Friday, September 3, 2010

New U.S. Visa Fees is the change only to be criticized or can we see anything more coming up soon?

The increased H1-B us visa fee would have had some eyebrows raised but the question to be thought and asked is if this was a major issue pertaining and needing some attention.

Every year thousands of Indians visit US(only with respect to US), for a normal visa the fee ranges till 10K INR and that’s for all one application which if rejected will need a reapplication, mostly if you are a tourist there are no chances of rejection but in most of the student visas which are for longer duration and the one which are for temporary work force ( staff sent by Indian countries to US for temporary period) there are many rejections. Every rejection earns the US government some more dollars.

However the H1-B visas have always been considered more important from the point of Indians who eyed them during the brain drain years and since then have always been eyed upon.

After the recent change in the visa fee due to Schumer border security bill in US one will have to shell away more approximately more of about US$2000 per visa ie about INR 92000.

What is to be looked upon is the direct and indirect impact of this bill on Indians, Indian firms and any kind of employment drawbacks.
  • The majority of the individuals who apply for H1-B visa are students and those always have a choice of applying in student visas.
  • Majority of the Indian firms who send there employees on a temporary period abroad are the ones who apply for H1-B visas however the percentage of these is incomparable to others. The reason why they send there people is simply based on the concept of high profit earnings (i.e. all IT companies charge there counter parts in US on a monthly basis for the service they provide on the other hand the Indian employee is normally paid on a daily fixed expense+ Indian salary or only on daily expenses abroad basis, the net difference is simple profit made in body shopping)        
  •  As we are taking about big corporations whose reason to send an employee and earn over per  head   is  more than mere fee H1-B despite the fact it will add to the cost it will make no difference to the number of people sent by these firms abroad.
  •  Employment Drawbacks: if and only if one would not have any prospects of future earnings they would drop a plan to avail H1-B and as there is no difference made in the number of visas allowed it makes no difference to the overall employment opportunity in US on part time or full time basis.

So after reading all of this the questions still remains same , why is a policy decision hyped so much when it makes no difference to the overall economic situation of a country except for the few thousand dollars surplus(which sound like peanuts in front of the overall reaction).

Or is this just the first step for the change and we can expect more change in the coming days. Looking at the present scenario the only option US seem to be having is generation of employment and creating more opportunity for employment and any changes made there could not only hurt US corporate profits but also Indian companies and overall employment scenario in India.

Thursday, August 12, 2010

Limited Licenses to new banks in private sector

Recently, RBI released a discussion paper on Entry of new banks in the Private sector. This discussion paper is mainly aimed at inviting the feedback and suggestions from the stakeholders, RBI would set up comprehensive guidelines for licensing of new banks.

On the following aspects in the Discussion paper RBI invites suggestions:
Minimum capital requirements for new banks and promoters contribution
Minimum and maximum caps on promoter shareholding and other shareholders
Foreign shareholding in the new banks
Whether industrial and business houses could be allowed to promote banks
Should Non-Banking Financial Companies be allowed conversion into banks or to promote a bank
Business model for the new banks (source. RBI website)

Why this step???
According to the discussion paper, RBI is considering this approach as larger number of banks would foster competition, reduce costs and improve the quality of service. It would promote financial inclusion and ultimately support inclusive economic growth, which is a key focus public policy.
For the discussion paper go to the link:

Sunday, August 8, 2010

Common wealth. What is more uncommon about it, the expenses, the speculations or the reactions?

Any event which is so big in itself  could not only add to the existing grwoth of  a developing nation like India but helps in generating more employment and other benefits . The Common wealth games are contributing to the livelihood of almost 300000 people (WSJ) employed in infrastructure and  other 200000 involved in services.

We know that the people employed in infrastructure would no longer will be working after the completion of the jobs but they have been involved since 2003 so lets account there presence till Oct-2010 and look at the future events taking place.

The stadiums might not be reused, but the equipments hired would be paid for, the stadiums would have tickets contributing towards their fixed cost (contribution), the roads being used and hence value for the money, the visitors coming in the country would stay in hotels (spend )and involve in other shopping around the town.

The basic economics suggest that any input by government favors a multiplier effect on the over all economy hence pump the economy with jobs and money. In a country like India the government investments still do not produce crowding out effect(as in case of developed nations) as in India  the private players  would still have lot of scope to take part.

It’s been estimated that a government expense in India results in a multiplier effect of approximately 1.8(WSJ). We know that after the approx 10000 millions expenses so far and over all revenues and expenditures to touch 2 billion approximately, the net multiplier will be approximately 4billion.

There are always possibilities of leakages in a system and so is the case of common wealth games and despite the uncommon large leakages happened what could possibly be done is manage the large event coming up not only for pride but also for the growth of the economy.

India won the bid to conduct an even which is so large and after having spent so many crores and expecting more to be spent are we looking back to withdraw it? Debate over it? or find a solution?

Wednesday, July 28, 2010

Tightening Monetary Policy: Repo and Reverse Repo

It was impending and is not taken as a surprise…when on 27th July 2010, RBI Governor, D. Subbarao announced the increase in Repo and Reverse Repo rates by 25 and 50 basis points respectively, making it to 5.75% and 4.5%. The hike in policy rates is done keeping in mind the food and non food inflation which is still in double digit at glaring 10.4%.However it is expected that monsoon will moderate the food prices and will help the inflation rate to come down. As a part of monetary tightening policy, increase in the interest rates will make the credit dearer, reduce the spending, thereby tightening the liquidity in the market. Apart from this, there is also narrowing of LAF (Liquidity Adjustment Facility) corridor to 125 bps.

LAF can be simply defined as gap between the repo and reverse repo rate incorporated in 2000.The broad objectives of LAF are:

• To give RBI greater flexibility in determining both the quantum of adjustment as also the rates by responding to the system on a daily basis.
• To help RBI ensure that the injected funds are being used to fund day-to-day liquidity mismatches and not to finance more permanent assets.
• To help RBI set a corridor for short-term rates, which should ideally be governed by the reverse-repo (top band), and repo (lower band) rates. This would impart greater stability in the markets.

The exact quantum of liquidity to be absorbed or injected and the accompanying repo and reverse repo rates are determined after taking into consideration, the liquidity conditions in the market, the interest rate situation and the stance of monetary policy. The decisions are based on a numerous factors including net inflows and outflows on account of forex operations, current account balances of the banks against the CRR requirements, open market operations, redemption of loans and coupon payments, announcement of new issues by the government, un-drawn liquidity support on account of export refinance, collateralized lending facility to banks.
D. Subbarao, in the disclosure also talked about the LAF to be narrowed to 125 bps thereby reducing the volatility.

However, the change in the rates had empirically no impact on the growing sectors, i.e auto and real estate immediately. It may be because the hike was an expected event or it may be just a short phenomenon.
The question which becomes pertinent here is the impact of hikes in the long run on the growth sectors and on the inflation. It is also expected that deposit and lending rates are next on the list. What will be its impact?

Sunday, July 18, 2010

Lending policies is there any safe way out? Liberalized or conservatism which view do you hold or is there any third way out?

The world seems to be astonished looking at India, a country which was popular for snake charmers and elephants in west is in news but for all the new reasons. From the terminology of “outsourced” synonymous to “Bangalored” in world, to financial shock observer India is leading the world for its policies and conservative approach.

Some day we blamed public sector banks for there hundreds of documentation procedures but today we look at them proudly and say” This is called banking”. When United States largest banks were in soup we had State Bank of India having its revenues exceeding its previous year. When People had serious doubts about banks like CITI Bank in India we even had private players like HDFC being not affected.

The Basel committee on banking supervision which consists of 27 countries seems to be following the same path of Indian Banking system with its new recommendations. The recommendations would be to thicken capital buffers, hold more liquid and cut down on leverage. This means improving on Cash Reserves (Like Indian CRR) and Capital adequacy ratio (CAR)will become mandatory for all the banks in the 27 nations at least.

The reason of the policy is simple, to avoid any other financial crisis in the future as was last time(mostly because of excessive liberal lending policies). Now when we are talking about capital account convertibility in India the world seems to be moving our way towards a more conservatism.

Liberalized policies or conservatism? One recession and we seem to neglect the growth created by the liberal lending policies, is the solution right or is there any other way around? Can we have a standard lending policies promoting growth?

Monday, July 12, 2010

Is Inflation problem India-Specific?????????

The year-end inflation figures as given from CIA Fact Book for India are 8.3% (2008) & 10.9% (2009), respectively. This year we have seen double digit inflation figures with WPI being at around 11 % in March 2010. Strong demand, supply constraints, rise in oil prices all are set to pressurize the Indian Government while making economic policies.

As recently we saw central bank’s initiative to tame inflation by shifting the BPLR system to the base rate system in which credit could not be lent to anyone at a rate below the base rate. Sure enough, this way of contracting the money supply help in taming inflation as the interest rate would be transmitted to the end-consumer in this way & hence would curb their spending thereby reducing their demand, & hence control the supply led inflation.

But the issue of concern is that is this inflation problem India-specific or is the same with other developing economies as well.

"This time around, inflation does appear to be an India-specific phenomenon, as there are no global factors at play as was the case during 2008," said Mr. Saumitra Chaudhuri, Member of the Planning Commission.

The question to ponder over is that is the RBI’s measure only sufficient to control inflation or we need to do something over our aggregate supply. Well, in the short-run, it would be impossible to increase our aggregate supply because it will take some time to start new plants and all. In the short-run, contracting money supply is the measure while in long run, focus should be towards improving the supply side.

When we see in developing economies like BRICs nations, we see that unlike India & China, Russia’s inflation has declined considerably. The reason may be attributed perhaps to the fact that India & China are already working at nearly full capacities & hence growing demand in these economies is further causing the inflationary pressures to rise.

What is your opinion from India’s perspective????? Is inflation problem India-specific????Are we running at nearly full capacities????Is RBI’s step sufficient to tame inflation?????

News 12th July 2010

Widening Trade surplus in China

For the past three weeks, China remained in phenomenal focus with regard to the undervaluation of Yuan. The pressure had just started building up on China, that it is again saddled with the global pressure. On 9th July 2010, China’s trade surplus increased to 20.2 billion, 140% from the previous year. The rise in exports was 44% and imports surged to 34%.
US Treasury Secretary Timothy Geithner said that US will be continuously monitoring Yuan’s appreciation. Also analyst predicted that Yuan would appreciate by 4% by the end of 2010 and 6% next year.This news ought to generate the weekend effect in the markets.DJIA, NASDAQ, NEKKEI, FTSE 100 would show volatility, which would be further witnessed by Indian markets as a Spillover effect. Also, the commodity prices tend to shoot up in the short run.
China is estimated to have invested about 70 percent of its foreign reserves in US denominated assets and is the biggest holder of US Treasuries of about $900 billion. Large trade surplus of China depicts, greater capital inflow, thereby increasing its forex reserve and thereby depicts a greater budget to purchase US treasury. Thus it is quite evident, that as the trade surplus of China surges, US would play the game of Tug of war and pressurize upon Yuan appreciation.
But the question still remains unanswered, that whether such increase in the Trade Surplus of China is signaling an economic growth or formation of an asset bubble in the near future.

Thursday, July 8, 2010

United States standing on cross- roads of Inflation, Deflation, depression or recovery? Which of one them is closer?

World seem to be caught turbulences one after other but it seem to be tougher for United states than others 2008-2009 recession, massive unemployement, threat to global currency value and now a new question appearing for the world’s biggest economy.

Where it heading to?

United States is indebted to worlds largest economies the country is running on 11 % deficit and has gross debt of 83% its GDP. As of now the country is majorly running on subsidies and rebates, Sooner the government would like to repay these debts and also reduce the subsidies so what would happen then?

After the subsidies reduction the Fed would like the demand in economy to be maintained and to foster growth it would possibly pump more money in the system and maintain money supply by keeping lower interest rates.
However what can be the impact of lower interest rate be?
  • Lower interest rates would lead to more money in system hence fear of inflation.
  • It would lead to easy purchases and hence people would buy more than they can afford (Unemployment levels are still same and hence people do not have sources to repay the debt) hence eventually another bubble and another recession.
What if the FED is cautious and the lending and rules are made strict then they were before recession?
  • The purchasing power of people will go down, the consumer price index will go down and the economy would move towards deflation.

Which one of them seems to be closer and what could be the right move towards recovery is something to ponder about.

Monday, July 5, 2010

News 4th July

Repo rates Up, BPLR system shifted to base rates

Inflation on its rise with WPI rise of 10.16% in May and the soaring prices of non-food manufactured products like metals, textiles, plywood etc along with petrol hikes have all placed the policy makers in a dilemma as on one hand, they need to tighten the monetary policy to curb inflation and on the other hand, they also don’t want to affect the economic growth since economy is in the recovery phase after the credit crisis. “We had to control credit demand, especially unproductive demand has to be curtailed”, said KC Chakrabarty, Deputy Governor of RBI. That means, demand which is leading to price hikes has to be checked.

As a result, the reverse repo is raised from 3.75% to 4% and the repo rate from 5.25% to 5.5% (source: RBI website).This Thursday i.e. July 1 2010 saw a new regime in banking system with BPLR shifted to base rate policy. The base rate fixed at 7% - 8.75% with a view to have a transparent banking system, as said by the Chairman, OP Bhatt, SBI “The base rate will be transparent”, while the CRR remains at 6%.

The existing Benchmark prime lending rate system led to unequal distribution of policy rates to the customers. In BPLR system, the banks could also lend to the customers at a rate below than BPLR, in some cases like lending to large corporations, housing loans etc. As a result some sections were being benefitted at the expense of others i.e. housing & corporates were being benefitted since they are the credit-worthy customers of banks so were getting loans at a lower rate than the small retail investors. Hence, the whole system was not transparent as well as the monetary policy didn’t seem to be that effective as it was proposed. Hence, fixing a base rate for banks in the range 7% - 8.75% aims to have an effective monetary system as the banks won’t be able to lend below 7% even to the large corporations.

This could be the right time for the policy actions as waiting more could lead to more spiraling inflationary pressures.

Wait & watch for the July 27 policy review!!!!!!!

Thursday, July 1, 2010

News 25th June

Ambanis agree terms on gas supply

Mukesh Ambani (RIL) will supply 28 million metric standard cubic metres a day of gas for 17 years toAnil Ambani (RNRL) at the government-set price of $ 4.2 per million metric British thermal unit (mmBtu) as per the GSMA (Gas Supply Master Agreement) signed on 25th June 2010.

Supreme Court explicit statement ‘Natural resource is National resource’ led to the GSMA agreement between the brothers and also the termination of previous non-compete agreement between RIL and RNRL, thus allowing them to enter into the arena of each others business except Gas-based power generation by RIL for another 12 years.

This will not only foster operational and financial flexibility but will also create an envoirnment of cooperation and collaboration among groups.

The effect of agreement is evident on BSE, as prices of RNRL and RIL moved up by 7.5 % and 0.7% respectively.

Yuan appreciation leading to a series of doubts

Chinese currency has risen by 0.5% against US dollar in last week after the formal announcement of revision to its exchange rate policy.

The increase in Yuan’s strength to 6.7971 from 6.8272 against 1 dollar on Friday, a significant change in terms of exchange rate has led to a series of questions. It is widely speculated as a step taken to ward off the exchange rate issue off the G-20 summit to be held on 26th-27th June which will put undue pressure on China from US and other participating countries.

Yuan also refered as Renminbi , it’s undervaluation was a boon for the Chinese market as it was simultaneously helping to export their goods to foreign markets and imposing a tariff on import of goods. In this scenario, yuan’s appreciation simply looks like a diplomatic step taken by the Chinese Government.

Deregulation of Petrol and Diesel Prices

The minister for Petroleum and natural gas, Murli Deora, announced that the prices of petrol and diesel would be market- driven , thereby accepting the recommendations of the group headed by the Planning commission member Kirit Parekh.The government agreed to increase the price of petrol by Rs 3.50 and that of diesel by Rs 2

The decision of price hike in fuels, thereby resulting in lowering the fuel subsidies, aims at correcting the fiscal deficit to 5.5% of GDP, followed by an increase of 0.9% in the wholesale price inflation. The inflationary pressure created by such a move would be taken care by RBI, by increasing the interest rates in its monetary policy next month. On one hand, it is lessening the burden on government’s part but simultaneously shifting the load of the burden upon the consumers.

By market-driven prices we mean that the consumers ought to pay price for petrol and diesel as per the international crude oil prices. But what if the volatility of the crude oil prices increase to a major extend? Would the consumers be able to bear the burden of such volatility of prices in the market? As in for now, the government has announced that it would intervene, if such volatility occurs in the market with regard to crude oil prices. But shouldn’t the government be more clear and transparent upon to what extend the intervention would be palpable. Shouldn’t the government set definite limits, so that in future we don’t see a tug of war between economics and politics?

Agenda G-20 Summit in Toronto
The G-20 summit to be held at Toronto on 26-27 June 2010, is being organized when there are a series of tribulations in the world economy after the Euro-zone crisis and when the emerging economies are in full swing
Agenda of G-20 Summit:
• to examine the global economic scenario with stress on the recovery process
• fiscal consolidation process of the economies
• reform of international financial institutions such as IMF
• issues related to resolving the eurozone crisis.

News 30th June

30th june:
G-20 summit still in news and still attracting views:

What is till to date news?
  • Targeted debt reduction fiscal deficit to be halved by 2013 and stabilized by 2016. (Estimates given by US is approximately reduce its debt from 10.1 % of GDP to 4.2% of GDP , Germany expects to reduce from 5.5% to 3%.)
  • Tighter bank capital requirement by 2012, but bank takes possibility only in debt zone of Europe.
  • Financial regulations to be tightened and more stringent however will be discussed in the Seoul Summit.
  • Focus on raising private demand and get away from the stimulus backed economies

What’s in for India?

  • The government would reduce subsidies in gasoline and Kerosene complying to long term goal of G20 to reduce subsidy on energy products.
  • India Signs a nuclear deal with Canada too open nuclear commerce with Canada.

*****Anjana Khanduri

Third Party Involvement in Trade Between Thailand & Africa

Ok here is the state of affairs up till now!

There has been trade between Thailand and Africa for decades now. Thailand is the largest exporter of rice in the world and it exports more than 42% of the rice to Africa. That makes it a cool 2.3 billion dollars. But the concern here is that there are no direct links between Thai and African banks.

Let’s comprehend the situation better. Assume that Thailand exports rice to Africa, and the African banks issue a LOC to the exporters back in Thailand. The Thai bank will merely reject the LOC is as it does not accept any letter of credit from any African bank. So there is a third bank in the picture i.e. a foreign bank. The foreign bank will have to issue a LOC on behalf of the African importers. Sine there is no direct links between Thai and African banks all payment from Africa will have to be made through a third party broker, in this case the foreign bank. The commission that will be charged by the third party broker will be about 1% of the entire trade amount. For a $ 2.3 billion trade, the third party broker will earn $ 23 million.

Dr. W Wongsurawat, a Thai economist opines that many non-economists fall prey to the erroneous belief that creating direct links between the Thai and African banks will improve the efficiency. In most situations he says it is a simple lack information and trust between the two transacting parties. The transactions being highly risky the middle men actually act as the risk bearers in this unique situation.

On the other hand Dr. R. Amoussou-Guenou an African lawyer states the reasons for creating direct links between the two parties. Africa is an emerging market. Countries like India and china already have direct relationships with Africa.

In 2009 the world economic forum has rated many African countries above USA and Singapore for the soundness of their banking system. No global crisis has ever originated from Africa.

Post 1973 Thailand has struggled to mark its political contours for a long time now and it will take sometime for Prime Minister Abhisit Vejjaviya to stabilize the situation. Thailand has seen a difficult and sometimes bloody transition from military to civilian rule, with several reversals along the way. In 2006 there had been the dissolution of the parliament and a provisional body was formed. In 2007 Thailand saw a civilian government and in 2008 many after a small revolution many parties joined hands to form a new government.

Now that you have heard both sides of the argument; darty o you think that Thailand should establish direct relations with Africa and save on the third party payments?

Wednesday, June 23, 2010

The revaluation of Yuan, is it going to set the growth path ahead or will it be the reason for fall?

China is the world’s largest developing economy with highest saving rate(50% of GDP) and forex reserves up to $2 trillion it has been been challenging and growing as a major threat to worlds most developed economies.
It’s been a while from the post recession heated talks about a new currency which could replace dollar, the focus of discussion was always China.The reasons were many why China did not revalue its currency and when you would look back now they all seem more like strategic decisions rather than succumbing to the situations as it seemed before

Here is China back with a boom not only revaluing its own currency but also making the whole world wonder about the reasons and the outcomes.

China which appeared as the biggest lender and savior of the US in the past today seems to be in a role reversal of sorts and now with the picture looking totally upside down we have a lot to discuss and a lot to learn.

The Chinese currency revaluation brought a new news across the world, would it bring positives for most of the world including India it is expected to give a tough time to US economic policy maker to formulate an easy way out.

Across the world the news was taken in different magnitude but in India we know that the stock prices jumped high, the oil prices followed them and than there is no commodity I guess which did not rise after the big news.

So why are the signals being speculated positively in India, What could Yuan’s revaluation possibly lead to?

  • Costlier imports for US largest importer of Chinese goods.
  • Higher cost of debt which US have to repay china(In May 2010, the US amount owes $900.2 billion to China)
  • Will give other nations of world a more competitive edge on their exports( India is one amongst them)
  • Increasing revenues for China on exports and debt interest.
  • Mitigation of the Euro falls as compared to it was before.

    But is their any other side of this picture? do we also have economies which have got tangled into a silk spool of china and going to fall?