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Impact 
The Government is planning to roll out certain tax measures proposed in the Direct Taxes Code (DTC) as it battles with the spiralling inflation. India's food inflation has remained in double-digits for most of the past year and has played a key role in pushing up the headline WPI inflation (8.43% in December 2010).
Under the DTC Bill the Income Tax base exemption limit has been proposed at Rs 2 lakh and the income limit attracting highest tax slab (of 30%) to Rs 10 lakh. However the proposal to increase the tax slab is unlikely in this year's budget 2011 as the budget 2010 2010-11 had already widened the tax slabs and therefore the Government may just go for an increase in the basic exemption limit (to Rs 1.80 lakh) without rearranging the slabs.
We believe that the Budget 2011 would be a populist one, as several scam stories have unfolded. Moreover, the Congress Government is under pressure as the opposition is trying to tarnish their image on the scam stories unfolding as well as their inability to tame spiralling inflation.
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Impact ![]()
While the Indian equity markets (BSE Sensex) ended the last month of the calendar year 2010 (December 2010) on a positive note (by gaining 987.8 points or 5.1%), the first month of calendar year 2011 (January 2011) saw the bears tightening their grip. In the month of January 2011, the BSE Sensex corrected by -10.6%, and so did the S&P CNX Nifty (corrected by -10.2%).
 (Source: ACE MF, PersonalFN Research)
The FIIs turned net sellers (to the tune of Rs 4,813 crore) in the Indian equity markets, as they remained conscious about WPI inflation (8.43% in December 2010) remaining above the comfort levels of RBI, and it (inflation) maintaining the northbound journey fuelled by food inflation (which is in double digit territory on account of rising prices of food articles - especially onions) and rising prices of crude oil. And knowing that the RBI in its third quarter review of monetary policy 2010-11, held on January 25, 2011, also revised March 2011 inflation forecast from 5.5% to 7.0%. The IIP number of 2.7% for November 2010 (data released in January 2011) also acted as a spoil sport which also led to the bears dominate the bulls.
At present the U.S economy is showing signs of economic revival (GDP expanded by 3.2% in the fourth quarter of their financial year) and jobless rate too is coming down (9.7% in December 2010), which is leading the FIIs shifting their focus to developed nations - especially the U.S. as it appears a promising investment destination. Moreover, post the Quantitative Easing II (QEII) announcement there seems to be a shift in focus on commodities, rather than equities (which again is witnessed by the surging prices of commodities), which is leading negative participation from the FIIs towards the Indian equity markets. Going forward, in our opinion for foreign money to flow into India, domestic factors such as - inflation, IIP growth rate, political stability and reforms (which would be announced in Budget 2011) would play a vital role.
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Impact ![]()
The large corporate houses eyeing a pie of the banking sector in India may have to wait a little longer, as the Government is of the view that corporate houses should be allowed to open new banks in the country only after the banking laws are amended to empower sector regulator -Reserve Bank of India (RBI), to monitor the parent or subsidiary companies of a bank.
This follows concerns raised by the central bank that the ownership structure of large business groups may lead to a turf war among regulators if they were given licences to run banks.
RBI in its report has urged that business houses have the entrepreneurial and managerial talent of running mutual fund and insurance companies. They (business houses) have successfully penetrated into rural India, and that their talent could be harnessed in the banking sector. However, existing banks are wary about corporate houses getting banking licences as this may create an uneven playing field due to the large capital buffer that would be available to banks sponsored by industrial or business houses.
We believe that the Government is taking prudent steps in amending the banking laws, and this would ensure safety by having tough law which will empower the banking regulator to protect the interest of the investors and the public at large. However, in our opinion the issue of conflict of interest should also be assessed before doling out licenses to the corporate houses.
| | | Weekly Facts |
| Close | Change | %Change | | BSE Sensex* | 18,008.15 | (387.8)![]() | -2.11% | | Re/US$ | 45.61 | (0.0)![]() | -0.09% | Gold /10g | 19,825.00 | (100.0)![]() | -0.50% | | Crude ($/barrel) | 102.07 | 4.4 ![]() | 4.54% | | FD Rates (1-Yr) | 7.00% - 8.75% | Weekly change as on February 3, 2011
*BSE Sensex as on February 4, 2011 | |
In this issue
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In an interview with the Economic Times, Billionaire Hedge Fund Manager - Mr. George Soros shared his views Foreign Institutional Investor (FII) flows in India and ways to regulate the markets.
Mr. Soros believes that the India has a very good dynamics among emerging markets and also the growth is domestically driven. However, he cautions that inflation and the hot money (FII flows) are a major deterrent to India's growth prospects.
He explains that an important lesson learnt post the world economic crisis is that there should be margin and capital requirements in trading positions and that needs to be varied. He further added saying, "It is beginning to be recognised finally. I think that capital flows can be disruptive, so some limitations on internal flows are necessary. It is being implemented but the principles have not been recognised. History shows that systemically important institutions will not be allowed to fail. This was visible in 2008 when systemically important institutions were given an implicit guarantee. If you have it then regulators have to exert themselves that this is not revoked. This will then mean stricter regulation and that the industry won't like. That's a big bone of contention. I think until some large institutions are allowed to fail there will be no credibility and that is a real problem."
Mr. Soros is of the view that control over money supply alone is not enough; one also has to control credit. He adds further, "The theory of monetarism is false. Markets have moods. (They) can be exuberant and fearful, which can change given the amount of money supply. Regulating money is not enough. You need tools for that-margin needs, variable capital requirement should be used."
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Monetary Policy : The actions of a central bank, currency board or other regulatory committee that determine the size and rate of growth of the money supply, which in turn affects interest rates. Monetary policy is maintained through actions such as increasing the interest rate, or changing the amount of money banks need to keep in the vault (bank reserves).
(Source: Investopedia)
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QUOTE OF THE WEEK
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- Benjamin Franklin | |
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