN EFFECTIVE U.S. DOLLAR HEDGE?

During the first nine years of this gold bull market, gold prices moved with a near perfect inverse relationship to the US dollar. Indeed, in the early years gold was only really moving up against the greenback, it was only after a few years that it began to appreciate against all currencies. The game plan was simple; the dollar is going down, so gold in USD terms is going up with some leverage factor. Gold worked well as both a USD hedge and as a tool to speculate on a USD decline. This is no longer the case.

 Nothing lasts forever and over the past two years or so this inverse relationship has broken down significantly. The gold story is no longer simply a USD devaluation play. Relationship remains intact, there are long periods where gold and the USD move together.

The most significant reason for this is that the Euros are a lot less desirable than they were a few years ago. Since all currencies trade on a relative basis, it doesn't matter if the USD has poor fundamentals; if the picture for the Euro is worse relative to the USD, then the greenback will make gains against the Euro. During periods where the Euro zone debt crisis has been the focus of market attention, gold and US dollars have been bought since both are preferable to Euros and provided a safe haven.

The key point of this article is not to say that gold will not rise is if the US dollar falls it is to point out that gold is no longer as effective as a USD hedge. In conclusion we hope to have shown that gold simply isn't a clean hedge against the USD any more. When trading one should aim to tailor positions to match your view and optimize the risk/reward dynamics. If we think that the USD is going to fall, short it. If we think gold is going to rise, then buy gold. Taking a long position on gold purely since we think the USD index is going to fall is not really statistically justifiable due to the weakness of the relationship between the two.

Mansukh brings to you the most updated monthly magazine which will help you in understanding online share market but will also help you in doing online stock market trading conveniently and smartly. For all the latest happening of Share market trading, visit www.moneysukh.com. Make more for sure!!!

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Expectations of individual taxpayers from Budget 2011

The Union Budget is an event that is anticipated with great anxiety, fear and some hope every year. This year, given that there is an overhang of the Direct Taxes Code (DTC) and the Goods and Services tax legislation (GST), the industry expectation is that the Budget should mean relatively few changes.

 

There is, however, a lack of clarity regarding the introduction of DTC from April 1, 2012, even though a significant part of the road has been travelled. We have outlined some areas where we expect changes and new proposals that may be tabled in Parliament.

INDIVIDUAL TAXES

1. Tax Rates and Income Slab
Increase in basic exemption limit — Currently, income up to 160,000 rupees is exempt from tax for individuals. For resident women and senior citizens, the limit is 190,000 rupees and 240,000 rupees respectively. Considering the pressure from rising inflation, it is likely that the government will increase the basic exemption limits, though no change in tax rates is anticipated.

2. Deductions/ Exemptions/Tax Credits
Limit for deduction under Section 80C — Currently, a deduction of up to 100,000 rupees is allowed under Section 80C for different investments expenses incurred by individuals. It is noted that the Indian central bank is pursuing a tight monetary policy. It is therefore expected that the limit will be increased with a view to spur small savings/investment.

Medical reimbursement by the employer — Non-taxable medical reimbursement by employers is limited to 15,000 rupees per annum for an individual and their dependents. It is felt that the government may give in to longstanding complaints that the exemption amount is very low considering the substantial increase in the cost of treatment over the years. Accordingly, it is expected that this limit will be suitably revised upwards.

Deduction for interest on housing loan — Presently, a deduction of up to 150,000 rupees for interest on borrowed capital for an owner-occupied house is available only if the acquisition or construction of such a property is completed within three years from the end of the financial year in which the capital was borrowed. Most housing projects have been delayed beyond their original completion dates; in general they are taking more than three years, due to lack of funds on the part of the developers/ realty companies, which is beyond the control of the individual who has taken the loan. This condition does not apply when a property is bought to let, and therefore, to remove this disparity, it is expected that the time period of three years may be increased to five years.

Employer’s contribution to Superannuation fund — The Finance Act, 2009 imposed a tax on employees for their company’s contribution to approved superannuation funds in excess of 100,000 rupees. It is expected that in view of the current government’s desire to encourage long-term private savings, and taking into account the fact that earlier employer superannuation fund contributions were not capped, a further relaxation in the annual monetary limit may be considered.

Refund — There is considerable dissonance among the general public at the inordinate delay in the processing of tax refunds. Individuals pay tax for the current year, while simultaneously waiting for refund claims from the tax authorities for the earlier year(s). In order to provide relief to small taxpayers, it is expected that the government will come up with a proposal to release all small value refunds before the end of the financial year in which the tax return is filed.

Allowability of foreign tax credit while determining tax deduction on salary — Currently, there is no provision for reducing the estimated Foreign Tax Credit (FTC), available to employees for taxes paid in the other country while withholding taxes in India. The government may include specific provisions in the statute allowing FTC at the same time as withholding taxes from income chargeable under the heads of salary in India. Similar provisions are already there in advance tax provisions.

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Where will price of gold move in 2011 BY MANSUKH JANUARY 2011

There is no definitive answer to where the price of gold will be in 2011. The best an investor can do is to look at possibilities based on historical data. If an investor assumes that paper currency will continue its debasing trend, what would be a high estimate on gold prices per ounce? To answer that we need to look for the highest that gold has been in the past.

Indians were on a spending spree last year. But those who shopped for gold have reason to be satisfied with their purchase gold price has seen a 26 per cent rally this year! In rupee terms, gold prices have shot up by Rs 400/gram (Standard 24 carat gold), a 22 per cent run up. In contrast, stocks weren't a better play the benchmark Sensex is up just 15 per cent year-to-date.

January 21st, 1980 saw the price of gold reach 850 US dollars per ounce. To understand how much money this is worth today one would need to adjust the figures according to the Consumer Price Index. 850 dollars in 1980 is worth 2,250 US dollars in the year 2010. If gold were to repeat the value of a previous high it could double from the price it is trading at in December of 2010.

Other situation suggest that because the current economic output is many times greater than 30 years ago, the peak price of gold could even reach 3000 to 4000 dollars per ounce in the years to come. On the other hand the argument could be made that markets are based on mass psychology and trader emotions. Some might suggest that the average person would not believe that the price of gold could ever reach up to 3,000 dollars, thus creating a resistance to that level ever being achieved.

However some market participants believe that as the market recovers in 2011 and beyond, the price of gold will retreat dramatically as the economic woe gets pushed to the backs of people's minds and their hedging tactics are tossed aside. Longer term, the market could face headwinds that come with a sustained economic recovery as global interest rates could rise, denting the appeal of gold, a non-yield bearing asset. “The market is expected to derive strength from further economic pitfalls and the near-zero interest rates maintained by the US Federal Reserve.

There are many other reasons for gold's out performance this year. One, the change in the gold-dollar relationship. While investors have traditionally bought gold when the dollar weakened, this year was different. They bought the dollar and gold simultaneously as the euro weakened. Two, strong revival in jewellery demand after the recession induced dip last year. Three, growing investment demand for the metal from emerging and also developed nations as returns from other options dwindled. Further, gold fundamentals were supported by the lack of significant increase in mine outputs during the year and a fall in scrap gold sales. With global economies still in the grip of uncertainty, gold continues to present a case for investment. The demand for gold has been traditionally driven by jewellery consumption. But that seems to be changing with investment demand for gold now driven by a range of products such as Gold Exchange Traded Funds.

some of these deals happening quite recently, there may be potential for further value unlocking in gold stocks. But before you choose mining funds over plainer options like gold ETFs do note that they are high risk bets they are more volatile than gold and also tend to under perform physical gold during a downturn. While most of the arguments presented here may well hold good in the coming year too, possible increases in interest rates that will make bond yields attractive, are a risk. Resurfacing concerns over another wave of recessionary conditions should keep investment demand for gold firm, as investors look to hedge against financial market volatility and vulnerability.

ECONOMY OUTLOOK FOR 2011- FAST, FASTER, FASTEST

The beginning of the new financial year is always a good time to take stockto look back and see where we have been, to look forward and prognosticate about future. 2010 closed on a relatively good note, amidst the pressures that emanated from the European economic crisis. Supported by simulative monetary and fiscal policies, a recovery in economic activity was visible from the second quarter of FY10. Industrial production has started rebounding; consumers who had held back on spending out of fear of job loss have begun to spend more freely as they see jobs begin to take hold. Improvement in global demand is generating a robust demand for exports while the financial markets are in better shape as evidenced by continued rally in equities.

Given this background what kind of growth can we expect in FY11? In our judgment, with the support from fiscal policy set to constant in the coming year, further economic expansion will hinge on continued growth in private final demand- both consumption and investment. Assuming a normal monsoon, we expect GDP growth to surge to 8.5% during FY12, driven by the robust  industrial growth and resilient performance of the service sector. The focus of government spending on infrastructure sector would continue to support growth. The overall risks to the outlook however remain slanted to the downside. Risks to the outlook can stem mainly from poor monsoon and the possible need for further monetary tightening if inflationary pressures do not abate. There are also looming concerns over a second round of convulsion in the advanced economies. If this is to happen, the recovery process is bound to be impacted to a certain extent. We expect Consumption demand to be the major contributor to GDP growth in the coming fiscal, which in turn will augment investment demand. The impetus to consumption demand will come from healthy growth in income levels as job creation gathers pace. The broadening of the income tax slabs will leave more disposable income in hands of consumer and should boost spending. The other elements that would support the growth in industrial production include the prospect of a rebound in investment activity, increased thrust of the government on infrastructure projects and the renewed growth of exports. With the surge in industrial production, and favorable financing conditions, we expect capex plans to gain traction and investment rate to increase to 38-40% in FY12.



EQUITY MARKETS: Sensex however, did not cross its January 2008 high of 21,206 to end on a mediocre 12% return. That this was despite the net $ 28 billion pumped by FIIs into equities should possibly lead us to look deeper behind the euphoric coverage on market outlook. Indian markets were even ahead of China and Brazil. The MSCI Emerging Asia Index for India exceeded its normal 11% weight by about 50%. The Sensex is poised to end 2010 on a trailing PE of 23 and a 2011 PE of 20. It is at a hefty premium to the MSCI Emerging Market Index even when the Indian retail investor has not participated. We believe a market so precariously placed could trigger fickle FIIs outflows due to negative perceptions on the global and domestic front or even positive economic developments in the US. However, our strong faith in the India long term growth story firmly in place. Globally, the real threat is in the sovereign debt space, especially in the euro zone. There is the possibility of capital moving out of emerging markets to fund losses and support balance sheets.