Biznews Aug 11 To Aug 18

BIZ VOCAB Flight to Quality Flight to quality is the action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This flight is usually caused by uncertainty in the financial or international markets. However, at other times, this move may be an instance of investors cutting back on the more volatile investments for the conservative ones (i.e. diversifying) without much consideration of the international markets. For example, during a bear market investors will often move their money out of equities and into government securities and money market funds. Another example is investors moving investments from high-risk countries with political unrest and volatile economic conditions to less risky markets of other countries. One indication of a flight to quality is a dramatic fall of the yield on government securities, which is a result of the increased demand for them.

WEEKLY ECONOMIC INDICATORS

Economic Indicators

Week ending Aug 17, 2007

Weekly Change

Rupee/USD Rupee/€ Sensex Nifty Gold/10gm Silver/Kg Oil ($)

41.35 55.77 14142 4108 8790 16945 69.51

1.80% 0.49% -4.88% -5.19% 0.63% -4.10% 0.12%

NEWS SNIPPETS Airtel, Vodafone : Hike mobile Tariffs, Meet TRAI to clear air Bharti Airtel and Vodafone Essar hiked tariffs for (1) local calls within their network to Rs1.2/min from 1 Re/min (2) local SMS to Rs 1.2 from Re 1 on 13th August. This increase in tariff at a time when TRAI is pushing to make mobile telephony even cheaper in India led to TRAI suggesting some form of “price cooperation” amongst operators. Subsequent to these developments, representatives from Bharti Airtel, Vodafone Essar and the GSM industry lobby Cellular Operators Association of India (COAI) met officials from TRAI to clear the air on 17th August. They explained that the hikes were not across the board but were on select plans in select circles and were purely a function of market dynamics. Monetrix Opinion   

Both Bharti and Vodafone have been affected the most by the recent reduction in roaming tariffs forced by the TRAI and hence they may be looking to recover revenues with this hike. Increase in tariffs could be a way to express these companies discontentment over a potential unfavourable 2G spectrum policy being mooted by TRAI If there is a reduction in license fees in future the Government may ask operators to pass the benefit to subscribers at which time these tariffs can be rolled back. This would then be a case of increasing the marked price before giving a discount.

Inflation in China hits a 10 year high China’s National Bureau of Statistics reported that the consumer price index shot up of 5.6% in July year over year, the fastest rate of increase in a decade. This inflation rate is nearly double the official target of 3% and comes at the back of a 4.4% surge in June and a 3.2% increase for the first six months of the year. The Bureau’s categorical breakdown indicates that food prices have jumped 15.4% in July from a year ago while non food items rose only 0.9%.

Impact: 

The inflation rate of China is growing faster than the returns on bank deposits. This could prompt the Peoples Bank of China to increase the interest rates for the fourth time in the year.  Increased inflation rates will result in families shifting their savings into the frenzied Chinese stock markets. However the China Securities Index (CSI – 300) is already up over 130% in 2007 and such investments may prove disastrous.  About 900 million people of 70% of China live in rural areas where the disposable income per capita in 2006 was $473 as against the urban average of $1550. Social unrest resulting from the increased prices of food items is becoming an increasingly likely scenario in these areas which are more price sensitive and have a history of such unrest.

US Federal Reserve cuts discount rate, keeps funds rate unchanged The US Federal Reserve on 17th August cut the discount rate at which it lends to the banks by half a percentage point to 5.75%, in a surprise move to keep worsening credit conditions from hurting the economy. In recent weeks, the large number of defaults on US sub-prime loans had caused banks to tighten lending standards, leading to a severe liquidity crunch. Though inflation, and not growth, has been the major concern of the Fed lately, this move is a check against potential deterioration of growth because of tighter credit conditions and market uncertainty.

Impact:       

The discount rate cut could lower the cost of capital for banks and help keep credit flowing through the economy at a time when investors have shown a greater reluctance to lend. Volatility in financial markets is expected to retreat, and even though this may not mark a return to previous equity market highs, the appetite for riskier assets should be more. The move was accepted with both hands by the financial markets, with the S&P 500 rising most in 4 years (2.5%), the Dow Jones 1.8%, and NASDAQ 2.2% on Aug 17. Shares of bank and brokerages like Merrill Lynch & Co., J. P. Morgan Chase and Citigroup surged on account of better liquidity and buying by bargain-hunting investors. U.S.-listed securities of overseas companies, or American Depository Receipts rose for the first time in 4 days. U. S. Treasury bill rates jumped as traders unwounded their flight-toquality positions. Treasury bills are U.S. government debt that has a maturity of shorter than one year The Federal Reserve, in its attempt to restore certainty, might be acquiescing to investors burned by risky bets. The investments were made of mortgages from borrowers with weak credit for high yields, but the resulting defaults have spread to other sectors of market, making credit availability poor for everyone. This lax approach may prove to be a moral hazard.

Highlights of PM’s I-Day Speech Following are the highlights of Prime Minister Manmohan Singh's address on India's 60th Independence Day from the ramparts of the Red Fort here on Wednesday:   

Farmers welfare core of all concerns; need to bridge rural-urban divide Industrialization most effective means to create new employment Massive increase in public spending on education, health care, agriculture and rural development opportunities 30 new central universities to be set up Mission on vocational education and skill development 1,600 new industrial training institutes and polytechnics 10,000 new vocational schools 50,000 new skill development centres 100,000 students to get vocational training National rural employment guarantee programme for entire country Special programme on investment in agriculture New thrust to industrialization and planned urbanization

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DLF Lands Rs 1675-cr Deal Construction Major DLF is set to close the Swantantra Bharat Mills(SBM) real estate deal with DCM Shriram Consolidated (DSCL) for over Rs 1600 crore . This will be the largest private sector land deal in the country, and will give DLF access to about 38 acres of prime land at just about 4-5 km from Connaught place, the capital’s central Business district. Impact  

With the acquisition of SBM’s 38 acres, DLF will have a 65-acre contiguous land in Delhi . If the real estate major goes for an integrated township on this land, it will be the largest such project in a city. This will perhaps be the first township of its kind, combining an IT SEZ with a massive housing supply for those working in the SEZ.

Nokia offers to replace its Faulty batteries. Nokia has recalled 46 million BL-5C Matsushita batteries (manufactured between Dec 2005-Nov 2006), in what would be the largest voluntary consumer electronics recall. The recall was prompted by about 100 cases of overheating being reported without any serious injury to the person or damage to the phone. The overheating was caused by a short circuit while the battery was being charged. The company would replace the batteries free of cost. Impact   

The recall by Nokia caused customers to panic. A lot of people rushed to Nokia showrooms to get their Batteries replaced. In all, Nokia received over 200,000 SMS’s from anxious customers within just 12 hours of opening the SMS-based check facility.

Monetrix’s Opinion 

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This kind of admission and product recall does not lead to brand submission. On the contrary it re-establishes Nokia’s brand image and shows that the company can incur losses to satisfy and safeguard its customers. This latest incident involving Matsushita Electric Industrial will once again draw attention to quality at Japan’s electronics makers after similar product recalls by Sony last year. This could be detrimental to the image and brand equity of Japanese electronics makers in the long run.

WORTH A READ Carbon Credits and their Trade The Business Standard reported on 17th August that in the first six months of 2007 global green house gas emission trade has reached euro 15.8bn, up 41% from a year ago period. Currently the global trade is at $30bn and is doubling every year. This means that the global market for carbon credits could be over 1 trillion dollars in 2012. This would make it the most valuable commodity. Last week JK Paper from India tied up with United Nations to sell carbon credits of farmers in Andhra Pradesh and Orissa. The following article would help better appreciate this fast growing market and its drivers. What are Carbon Credits? One Carbon Credit is the right to emit one metric tonne of emissions in CO2 – equivalent terms. The concept of carbon credits is aimed at reducing green house gas emissions by assigning a monetary value to the earth’s shared atmosphere. The

“carbon market” is so called because carbon dioxide is the most widely produced greenhouse gas and because emissions of other greenhouse gases are recorded and counted in terms of “carbon dioxide equivalents”. A little history… The Kyoto Protocol was adopted on 11 December 1997 and came into force on 16 February 2005. 175 Parties have ratified the Protocol which places mandatory targets on green-house gas emissions for the worlds leading economies which have accepted it. 36 countries and the Economic Integration Organization (EEC) are required to reduce emission below levels specified for them in the treaty. The target is to reduce the overall emission of such gases by at least 5% below existing 1990 levels in the commitment period 2008 to 2012. The Logic The restrictions apply to the developed countries as these are the most polluting and the most able to cut emissions. These are countries that have already polluted and are deriving profits from their actions. The Protocol seeks to add a “polluting cost” to the operations of companies in these countries just like the cost of raw materials, labor etc. Each country is to bring their emission levels to below the specified limit in order to reduce greenhouse gas emissions worldwide. Due to this binding clause, the agreement offers flexibility in how countries meet their targets. This means that if they are not able to actually reduce emissions then they can buy credits (right to emit) from developing nations such as India, China or Brazil that are not bound by the protocol but are free to sell their carbon credits. The underlying logic being that the atmosphere is harmed or helped by emission cuts wherever they are made and can therefore be “sponsored” in countries not bound by emission targets. This cost of sponsoring or acquiring the credits is the “polluting cost” that gets added to the other costs for developed countries. Mechanisms for meeting shortfalls 

Clean Development Mechanism: The developed countries pay for projects in developing countries that help in cutting or avoiding emissions. The recipient countries get free technology which leads to lower costs and higher profits while the atmosphere gains due to lesser future emissions.

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Joint Implementation: A developed country can implement emission reducing projects or increase the sinks to absorb emissions in another developed country. The emission reductions units resulting from these actions can be counted towards the countries own Kyoto protocol target.

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Emission Trading: This involves the trading of carbon credits between countries that need credits to meet emission requirements and those that have excess credits. The credits bought would be valid to meet shortfalls only till the period of commitment (2008-2012) ends. This gives the developed countries lower cost opportunities to meet targets and therefore increase their efficiency.

What it means Globally Global greenhouse gas emission trade has multiplied in the past few years and has given birth to a new segment in financial services called “Emission Management”. Credits are sold not only by the issuer but also in the secondary market. This has resulted in massive volumes of carbon credits worth billions of dollars being freely traded. Globally carbon credits are traded at exchanges such as CO2E Exchange in UK, CDM exchange in Europe, Chicago Climate Exchange (CCX) and European Climate Exchange (ECX). The overall demand for carbon credits is expected to rise due to tighter compliance norms. What it means for India India being a developing country does not need to adhere to the Protocol. However it can sell Carbon Credits to the developed countries. Companies investing in windmills, Bio-diesel, Co-Generation, Bio Gas etc will generate carbon credits to sell to the developed nations. India has the largest number of Clean Development Mechanism projects that are registered with the carbon market regulator and has the potential of 20bn certified emission reduction units by 2012. Torrent Power, Gujarat Fluro Chemicals, Balrampur Chini, Jaypee Associates and Grasim Industries are some Indian companies that stand to benefit from Carbon Credit Trading