Sunday, November 18, 2007

For an average Indian such as me, school, college and post graduation have always been a path to learn skills and gain knowledge so as to secure a good job and start earning money. However only a few Indian actually understand time value of money and just how inflation can destroy ones savings over time. The banking channel is what most Indian have preferred and most probably will continue to prefer when it comes to savings and a bank loan will probably be the chosen path to meet aspirational needs such as a Maruti 800 or perhaps post 2008 the one lakh rupee car.

Build the Financial Plan around your Need Hierarchy

Since generations we have been told by our elders that by vigilant spending, saving & investing, one can meet the needs and life goals effectively. However the neo-generation has aspirations which have no end. Meeting one goal simply fuels an aspiration for a much higher and most probably an even costlier goal (from a Maruti 800à Alto à Wagon Rà Swift àà Maybach). In this situation it becomes imperative to prioritize our needs and goals, put our best efforts to meet each of them through proper management of our personal finance. And that’s what Financial Planning teaches us. Simply put financial planning begins with a Need Analysis followed by creation of a pathway which maps the financial resources to the goals and then simply following and updating the path.

Need Analysis
Prioritizing Needs forms the crux of any Need Analysis exercise. Maslow’s “Hierarchy of Needs” pyramid could be used to explain needs

Basic needs -->Contingency Planning

The most basic need our money can meet is taking care of our day-to-day living expenses like Food, Shelter, Clothing, Utilities etc. We should be in a position to meet them under any kind of contingencies and emergencies such as loss or change of job, physical disability, health problems, re-locating to new places, business losses or any natural disasters. Basic needs could be meet by a emergency fund in the form of bank balance in savings account, cash or short-term Fixed Deposits.

Security needs --> Risk Management

A human being is an income generating asset and this income may stop under circumstances such as death, physical disability and long-term health problems. Thus Life and medical insurance becomes important to protect this asset. After insuring the life, one has to cover the physical assets generated during the lifetime. Physical assets include House, Car and many of the valuable household items. Much of our income is devoted in generating these assets. Any loss demands replenishment which is a very costly affair and affects our other commitments in life. The General Insurance companies provide such covers.

Social Needs --> Planning for Financial Goals

Financial goals a scan be seen at two levels namely

  • Commitments such as providing decent accommodation for family, children’s upbringing and education, taking care of parents
  • Aspirations meant more to move up the ladder in society

These goals and dream can be met through a corpus created thru prudent investments into debt and equity as well as thru loans. Loans should be avoided in the absence of leverage (Return from investments funded by a loan e.g. House should exceed the sum of interest rate on loan plus inflation). There is a old saying that “Credit buying is much like being drunk. The buzz happens immediately and gives you a lift.... The hangover comes the day after”.

Self Esteem --> Retirement Planning

Retirees need a steady income to maintain the standard of living, meet post-retirement commitments and provide for medical expenses amongst others. The retirement corpus needs to be managed in such a way that it becomes a source of steady income and lasts for the lifetime. PF and pension funds have been traditional methods used for retirement planning in India.

Self actualization --> Tax & Estate Planning

Tax evasion is a crime in India but tax avoidance through legitimate means is not. As ones income and spending increases so does the tax bracket he/she is in. Tax planning should be done with a long term perspective and not on an annual basis keeping in view time-horizon of investments made to save taxes, salary structure opted for, liquidity concerns etc

Estate Planning means transferring our physical assets and financial assets to our next generation. A structured and carefully drafted Estate Plan not avoids legal hassles for the successors and bitter state of affairs among successors but also can reduce tax outgo.

As Mr Kini has rightly said if all inputs are properly validated and put into an equation the outputs always are perfect and optimized.



Friday, November 16, 2007

The 123 Paradox

Historical Overview

India's nuclear program was conceived in the pre-independence era by a small group of influential scientists who grasped the significance of nuclear energy and persuaded political leaders from the Indian National Congress to invest resources in the nuclear sector. In the aftermath of independence in August 1947, the Congress government led by Prime Minister Jawahar Lal Nehru launched an ambitious dual-use, three-stage nuclear program to exploit India's abundant natural thorium reserves. The primary focus of the program was the production of inexpensive electricity. However, the decision to develop the complete nuclear fuel cycle--from ore mining, processing and fuel fabrication facilities, research and power reactors, spent-fuel reprocessing plants, heavy water production plants, and waste treatment and disposal facilities--also led to India's acquiring the technical capability to build nuclear weapons.
India's defeat in the 1962 war with China and the latter's nuclear test in 1964 triggered an internal debate within and outside the Indian government on whether India should follow suit. Ultimately, in November 1964, Prime Minister Lal Bahadur Shastri authorized theoretical work on the Subterranean Nuclear Explosion for Peaceful Purposes (SNEPP).

The SNEPP project culminated in the test of a fission device on 18 May 1974 during Prime Minister Indira Gandhi's tenure. India described the test as a peaceful nuclear explosion (PNE). However, India did not follow the 1974 test with subsequent tests, nor did it immediately weaponize the device that was tested. During the brief tenure of the Janata Party government (1977-79), the nuclear weapons program was put on hold. However, the weapons program was resumed after Indira Gandhi returned to power in 1980. Prime Minister Indira Gandhi authorized preparations for additional nuclear tests in 1982, but the tests were canceled for reasons that have never been explained publicly. However, in the late 1980s advances in Pakistan's efforts to acquire nuclear weapons, as well as the oblique nuclear threats issued by Islamabad in the wake of the 1986-87 Brasstacks crisis, appears to have persuaded Prime Minister Rajiv Gandhi to authorize weaponization of India's nuclear capability. By May 1994, India acquired the capability to deliver nuclear weapons using combat aircraft; by 1996, Indian scientists also succeeded in developing a nuclear warhead that could be mated on to the Army's Prithvi-1 ballistic missile. In the winter of 1995, in an apparent reaction to the indefinite extension of the Nuclear Non-Proliferation Treaty (NPT) and advances in negotiations on the Comprehensive Test Ban Treaty (CTBT), the Narasimha Rao government considered a crash program of nuclear tests. However, India's test preparations were detected by U.S. intelligence agencies; subsequently, Rao's government postponed the tests under U.S. pressure.

Plans for testing were renewed when the Hindu-nationalist Bharatiya Janata Party (BJP) led by Atal Bihari Vajpayee came to power for a brief period in 1996. However, Vajpayee's government was unable to win a parliamentary majority and decided not to go through with the tests as they would create a political crisis for the incoming successor government. However, when returned to power in 1998, the BJP finally authorized two rounds of nuclear tests in May 1998, after which it formally declared India's nuclear status. Subsequent to the tests, the Vajpayee government declared that India would build a "credible minimum deterrent." Since then, the Indian government also formally articulated a nuclear doctrine of "no-first-use" and more recently spelled out the broad outlines of India's nuclear command, control, and communications framework.

Capabilities
There is considerable controversy over the yield and reliability of India's nuclear devices. When India tested its first fission device in May 1974, Indian scientists claimed the device had a yield of about 12kt. However, that figure has been disputed by independent analysts who estimate that the yield was far lower, probably between 2-6kt. Later, a senior Indian scientist who was part of the design and testing effort privately admitted that the yield was more likely in the range of 8kt. Similar controversy dogs India's May 1998 tests. After the first of round of tests on May 11, India's Department of Atomic Energy (DAE) announced that it had tested three nuclear devices: a fission device with a yield of 12kt; a thermonuclear device with a yield of 43kt; and a sub-kiloton device with a yield of 0.2kt; The figures were later revised to 45kt for the thermonuclear device and 15kt for the fission device. However, these figures have been disputed by independent analysts, who--citing evidence from seismic data--claim that the cumulative yield of the Indian tests was more likely between 20-30kt, the implications being the thermonuclear test was likely to have been a failure. Senior Indian scientists such as P.K. Iyengar have also publicly suggested that it is likely that the fusion device only burned partially. However, the former head of India's Atomic Energy Commission (AEC) Dr. R. Chidambaram has claimed that a "post-shot" analysis of the Pokhran II tests confirmed that the May 1998 tests yielded about 60kt. Chidambaram subsequently asserted that the tests provided India with "the capability to design and fabricate nuclear weapons [in the range] of low-yields up to 200 kilotons."


Following the May 11 tests, India carried out two tests of sub-kiloton devices on May 13 "to generate additional data for improved computer simulation of designs and for attaining the capability to carry out sub-critical experiments, if considered necessary." However, observers doubt whether such a small number of tests are sufficient for Indian scientists to have collected all the necessary data to conduct "sub-critical" experiments successfully.

Fissile Material Stocks

The plutonium for India's nuclear stockpile is most likely obtained from two research reactors: the 40MW CIRUS and 100MW Dhruva, which went critical in 1960 and 1985, respectively. The CIRUS reactor is capable of producing 9-10kg of weapons-grade plutonium annually; the corresponding figure for the Dhruva reactor is 20-25 kg. The CIRUS reactor was shut down in 1997 for refurbishment and is expected to resume operations in 2003. Although the Dhruva went critical in 1985, vibration problems delayed normal operations until 1988. The irradiated fuel from the reactors is probably reprocessed at either the Plutonium Reprocessing Plant in Trombay (50 tons per year) or the Kalpakkam Reprocessing Plant at Kalpakkam (100-125 tons per year). According to published sources, India produces 20-40 kg of plutonium annually and has probably accumulated 280-600kg of weapons-grade plutonium, enough to build 40-120 weapons. There is some evidence to suggest one of the nuclear devices tested in 1998 used reactor grade plutonium (Pu-240). If Pu-240 is available for warhead production, it would fundamentally change estimates of India's fissile material stock. India also has a small stock of highly enriched uranium, but it is unclear if the latter has been used to build nuclear weapons.

Nuclear Force Architecture

India's nuclear deterrent is centered on a dyad consisting of a small number of land-based bombers and land-based short- and medium-range ballistic missiles. However, in the long term, the Indian government envisions a "minimum deterrent" based on a triad of land-, air-, and sea-based nuclear forces.
The bomber leg of India's dyad consists of a small number of Mirage 2000s and possibly Jaguar and MiG 27 aircraft. There is evidence to suggest that the Indian Air Force (IAF) is seeking to augment its bomber fleet through the purchase of additional Mirage 2000 multi-role combat aircraft; reports also suggest that the IAF is interested in arming its proposed Su-30 fleet with nuclear capable air-launched cruise missiles. Other reports indicate that India may be interested in acquiring long-range nuclear-capable bombers such as the Tu-22 Backfire bombers from Russia.


At present, the Prithvi-1 (150km-range/1,000kg-payload) and Prithvi-2 (250km-range/500kg-payload) are the only ballistic missiles in service with the Indian Army and Air Force respectively. An undisclosed number of Prithvi-1 missiles have been modified to deliver nuclear warheads. However, the Prithvi suffers from several limitations such as its short-range, liquid-fueled engines, which add to the logistics burden, and fuel toxicity, which increases the difficulties of handling the weapon system in the field. Hence, the Prithvi missiles will most likely be replaced by the new solid-fueled, short-range Agni ballistic missile (700-800km-range/1,000kg-payload) for nuclear missions. The missiles already in the inventory of the Army and Air Force are likely to be reassigned to perform conventional battlefield support functions. The Defense Research and Development Organization (DRDO) has also developed a 350km-range naval-variant of the Prithvi: the Dhanush. The missile has completed flight-trials at sea. However, the Indian Navy (IN) has not made a decision to deploy the Dhanush on board surface warships; but the IN might acquire a small number of these missiles and deploy them on board surface warships as part of the inter-services organizational battle to acquire a stake in the proposed "minimum deterrent."


The short-(700-800km-range/1000kg-payload), medium- (2,000-2,500km-range /1,000kg-payload), and the planned intermediate-range (3,500-4,000km-range/1,000kg-payload) variants of the Agni ballistic missile are likely to be the mainstay of India's land-based missile force in the future. In comparison to the Prithvi, each of these variants of the Agni combines the advantages of longer-range, higher-payload, and solid-fueled engines. Although it is developing an intermediate-range ballistic missile, India appears to have stopped short of building an intercontinental ballistic missile (ICBM) capability. New Delhi's restraint in this regard is probably the result of a conscious political choice to avoid threatening or challenging the legally recognized members of the nuclear club, with the exception of China, which India regards as a potential long-term threat to its security. Furthermore, as India moves in the direction of an operational nuclear force, Indian elites perhaps feel reduced pressure to rely on technological symbols to demonstrate political resolve.


As part of a program to develop a secure, sea-based, second-strike capability, India is developing a nuclear powered submarine, also referred to as the Advanced Technology Vessel (ATV). However, the DAE's inability to design and integrate a compact reactor power plant for the vessel has led to program delays. It has been reported that India has sought technical advice and assistance for the ATV from Russia. India is also negotiating the lease of two Shchuka B-class (NATO designation Akula-II) nuclear submarines from Russia. India's nuclear submarines will probably be armed with the Sagarika missile. Details about the Sagarika missile's class, payload, and range are classified. In addition, the DRDO is also developing a supersonic anti-ship cruise missile, the BrahMos/PJ-10, in close collaboration with the Russian entity NPO Mashinostroyeniye. Two versions of the missile are under development: a naval version for surface and sub-surface vessels, and an aircraft-based version. Indian defense planners ultimately hope to develop nuclear-capable cruise missiles with land attack capability.

Custody/Command and Control

India does not maintain a constituted nuclear force on a heightened state of alert. The nuclear-capable missiles, bombers, non-nuclear warhead assemblies, and fissile cores are maintained in a de-alerted state by their respective custodians--the individual armed services, the DRDO, and the DAE--with plans to reconstitute them rapidly during an emergency or national crisis.
After much debate, deliberations, and delay, the Indian government has entrusted operational control of India's nuclear missile force to the Indian Army. Although the Air Force deploys an undisclosed number of nuclear-capable bombers and the short-range Prithvi-2 ballistic missiles, it has lost the inter-services battle with the Army for custody of India's nuclear missile force. The Indian government is also considering a proposal to place all nuclear-capable land missiles under the consolidated control of a Strategic Rocket Command within the Army.


Although the nuclear-capable missiles and aircraft are under the control of individual armed services, India's consolidated nuclear force is administered by a tri-service Strategic Forces Command (SFC). Due to the delay in the appointment of the proposed Chief of Defense Staff (CDS), who will ultimately head a joint tri-service command, the commander-in-chief of the SFC currently reports to the Chairman of the Chiefs of Staff Committee. Ultimately, however, the SFC will report to the CDS, who will act as the "single-point" military advisor to the Indian government and act as the interface between the civilian executive and the armed services.
At the level of the civilian executive, India's Nuclear Command Authority (NCA) is responsible for the management of its nuclear forces and for making all decisions pertaining to the use of nuclear weapons. The NCA is a two-layered structure. It comprises a Political Council (PC) and an Executive Council (EC). The PC is chaired by the prime minister and is the "sole body which can authorize the use of nuclear weapons." The decisions of the PC are conveyed to the EC, headed by the prime minister's National Security Advisor, who then interfaces with the SFC to execute the political directives of the PC.
The Indian government claims it has "reviewed and approved arrangements for alternate chains of command for retaliatory nuclear strikes in all eventualities," an obvious reference to the transfer of power in the event of a successful decapitation strike on India's top political and military leadership. However, for reasons of national security, details and composition of the NCA and the alternate chains of command remain a closely guarded secret.

Nuclear-Use Doctrine


India's primary goal is to achieve "economic, political, social, scientific, and technological development" and autonomy in domestic and strategic decision making in an environment free of coercion from either the threat or use of nuclear, chemical, or biological weapons. With these objectives in view, the Indian government has adopted a nuclear "no-first-use" or doctrine of "retaliation only." The doctrine's central goal is to deter the threat of nuclear (subsequently revised to include chemical and biological) weapons use by any state or entity against India or its armed forces. In the event of deterrence failure, the doctrine states that India will resort to punitive strikes to inflict unacceptable losses on the adversary state or entity. However, India will not resort to the threat of use or use of nuclear weapons against states that do not possess nuclear (subsequently revised to include chemical and biological) weapons, or are not aligned with states that possess such capabilities.

India and the Nonproliferation Regime

India remains steadfastly opposed to the Nuclear Proliferation Treaty (NPT). Since the late 1960s, a consensus has emerged in India that the NPT is an inequitable instrument that divides the world into "nuclear haves" and "have nots," and the solution to the problem of nuclear proliferation is comprehensive global nuclear disarmament. The Indian government, even while remaining steadfastly opposed to the NPT, has reiterated its resolve to undertake nuclear disarmament as part of a time bound and comprehensive worldwide effort in that direction.
Although India was initially one of the most enthusiastic supporters of the Comprehensive Test Ban Treaty (CTBT) when that treaty was first proposed in the 1950s and among the first to sign the Partial Test Ban Treaty (PTBT) in 1963, the Indian government's position has changed radically since then. By the early 1990s, when negotiations on the CTBT rapidly moved towards a resolution, Indian elites came to regard the CTBT not as an instrument of controlling the nuclear arms race, its original goal when it was first proposed, but rather as an instrument of nonproliferation that sought to freeze countries along the nuclear learning curve. The Indian government also objected to the treaty's entry-into-force provision, as well as clauses that allowed nuclear weapon states to conduct hydronuclear and hydrodynamic experiments to ensure the safety and reliability of their nuclear arsenals.


After conducting nuclear tests in May 1998, the Indian government announced that it would abide by a self-imposed moratorium on further nuclear testing and declared that India would not be the first state to resume nuclear tests. In the aftermath of the tests, the Indian government also considered the idea of signing though not ratifying the CTBT. However, the absence of a domestic consensus, the U.S. Senate's failure to ratify the treaty, as well as questions about the success of India's past nuclear tests, led the Indian government to defer signature in favor of the current policy of an informal moratorium. There is some evidence to suggest that India's AEC has requested the government's permission to conduct further nuclear tests. Thus far, such a request has not been approved.
India has rejected U.S. suggestions to abide by an informal moratorium on fissile material production. However, India has agreed to participate in the Fissile Material Cut Off Treaty (FMCT) talks at the Conference on Disarmament (CD) in Geneva. However, India proposes to continue accumulating fissile material stocks until the FMCT comes into effect.
As a non-signatory to the NPT, India remains the target of nuclear supplier export controls. Although India is not a member of the Nuclear Suppliers Group, it formally abides by strict domestic export control laws and regulations to control the export of nuclear and related dual-use technologies.

Future Trends


In its determination to build a "credible" and "survivable" minimum deterrent, the Indian government is transforming India's once symbolic nuclear capability into an operational nuclear force. Since conducting nuclear tests in May 1998, the Indian government has divided the custody of India's nuclear delivery systems and nuclear warheads among the armed forces and civil defense and atomic energy departments. It has also formally articulated a nuclear use doctrine, and spelled out command and control arrangements for initiating nuclear use as well as succession arrangements within the government to manage in the aftermath of a nuclear attack. Reluctantly, Indian strategic elites have begun to grapple with the reality that nuclear weapons are not just political instruments, but that such weapons may indeed have to be used, and India needs to start planning for such contingencies.


India's nuclear policy planning, which for the last four decades was almost the exclusive preserve of a handful of politicians and civilian nuclear and defense scientists, is in the process of being opened up to a larger coalition of stakeholders. New entrants in this coalition now include the military and, to a lesser extent, civilian strategic thinkers. Accommodation of new stakeholders in the nuclear coalition is changing the cognitive lens through which nuclear weapons have been perceived. Whereas Indian politicians and scientists have traditionally treated nuclear weapons as political icons, the military and professional strategic analysts' goals converge around the task of transforming that symbolism into an operational and hence, usable nuclear capability.


New Delhi has so far not defined what it means by a "minimum" deterrent. However, statements by Indian government leaders suggest that the program is evolutionary in its scope: the nature and scale of the nuclear arsenal will be determined by a host of variables ranging from the regional and global security environment, to the performance of the Indian economy, and the availability of specific technologies. A review of India's defense strategic programs also suggests that in the medium-term, the dyad, which currently comprises short-range bombers and land-based short- and intermediate-range ballistic missiles, will most likely be expanded to include long-range nuclear-capable bombers and medium-range ballistic missiles. But in the long-term, India is likely to acquire a sea-based capability based on nuclear submarines armed with cruise or ballistic missiles. However, at this point, it is unclear whether India is seeking to acquire a global nuclear strike capability in the long-term, or whether its nuclear deterrent will be technically restricted to deterring nuclear threats from China and Pakistan.

But in the short- and medium-term, the shift toward an operational nuclear capability is unlikely to be accompanied by corresponding changes in India's posture. All indicators suggest that the Indian government favors a recessed posture of deployment. Barring a national crisis or emergency, the arsenal will not be deployed in the field. Furthermore, current custodial arrangements under which control over nuclear delivery systems, non-nuclear warhead assemblies, and fissile cores is divided among different civilian and defense agencies, is likely to be retained in the interests of safety, security, and the reduced risk of nuclear accidents. However, the acquisition of a sea-based strike capability in the long-term will most likely induce changes in the current deployment posture.


There is a strong possibility that future Indian governments might authorize additional nuclear tests to clear the controversy surrounding India's thermonuclear weapons capability, to gather additional data for subcritical experiments, as well as to design and validate a new class of nuclear weapons. The Indian military is also likely to favor additional tests in the interests of safety and reliability. However, the Indian government is unlikely to break the current moratorium in the face of the prevailing global moratorium on tests. However, tests by another country will provide the Indian government an adequate political cover to break its self-imposed restraint on further nuclear testing.


Finally, India's nuclear doctrine has begun to show evolutionary changes. In 1999, the draft nuclear doctrine suggested that India's nuclear deterrent would only be invoked against the threat or use of nuclear weapons. However, new security guidelines released in early 2003 suggest that the threat of nuclear use would be invoked to deter or retaliate against the use of chemical or biological weapons as well. But despite revisionist suggestions from some members of the strategic establishment, the Indian government remains steadfast in its commitment to abide by a "no-first-use" doctrine.

Sabse Bada Rupaiya


The appreciation[1] of the rupee versus the dollar has been a matter of concern for everyone and anyone remotely related to the Indian economy. As the rupee becomes stronger, the cost of all imported goods and services reduce. This is good news for a net importer such as India. Common sense would add that since majority of India’s oil needs are imported, a stronger rupee would translate into cheaper oil imports which in turn would mean a fall in goods and commodity prices.

Quotation:

An exchange rate quotation is given by stating the number of units of a price currency that can be bought in terms of 1 unit currency (also called base currency)USD/EUR exchange rate is 1.2 means a euro (unit currency) can be purchased by 1.2 dollars ( price currency)

Direct quotation

Quotes using a country’s home currency as the price currency (e.g., Rs 41 = $1 in the India) are known as direct quotation or price quotation and are used by most countries. In direct quotation as used in India the strength of home currency is inversely proportional to the exchange rate. The higher the strength of the home currency the lower will be the exchange rate. As we all know the excahnge rate has reduced from Rs 44 levels to Rs 40 levels. But the strength of the home currency is said to be increasing in this period.

Direct quotation: 1 foreign currency unit = x home currency units

Indirect Quotation

Quotes using a country’s home currency as the unit currency (e.g., .02439= Rs1 in the India) are known as indirect quotation or quantity quotation and are used in British newspapers and are also common in Australia, New Zealand and Canada.

Indirect quotation: 1 home currency unit = x foreign currency units

Free or Floating Rate

Demand – Supply in the foreign exchange market decides the quotation price

Pegged/Fixed rate

The exchange rate is fixed by government and remains the same irrespective of market changes. India followed a pegged rate up till liberalization (pre-1991)

Hybrid or Dirty Float

In practice, many countries including India now have a hybrid system called ‘dirty float’. This is basically a floating rate where the government intervenes from time to time, trying to nudge the exchange rate in one direction or the other

Interest rate parity concept

Interest rate parity (IRP) states that an appreciation or depreciation of one currency against another currency might be neutralized by a change in the interest rate differential. If Indian interest rates exceed US interest rates then the Indian rupee should depreciate against the USD by an amount that prevents arbitrage.

However IRP showed no proof of working after 1990s. Contrary to the theory, currencies with high interest rates characteristically appreciated rather than depreciated. This happened because

  1. Foreign exchange chased the higher yielding currency leading to appreciation of the currency.
  2. The gov did not intervene in the forex market as that would have led to increased liquidity leading to increase in inflation.
  3. This led to appreciation of the currency.

This is what we are seeing in the Indian context today.

Balance of payments

This model holds that a foreign exchange rate must be at its equilibrium level - the rate which produces a stable current account balance. A nation with a trade deficit will experience reduction in its foreign exchange reserves which ultimately lowers (depreciates) the value of its currency. The cheaper currency renders the nation’s goods (exports) more affordable in the global market place while making imports more expensive. After an intermediate period, imports are forced down and exports rise, thus stabilizing the trade balance and the currency towards equilibrium.

Fluctuations in exchange rates

A market based exchange rate will change whenever the values of either of the two component currencies change. A currency will tend to become more valuable whenever demand for it is greater than the available supply. It will become less valuable whenever demand is less than available supply. The demand for money is highly correlated to the country’s level of business activity, gross domestic product (GDP), and employment levels. The more people there are out of work, the less the public as a whole will spend on goods and services.

A currency will tend to lose value, relative to other currencies

1. If the country’s level of inflation is relatively higher

2. If the country’s level of output is expected to decline

3. If a country is troubled by political uncertainty. For example, when Russian President Vladimir Putin dismissed his Government on February 24, 2004, the price of the ruble dropped.

The Indian context

As the mad rush to invest into India picks up steam, the demand for rupees in the foreign exchange markets will increase, which will mean the rupee, will rise in value. In the financial year 2006-2007, India received $16 billion dollars in foreign direct investment; this is about three times the previous year’s figure. Another important factor is the interest rate in different countries. If Indian interest rates rise relative to other countries, Indian interest-bearing products become more attractive; this will once again increase demand for the rupee. For instance, if the rate of interest in the US is only 4 per cent on bank deposits and a fixed deposit in India fetches, say, 10 per cent, the 6 per cent difference between the interest rates of these two countries will attract foreign investors to India. In India, the Reserve Bank of India has been raising interest rates in recent months as a way of fighting inflation; this has played a role in the rising value of the rupee.

So what is the impact of a rising rupee on different sectors of the economy?

In a nutshell, exporters are hurt and importers celebrate. The logic is simple: suppose an exporter earns $1 million in foreign exchange. At an exchange rate of 47 rupees to the dollar, this is worth Rs. 4.7 crores while at a rate of 43 rupees it’s only worth Rs. 4.3 crores. This is why stocks of export-intensive technology firms like Infosys have performed relatively poorly in recent weeks. Firms in the textile sector have also been hurt. Both the information technology and the textile sector are export-driven and are hurt whenever the rupee’s value increases. The reason is they get less rupees for the dollars they earn through exports. The opposite is true for companies with large imports. A stronger rupee means their import bill will fall in rupee terms. In India, the single biggest import is crude oil, and the rising rupee has seen stock market gains for oil marketing companies like IOC and HPCL in recent weeks. If a barrel of oil cost $ 40, it would cost Rs. 1720 if the exchange rate were Rs 43 per dollar. This would reduce to Rs 1,680 if the rupee appreciates by just Rs1 to Rs 42. This saving directly goes into the net profit kitty of oil marketing companies.

The rising rupee also has a direct impact on consumers who will face lower prices in rupees for imported goods or travelling abroad. For instance a typical weeklong trip abroad costing, say, $1000 (or Rs 42,000; $1 = Rs 42) will be cheaper because of the rise of the rupee in the last six months. The same trip would have earlier cost Rs 44,000 (assuming $1 = Rs 44).

So what’s likely to happen to the rupee in the future?

No one can say for sure as exchange rates are notoriously unpredictable. If the rupee rises significantly, you could see the RBI intervening in the markets and selling rupees in order to lower its value. As of now, it is not doing this, allowing the rupee to increase in value.

However, if India remains an attractive investment destination, the rupee is unlikely to drop significantly from its current level as foreign investments will come pouring in. But if it does ‘rise in value’ further then you and I will be able to buy that imported watch, the latest laptop and of course, oil at much cheaper rates than we are doing now.



[1] Rupee getting stronger means that one needs to shell out lesser rupees to buy a dollar.

The appreciation[1] of the rupee versus the dollar has been a matter of concern for everyone and anyone remotely related to the Indian economy. As the rupee becomes stronger, the cost of all imported goods and services reduce. This is good news for a net importer such as India. Common sense would add that since majority of India’s oil needs are imported, a stronger rupee would translate into cheaper oil imports which in turn would mean a fall in goods and commodity prices.

Quotation:

An exchange rate quotation is given by stating the number of units of a price currency that can be bought in terms of 1 unit currency (also called base currency)USD/EUR exchange rate is 1.2 means a euro (unit currency) can be purchased by 1.2 dollars ( price currency)

Direct quotation

Quotes using a country’s home currency as the price currency (e.g., Rs 41 = $1 in the India) are known as direct quotation or price quotation and are used by most countries. In direct quotation as used in India the strength of home currency is inversely proportional to the exchange rate. The higher the strength of the home currency the lower will be the exchange rate. As we all know the excahnge rate has reduced from Rs 44 levels to Rs 40 levels. But the strength of the home currency is said to be increasing in this period.

Direct quotation: 1 foreign currency unit = x home currency units

Indirect Quotation

Quotes using a country’s home currency as the unit currency (e.g., .02439= Rs1 in the India) are known as indirect quotation or quantity quotation and are used in British newspapers and are also common in Australia, New Zealand and Canada.

Indirect quotation: 1 home currency unit = x foreign currency units

Free or Floating Rate

Demand – Supply in the foreign exchange market decides the quotation price

Pegged/Fixed rate

The exchange rate is fixed by government and remains the same irrespective of market changes. India followed a pegged rate up till liberalization (pre-1991)

Hybrid or Dirty Float

In practice, many countries including India now have a hybrid system called ‘dirty float’. This is basically a floating rate where the government intervenes from time to time, trying to nudge the exchange rate in one direction or the other

Interest rate parity concept

Interest rate parity (IRP) states that an appreciation or depreciation of one currency against another currency might be neutralized by a change in the interest rate differential. If Indian interest rates exceed US interest rates then the Indian rupee should depreciate against the USD by an amount that prevents arbitrage.

However IRP showed no proof of working after 1990s. Contrary to the theory, currencies with high interest rates characteristically appreciated rather than depreciated. This happened because

  1. Foreign exchange chased the higher yielding currency leading to appreciation of the currency.
  2. The gov did not intervene in the forex market as that would have led to increased liquidity leading to increase in inflation.
  3. This led to appreciation of the currency.

This is what we are seeing in the Indian context today.

Balance of payments

This model holds that a foreign exchange rate must be at its equilibrium level - the rate which produces a stable current account balance. A nation with a trade deficit will experience reduction in its foreign exchange reserves which ultimately lowers (depreciates) the value of its currency. The cheaper currency renders the nation’s goods (exports) more affordable in the global market place while making imports more expensive. After an intermediate period, imports are forced down and exports rise, thus stabilizing the trade balance and the currency towards equilibrium.

Fluctuations in exchange rates

A market based exchange rate will change whenever the values of either of the two component currencies change. A currency will tend to become more valuable whenever demand for it is greater than the available supply. It will become less valuable whenever demand is less than available supply. The demand for money is highly correlated to the country’s level of business activity, gross domestic product (GDP), and employment levels. The more people there are out of work, the less the public as a whole will spend on goods and services.

A currency will tend to lose value, relative to other currencies

1. If the country’s level of inflation is relatively higher

2. If the country’s level of output is expected to decline

3. If a country is troubled by political uncertainty. For example, when Russian President Vladimir Putin dismissed his Government on February 24, 2004, the price of the ruble dropped.

The Indian context

As the mad rush to invest into India picks up steam, the demand for rupees in the foreign exchange markets will increase, which will mean the rupee, will rise in value. In the financial year 2006-2007, India received $16 billion dollars in foreign direct investment; this is about three times the previous year’s figure. Another important factor is the interest rate in different countries. If Indian interest rates rise relative to other countries, Indian interest-bearing products become more attractive; this will once again increase demand for the rupee. For instance, if the rate of interest in the US is only 4 per cent on bank deposits and a fixed deposit in India fetches, say, 10 per cent, the 6 per cent difference between the interest rates of these two countries will attract foreign investors to India. In India, the Reserve Bank of India has been raising interest rates in recent months as a way of fighting inflation; this has played a role in the rising value of the rupee.

So what is the impact of a rising rupee on different sectors of the economy?

In a nutshell, exporters are hurt and importers celebrate. The logic is simple: suppose an exporter earns $1 million in foreign exchange. At an exchange rate of 47 rupees to the dollar, this is worth Rs. 4.7 crores while at a rate of 43 rupees it’s only worth Rs. 4.3 crores. This is why stocks of export-intensive technology firms like Infosys have performed relatively poorly in recent weeks. Firms in the textile sector have also been hurt. Both the information technology and the textile sector are export-driven and are hurt whenever the rupee’s value increases. The reason is they get less rupees for the dollars they earn through exports. The opposite is true for companies with large imports. A stronger rupee means their import bill will fall in rupee terms. In India, the single biggest import is crude oil, and the rising rupee has seen stock market gains for oil marketing companies like IOC and HPCL in recent weeks. If a barrel of oil cost $ 40, it would cost Rs. 1720 if the exchange rate were Rs 43 per dollar. This would reduce to Rs 1,680 if the rupee appreciates by just Rs1 to Rs 42. This saving directly goes into the net profit kitty of oil marketing companies.

The rising rupee also has a direct impact on consumers who will face lower prices in rupees for imported goods or travelling abroad. For instance a typical weeklong trip abroad costing, say, $1000 (or Rs 42,000; $1 = Rs 42) will be cheaper because of the rise of the rupee in the last six months. The same trip would have earlier cost Rs 44,000 (assuming $1 = Rs 44).

So what’s likely to happen to the rupee in the future?

No one can say for sure as exchange rates are notoriously unpredictable. If the rupee rises significantly, you could see the RBI intervening in the markets and selling rupees in order to lower its value. As of now, it is not doing this, allowing the rupee to increase in value.

However, if India remains an attractive investment destination, the rupee is unlikely to drop significantly from its current level as foreign investments will come pouring in. But if it does ‘rise in value’ further then you and I will be able to buy that imported watch, the latest laptop and of course, oil at much cheaper rates than we are doing now.



[1] Rupee getting stronger means that one needs to shell out lesser rupees to buy a dollar.

Mutual fund fundas

Beta- Measure of volatility

Beta is the measure of the sensitivity of a fund to its index. A Beta of 1.5 means that the fund tends to rise and drop 50% more than the index does.

Alfa- Performance of fund

Alfa is an indicator of a funds excess return over that predicted by Beta of the portfolio/ Alfa of the fund gives the level of variability of return of the fund. If one goes by the Beta of the fund and it predicts a return of say 10% and the funds return is say 15% then alfa would be 5% . A positive alfa indicates a good fund manager performance

Standard deviation of Portfolio.

Provides level of correlation between fund return and market return.

The reality of IT

1. NIIT : Not Interested in IT

2. WIPRO : Weak Input, Poor & Rubbish Output

3. HCL : Hidden Costs & Losses

4. TCS : Totally Confusing Solutions

5. INFOSYS :Inferior Offline Systems

6. HUGHES : Highly Useless Graduates Hired for Eating and Sleeping

7. BAAN : Beggars Association and Nerds

8. IBM : Implicitly Boring Machines

9. SATYAM : Sad And Tired Yelling Away Madly

10. PARAM : Puzzled And Ridiculous Array of Microprocessors

11. C-DOT : Coffee During Office Timings

12. AT&T : All Troubles & Terrible

13. CMC : Coffee, Meals and Comfort

14. DEC : Drifting & Exhausted Computers

15. BFL : Brainwash First and Let them go

17. TISL : Totally Inconsistent Systems Ltd.

18. PSI : Peculiar Symptoms of India

19. ORACLE : On-line Romance And Chatting with Lady Employees.

20. PATNI: Pathetic Appraisal Techniques, No Increments

Wednesday, October 24, 2007

IT and the financial sector

Globalization through global high-speed data highways has led to a significant increase in IT spending especially for financial concerns. Absorption of new technology has seen financial companies able to instantaneously transfer funds and price sensitive information across the globe, computers have enable the industry to store, process and analyze huge masses of information. Most importantly computers have led to new complex products to be devised and priced in real time.

Technology has had a dramatic effect on how banks function as well as their profitability. Facilities such as ATMs, debit cards and RTGS have reduced the staff burden on one side and also reduced the cost of servicing. In fact the marginal cost of making a transfer through a debit card is less than 5% of processing a cheque payment. Development of databases has meant that new web based services can be offered such as core banking[1] as well services can be targeted at the customer.

However this is not just software –hardware game, where in the corporate entity with the best hardware and software wins. The human capital needs are also changing. The complexity of some of the newer financial products o offer has meant that higher skill sets are needed than those of traditional traders. This in turn means a significant increase in man power costs. The shifting of back office and processing operations to cheaper locations than traditional expensive financial hubs by leveraging IT connectivity could be a way out of this.

The cost of transitioning to newer technologies is extremely high. Also the question of maintaining ‘backward compatibility’ with existing systems means that taking full advantage of latest developments is just not possible. Security issues such as identity theft and hacking also need to be addressed using expensive software’s and consultants. Most financial institutions may even find it difficult to earn an adequate return on their capital investments, especially when the advantage they may gain is usually transient as their competitors catch up.

This is where market share becomes important. Technology has changed the balance between fixed and variable cost to a great extent. The initial high capital costs of hardware and software can be offset by the low marginal costs of serving the client. This directly means that a financial concern with a large market share can cover up its high initial costs faster before competition catches up.



[1] Services such as where a customers can operate their accounts, and avail banking services from any branch

Tuesday, October 23, 2007

Offshore derivatives instruments and the P notes

In the context of the Indian market, offshore derivatives instruments (ODIs) are investment vehicles used by overseas investors for an exposure in Indian equities or equity derivatives. These investors are not registered with SEBI, either because they do not want to, or due to regulatory restrictions.

These investors approach a foreign institutional investor (FII), who is already registered with SEBI. The FII makes purchases on behalf of those investors and the FII’s affiliate issues them ODIs. The underlying asset for the ODI could be either stocks or equity derivatives like Nifty futures.

What are participatory note or P-Notes?

Participatory notes (PN) is one of the categories of ODIs. At a basic level, the underlying asset class could be stocks, and returns would be directly related to the appreciation in prices of those stocks. In some complex forms, returns could be linked to the appreciation in Nifty over a given time frame and could be even linked to a combination of change in Nifty and a basket of stocks. For instance, the holder of a P-Note may be promised a return of 10% if Nifty rises by 5% within a month. Other categories of ODIs include equity-linked notes, capped return notes, participating return notes, etc.

What are FII sub-accounts?

Sub-accounts are special purpose vehicles floated by foreign funds in which they manage money on behalf of their overseas clients. FIIs also form proprietary sub-accounts to invest their own money.

What are third party sub-accounts?

This facility has been discontinued by SEBI. Earlier, overseas clients could nominate a fund manager of their choice to manage their money in a sub-account of an FII to whom they have entrusted the funds.

Are ODIs/P-Notes less transparent?

There are fears that P-Notes are being used as a vehicle by promoters, market operators, politicians to repatriate illegitimate funds parked abroad. Quite a few promoters are said to be using this route to ramp up their stocks. Then there is also a concern that terrorist organisations could be channelling money through ODIs and using profits to fund their nefarious activities.

As per SEBI rules, the FII issuing ODIs/P-Notes should know the eventual beneficiary to whom the instruments are being issued to. But through multiple layering, it is possible to conceal the identity of the original client. Then there are concerns that too much money flowing into the derivatives segment through the P-Note route is adding to volatility, not to mention the pressure on the currency.

Does the SEBI proposal mean that no fresh P-Notes can be issued?

No. P-Notes with stocks as underlying assets can be issued by an FII, subject to a limit of 40% of the overall assets under the custody of that FII. Simply put, if an FII has $100 million worth of assets under custody (AUC), only $40 million of those assets can be in the form of equity-based P-Notes. Where P-Notes with equity derivatives are the underlying assets, SEBI has proposed that these cannot be issued anymore, and the existing positions have to be unwound over a period of 18 months.

What if an FII has issued P-Notes up to 25% of its total assets under custody. Can he issue P-Notes for another 15% of his AUC overnight?

No. As per the SEBI proposal, he can raise it by only 5% at a time.

What will be the broad impact if SEBI’s proposals on P-Notes are implemented?

In the short term, inflows could be affected to an extent. But it is a positive move from a long-term perspective. For some time, SEBI has been saying it wishes to encourage FIIs to enter our stock market through the front door (by registering themselves) and not through the back door (via P-Notes). If more overseas players register with SEBI, it will be easy for the regulator to keep tabs on the fund flow into the market.

Source : http://economictimes.indiatimes.com/articleshow/2468970.cms

Tuesday, September 11, 2007

Beggers of Mumbai


NAME: Massu or Malana, 60
Massu's Assets
Rs 30 lakh in properties alone
Day's earnings Rs 1,000 to 1,500
Begs at: Lokhandwala. Mostly outside high-end restaurants visited by TV and film stars.
Working hours:
8 pm to 3 am.
Home is:
A one BHK at Amboli in Andheri (west). He owns another 1 BHK nearby.

Massu's 1BHK room at Amboli. Both houses are duplexes

Family: Wife, two sons and a daughter-in-law share the apartment with him.
Day's earnings:
Rs 1000 to 1500.
Assets:
Rs 30 lakh in just properties. One son makes and sells brooms, while the other hawks knick-knacks near Andheri station. He has substantial savings, but would not reveal details.

Cool quotient:
Massu is dressed in spotless clothes when he takes an auto-rickshaw to Lokhandwala every evening. He changes into his beggar attire near Ad Labs. During his working hours, he has a complete sway over the area. You will never find another beggar in his vicinity. He takes an auto on his way home too. Stops at Yashraj Studios for a change of clothes.

NAME: Krishna Kumar Gite, 42
Krishna 's Assets
Rs 5 lakh in properties alone
Day's earnings
Rs 1500 to 2000

Begs at: CP Tank, Charni Road
Working hours: Early morning to late evening
Home is: I BHK apartment at Nallasopara, which he shares with his brother.
Family: Brother, sister-in-law and their children.
Day's earnings: Rs 1500 to 2000.

His worth: The Nallasopara apartment is worth nearly Rs 5 lakh. Krishna claimed he has substantial savings but would not put a figure to it. "My brother manages everything," he said.

Cool quotient:
Claims he can't be bothered with money matters. He retires every evening to his Nallasopara home and hands over the day's earnings to his brother. "My bhabhi and brother know best what to do with the money."

NAME: Bharat Jain, 45
Bharat's Assets
Rs 70 lakh in properties alone
Day's earnings Rs 2000 to 2500

Begs at: Azad Maidan and Chhatrapati Shivaji Terminus.
Working hours:
Early morning to late evening.
Home is:
Two adjacent 1 BHK apartments in Parel, where his family stays. Bharat, however, visits home only once in a week. His family, which deals in school notebooks and other study material, has tried on many occasions to get Bharat to give up begging and join the family business.

Bharat's Parel house where he stays with his family. (right) The Bhandup shop the family has rented out to a juice centre

Family: Wife, two sons -- one studying in class X and the other in class XII -- father and brother.
Day's earnings:
Rs 2000 to 2500.
His worth:
The family apartments are worth close to Rs 60 lakh. The family also has rented out a shop in Bhandup to a juice centre and gets Rs 7,000-a-month in rent. The rent is collected every month by Bharat's wife.

Cool quotient:
Bharat speaks impeccable English. He is soft spoken and you will never find him harassing people for alms.

Name: Haji, 26
Haji's Assets Rs 15 lakh
Day's earnings Rs 1000 to 2000

Begs at: Deonar and Chembur. Usually begs near mosques and
temples.
Working hours:
Flexi. Picks the best time to be at a temple or a mosque.
Home is:
A room at Cheetah Camp, where his mother and sister run a zari workshop, employing 15 people.
Family:
Mother and sister.
Day's earnings:
Rs 1000 to 2000 .
Earnings increase mani-folds during festivals.
His worth:
The Cheetah Camp room worth anything between Rs 3 and 5 lakh. The zari workshop could be worth 10 lakh. The family earns a steady income from the zari business and his mother has tried every trick to get him to give up begging and join the family business.

Cool quotient:
He says managing the zari workshop is too much
hardwork. "I can't be bothered with all that. I like to be left alone. Also, I make a decent amount every day.

----------------<( ULTIMATE!!! )>-----------------

Name: Doesn't matter, A Software Engineer (Double Graduate :D)

S/W Enggr's Assets: Some old C++, Java, Cryptography Books worth 10,000 INR. Rest all Assets are based on EMI's (Easy Monthly Installment) so it's the bank that owns it and not me.

Day's earning: Peanuts :)

Works @ : Does't Matter , Sometimes even sitting on the Kamod.

Working Hours: Day and Night

Family: 1 intel Pentium 4 3.8 GHz CPU, 1 Flat monitor, 1 mouse and 1 keyboard.

His worth: Depends on the Tester, If tester files several critical bugs @ a time then he's useless :)

Cool Quotient: Whenever he opens his mouth he knows speaks only C, C++ and Java. Never fires anyone, only he gets fired everywhere.

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