Smile :)

Indian Diesel Consumption !!!!!!!

Diesel consumption for April-May’12 jumped 14% over full year FY12 (up 8.5% YoY). Controlled prices are fuelling the strong demand for diesel led by dieselisation of cars and substitution of FO by diesel due to the continued substantial price advantage. 15% YoY decline in April-May’12 FO demand substantiates our point.

April-May’12 petrol demand declined 1% YoY as higher petrol prices impacted driving demand. The growth level is expected to remain low as long as petrol price remains high with huge difference in HSD  selling price, a derived benefit of de-control. Petrol demand growth peaked in FY10 at 14% and post decontrol in June 2010, demand growth has slowed down to 5.6% in FY12, lowest in six years.

With gap between diesel and petrol prices further widened post petrol price hikes in May'12, diesel usage is expected to be further boosted, leading to increased u/r for the sector.

Something About Quantitative Easing !!!

The impact of Quantitative Easing operations undertaken by Central Banks in the developed world is an intensely debated topic and has sharply polarised opinions across academia, financial markets and the popular media. However, as with the debate on austerity versus spending, the  discussion tends to get clouded by firmly held ideological biases rather than focusing on empirical based arguments. With that aim in mind, I summarise below a recent note by Roger Farmer, head of the economics department at UCLA, which argues why central banks should do a lot more to reduce unemployment and boost economic growth.

In a series of recent academic work , Professor Farmer has argued that there is a stable, and causal, relationship between the stock market and the unemployment rate.  And that the stock market crash of 2008, triggered by a collapse in housing prices, caused the Great Recession, and therefore the Fed can do a lot more to lower the unemployment rate by impacting the stock market..

-The chart below illustrates that in normal times the Fed’s balance sheet consists mainly of treasury securities, and that after the Lehman shock of 2008 and the ensuing freefall of the stock market, its balance sheet went from $800BN to over $2 trillion in the space of a month, as it engaged in a variety of lending programmes.

-As the chart also clearly shows, the stock market rally began in  March 2009 when the Fed began purchasing mortgage securities, and began to fall once the QE1 programme ended a year later. The market then began its ascent In  August 2010 when the Fed announced QE2 at its annual Jackson Hole conference.

-Fed policy not only influences markets, it has a big impact on the average citizen as all forms of wealth tend to move up and down together. A person’s wealth is tied-up in his future earnings,  and when the stock  market plummets the prospects of the average worker decline as well. His research has shown that when the stock market rises, unemployment falls and when the stock market crashes a recession ensues.

-Suppose an economist working in the 1970s was trying to predict the unemployment rate three months forward by looking just at the average unemployment rate and the real value of the stock market in the previous two quarters,  his predictions would have been very accurate in that era as well as the more recent era.

Market are moved by sentiment, but these movements have a big impact on our lives through the job market  - as plunges in  financial wealth can lead to devastating  job losses.  The Fed can do a lot more.

An interesting  empirical argument which  illustrates  that central bank actions to expand balance sheets  can positively impact the  stock market as well as the real economy. While an environment of deleveraging and zero short-term interest rates can limit the full impact of monetary policy, it is all the more necessary to take aggressive monetary action, particularly given that governments across the developed world are constrained by their  inability to do more on the fiscal front. Aggressive balance sheet expansion lowers  the real interest rate (by increasing inflationary expectations) which is a powerful tool to boost aggregate demand and increase investment spending.  It is therefore inevitable that the Fed and the ECB will have to do a lot more to buoy the stock markets and the economy, as the process of deleveraging and fiscal constraint continues.

Happy Guru Poornima !!!!

Even by the very sipping of the charanamruta (the water with which the feet of Yours-Gurudev are washed), we get blessed by the eternal wealth (of liberating knowledge), and which dries up the endless ocean of seeking & the subsequent sorrows. My Salutations to the lotus-feet of Yours Gurudev.

There is no higher truth than the Guru, no higher penance than (service to) the Guru, and there is nothing higher than Realisation of the Knowledge of the truth imparted by the Guru. My salutations to You - Gurudev, who is himself that very timeless truth (and who has taken up a form to bless his disciples like me with real knowledge).

The Gurudev is the beginning of the Universe, yet He himself is without a beginning, the Guru is the highest deity, and there is none higher than the Guru. My salutations at the lotus-feet of You - Gurudev.

Today on occasion of Guru Poornima...  
I have no words to express my happiness for providing me the place in your heart for learning.

Balance Of Payment Situation in India !!!!!!

Current Account Deficit (CAD) is now a days become a crucial matter for the Indian government. Due to heavy subsidy, higher import as compared to export has made problem more serious. Balance of payment (BOP) during January to March quarter has grown sharply. BoP, in Q4FY12, showed a deficit of USD5.7bn, as net capital inflows of USD16bn were insufficient to fund CAD that came at an elevated level of USD21.8bn (against expectation of USD20bn). The main reason for the increase in CAD is elevated levels of oil and gold imports (USD16bn in Q4 FY12 vs USD12.7bn in Q3FY12), along with weak external demand. Because of these reasons, trade deficit increased to USD52bn in Q4FY12 from USD49bn in Q3FY12. Ironically, in Q4, trade deficit tends to narrow, reflecting year‐end seasonality (as exporters tend to ramp up sales in Q4 to improve financial result). 

Highlights of BoP FY 2011-12

• In 2011-12, the CAD rose to US$ 78.2 billion (4.2 per cent of GDP) from US$ 46.0 billion (2.7 per cent of GDP) in 2010-11, largely reflecting higher trade deficit on account of subdued external demand and relatively inelastic imports of POL and gold & silver.
• Net inflows under Capital and Financial account (excluding changes in reserve assets) were higher at US$ 67.8 billion during 2011-12 as compared with US$ 62.0 billion during 2010-11. However, there was a drawdown of reserves to the extent of US$ 12.8 billion during the year as against an accretion of US$ 13.1 billion in 2010-11.
  
  
  
  
  
  
  There are a number of risks to the view that country’s external position is likely to improve. Anemic growth in the developed markets of the U.S. and Europe could be a barrier to export growth. Crude oil prices may gain, especially since European Union oil sanctions on Iran have kicked in from July 1. Also, Our government heavily subsidizes some fuel products for end-consumers, which keeps the demand for fuel artificially high. If it doesn’t cut back on fuel subsidies as it has committed to do, the pressure on the current account deficit may continue. The sharp fall in the Indian rupee against the dollar is likely to discourage imports, as companies will have to pay more rupees for goods priced in dollars. It also swells earnings from exports when converted into Indian rupees, which will encourage Indian companies to export more. These simultaneous developments could reduce the current account gap.
  
  
  

Solvency test by "Z- score" model on traded companies

      It is a big question for any investor at the time of investment, whether he is investing in solvent company or not? To ensure financial stability of the company investor may look at some financial ratios like profitability ratios, liquidity ratios etc. The trouble is, each ratio is unique and tells a different story about a firm's financial health. Here we have demonstrated a financial measure that checks the company’s financial solvency by just a one figure i.e. “Z-Score”.  It is a statistical measure that quantifies the distance of data point from the mean of a data set. In a more financial sense, Z-score is the output from a credit-strength test that measures the likelihood of bankruptcy. A Z-score of 0 is equal to a 50% probability of bankruptcy and the higher the number refers good financial condition and vice versa. All prices in these companies are as on 29th June, 2012 and amount are in crore unless otherwise stated.

Negative “Z Score” Companies

      Here below we have screened out list of the company which has Z-Score between zero to one. We can further look to the company’s financial and profitability condition before investing in this companies.

The Companies Which has “Z Score” Between 0 to 1

      Here, we are providing the list of the companies which are quite solvent and we can park our investment in these companies. For this purpose, we have also applied screening measure on out total list of companies, to find refined list. The measures we have applied are market cap greater than 500 Cr, having dividend yield of more than 3% and whose Net Block is greater than its Total Debt. So we belive, these companies have potential to be solvent in critical slow down of the economy situation.

The Companies Which has “Z Score” Above 1

Moody's Rating Criteria For Indian Economy

Here is the fact about rating Baa3 of India which is given by Moody's. Moody's has given stable outlook to the Indian Economy based on the various factors. Here are the FAQ for providing India's Sovereign Rating.


Why is Moody’s outlook on India’s sovereign rating stable when GDP growth has decelerated? 


Moody’s sovereign ratings are a global ranking of relative creditworthiness, based on the
ability and willingness of the sovereign to meet its debt obligations, compared to other rated 
sovereigns. Every rating incorporates an analysis of many different quantitative and 
qualitative factors outlined in our sovereign rating methodology, including but not limited to 
GDP growth.
At any given time, there could be largely positive or largely negative trends in one or more 
credit-relevant metrics in any country. We would change the sovereign rating outlook on 
that country when we believe that these (positive or negative) trends:
» Go beyond what is already incorporated into the current rating
» Will persist over the medium term
» Are strong enough to change the sovereign credit profile to such an extent that, over the 
next 12 to 18 months, this credit profile would not be compatible with its current rating 
and with those of other sovereigns that currently have the same rating.


Following from the above, we maintain a stable outlook on India’s rating because: 


» Some negative aspects – such as weak fiscal performance, tendency towards inflation, uncertain  
investment policy environment – have characterized the Indian economy for decades, and are 
already incorporated into the current Baa3 rating.
» On the other hand, other negative trends – such as recent low growth, slowing investment and 
poor business sentiment - are unlikely to become permanent or even medium term features of the 
Indian economy, although we do expect that global and domestic factors will keep India’s growth 
below trend for the next few quarters.  
» The impact of lower growth and still-high inflation will deteriorate credit metrics in the near 
term, but not to the extent that they will be incompatible with India’s current rating.
» India’s growth slowdown is neither unique nor irreversible. Deceleration in Indian growth is 
similar to that experienced in other countries.
To summarize, our ratings express a view on medium term creditworthiness and do not generally 

change with fluctuations in growth related to the direction of the business cycle at a particular point in 
time, if we expect growth to recover and sustain over time. We were not convinced that the Indian 
economy could sustain 9 - 10% growth over the medium term,  given India’s structural constraints, 
even though India enjoyed those growth rates between 2005 and 2007.  Similarly, we are not 
convinced that India’s medium term growth potential has dipped dramatically from approximately 7% 
levels, although we expect economic growth to be well below this level in the near term, due to 
depressed business sentiment, potential agricultural shocks, tighter financial conditions and global 
volatility.   
Moody’s Sovereign Methodology includes an assessment of all rated countries’ economic strength on the following scale: very high/high/moderate/low/very low. We view India’s economic strength as moderate relative to other rated countries and events in the last few quarters have not changed this assessment, which incorporates both credit strengths and weaknesses.  Credit strengths such as the very large size and diversity of the Indian economy, its higher than peer-average growth rates, robust savings rates, and a fairly dynamic, internationally competitive private sector are constrained by high rates of poverty and inequality, weak social and physical infrastructure and a relatively difficult operating environment.



Are deteriorating budget deficits incorporated into the rating outlook? 


India’s government debt and deficit ratios are worse than those of most similarly rated countries, and always have been. Per our rating methodology, we evaluate the Indian government’s financial strength as low (on a scale that ranges from very high/high/moderate/low/very low).  However, this assessment was based not merely on a comparison of the relative level of government debt and deficit ratios, but on the underlying reasons for relatively high deficits which suggest that India’s fiscal deficits will remain above peer averages in the medium-term and will widen substantially with every dip in growth.  
Recent trends have validated this assessment.

» Since fiscal policy also serves to maintain social stability in a highly diverse, poor and unequal 
society, India’s budgets are likely to remain in deficit until these underlying socio-economic 
weaknesses are alleviated. This poverty constraint is effectively factored into the rating by  
assigning India a ‘moderate’ economic strength assessment, despite the well-above global average size and growth rates of its economy. 
- Low per capita income and widespread poverty limit the amount of revenue that the 
government can collect in the form of personal income tax, hence the reliance on profit, 
output and consumption taxes. In addition, shortcomings in the area of tax compliance limit 
the gains to government revenue from a surge in income growth. 
- At the same time, poverty and inequality make it difficult to cut social services and subsidies
in order to reduce the deficit. Although there have indeed been modest attempts to cut 
fertilizer and fuel subsidies over the last two years, they haven’t been enough to dent the 
deficit or compensate for the increased spending commitments on food subsidies.
» India’s deficits reveal a greater vulnerability to growth downturns compared to other similarly 
rated countries. Therefore, it is not surprising that a growth slowdown has also led to missed 
budget deficit targets. Fiscal vulnerability lies partly in the government’s reliance on corporate 
profit and consumption taxes, which are highly growth-elastic. On the other hand, nondiscretionary expenditures like pensions and interest payments consume much of the Indian 
budget, so the government has little room to cut expenditures when revenues decline. Therefore,
fiscal metrics have deteriorated substantially with every dip in corporate profits and private 
consumption. As Exhibit 3 reveals, the current trend in the fiscal deficit echoes what happened 
during the last cyclical slowdown between 2000 and 2003. Conversely, fiscal metrics improved 
with the cyclical upturn, when they also coincided with efforts at fiscal consolidation.  
» The Indian budget is also exposed to global volatility since India’s food, fertilizer and petroleum 
subsidy spending is exposed to commodity price and exchange rate trends, both of which have 
inflated expenditure during the last few years.

» Recognizing the socio political constraints on government financial strength, and the cyclical 
aspect of recent fiscal deterioration, a look at past trends suggests that there is still the possibility for fiscal consolidation in India. After averaging 9.3% of GDP for four years between 1999 and 2003, India’s general government deficit fell to under 4% of GDP in FY 2007/08,  due to  strong revenue growth and relative expenditure restraint. However, consolidation is generally adopted (and more successful) when growth conditions are benign. Therefore, looking ahead, we expect that the government will attempt to boost revenues or streamline expenditures, albeit modestly, at a politically and economically expedient time.  Given the now well-established link between loose fiscal policy and inflation, there may be an added impetus to curtail fiscal expansion that leads to economically and politically harmful inflationary trends. 
» Large fiscal deficits have led to a relatively high level of public debt. Although government debt 
has been increasing in rupee terms, it has declined as a percentage of GDP – from 88% in 2005-
06 to 71.9% in 2011-12, as shown in Exhibit 3. Part of this decline was due to robust growth 
during those years; however high inflation has also buoyed the denominator and contributed to 
lowering the ratio.   
» The composition and maturity structure of government debt allows its high level to be sustained.
The government’s debt is mostly long term and held domestically, which lowers the refinancing 
and exchange rate risks inherent in short term, externally financed debt. 
To summarize, given the greater vulnerability of Indian public finances to cyclical fluctuations, the 
missing of the budget deficit target in a year of sub-par growth was anticipated in our credit analysis. 
Looking ahead, the political economy constraints on fiscal policy will likely keep India’s fiscal metrics in a poorer state than those of similarly rated countries.  
This weaknesses is incorporated into our Baa3 rating, along with credit strengths such as a higher than average domestic savings rate which helps absorb government debt issuance and the positive differential between India’s real growth rates and the real interest rates paid on government debt, which sustains the high debt burden. Having said that, we have also emphasized in previous publications that the failure to narrow persistent government deficits could endanger India’s credit strengths. Loose fiscal policy nourishes inflation. Persistent inflation, in turn, erodes the value of accumulated savings. It also raises capital costs and discourages investment. Moreover, high domestic interest rates prompt the private sector to borrow abroad, and increase economic vulnerability in times of global financial volatility.
Therefore, the stable outlook on India’s rating is predicated on our expectation that there will be some, if modest, policy effort to curtail the primary deficit over the medium term, although a turnaround in current fiscal trends is unlikely without a turnaround in growth. 


Is rupee depreciation negative for the sovereign credit profile? 


The rupee has depreciated by over 20% over the last year against the US$, in conjunction with a 
widening current account deficit and lower capital inflows. However, since government foreign 
currency debt comprises only 5.3% of total government debt and is equivalent to 3.8% of GDP, 
depreciation does not increase the government’s own debt service burden significantly, especially since most of its debt is owed to multilateral and bilateral creditors and has a maturity profile that keeps annual foreign currency repayments relatively low. 


Indian firms that have large foreign currency repayments due this year will suffer from depreciation. 
However, since the government has not guaranteed private-sector foreign debt, possible private-sector credit stress does not impinge upon the sovereign – and won’t unless asset quality in state-owned banks worsens, due to depreciation-induced stress, to a degree that requires government support for the banks. 
More importantly, India’s total private sector external debt is a relatively low 16% of GDP. Therefore, individual firms’ foreign debt repayment troubles are unlikely to lead to the sort of domestic demand collapse or deleveraging seen in countries with more significant private-sector external leverage. Since official foreign currency reserves are well over 100% of the country’s total debt repayment needs over the next 12 months, continued balance of payments volatility will be much less damaging than in 1991, when low reserves and a widening current account deficit prompted India’s last balance of payments crisis. 
Depreciation could help correct some macro-economic imbalances…. 
The rupee’s performance is linked to global volatility as well as India’s own macro-economic 
imbalances, including loose fiscal policy, which has boosted domestic demand, inflation, and import spending and government subsidies, which support India’s reliance on imported commodities. These factors widened India’s current account deficit to about 4% of GDP in December 2011 from 2.6% of GDP in March 2011. For most economies, reversing such a trend requires one or more of the 
following: 
» Exchange rate depreciation to encourage exports and discourage imports
» Fiscal consolidation that subdues domestic demand and hence imports
» Structural reforms that improve international competitiveness
Since the Indian government’s political capacity to implement fiscal and structural reform is weak, a flexible exchange rate can still serve as a policy tool, allowing depreciation to correct external 
imbalances. Historical experience has shown that depreciation can have positive effects on correcting macroeconomic imbalances and boosting growth for fundamentally competitive economies, which we think India is—notwithstanding recent growth deceleration.
…But rupee weakness could persist during a period of global volatility 
The current global growth and capital market environment will limit any credit positive implications 
of currency correction. First, it is likely that any narrowing of the trade deficit following depreciation will be more the result of import deceleration (helped by lower oil prices more recently) than export acceleration over the next two to three quarters in light of subdued global demand. In that case, lower GDP growth will accompany balance of payments improvements, a necessary short-term cost to avoid a more severe crisis and to repair the current account deficit over the next 12 months. Second, a lower current account deficit is unlikely by itself to reverse rupee depreciation as long as global portfolio flows remain volatile. 



How do you incorporate the policy environment into the sovereign credit 
analysis?

We evaluate India’s institutional strength as moderate  (on a 5 point scale ranging from very high to very low),  to encompass a range of operating environment characteristics including  security of property rights and contracts, access to judicial redress, regulatory and policy certainty, financial supervision, monetary policy effectiveness, and administrative efficiency. 
As noted in the response to the question on growth, we believe that the investment policy environment in India is a credit weakness, which diminishes the potential growth rate that the economy would otherwise achieve, given favorable demographics, private sector dynamism and increased integration into global production networks. Along with poor public finances, central government policy action and inaction constrains India’s rating at the Baa3 level. Specific policy constraints include: 
» The government’s inability to accelerate the provision of social and physical infrastructure – either 
itself or by allowing private sector participation
» Regulatory restrictions and complexities which thwart private investment, particularly FDI
» An uncertain tax environment which makes long term planning difficult, and so subdues 
investment. 
» Corruption and administrative inefficiency impinging upon project implementation
These constraints, which have existed for decades, have not prevented cyclical acceleration when global growth was flourishing, international capital was easily available, and a more benign domestic inflationary environment allowed monetary policy to be more aggressively counter-cyclical. 
Over the past year, however, market-unfriendly policy actions, such as changes to the tax regime for foreign investors as well as a reversal on foreign investment allowed in the retail sector, have further dampened business sentiment that was already deteriorating because of global uncertainties and tight financing conditions. While the government’s specific recent announcements may have been unanticipated, their impact on growth – by lowering investment intentions – was foreshadowed by our long held view that the central government’s policy framework is a credit constraint. 
However, central government policy is only one aspect – albeit an important aspect – of the overall institutional and policy environment that affects sovereign creditworthiness. Recent investment behavior has shown that India’s state level policies can be important determinants of growth. This is apparent not only in the differing levels of growth observed in Indian states that promote investment friendly policies, but also differentials in terms of infrastructure and living standards. Voting behavior at the state level suggests that good economic outcomes are rewarded, which in turn implies that where growth-friendly policies are in place, they are likely to persist, and where they are not in place the demonstration effect may result in their adoption. In our view, given India’s vast market and its potential, as well as the efforts being made by some state governments to woo investment, a few illconceived recent policy proposals by the central government are unlikely to derail India’s investment growth over the medium term. 
Another aspect of the policy framework is the monetary policy and financial supervision conducted by the Reserve Bank of India. During the global financial crisis, the Indian financial sector’s relative insulation was partly attributed to the central bank’s supervisory role. The RBI has also vastly increased its transparency with regard to monetary policy, leading to greater policy predictability and credibility. 


The RBI’s decision to eschew exchange rate defense in favor of preserving reserves was credit positive: exchange rate flexibility allows for the correction of macroeconomic distortions that loose fiscal policy begets; maintaining a significant reserve buffer guards against the balance of payments volatility that current global uncertainties create. Demonstrated monetary and financial supervisory vigilance supports the sovereign credit profile. 


What could change the rating down?


The following developments would put downward pressure on India’s rating: 
» Evidence that the structural drivers of India’s growth potential – high savings and investment 
rates, favorable demographics, private sector competitiveness – have been eroded to such an extent that India’s medium term growth rate will no longer exceed the global emerging market average. 
Substantially lower growth for a number of years would leave the government’s debt burden less 
sustainable than it is now. 
» Fiscal policy actions that continue to pile up long term expenditure obligations, without
compensatory revenue measures. As we have noted, we expect a growth upturn and modest fiscal consolidation measures to lower the budget deficit and debt ratio over the next few years.  
However, this expectation would be derailed if policy remained expansionary during the recovery, 
or created long-term liabilities beyond what can be expected as part of pre-election populism. 
» Greater than anticipated stress in the banking sector would also exert downward pressure on the government’s rating. Government ownership of the country’s largest banks represents a contingent liability, should those banks experience significant credit stress themselves that requires government support. Moreover, banking system stress would also hurt growth, as well as savings intermediation (since about half of all household financial assets are held by the banking system). 


What could change the rating up? 


As mentioned in previous sections, India’s Baa3 sovereign rating is constrained by the government’s weak financial position, the country’s weak social and physical infrastructure, and the dampening of potential investment growth due to the central government’s policy framework. Efforts to address these constraints along with evidence that these efforts are both effective and will be sustained could lead to upward rating momentum. 


Source: Moody's Report