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VOLUME

Stats Watch .......

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Open Forum…….

Policy Rate Hike

Cover Story .......

Eurozone in Intensive care

News ……

News on Industry and Emerging Markets

In Focus

It takes 32 Rs. to cross

poverty line!

Investeurs Chronicles

Outlook

Onshore Yuan

September 2011, Volume: 28

Figure Facts

Forex

Forward Rates against INR as on 23rdSeptember, 2011

Spot Rate 1 mth 3 mth 6 mth US 49.63 49.88 50.3 50.56 Euro 66.8 67.12 67.68 68.06 Sterling 76.52 76.88 77.49 77.84 Yen 65.11 65.47 66.08 66.53 Swiss Franc

54.43 54.75 55.32 55.79

Source: Hindu BusinessLine

Libor Rates

Libor % 1 mth 3 mth 6 mth 12 mth

US 0.23 0.36 0.54 0.84 Euro 1.29 1.48 1.69 2.03 Sterling 0.68 0.93 1.21 1.69 Yen 0.14 0.19 0.33 0.55 Swiss Franc 0.003 0.010 0.057 0.29

Forward Cover

1 mth 3 mth 6 mth

US 6.13% 5.47% 3.80% Euro 5.83% 5.34% 3.82% Sterling 5.72% 5.14% 3.50% Yen 6.73% 6.04% 4.42% Swiss Franc 7.15% 6.63% 5.07% as on 23rd September, 2011 Source: Hindu BusinessLine

Commodities

Aluminum (1 kg) 108.65

Copper (1 Kg) 397.40

Zinc (1 kg) 96.75

Steel L(1000kg) 31800

As on 23rd September 2011

Call Rates as on 23rd September 2011

6.50% - 8.35%

Sensex Nifty

16501.74

16162

4946.8 4867.75

Gold (10 gm) Silver (1 KG)

28134

27271

64681

58801

Crude Oil (per barrel) Dollar

110.9

104.08 45.35

50.01

Data from 12th

September to 23rd

September

YEAR

Falling Connections- GSM subscribers

Onshore Yuan

For more than a decade, economists and officials in other countries have charged that

the Chinese government has kept the value of its currency artificially low to make the

country's exports more affordable. China’s currency started appreciating in July 2005,

remained stagnant from July 2008 till May 2010 and started appreciating again in June

2010.

Spot Yuan (USD/ CNY) was at 6.3832 on 16 Sept, 2011. Though it was below its all time

high of 6.3705 on Aug 30, it has risen 3.24% so far this year and 6.94% since its de-

pegging in June 2010.

Currently, inflation is the biggest threat faced by Chinese administration. Hence, China

continues to focus on curbing inflation and to reduce the economy’s reliance on exports

and Yuan appreciation is one of the tools to achieve that. China’s economic outlook is

rosier compared with developed countries, that helps stimulate demand for the

currency. The Yuan is expected to strengthen and rise 4% to around 6.115 by the end of

this year as the government uses it to reduce the nation’s inflationary pressure and help

its overheating economy,

“Dumping”

The practice of selling goods outside of the usual distribution channels, often

a foreign market, for a lower than normal price.

StatsWatch

Outlook -Coal

Gloss

Almost every day, warnings come thick and fast that the euro currency club cannot

survive the ongoing Greek crisis. A wide range of policy makers and analysts are

convinced the eurozone will be torn apart by the wrangling over how much cash to

loan the Greeks and how much of the country's debt to write off. The government at

the heart of concerns, Greece, risks being unable to pay wages and pensions, if the

funds (8 billion euros) are not released in next two weeks. Panicked officials are racing

to plug a gaping hole in the budget and accelerate reforms to evade such a possibility.

A hastily announced property tax which should raise about €2 billion, to keep the

budget deficit below 9% of GDP this year, is a shot at pleasing international lenders.

A €13 bn bond-buying spree in the mid of September, by the European Central Bank

(ECB) has compounded the controversy. The purchase of Italian and Spanish

government debt led to the resignation of Jürgen Stark, the ECB's hardline chief

economist, who argued that Rome and Madrid should be prevented from accessing

ECB funds before instituting further austerity measures.

The problem is that although a beefed-up EFSF (European Financial Stability Fund)

will be able to cope with the smaller peripherals, it is unable to support the

refinancing needs of an economy as big as Italy. At an auction of Italian five-year bonds

on September 13th its borrowing costs jumped to 5.6%, up from 4.9% at a similar

auction in July. Another problem is that the pressure on European banks is increasing.

Again, the real last resort is the ECB, which could relieve the pressures on the system

by being prepared to buy without limit the bonds of solvent euro-zone countries. But

the ECB is itself divided by disagreement.

Fiscal policy in a debt crisis attracts two divergent views: one, austerity never works;

two, you don’t get out of debt by taking on more debt. Neither is necessarily true. But

the problem right now is that the first holds in Greece, where policy is based on

ignoring it, and the second fails to hold in Germany, the US and UK, where policy is

based on accepting it!

Cover Story

Eurozone in Intensive Care

Further, the first view ignores the successful use of fiscal tightening to escape debt

crises in, for example, Brazil and Turkey in the early 2000s as well as the oft-cited

examples of simultaneous austerity and expansion of Canada and Sweden in the

1990s. But they had the benefits of a rapidly recovering global economy to export

into as also had the ability to depreciate their currencies. Greece has neither. It

cannot escape its predicament using fiscal policy. It needs a debt restructuring.

The second myth involves a willful or ignorant confusion of short-run stimulus and

long-run solvency. The irony is that, assuming growth in their economies will

materialize despite short-run fiscal tightening; the US, the UK and Germany are

jeopardizing the attempts of others to do the same. What those three countries

think will reassure the markets about solvency will in fact scare them about

growth.

Meanwhile, the source of much of this tension – the eurozone’s painfully slow and

disunited approach to resolving the Greek crisis – continues.

The fine print of the fuss

For the uninitiated, the obvious solution to the problem may be Greece exiting

eurozone. After all, it is the proverbial Achilles’ heel here. However, it is easier

thought of than done. Adopting the euro was designed to be irrevocable, and

European Union treaties don't contain provisions that would permit a country to

leave. Amending the treaties could take years and requires unanimous

agreement—including that of any country threatened with expulsion. That means

Greece can't be pushed out against its will. But fellow members could make life so

difficult for Greece that is has no choice. After all, Greece depends almost entirely

on loans from the euro zone and International Monetary Fund while the European

Central Bank is providing badly needed liquidity to Greece's enfeebled banks.

Those faucets could be shut off.

Run up to our cover story “The crisis Continues-European Union” published 0n 6th June 2011

But such an action would be hugely costly. It would leave Greece with little or no

ability and incentive to service its euro denominated bonds. Remember, banks

across Europe hold Greek bonds and they would suffer giant losses. During

subprime crisis, toxic debt was hidden in ‘derivatives,’ and kept off balance-sheet.

Now instead of sub-prime property loans, the banks across America and Europe

are hiding toxic Greek debt in their assets: Thus even small exposures – US banks

hold only $1.5bn (€1.1bn) in Greek debt, and British banks are on the hook for

$3.4bn (€2.5bn) – could be masking considerably larger off-balance sheet risks.

Besides the American and British exposure, the direct impact list include: Japanese

banks holding $432m (€316m) in Greek debt, Turkey $30.4bn (€22bn), Poland

$8bn (€5.8bn), Croatia, Hungary and the Czech Republic combined are exposed to

some $460m (€336m) – and on through Bulgaria, Serbia, and Romania.

A Banking Crisis

No wonder then that the sovereign debt crisis has transformed into a ‘Banking

Sector Crisis’.

Greek default can lead to a severe liquidity crunch and flight to safety of deposits

from not only Greek and euro area banks, but from a number of closely inter-

connected banking systems, especially those with close trading and investment

links to the European Economic Community. This is bound to induce contagion

across the entire euro area and spill over to euro area banks’ cross-links to Eastern

and Central Europe and beyond.

Already, credit-default-swap spreads for European banks, a measure of how costly

it is to buy insurance against their default, are at record highs. The rates that banks

charge each other for loans in the interbank market are rising, too. Banks are

finding it hard to issue longer-term debt, too. The market for unsecured bonds has

been closed for weeks, leaving banks with no option but to sell covered bonds at

usurious interest rates that will challenge their profitability.

Commotion Continues

Even if the bank's exposure to Greece was minimized and their position

consolidated, there still are a couple of reasons that will keep the threat of a

broader collapse alive.

The first is that market pressures will move on to the next most likely "candidate"

to follow the path of Greece; Ireland and Portugal who have also received bailouts.

There will most probably be speculation regarding the future of Spain and Italy.

The second issue is that if Greece eventually defaults, it will most probably re-

adopt its national currency, the drachma, which implies that inflation will sharply

rise leading to hyperinflation. This means that Greece will have absolutely no

capacity to trade with its European partners under free market conditions, since

she will have to impose protectionist measures in an attempt to safeguard

whatever is left of her economy.

note that its debt is far higher, so the ripple effects could be more serious.

Total Greek public debt is about 370 billion euros, or $500 billion. By comparison,

Argentina's debt was $82 billion when it defaulted in 2001; when Russia defaulted, in

1998, its debt was $79 billion.

At its heart, the eurozone's problems remain rooted in the banking sector. A decision

by the French and German parliaments to underwrite their biggest at-risk banks

would take the problem off the table for now. But policymakers remain in denial and

prevarication among politicians dumps the problem back in the ECB's lap. In

particular, work on transforming Europe's main financial rescue vehicle, the proposed

440 billion euro European Financial Stability Facility, would have to be fast tracked so

that it would be in a position to buy European bonds and, crucially, provide emergency

loans to countries that need to inject money into capital starved banks.

Rising government credit risks, including recent Italy’s downgrade, shaky asset

markets, weakening growth: the makers of the horror movie of 2008 are clearly

contemplating a sequel – “Lehman Brothers II: This Time its Sovereign”.

The protectionist measures, together with the massive depreciation of the Greek

currency, will have two effects: (a) Greek exports will become very cheap and

therefore will be preferred over the equivalent products of Greece's competitors,

who are also part of the Euro (b) Greece will act like a black hole that will absorb

all the money that is thrown her way without giving anything away (since she will

mostly export and not import). This will understandably destabilize trade, which

again will have negative implications for the rest as it will as well lead to a vicious

cycle.

At any rate the catastrophic implications of a Greek exit or default are such that

will force European leaders to devise any sort of action that will prevent them.

Eurobond

With the European Union (EU) on the brink, the world is hoping that the political

leadership in eurozone agrees to plans for a common euro zone sovereign bond

that could avert Europe’s “Lehman moment”, and the prospect of fresh financial

contagion. Although such a bond cannot address the deeper structural issues that

the euro zone faces, of slow growth and political asymmetries, this joint debt issue

will go some way towards easing the impending credit crunch by lowering the cost

of borrowing for debt-ridden countries and, as important, sending signals to the

investor community that Europe’s strong economies are – finally – ready to take

some responsibility for the smaller and weaker states. A euro-bond issue will also

give Europe the breather it needs to redefine the contours of the monetary union.

One sticking point about the euro bond is that it is likely to come with stricter and

more intrusive financial oversight, at which member countries may baulk.

Conclusion

While other countries have defaulted on their sovereign debt in recent times

without causing systemic contagion, analysts weighing the numbers on Greece

Everonn to sell 12% stake to Dubai-based GEMS

Education for Rs 138 crore

Embattled Chennai-based Company Everonn Education,

whose founder is in jail, will sell a 12% stake for Rs 138

crore to Dubai-based GEMS Education via a preferential

allotment of shares. Each share will cost GEMS 528, an

over 40% premium to Tuesday's (20th September 2011)

closing price. GEMS belongs to the Varkey Group, founded

by Padmashri Award recipient and Dubai-based NRI

entrepreneur Sunny Varkey.

Desktops won't die so soon

In the April-June quarter, desktop PCs accounted for 61

per cent of the total market size of 2.5 million PC units

sold (the installed base is estimated at around 53 million

units), according to Gartner. In 2011, while the growth of

desktops is expected to rise 10 per cent to 6.74 million

units, the share of desktops as a percentage of total PC

shipments is expected to fall marginally to 60 per cent. In

2012, desktops are estimated to grow by 11.9 per cent

(7.54 million units).

12th rate hike by RBI; loans to cost more

Concerned over high inflation, the Reserve Bank on 16th

September 2011 raised key interest rates by 25 basis

points, its 12th such hike since March, 2010, making auto,

home and other loans more expensive. Following the

increase, the short-term lending (repo) rate stands at 8.25

per cent and the short-term borrowing rate (reverse

repo) is 7.25 per cent.

The RBI, while announcing its mid-term review of the

Contracts for 7,300 km roads to be awarded by

March-end: Joshi

The government today said contracts for laying over

7,300 km roads will be awarded by the end of current

financial year."...Before the year ends, we will award

concessions for over 7,300 km (roads). This will harness

private investment of over Rs 50,000 crore," Road,

Transport & Highways Minister C P Joshi said at the

'Conference on Public Private Partnership (PPP) in

National Highways: Challenges & Opportunities. He said

that out of India's highways network of 71,000 km, up

gradation projects for about 16,000 km have been

completed, while about 15,000 km are in different

stages of implementation of being awarded.

12th rate hike by RBI; loans to cost more

Concerned over high inflation, the Reserve Bank on 16th

September 2011 raised key interest rates by 25 basis

points, its 12th such hike since March, 2010, making auto,

home and other loans more expensive. Following the

increase, the short-term lending (repo) rate stands at 8.25

per cent and the short-term borrowing rate (reverse

repo) is 7.25 per cent. The RBI, while announcing its mid-

term review of the monetary policy, kept all other rates

and ratios unchanged

Consumer Price Index up 1.18% in Aug; food and

clothing dearer

Expensive food and clothing pushed up the Consumer

Price Index (CPI) by 1.18 per cent in August vis-a-vis the

previous month, but experts said too much should not be

read into the numbers, as the data on retail prices is yet to

stabilise. The CPI based on retail prices stood at 111.7

points in August, compared to 110.4 points in July, as per

data released by the government. The main increase was

seen in the prices of vegetables, with the index rising by

4.61 per cent month-on-month to 113.4 points, while the

indices for milk and milk products and fruits went up by

over 1 per cent each.

Emerging Markets

Indonesia: Coal production may reach 370 million

tons this year

Given current production trends, Indonesian coal output

may reach 370 million tons by the end of this year, if

rainfall is not too excessive during the final three months,

the Indonesian Coal Mining Association (APBI)

announced. The association said that from January to

August, the country’s coal production had already

reached 235 million tons. Earlier estimates had targeted

this year’s coal production to between 340 million and

360 million tons. In 2011, Bob predicted that around 65

million tons of coal would be sold to the domestic market

through the domestic market obligation (DMO)

regulation, which requires coal producers to sell a part of

their production to local buyers.In 2012, he estimated

that 75 million tons of coal would be allocated for the

country’s coal users.

Thailand: Thai tech companies draw global

interest

Competition in the local online business is heating up

with some global companies exploring opportunities to

buy or form partnerships with Thai online firms to

provide services here. Baidu, a Chinese search engine

operator, is in talks to invest in some Thai websites with

strong customer bases such as Mthai and Kapook, said an

industry source. Earlier, Living Social, a US online

discount-deals operator, acquired Ensogo, a Thai

company operating the same business, while Rakuten, a

Japanese e- commerce company, bought Tarad.com, a

Thai online market. The two global players came to

Thailand as they are looking to expand to the fast-

growing, less-crowded Asian market.

Egypt asks U.S. business for help, urges investment

Badly in need of cash flow, Egypt appealed to the U.S.

business community to help the country rebuild following

street protests that pushed its president out in February.

The Egyptian government has forecast growth of

somewhere between 3 to 3.5 percent in the current fiscal

year ending June and has narrowed its budget deficit to

8.6 percent of gross domestic product

Singapore jobless rate up slightly in Q2

Singapore's final unemployment rate increased slightly in

the second quarter, but is lower than the preliminary

figure of 2.2 per cent reported in July. According to the

Ministry of Manpower (MOM), the overall unemployment

rate increased from a seasonally adjusted 1.9 per cent in

March 2011 to 2.1 per cent in June 2011 with the slower

unemployment growth. Services continued to generate

the bulk of the employment gains, adding 20,200 workers

in the second quarter. Construction expanded by 3,600,

higher while manufacturing rose by 800, up from the flat

gains (100) in the previous quarter.

South Africa: No surprise as rates held steady

The Reserve Bank has left the repo rate unchanged at

5.5%, as widely forecast. Although economic data out

this week sent mixed signals about the state of the

South African economy, the dovish stance of the

monetary policy committee (MPC) after its three-day

meeting was no surprise. Money markets factored in

a small chance of a repo rate cut late this year or

early next year, but the steep rand depreciation may

limit further monetary loosening.

Indonesia: Rupiah drops to lowest rate this

year

The rupiah dropped to 9,367 per US dollar at

opening time on 22nd September morning, its lowest

position since May last year. Commonwealth Bank

currency analyst Mika Martumpal said the rupiah

depreciation had followed the falling stock and

commodity markets. He said many investors had let

go of stocks and bonds and shifted to dollars, further

pressuring the rupiah.“The market [situation] has

been triggered by the Greek default risk and the

decision of the [US] Federal Reserve, announced last

night,” Mika said.

POLICY RATE HIKE: The other side of Discussion All I Said Was Don’t Ignore Turkey Rate Cuts & Fall in Inflation: Basu

In the run up to the monetary policy review on September 16,

chief economic advisor Kaushik Basu said he did not favour an interest rate increase. The

RBI lifted the key policy rate 25 basis points.

Contrary to what you were advising, the RBI has raised rates. Does this show a

conflict among the decision-makers?

Not at all. Let me first clarify that what I advised RBI was to “consider” not raising the

interest rate. Turkey, despite high inflation, began lowering interest rates from the

middle of last year. Critics were fully braced for further inflation. What happened was

interesting. Turkey’s growth rate rose—as expected; Turkey now stands with China at

the top of the league among G20 nations. The surprise was in the inflation. Far from

rising it came down from over 10% in April 2010 to around 6%. I am fully aware that

nations have their own idiosyncracies; but we must not dismiss other nations’

experiences out of hand. I used the Turkish experience—and some of Brazil—and also

some economic theory to argue that it is no longer obvious that India should continue to

raise interest rates. I urged the RBI to think out of the box and then act. It is my job as an

economic adviser to float new ideas and not simply parrot the majority opinion. And I

am glad that India’s policy cycle is robust enough that we can openly discuss different

ideas. It is RBI’s job to take a final call. I like to believe that it did consider my views and

then took the decision. The Reserve Bank is a thinking organization and I have great

respect for those at its helm. But that does not mean that we will all reach the same

conclusion. Total coincidence of opinions is not a sign of good government but of a bad

totalitarian state.

Open Forum

InFocus

It takes 32 Rs. to cross poverty line!

If a person is spending more than Rs.32 a day in urban India, is he poor? No.

Atleast the Planning Commission thinks so! According to a reply submitted by the

Planning Commission to the Supreme Court, anyone spending more than Rs 965

per month in urban India and Rs 781 in rural India will be deemed to be not poor.

This effectively means that those spending in excess of Rs 32 a day in urban areas

or Rs 26 a day in villages would no longer be eligible to draw benefits of central

and state government welfare schemes for those living below the poverty line.

Not surprisingly, it has created outrage among activists who feel it’s a ploy to

artificially depress the number of poor in India. However, commission maintains

that these were provisional figures based on the Tendulkar committee report

updated for current prices by taking account of the Consumer Price Index for

Industrial and Agricultural workers.

Practically applying this idea of Planning Commission would yield following

picture according to prices in the national capital:

The Turkish Central Bank lowered interest rates not to control inflation but to counter capital inflows?

You are right about that. But the reason for which Turkey did this is of no interest to me. Turkey’s action has thrown up evidence that is of interest. Fleming did not discover

penicillin because he was looking for it; it was a by-product of other activity. It is entirely possible that after studying this serendipitous experiment we will conclude that it is

unlikely to be repeated in India. I am fine with that. But we must have the openness to examine it.

Do you believe, as some have argued, that to control inflation India has to keep its growth down to below 8%?

No I don’t. The kind of research which leads to such a belief entails statistically extending a nation’s past experience to create a potential growth path. For a dynamic nation on

a take-off path, such as India, such projections are deeply misleading. There are many economies in early stages that have grown consistently beyond what would have been

considered their capacity growth by this calculation. From 1966 to the end of the 70s, South Korea grew at astonishing rates, often above 10% per annum. This was also a

period when it had high inflation. In fact, barring one year, it had double-digit inflation for this entire 14-year stretch. It is important to see that neither of these two trends got

in the way of the other. It would have been a mistake if Korea had cut its growth back during this vital period in the belief that it was performing above capacity.

Are inflation and slowdown signs of the government running out of ideas and the Indian miracle coming to an end?

The inflation situation and the slowdown in growth are indeed a matter of concern, but let us not get things out of proportion. A growth rate of 7.7%—the figure India

achieved in the first quarter of 2011-12—is disappointing compared to what we have achieved in recent times. But by any international comparison it is remarkable

performance. The fact that it disappoints us shows more than anything else how our yardstick has changed. We are demanding of India, which is a good sign. As for inflation,

9.8% is unacceptably high and we have to work to bring it down. But once again we have to recognize that there are nations—industrialized and emerging-—that have had

inflation many times more than that. Further, India’s nominal income is growing by roughly 18% per annum. So even if inflation takes away 10 of those percentage points,

people have more real goods and services to consume each year by a hefty 8%. This is no mean achievement.

Should we accept high inflation and press full throttle on growth?

We should not accept it and we press full throttle. Let me explain. I have argued elsewhere that it is natural to get an additional 2 percentage points of inflation during a

nation’s rapid growth phase. If in addition we treat up to 2 or 3 inflation as standard as many central banks do, even then we are talking of an inflation of less than 5%. I am in

favor of using such a target. I don’t think that just because we are in a high growth phase we have to inflate faster. At times, in rapidly growing economies such as ours or

Korea’s in the seventies, there is so much change that inflation goes up as happened in Korea and is happening here. But there is no “has to” about this. We simply need to find

the new policy rules, for a new and changing economy.

TeamChronicle

Bhavna Goal bhavna@investeurs.com

Akanksha Srivastva akanksha@investeurs.com

Disclaimer: Investeurs Chronicles is prepared by Research & Analysis Team of Investeurs Consulting Private Limited to provide the recipient with relevant information pertaining to the world economy. The

information contained in the document is based on the releases made by various newspaper & publications; hence, we are not responsible for any inaccuracies in the information provided.

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