Central-bank strategies

• The Japanese yen has seen dramatic gyrations in its value since the earthquake and tsunami of March 11th. Immediate bets by speculators—or “sneaky thieves”, in the words of one Japanese official—that companies would have to repatriate funds to cover insurance payouts and reconstruction costs led its value to spike following the disaster. Concerned about the impact of a pricey currency on Japan’s post-disaster recovery, the central banks of the G7 countries flooded the market with more than $25 billion of the Japanese currency, sending the yen tumbling by nearly 3% in a single day. It kept on falling, breaching ¥85 to the dollar on April 6th.
• The yen is now being buffeted by opposing forces. When risk perceptions among investors rise—for instance, after the announcement on April 12th that the continuing nuclear crisis in Japan was being upgraded to the same level of seriousness as the Chernobyl disaster—upward pressure is applied to the yen. Analysts reckon that currencies like the yen and the Swiss franc, which are traditionally seen as havens in times of trouble, appreciate whenever investors believe that the environment is riskier. Gold, which hit a record nominal high on April 11th, is another beneficiary of this “flight to safety”.
• The yellow metal also benefits from fears that loose monetary policy and rising oil prices will unleash inflation. Such concerns, and the response to them by the world’s central banks, lie behind a second, downward source of pressure on the yen—the “carry trade”, in which investors borrow in low-yielding currencies to finance investments in higher-yielding ones.
• Many argue that the European Central Bank’s decision on April 7th to raise the policy rate in the euro area, and the prospect of further rises to come, has reinvigorated the carry trade. An interest-rate gap is opening between currencies like the dollar and the yen on the one hand, where monetary policy is likely to remain ultra-loose, and higher-yielding ones like the euro on the other. This gap may explain the strength of the euro, which has risen against the dollar in recent weeks despite endless euro-zone sovereign-debt worries.
• It also explains the sustained appreciation of the Australian dollar, which has strengthened markedly since the start of the year. The Reserve Bank of Australia (RBA) was among the first rich-world central banks to start raising interest rates after virtually all countries had slashed them during the crisis. Australia’s deep economic linkages to booming China via its commodity exports mean that the RBA is unlikely to reverse its policy stance in the near future.
• The Federal Reserve, too, is unlikely to change direction soon, which implies continued dollar weakness. The Fed’s daily index of the dollar’s value against major traded currencies fell to 69.92 on April 8th, the lowest level since May 23rd 2008. Its monthly index of the dollar’s value against major currencies fell in March for the fourth month in a row.
• For Americans concerned about their country’s export prospects, the depressed value of the greenback ought to be good news. In February, the most recent month for which trade data are available, the dollar was 4.5% cheaper in real terms than a year earlier. But although America’s trade deficit did fall in February, it was only because exports fell less steeply than imports. That month’s deficit was still $6 billion higher than a year earlier, when Barack Obama announced a plan to double exports in five years. Achieving that will take more than a cheap currency.

metals, banks will boost sensex further

• Japan’s government kept its assessment of the economy unchanged in a monthly report on Friday but warned of increasing downside risks to growth such as the strong yen and slowing overseas growth.
• China’s imports leapt in August, boding well for a strengthening of domestic demand in an economy that has become a major driver of global growth.
• Stocks rose and bonds fell on Thursday after stronger-than-expected U.S. data on jobless benefits and trade, raising hopes the tepid economic recovery would accelerate.
• The Basel Committee of central bank and regulatory officials is likely to complete talks on new Basel III capital standards by Sunday or Monday, German Finance Minister Wolfgang Schaeuble said on Thursday.
• There are no signs of a slowdown in India’s industrial output growth, senior finance ministry adviser Kaushik Basu said on Thursday.
• India, the world’s top consumer of sugar, has asked millers to apply for exports of the sweetener against imports of raws in the past, trade and government officials said on Thursday.
• Japan and India agreed on a free trade deal on Thursday which Tokyo said would lead to a 10-fold jump in trade flows as it eyes the fast-growing economy as a low-cost production centre and a market for exports.
• High inflation in India is expected to ease in coming months, reducing pressure on the Reserve Bank of India (RBI) to raise interest rates further.
• India’s wholesale price index in August probably rose 9.6 percent from a year earlier, easing from a rise of 9.97 percent in July. Forecasts from 15 economists ranged from 9.36 percent to 9.84 percent.
• Equity funds posted the biggest weekly inflows in more than a month in early September, reflecting some comfort with the global economic outlook, though fresh cash allocations showed the limits of risk taking, EPFR Global data showed on Friday.
• Asian stocks rose to a four-month high on Friday as some investors were inspired by positive U.S. and Japanese economic data to pick out bargains, with the shift to riskier assets weighing on the yen.
• World stocks kicked off September on a stronger note on Wednesday as data showed a manufacturing rebound in China and stronger-than-expected growth in Australia, while the yen held near recent 15-year peaks against the dollar.
•  India’s tax department has jurisdiction over tax bills in cross-border mergers, a court ruled, dismissing a petition by Vodafone(VOD.L) and setting a precedent for foreign firms looking to buy into Indian companies.
• U.S. President Barack Obama stood firm on Thursday in opposition to a Republican push to extend Bush-era tax cuts for the rich but stopped short of threatening to veto such a measure if passed by Congress.
• Advice may be nice, but backing it up with balance sheet can be key to winning M&A business for investment banks in India.
• Switzerland remains the world’s most competitive economy, while India dropped two places to 51, according to the World Economic Forum’s annual rankings issued on Thursday.

sensex rose 623 points, measures proposed in the Union Budget 2011-12 would attract foreign inflows

• The Sensex closed at 18475 (provisional), up 651 points from its previous close, and Nifty closed at 5532 (provisional), up 199 points.
• The markets registered robust growth today with all sectoral indices closing in the green. Auto was the biggest gainer of today’s trade followed by capital goods, banking and realty.
• Indian shares provisionally rose 0.7 percent on Monday, after the annual budget announced incentives for private investment in infrastructure.
• Indian shares were up more than 1 percent in early trade on Tuesday tracking firm Asian equities, and after the finance minister said he expects the economy to grow by nearly 9 percent in the next fiscal year.

• Finance Minister Pranab Mukherjee on Monday presented to parliament the budget for the coming financial year beginning in April.

Following are the highlights of the budget:
BORROWING
* Gross market borrowing for 2011-12 seen at 4.17 trillion rupees.
* Net market borrowing for 2011-12 seen at 3.43 trillion rupees.
* Revised gross market borrowing for 2010-11 at 4.47 trillion rupees.
FISCAL DEFICIT
* Fiscal deficit seen at 5.1 percent of GDP in 2010-11
* Fiscal deficit seen at 4.6 percent of GDP in 2011-12
* Fiscal deficit seen at 3.5 percent of GDP in 2013-14
SPENDING
* Total expenditure in 2011-12 seen at 12.58 trillion rupees.
* Plan expenditure seen at 4.41 trillion rupees in 2011-12, up 18.3 percent.
REVENUE
* Gross tax receipts seen at 9.32 trillion rupees in 2011-12.
* Corporate tax receipts seen at 3.6 trillion rupees in 2011-12.
* Tax-to-GDP ratio seen at 10.4 percent in 2011-12; seen at 10.8 percent in 2012-13.
* Customs revenue seen at 1.52 trillion rupees in 2011-12.
* Factory gate duties seen at 1.64 trillion rupees in 2011-12.
* Non-tax revenue seen at 1.25 trillion rupees in 2011-12.
* Service tax receipts seen at 820 billion rupees in 2011-12.
* Revenue gain from indirect tax proposals seen at 113 billion rupees in 2011-12.
* Service tax proposals to result in net revenue gain of 40 billion rupees in 2011-12.
SUBSIDIES
* Subsidy bill in 2011-12 seen at 1.44 trillion rupees.
* Food subsidy bill in 2011-12 seen at 605.7 billion rupees.
* Revised food subsidy bill for 2010-11 at 606 billion rupees.
* Fertiliser subsidy bill in 2011-12 seen at 500 billion rupees.
* Revised fertiliser subsidy bill for 2010-11 at 550 billion rupees.
* Petroleum subsidy bill in 2011-12 seen at 236.4 billion rupees.
* Revised petroleum subsidy bill in 2010-11 at 384 billion rupees.
* State-run oil retailers to be provided with 200 billion rupee cash subsidy in 2011-12.
GROWTH, INFLATION EXPECTATIONS
* Inflation seen at 5 percent in 2011-12.
* Economy expected to grow at 9 percent in 2012, plus or minus 0.25 percent.
TAXES
* Standard rate of excise duty held at 10 percent.
* Service tax rate kept at 10 percent.
* To widen scope of service tax.
* To raise minimum alternate tax to 18.5 percent from 18 percent.
* Iron ore export duty raised to 20 percent.
* Personal income tax exemption limit raised to 180,000 rupees.
* To reduce surcharge on domestic companies to 5 percent.
DISINVESTMENT
* Disinvestment in 2011-12 seen at 400 billion rupees.
POLICY REFORMS
* Foreign direct investment policy to be liberalised further in 2011-12.
* To create infrastructure debt funds.
* To boost infrastructure growth with tax-free bonds of 300 billion rupees.
* Raised foreign institutional investor limit in 5-year corporate bonds for investment in infrastructure by $20 billion.
* Food security bill to be introduced this year.
* To permit Securities and Exchange Board of India (SEBI) registered mutual funds to access subscriptions from foreign investments.
* Public debt bill to be introduced in parliament soon.
SECTOR SPENDING
* To allocate more than 1.64 trillion rupees to defence sector in 2011-12.
* Corpus of rural infrastructure development fund raised to 180 billion rupees in 2011-12.
* To provide 201.5 billion rupees capital infusion in state-run banks in 2011-12.
* To allocate 520.5 billion rupees for the education sector.
* To raise health sector allocation to 267.6 billion rupees.
AGRICULTURE
* To focus on removal of supply bottlenecks in the food sector in 2011-12.
* To raise target of credit flow to agriculture sector to 4.75 trillion rupees.
* Gives 3 percent interest subsidy to farmers in 2011-12.
* Cold storage chains to be given infrastructure status.
* Capitalisation of National Bank for Agriculture and Rural Development (NABARD) of 30 billion rupees in a phased manner.
* To provide 3 billion rupees for 60,000 hectares under palm oil plantation.
* Actively considering new fertiliser policy for urea.
FINANCE MINISTER ON THE STATE OF THE ECONOMY
* “Fiscal consolidation has been impressive. This year has also seen significant progress in those critical institutional reforms that will pave the way for double digit growth in the near future.”
* “At times the biggest reforms are not the ones that make headlines, but the ones concerned with details of governance which affect the everyday life of aam aadmi (common man). In preparing this year’s budget, I have been deeply conscious of this fact.”
* Food inflation remains a concern.
* Current account deficit situation poses some concern.
* Must ensure that private investment is sustained.
* “The economy has shown remarkable resilience.”
FINANCE MINISTER ON GOVERNANCE
* “Certain events in the past few months may have created an impression of drift in governance and a gap in public accountability … such an impression is misplaced.”
* Corruption is a problem, must fight it collectively.

• ASSOCHAM cheers budget proposals aimed at reducing fiscal deficit. Apex chamber ASSOCHAM described the proposals of Union Budget for 2011-12 as positive and encouraging which attempt at reducing the fiscal deficit down to 5.1 per cent from the earlier estimate of 5.6 per cent for the current fiscal year and 4.6 per cent for the next.

• NASSCOM today expressed its disappointment on the Union Budget Proposals 2011-12 that chartered a roadmap on sustaining a high growth trajectory for the country, but missed the relevant thrust for business to enable this growth.MAT imposed on SEZ; 10A/10B tax incentives withdrawn.Policies announced for service tax refunds; transfer pricing – need to ensure implementation.
• The three key macroeconomic concerns before Union Budget 2011-12 were high inflation, high current account deficit (CAD), and fiscal consolidation. Additionally, there was an expectation that the government would restart the reform process. The Budget has made an attempt to address all these issues, albeit through small steps. Despite the strong performance of the economy in 2010-11, the outlook for 2011-12 is clouded by stubborn and persistently high inflation, and rising external risks. The Budget factors in a GDP growth target of 9 per cent, which is on the optimistic side. CRISIL expects GDP growth to moderate to 8.3 per cent in 2011-12.