vol 3.

23

ISSUE
nO - 61

MAR 01
 1

Investors check 3
Tax Haven 6
Alumni Speak 10
Rs/$
Budget Buzzwords 11
47
Budget Highlights 13
46.6 Rs/$
Commodity Market 14
46.2
Did You Know 17
45.8

45.4

45
1-Feb 4-Feb 8-Feb 11-Feb

Gold(per 10 gram) Oil(per bbl)

16000 78
Gold(per 10 gram)
15800 76
Oil(per bbl)
15600 74

15400 72

15200 70

15000 68
01-Feb 04-Feb 08-Feb 11-Feb 01-Feb 04-Feb 08-Feb 11-Feb

5400 35000000 17000 5,100.00

16500
5200 32000000 4,900.00

16000
5000 29000000
4,700.00
15500
4800 26000000
15000 4,500.00
1-Feb 4-Feb 8-Feb 11-Feb
4600 23000000
01-Feb 04-Feb 08-Feb 11-Feb

future rates sensex nifty

open interest

Repo 4.75%
Reverse Repo 3.25%
Call rate 2.10-3.35%
Inflation (as on 13 Feb) 8.56%
Forex Reserve (as on 19th Feb) $ 279.1 billion
91day T-Bill 4.1334%
IIP (as on 12th Feb) 16.8 %
6.90 GS 2019 7.9330-7.9973%
 2

international news

• British oil major BP in talks for $1.2-b Canadian oil sands deal.
• Norways Yara agreed on Monday to buy Terra Industries for $4.1 billion to create
a world leading fertiliser producer.
• US President Barack Obama announced more than $8 billion in loan guarantees
to build the first US nuclear power plant in the country.
• INTERNET telephony firm Skype made its first major leap into cellphones striking
a deal with the largest US mobile carrier Verizon Wireless.
• Schlumberger will buy Smith International in an all-stock transaction for $45.84 a
Smith share.

national news

• The Union budget 2010 has been announced with a Rs 2.71 a litre and Rs 2.55
a litre hike in petrol and diesel prices respectively.
• The Finance Ministry has made a provision for Rs.35000 cr net revenue for the
3G auction which is scheduled to be held on April 9.
• Government to raise funds worth Rs.40000 cr by issuing shares of PSUs.
• Reliance Capital partners has acquired 1.71% stake in cinema chain operator
Fame India through open market purchases.
• The IPO of the state run United Bank of India got a big response by getting issued
33.3 times.
• After ICICI, HDFC and Union Bank also increased the deposit rates of selected
tenure deposits up to 50 basis points.
• Essar group to sell its telecom tower business to American Tower Corporation for
2000cr.
• Indian Rail Finance Corporation to raise Rs. 9100 cr through issue of bond.
• Mercedes Benz rolled out India’s costliest Limousine S-guard for a price tag
of 6 crores.
 3

GLASS STEAGALL ACT

By Nivedita Tiwary, I MBA
The Banking Act of 1933 popularly known as the Glass Steagall Act introduced bank-
ing reforms in the United States. The act was mainly designed to control speculation
activities. The act came to be known as Glass Steagall Act after its legislative Found-
ers Carter Glass and Henry B. Steagall.

Brief Overview:

Glass-Steagall Act consists of two separate laws. These bills were introduced in the
senate by Democratic Senator Carter Glass of Lynchburg, Virginia, a former Secre-
tary of the Treasury, and Democratic Congressman Henry B. Steagall of Alabama,
Chairman of the House Committee on Banking and Currency.

The first Glass Steagall Act of 1932 was enacted

to stop deflation and also gave powers to the
Federal Reserve to rediscount several assets
such as government bonds as well as commer-
cial papers. The second Glass-Steagall Act of
1933 was enacted largely due to the collapse
of the American commercial banking system in
1933. It introduced the separation of the banks
based on their businesses namely commercial
and investment banking and it also introduced
the Federal Deposit Insurance Corporation for
insuring bank deposits.

The Banking Act of 1933 limited competition with

deposit insurance, interest rate regulation, and entry barriers which made banks
similar in the eyes of the ordinary depositor. This pre-empted the tendency to push
up deposit rates to attract depositors that would require risky lending and investment
to match returns with costs. The regulatory framework went even further to curb risky
practices in the banking industry. Restrictions were imposed on investments that
banks or their affiliates could make, limiting their activities to provision of loans and
purchases of government securities. There was a ban on banks underwriting securi-
ties and serving as insurance underwriters or agents, besides limits on outstanding
exposure to a single borrower and lending to sensitive sectors like real estate. The
act implicitly regulated the non-bank financial sectors as well as their operations de-
pend much upon the principal depository institutions namely the banks.

History:

Republican president Herbert Hoover lost re-election in November 1932 to Dem-

ocratic governor Franklin D Roosevelt of New York. The administration changed
hands only until 1933 and hence the Hoover administration and Roosevelt adminis-
tration did not coordinate actions to stop the run on banks affiliated with the Henry
 4

Ford family that began in Detroit, Michigan in January 1933. The then Federal Re-
serve chairman Eugene Meyer was also ineffective.

According to congressmen in the nineteenth and twentieth century bankers and bro-
kers were indistinguishable. Thus in 1929 after the Great Depression Congress ex-
amined the mixing of the commercial and the investment banking industries that oc-
curred in 1920. Some hearings revealed conflict of interests and fraud in few banking
institutions’ securities activities.

Thus a barrier to the mixing of these activities was then set up by the Glass-Steagall
Act. The Act has strongly influenced the financial systems of fundamentally strong
economies like China which remained very stable during the 2008-2009 crises.

Some key points of this act were:

1. Conflict of interest i.e. granting of credit- lend-

ing, and the use of credit - investing was done by
the same entity which led to abuses.

2. Depository institutions possessed enormous

financial power, by virtue of their control of public
money and hence its extent must be limited to
ensure soundness and competition in the market
for funds be it loans or investment.

3. Securities activities are risky and could lead to

enormous losses which could threaten the integ-
rity of deposits.

Repeal of the Act:

The bill that repealed the act was finally signed by President Bill Clinton on Novem-
ber 12 1999. The arguments given against preserving the act were as following:

1. Depository institutions should operate in free ‘deregulated’ financial markets in

which there is no distinction between loans, securities and deposits.

2. Conflict of interest could be prevented by enforcing legislation against them and

by separating the lending and the credit functions through forming distinctly separate
subsidiaries of financial firms.

3. The securities activities the depository institutions were seeking would reduce the
total risk by diversification.

Effect of the repeal:

The repeal enabled commercial banks like Citigroup, the largest bank in the US in
1999 by assets, to underwrite and trade instruments such as mortgage backed secu-
 5

rities and collateralised debt obligations and establish structured investment vehicles
that bought those securities. The sub-prime loans were only 5% of all mortgages in
the year before the repeal but by 2008 it approached around 30% which contrib-
uted to the subprime crises and recession in 2008.This statistics shows clearly how
the appetite for risk taking increased due to the repeal of the act. Moreover due to
complex and opaque instruments like credit default swaps all these bad loans were
distributed amongst multitude of financial institutions without anybody knowing the
actual amount of risk they had on their books

Current Relevance and implication:

The economic downturn is over and

partially stalled but to prevent such
things to happen in future strict and
stringent measures or regulations is
the need of the hour. It definitely calls
for reinforcing partly acts like the Glass-
Steagall Act which set up a regulatory
framework and limits financial innova-
tion and proliferation.
This kind of regulation makes
financial institutions more stable by
keeping their ability to take risks low,
if they could bring down the economy
with their failure.

A simple example would be the reaction of the US government to crisis at

Lehman Brothers and Citi Group. Government could let Lehman Brothers collapse
without much effect on broader financial system.

Lehman Brothers took some particularly bad risks and went bankrupt due
to their greed. The same mistakes were committed by investment banking divisions
of all the big banks like Citi Corp and Bank of America and ideally they should have
been allowed to bear the consequence of their greed. But there was one major differ-
ence in that these banks were also deposit taking commercial banks.

These banks had become too big to fall. If government would have allowed
them to fall, they would have brought down the whole economy and savings of most
of the population with them.

If the commercial and investment banking were separated as was done by

the Glass-Steagall act, none of these banks could have become too big to fall and
there would not have been this obscene glut of risk taking for short term profits and
bonuses.

A man is usually more careful of his money than of his principles.

~Oliver Wendell Holmes
 6

Closing Down The Tax Haven Racket

By Nithya Prakash, I MBA

Closing Down the Tax Haven Racket

Lucy Komisar of the Tax Justice Network-USA (taxjustice-usa.org) spoke at

the Conference on Taming the Giant Corporation about “Closing Down the Tax Ha-
ven Racket.” Her words were so compelling that the rest of this column is devoted to
excerpts from her presentation:

“The tax haven racket is the biggest scam in

the world. It’s run by the international banks
with the cooperation of the world’s financial
powers for the benefit of corporations and
the mega-rich. Most Americans, including
progressive activist Americans, don’t know
what I’m going to tell you. And that’s part of
the problem.

“Tax havens, also known as offshore finan-

cial centers, are places that operate secret
bank accounts and shell companies that
hide the names of real owners from tax au-
thorities and law enforcement. They use nominees, front men. Sometimes offshore
incorporation companies set up the shells. Sometimes the banks do it. Often some-
one will use a shell company in one jurisdiction that owns a shell in another jurisdic-
tion that owns a bank account in a third. That’s called layering. No one can follow the
paper trial.

“Offshore is where most of the world’s drug money is laundered, estimated at up to

$500 billion a year, more than the total income of the world’s poorest 20 percent.
Perhaps another $500 billion comes from fraud and corruption.”Those figures fit with
[International Monetary Fund] numbers that as much as $1.5 trillion of illicit money is
laundered annually, equal to two to five percent of global economic output.

“Wall Street wants this money. The markets would hurt, even shrivel without that
cash. That’s why Robert Rubin as Treasury Secretary had a policy, as Joseph Stiglitz
told me, not to do anything that would stop the free flow of money into the US. He
was not interested in stopping money laundering because the laundered funds end-
ed up in Wall [Street], maybe in Goldman Sachs where he had worked, or Citibank,
where he would work.

“Attempts to find laundered funds are usually dismal failures. According to Interpol,
$3 billion in dirty money has been seized in 20 years of struggle against money laun-
dering -- about the amount laundered in three days.

“The other major purpose of offshore is for tax evasion, estimated to reach another
 7

$500 billion a year.”That’s how corporations and the rich have opted out of the tax
system.”They have sophisticated mechanisms. There’s transfer pricing. A company
sets up a trading company offshore, sells its widgets there for under market price,
the trading company sells it for market price, the profits are offshore, not where they
really were generated.

“Two American professors, using customs data, examined the impact of over-in-
voiced imports and under-invoiced exports for 2001. Would you buy plastic buckets
from the Czech Republic for $973 each, tissues from China at $1874 a pound, a cot-
ton dishtowel from Pakistan for $154, and tweezers from Japan at $4,896 each!
“U.S. companies, at least on paper, were getting very little for their exported prod-
ucts. If you were in business, would you sell bus and truck tires to Britain for $11.74
each, color video monitors to Pakistan for $21.90, and prefabricated buildings to
Trinidad for $1.20 a unit.

“Comparing all claimed ex-

port and import prices to
real world prices, the profes-
sors figured the 2001 U.S.
tax loss at $53.1 billion.”Or
a company sets up subsid-
iaries in tax havens to “own”
logos or intellectual prop-
erty. Like Microsoft does in
Ireland, transferring software
that was made in America, that benefited by work done by Americans, to Ireland
so Microsoft can pay taxes there (at 11%) instead of here (at 35%). Why is Ireland
getting the benefit of American-created software? It’s legal. We need to change the
law.

“When logos are offshore, the company pays royalties to use the logo and deducts
the amount as expenses. But the payments are not taxed or are taxed minimally off-
shore where they are moved. When Cheney ran Halliburton, it increased its offshore
subsidiaries from 9 to at least 44.

“Half of world trade is between various parts of the same corporations. Experts be-
lieve that as much as half the world’s capital flows through offshore centers. The
totals held offshore include 31 percent of the net profits of U.S. multinationals.
“The whole collection of tax scams is why between 1989 and 1995, of US and multi-
national corporations operating in the United States, with assets of at least $250 mil-
lion or sales of at least $50 million, nearly two-thirds paid no U.S. income tax.

“In 1996-2000, Goodyear’s profits were $442 million, but it paid no taxes and got a
$23-million rebate. Colgate-Palmolive made $1.6 billion and got back $21 million.
Other companies that got rebates in 1998 included Texaco, Chevron, PepsiCo, Pfiz-
er, J.P. Morgan, MCI Worldcom, General Motors, Phillips Petroleum and Northrop
Grumman. Microsoft reported $12.3 billion U.S income in 1999 and paid zero federal
taxes. (In two recent years, Microsoft paid only 1.8 percent on $21.9 billion pretax
U.S. profits.)
 8

“During the 1950s, U.S. corporations accounted for 28 percent of federal revenues.
Now, corporations represent just 11 percent.”Those unpaid taxes can buy a lot of
politicians and power. When Nixon needed money to pay the Watergate burglars, he
got it from some corporate offshore bank accounts.

“The system has given the big banks and corporations and the super-rich mountains
of hidden cash they use to control our political systems.”The offshore system must
be dismantled.”So why isn’t the progressive movement doing something about this?
This is a case where some people in Congress are ahead of the activists. There are
a handful of Democrats like Senators Levin (MI), Dorgan (ND) and Conrad (ND),
like Rep. Doggett (TX), who are speaking out and introducing legislation. But there
is no movement behind them. And while Obama has signed onto the Levin Stop Tax
Haven Abuse Act, Clinton, Biden and Dodd have not.”

As concluded: “Let’s get the country to tell the corporations that the taxes they are
dodging is our money.”

BUZZ WORDS

Cherry Picking

1. The act of investors choosing investments that have performed well within another
portfolio in anticipation that the trend will continue.
2. Relating to bankruptcy proceedings whereby the courts uphold contracts favorable to
bankrupt companies, but annul those that are unfavorable.

Bo Derek

A slang term used to describe a perfect stock or investment. In the 1979 hit movie “10”,
actress Bo Derek portrayed the “perfect woman”, or “the perfect 10”.

Bubble

1. An economic cycle characterized by rapid expansion followed by a contraction.

2. A surge in equity prices, often more than warranted by the fundamentals and usually in
a particular sector, followed by a drastic drop in prices as a massive selloff occurs.
3. A theory that security prices rise above their true value and will continue to do so until
prices go into freefall and the bubble bursts.

Blotter

A record of trades and the details of the trades made over a period of time (usually one
trading day). The details of a trade will include such things as the time, price, order size
and a specification of whether it was a buy or sell order. The blotter is usually created
through a trading software program that records the trades made through a data feed.
 9

Is Stimulus exit strategy good for Indian Economy or not

YES, stimulus exit strategy is good for Indian NO, stimulus exit strategy is not good for
economy: Indian economy:
Mohit Mathai, II MBA Enoch Paul , II MBA

I think this is just the right time for the govern- I would like to point out that this is not the right
ment to rollback its stimulus strategy. The justi- time to withdraw the stimulus package by the
fication is as follows. Corporate profits are in the government because of the following factors:
grip of a strong momentum. Sectors that have
delivered stand-out growth recently are automo- 1. The economy, according to advance esti-
biles, commercial vehicles, consumer goods that mates for 2009-10, is expanding at 7.2 per cent,
are all direct or indirect beneficiaries of the gov- recovering from a slowdown in growth to 6.7
ernment’s stimulus. There is no denying that the per cent in 2008-09. The growth rate, however,
withdrawal of the stimulus will have an impact, is still much below the average of 8.6 per cent
however, the impact will not be all that signifi- clocked in the four years before the downturn.
cant. When a patient recovers from an illness, Therefore, the stimulus must not be abandoned
you obviously have to take him off medication. prematurely.
I believe that the economy has recovered in a
very significant manner and that the government 2. Credit off take has been very poor as
is not going to withdraw the stimulus suddenly, compared to the previous three years. From 30%
it will be gradual and sector-specific. If you look growth it has come down to almost 12-15%. It
at the size of the stimulus package in India, it even went to single digits and has now picked
amounts to just 2.7 per cent of the GDP, in China up. It is the stimulus package which has stimu-
the number is 7 per cent. We are likely to man- lated this growth and the situation could deterio-
age (as per the recent RBI forecast) a 7.5 per rate if withdrawn.
cent growth with a 2.7 per cent stimulus, while
China has managed a 10 per cent growth with a 7 3. IIP figures of 16.8% growth may look
per cent stimulus. amazingly high, but the fact is that this is due to
base ef-
On the demand side, there has been a massive fect. The
boost to consumption due to a shift in terms of growth
trade in agriculture. For the first time in decades, in IIP
farmers are benefiting from rising product prices. over the
That is why we recorded 9 per cent growth in quarters
2004-08. The global financial crisis interrupted is possi-
that trend. We need to worry only if interest rates bly in the
or material prices rise to exceptional levels, as region of
in 2008. Material prices are still 30-40 per cent 7-9% and
lower than those levels. Interest rates are now not amazing double digits.
recovering from a low too.
4. Specific industries which have driven the
Whenever there is a stress on the business, they IIP like automobiles or consumer durables may
cut down on costs and significantly improve their be the impact of pent up demand because the
productivity. When the economy turns around, demand for these sectors had come down 12-15
therefore, they reap the twin benefits of produc- months back. A similar situation occurred when
tivity gains and volume growth. If you look back excise duty was raised in 1986 car sales tanked
at the Sensex earnings for ten years, in every almost overnight.
block of three years there has been a sustain-
 10
able spurt in earnings. And whenever earnings
come out of a stressful period, they grow with a
vengeance. In the latest December quarter, the
1,572 companies (excluding oil and gas, bank-
ing) delivered a profit growth of 42 per cent on
a revenue growth of 12 per cent. That clearly
shows the extent of buoyancy. There is also the
advantage of a stable government at the Centre
after a span of ten years .That should facilitate
both growth and an economic reform-oriented
Budget. Therefore, we have every right to be-
lieve that we are set for a strong spurt in earnings
over 2011 and 2012.
If you have experienced an earthquake, every
tremor may have you running for cover! That is
what is happening now. However, if you look at
fundamentals, no matter what macro-indicator
you look at today (except inflation), it points to
an improvement — whether it is tax collections,
IIP numbers, export data, or FDI flows. Thus I
believe that this is the right time to rollback the
stimulus packages by the government, but in
phases.
5. Commodity prices globally are begin-
ning to tighten, so there maybe rise in com-
modity prices like iron ore or variety of inputs
simultaneously the oil prices may in fact go up.
So the excise duty rising passed on to the con-
sumer maybe coupled with commodity and oil
price rises then it becomes a major problem as
all these costs are passed on to the customer and
may pull down the demand for the products.
6. Demand from overseas markets contin-
ues to be subdued as economic recovery in the
US and Europe is still feeble. If the government
pulls back the interest subvention, it will be
disastrous for the industry.
7. Some experts say ours is a ‘W’ shaped
economic recovery not a ‘V’ shaped economic
recovery, so the stimulus should not be rolled
back completely unless the economy stabilizes.

Alumni Speak
Name - Tarun
Batch - 1994 – 1996
Own company – Inspiration Consultancy

Ques - Sir what is your view about Budget?

Ans - Budget is very general, there is nothing done for public, increase in excise
duty, increase in fuel price.

Ques - But sir there is only 2% increase in excise duty, while the speculation were
for higher increase, and there in increase in tax slabs also.
Ans - I am earning 24 lakh per annunm what is benefit of that to me.

Ques- That’s good sir, in which company are you working?

Ans - I have opened my own companies.
Inspiration Consultancy.

Ques- In which other companies have you worked before this initiative.
Ans – Prabhudhas Liuadher, Times of India, Birla Principal

Ques - Will this tax slab increase in investment in share market?

Ans - Not much as there is not much retail investment, and public don’t have much
knowledge about stock market.
 11

BUDGET BUZZ WORD

Appropriation Bill:

It is presented to Parliament for its approval, so that the government can withdraw from
the Consolidated Fund the amounts required for meeting the expenditure charged on
the Consolidated Fund. No amount can be withdrawn from the Consolidated Fund till
the Appropriation Bill is voted is enacted.

Capital Budget:

It consists of capital receipts and payments. It also incorporates transactions in the

Public Account. It has two components: Capital Receipt and Capital Expenditure.

Capital Expenditure:

It consists of payments for acquisition of assets like land, buildings, machinery, equip-
ment, as also investments in shares etc, and loans and advances granted by the
Central government to state and union territory governments, government compa-
nies, corporations and other parties.

Capital Receipt:

The main items of capital receipts are loans raised by the government from public
which are called market loans, borrowings by the government from the Reserve Bank
of India and other parties through sale of Treasury Bills, loans received from foreign
governments and bodies and recoveries of loans granted by the Central government
to state and union territory governments and other parties. It also includes proceeds
from disinvestment of government equity in public enterprises.

Central Plan:

It consists of the government’s budget support to the Plan and the internal and extra
budgetary resources raised by public enterprises.
Consolidated Fund: It is made up of all revenues received by the government, loans
raised by it, and also its receipts from recoveries of loans granted by it. All expendi-
ture of the government is incurred from the Consolidated Fund and no amount can
be withdrawn from the Fund without authorisation from Parliament.

Contingency Fund:

It is an imprest placed at the disposal of the President and is used by the govern-
ment to incur all its urgent and unforeseen expenditure. Parliamentary approval for
such expenditure and for withdrawal of an equivalent amount from the Consolidated
Fund is subsequently obtained and the amount spent from the Contingency Fund is
recouped to the Fund.
 12

Finance Bill:
BUZZ words
This contains the government’s proposals for levy of new taxes, modification of the
existing tax structure or continuance of the existing tax structure beyond the period
By M.R.Ravi, II MBA - A
approved by Parliament. It is submitted to Parliament along with the Budget for its
approval.

Fiscal Deficit:

It is the difference between the revenue receipts plus certain non-debt capital re-
ceipts and the total expenditure including loans (net of repayments). This indicates
the total borrowing requirements of the government from all sources.

Monetised Deficit:

It indicates the level of support extended by the Reserve Bank of India to the govern-
ment’s borrowing programme.

Non-Plan Expenditure:

It includes both revenue and capital expenditure on interest payments, the entire de-
fence expenditure (both revenue and capital expenditure), subsidies, postal deficit,
police, pensions, economic services, loans to public enterprises and loans as well as
grants to state governments, union territory governments and foreign governments.

Plan Expenditure:

It includes both revenue and capital expenditure of the government on the Central
Plan, Central assistance to state and union territory plans. It forms a sizeable propor-
tion of the total expenditure of the Central government.

Revenue Budget:

It consists of the revenue receipts of the government (which is tax revenues plus oth-
er revenues) and the expenditure met from these revenues. It has two components:
Revenue Receipt and Revenue Expenditure.

Revenue Receipt:

It includes proceeds of taxes and other duties levied by the Centre, interest and divi-
dend on investments made by the government, fees and other receipts for services
rendered by the government.

Revenue Expenditure:
It is meant for the normal running of government departments and various services,
interest charges on debt incurred by the government and subsidies. Broadly speak-
ing, expenditure which does not result in creation of assets is treated as revenue ex-
penditure. All grants given to state governments and other parties are also treated as
revenue expenditure even though some of the grants may be for creation of assets.
 13

BUDGET HIGHLIGHTS

• First challenge to quickly revert to GDP growth of 9%, says FM.

• FM aims to implement direct tax code from April 1,2011.
• Endeavour to introduce GST by April 1, 2011
• Government to budget Rs 25000 crore disinvestment in FY10 and Rs 35000
crore in FY11.
• Total expenditure in 2010-11 to increase by 8.6 per cent over 2009-10
• RBI considering issuing banking licences to private companies. Non-banking
finance companies will also be considered if they meet the criteria.
• Fisal deficit targeted at 5.5 % of GDP for 2010-11.
• Fiscal deficit projected at 4.8 per cent and 4.1 per cent of GDP in 2011-12
and 2012-13, respectively.
• NREGA scheme allocation raised to Rs 41000 Crs.
• Personal income tax slabs changed:
Income up to Rs 1.6 lakhs — nil
Income between Rs 1.6 lakhs and Rs 5 lakhs — 10 per cent
Income above Rs 5 up to 8 lakhs — 20 percent
Income above Rs 8 lakh — 30 per cent
• Allocation to health Rs 22,300 Crs.
• Minimum Alternate Tax (MAT) to be increased from 15 per cent to 18 per cent
on book profits
• Excise duty on petrol and diesel up by Re 1 per litre
• 25% of plan allocation for rural infrastructure.
• Social sector spending seen at Rs 1.38 lakh Crs.
• Allocation for school education up from Rs 26800 Crs to Rs 31036 Crs.
• Allocation for women and child development hiked by 80 per cent.
• Allocation to Power sector at Rs 5130 Crs.
• Draft food security Bill ready.
• Clean energy fund to be established.
• Allotment for renewable energy hiked by 61%.
• Coal regulatory authority to be set up.
• Nutrient based fertiliser subsidy scheme to come into force from April 1, 2010
• Road development hiked to Rs 19894 Crs.
• Rs 1.73 lakh Crs, which is 46% of total plan outlay, reserved for infrastructure
development.
• 2% loan subsidy to farmers.
• Spending on social sector increased to Rs 1376.7 billion, which is 37
per cent of total plan outlay
• Farm credit targets to be increased to Rs 3.75 lakh Crs.
• Farm loan payments to be extended for six months.
• Interest subvention of 2% to be extended for handicrafts and SMEs.
• Rs 300 Crs for agricultural impetus.
• Rs 165 billion allocated for enhancing bank’s Tier-I capital to 8 per cent by
March 31, 2011. Additional Rs 1,65,000 Crs for bank re-capitalisations.
 14

COMMODITY MARKET
Mookambiga , I MBA

COMMODITY TRADING – STRATEGIES

Commodity trading strategies are simply the basis for why and when one will buy
and sell commodities. An investor should have some well thought out strategies
before he begins trading commodities. This does not mean watching the financial
news or reading a commodity newsletter for the latest trading tips. Rather, one
should have consistent strategies that will let him know under what circumstances
he will buy, sell and limit losses.
Most commodity trading strategies use some form of technical analysis for the
trading decisions. Most commodity trading strategies consist of either a range
trading or breakout methodology. Each type of strategy has its pros and cons, so it
is up to the investor’s personal taste on which type of strategy might work best for
him.

Range Trading Strategy:

Range trading in commodities sim-

ply means buying near the bottom of
a range (support) and selling at the
top of a range (resistance). Another
way to look at this strategy is that one
might look to buy a commodity after
it has experienced a lot of selling and
becomes oversold. Oppositely, one
might look to sell a commodity after
it has had a long rally and becomes
overbought.
There are numerous indicators which measure overbought and oversold levels
like RSI, Stochastics, Momentum and Rate of Change. These strategies work well
when the market has no significant trend. However, a trader could have a string of
bad losses when a market forms a major trend, as markets can stay overbought or
oversold for long periods of time.

Trading Breakouts:

Trading breakouts in commodities means that a trader will look to buy a commod-
ity as it makes new highs and sell a commodity as it makes new lows. New highs
and lows can easily be spotted on a chart, as they are the peaks and troughs.
Many professional traders use these techniques when they are managing large
sums of money.The philosophy for this strategy is simple – a market can’t continue
its trend without making new highs or new lows.

 15 15

This strategy works best when commodities are trending strongly. It doesn’t matter
whether the trend is up or down, as you are buying new highs and selling (shorting)
new lows. The drawback of this strategy is that it performs very poorly when mar-
kets don’t establish strong trends.

Fundamental Trading Strategy

While trading breakouts and trading ranges usually come with specific setups for
buying and selling commodities, fundamental trading leaves much more room for
interpretation. For example, you might buy soybeans because the weather has
been dry during the summertime and you expect a much smaller crop. Or, you ex-
pect demand to increase for crude from China, so you buy oil futures.

Changing Commodity Trading Strategies Can Be Dangerous

One of the pitfalls many commodity traders fall into is the constant changing of
trading strategies. They often spend weeks researching a particular trading method
and have good evidence that it should work. They will then start trading it with real
money and eventually there will be some rough periods where it hits a string of
losing trades. Then, of course, the strategy is abandoned and the hunt for a new
trading strategy begins. One of the main traits of a successful commodity trader is
consistency. This means that you should keep using a trading strategy long enough
to see if it works. A recipe for disaster is dropping a strategy when it has some los-
ing trades and then starts trading another one.

Trading Commodities After News Reports

News on commodities can often be a dangerous trap for novice commodity trad-
ers. There are major wire services that usually produce an end of day recap on why
each commodity market moved up or down for the day. There are also news reports
on the financial channels that give some bullet points on why a market has made a
large move. It is good to stay informed when trading, but a wrong interpretation of
the news can lead to many losses.

If you are an inexperienced commodity trader it is a good bet that you will poorly
interpret the news on the commodities markets. The problem is that most reporters
have to supply news reports everyday and they are not commodity traders. They
need a fundamental reason on why a commodity is moving and it is often just a
guess. Commodity reporters also ask floor traders for comments on why a market
is mov ing and they either get a comment that supports the trader’s positions or
sometimes traders just have some fun with the reporters and make up a reason.

There are also major reports that are released periodically that have a major impact
on commodities. Reports like the USDA Monthly Crop Reports are released before
the grain markets open and they often cause large movements in corn, soybeans
and wheat. Trying to buy off the news as the market opens is often a recipe for
disaster. I prefer to wait and see how the markets react to the news before I enter a
position.
 16

Exchange Traded Funds - ETFs

The ABCs of ETFs

ETFs are mutual fund schemes and are similar to index funds. Just like an index
fund, ETFs also replicate a given benchmark index by investing in stocks compris-
ing a particular equity index such as the S&P Nifty or the BSE Sensex. However, the
crucial difference is that ETFs are listed and traded on the stock exchanges, while
index funds are bought and sold through fund houses. Hence, like stocks, the price
of an ETF fluctuates on an intra-day basis.Further, while buying or selling ETFs, a
brokerage has to be paid unlike entry and exit loads levied by regular mutual fund
schemes.

The risk-return profile of ETFs

In terms of performance,
ETFs usually move in line
with the benchmark index to
which the scheme pertains.
Even the risk involved in
ETFs is directly co-related
to the volatility of the index.
As both, ETFs and index
funds replicate a selected
equity index, the risk and re-
turn matrix is also similar for
the two.
These traded funds gener-
ally involve a passive in-
vestment strategy and when
compared to actively man-
aged schemes, the risk in-
volved is low to medium. Hence, ETFs generate returns that are approximately equal
to returns generated by the index.
ETFs are adequately transparent and a flexible tool
ETFs offer transparency as an investor will know which stocks the fund is holding.
Moreover, as it replicates an index, diversification automatically sets in. the expense
ratio of an ETF is usually below the mutual fund industry average.

Largest Gold ETF

SPDR Gold Shares is the largest Gold ETF in the world. Originally listed on the
New York Stock Exchange in November 2004, it now also trades on the Singapore
Stock Exchange, Tokyo Stock Exchange and the Stock Exchange of Hong Kong. The
amount of gold currently held in the form of gold bars in a Trust is 1,116.25 tonnes.

 17

Its value was been pegged at $40,332,797,729.46 when the price of gold in the U.S
was at $1,114.80/ounce (December 12, 2009)

Gold ETFs in India

Gold ETFs in India have cumulative assets of just Rs. 1169.23 Crores. They form just
0.60 per cent of total equity assets in India. There are total of six Gold ETFs, the larg-
est being Gold Benchmark ETF with assets of Rs. 518.24 crore, the smallest being
SBI Gold ETF with assets of Rs. 92.28 crore. This is because Indians clearly prefer
holding their gold in physical form.

Conclusion

The demand for ETFs is likely to go up further as the awareness level among inves-
tors and the investment advisory community improves. Besides, ETFs are a very
convenient way to hedge, not only for institutional investors but also for small and
retail investors.

Did You Know

International Pepper Exchange in Kochi (Kerala) is the world’s oldest and

only pepper exchange that deals with the global trade of black pepper. It is run
by the India Pepper and Spice Trade Association (IPSTA) at the port city of Mat-
tancherrry. International Pepper Exchange got its government clearance under
the Forward Markets Regulation Act of 1952 to start futures trade in 1957. It was
founded by V.M. Patel, Valabhdas Mariwala and Shamji Narshi. The price at which
pepper was traded in this exchange decided the movement at the global market.
Members of this exchange had to pay margins up front as guarantee for the trade
done daily and the delivery system at the end of the monthly contracts was smooth.
These norms and the emphasis on quality control had made the exchange a model
for others and even the regulator, Forward Markets Commission (FMC), used to
look up the exchange to implement any new program. In 1996 the exchange was
put in an international division, called the International Commodity Exchange (ICE),
based on a study by the United Nations Conference on Trade and Development
(UNCTAD).

Bank of India opened a branch in London in 1946, the first Indian bank to do
so. This was also the first post-WWII overseas branch of any Indian bank. This was
followed by Tokyo, Osaka (1950), Singapore (1951), Kenya, Uganda (1953) etc.
Bank of India, established on 7 September 1906 is a bank with headquarters in
Mumbai. Government-owned since nationalization in 1969, It is one of India’s lead-
ing banks, with about 3140 branches including 27 branches outside India.
 18

Quiz

1. Gameplan Sports Pvt. Ltd. is an organisa-

tion that deals with event management, spon-
sorship sales etc. but has become famous by
being the manager of a famous sports personal-
ity. Identify the person.
2. Tata Marcopolo buses are the result of a
joint venture between Tata Commercial Vehicles
India and Marcopolo S. A from _______.
3. Funskool , a Joint venture between ______
and _____, in the toy manufacturing in India.
4. Former U.S president Theodore Roosevelt
is also known for a product or an item named after him. Name it.
5. Heysley Disaster and Hillsborough disaster had made this organization in-
famous all over the world. It now has George Gillett and Tom Hicks as its chair-
men. It is now planning to move from Anfield to Stanley Park. It has these words
written in its logo “You will never walk alone”. What am I talking about?

Crossword

Across

2. Under which effect the government is

likely to increase taxes in the future in order
to repay the money being borrowed to finance
a current budget deficit.
4. An unsecured, short-term debt instru-
ment issued by a corporation, typically for the
financing of accounts receivable, inventories
and meeting short-term liabilities.
5. he budget that may just be enough for
an individual to live on or for a company to
profit from a project.
6. The method in which the debt with the
highest interest rate is completely paid for,
subsequent extra debt payments from the
debt repayment budget go toward the next highest interest-bearing debt.

Down

1. When rating agencies reduce their ratings on structured financial collateral

based on ratings from another agency without rating the collateral themselves.
3. A person who is able to remain stylish during times of economic hardship.
 19

Answers

Crossword Quiz

1. Mahendra Singh Dhoni

2. Brazil
3. Hasbro and MRF
4. Teddy Bear
5. Liverpool Football Club

Andrea Simento Sr. Co-ordinator

Nithin Mishra Sr. Co-ordinator
Team
Ravi M R Debate
Manesh Paul Mani Jr. Co-ordinator
Amutha Priya D News
Sonal Sankhla Student Article & Scam
Nivedita Tiwary Investors check
Dorin Jane Quiz & Did You Know
Mantri Ankit Atul Quotes & Buzz Words
Pottim Sahiti Reddy Crosswords
Vipul Jain Graph, Rates
Rajdeep Rathi Alumni Speak
Bhargav K Editor And Design
Pradeep Thangavel Editing And Compiling
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