Economic Growth Revised Up to a Healthy 2.5% for Q2

From April through June, the U.S. economy grew 2.5%. This is a much higher than the first estimate of 1.7%, released by the Bureau of Economic Analysisjust a month ago. Even better, it's at the high end of the 2-3% ideal growth rate. It's also more than a percentage point higher than first quarter's GDP growth rate of 1.1%.

Why was the revision so dramatic? The BEA improved its estimate as it received better data during the month. It found that exports were really a lot better than it originally thought. (Source: BEA,GDP Second Estimate, August 29, 2013)

How It Affects You

Today's report means that the Federal Reserve is more likely to begin tapering its Quantitative Easingprogram, possibly as early as next month. That's because growth is well within the Fed's stated target of 2.3%-2.6% growth, which it wants to achieve by the end of the year.

In addition, there's a political reason the Fed may start tapering sooner rather than later. President Obama is likely to announce his choice for Fed chair to replace Ben Bernanke in January. Regardless of whether it's Janet Yellen or Larry Summers, the Fed will want to make the transition as smooth as possible. One good way to do that is to start the tapering before that announcement is made.

Who Would You Pick With Fed Chair?

Although monetary policy is important, what's more important is the economic strength indicated in this report. It's very solid, as growth is being driven by exports and residential construction, and despite sequestration and tax hikes in the first quarter. Unfortunately, this growth rate may not continue for the third quarter, if July's downturn in durable goods orders continues.

Why the Dollar Has Strengthened

Thursday August 29, 2013

The dollar has strengthened in the last week as the U.S. announced its readiness to launch airstrikes against Syria. The dollar is a typical safe haven in time of crisis. The ICE dollar index went from 80.93 on August 19 to 81.2 on August 27, 2013.

It also initially strengthened in response to the Federal Reserve's announcement that it would cut back on Quantitative Easing.  The ICE dollar index went from 80.96 on June 17 to 84.78 on July 9, 2013. However, it then dropped back down to 80.03. The Fed's announcement caused Treasury yields to rise, from 1.6% on May 2 to 2.9% on August 22. This indicates a weakening dollar, as higher yields result from lower demand for Treasuries.

Higher interest rates means the dollar is now more expensive to borrow, which reduced investments inIndia and several other emerging markets. First, it meant investors could no longer borrow dollars as cheaply in America to invest in these growing overseas economies. Second, the Fed actions signal an improving U.S. economy. That makes investors feel more confident in returning to the U.S.

India hasn't helped its situation by running a largecurrent account deficit. In other words, it imports more goods, services and investment that it creates at home and exports. As its currency falls, inflation rises. When combined with slowing growth, many experts are concerned about stagflation. Fleeing investors have sent the value of India's currency, the rupee, plummeting 15% since June.

Other emerging markets with high current account deficits have suffered the same fate.  Since June, currencies have fallen 9.7% in Brazil, 13.6% in Indonesia and and 7.9% in Turkey.  The situation in Syria doesn't help, as it simply encourages investors to return to the safe haven U.S. dollar.

Source: BY http://useconomy.about.com/

Thursday August 29, 2013

Under Rajan, RBI to focus on currency; rupee to hit 69: Reuters poll

(Reuters) - Incoming Reserve Bank of India (RBI) Governor Raghuram Rajan will prioritise currency stability over inflation and growth, according to a Reuters poll which also showed the worst is not over for the rupee.

The rupee has lost around 15 percent to the dollar, hitting record lows almost daily, since the U.S. Federal Reserve hinted in May that it would soon begin paring back its massive economic stimulus programme, sparking an investor exodus from emerging markets seen as the most exposed to foreign funding.

Rajan, a widely acclaimed economist, takes over as governor of the RBI from incumbent Duvvuri Subbarao on September 5, at a time when the Indian economy is facing its worst crisis since 1990-1991.

Eleven of 17 economists polled by Reuters said the currency will be the top priority for Rajan but the consensus showed it will likely weaken to 69 per dollar before rising, implying a further 7 percent fall from Monday's spot rate of 64.10.

Most expected it to bottom out in September.

The Indian economy is caught in a quagmire of slow growth, high inflation, rickety government finances and a tumbling currency that is the among the worst performing in emerging markets.

"Rajan could streamline the RBI's focus to stabilising the currency and inflation while being supportive of growth," said Nizam Idris, head of FX strategy at Macquarie Bank in Singapore.

"The RBI must realise it cannot control the rupee, rates, capital flows and inflation all at the same time."

Most of the RBI's moves to break the currency's fall so far have not helped.

Since mid-July, it has tightened cash conditions which have failed to support the rupee, partly as Subbarao later said those measures were temporary.

Changing tack, it announced last week it would buy longer-dated bonds to lower borrowing costs, but that led markets to question the RBI's resolve in defending the currency.

Even Rajan's appointment earlier this month failed to calm markets and the rupee rallied for only a few hours after the announcement.

Analysts, however, said the RBI will likely make some important changes under the new regime.

While most expected greater focus on the currency and prices, a few economists said the RBI might begin targeting an inflation level while bringing the consumer price index into the realm of policy making.

RBI VS. NEW DELHI

With elections due in 2014, New Delhi's subsidy programme, most recently the food security bill, could blow a hole into the country's weak finances -- one of the biggest causes of the rupee's thrashing.

Policymakers are struggling with both trade and current account deficits.

Despite that and the clamour for easy monetary policy, the RBI will be expected to maintain its tough stance on inflation and check currency volatility.

Analysts also said under Rajan the RBI could be expected to improve its communication with markets.

"It's a difficult job, especially when the government lacks a majority in the parliament and due to the upcoming elections which can tie Rajan's hands," said Amy Yuan Zhuang, analyst at Nordea.

"The RBI should make efforts to increase transparency and communication in its policy making."

India's economic downturn leaves middle classes fearing the worst

Price rises, the falling rupee and a huge balance of payments deficit have prompted predictions of a full-blown economic crisis

In a small house in the Indian capital, a musician was doing the maths. During the good months, when his deft accompaniments to classical or popular vocalists are in demand, sarangi player Ghulam Ali can make as much as R50,000 (£500). The problem for Ali is that he's not sure there will be many good months in the near future.

"Those like us without a regular monthly income are the worst hit," he said, referring to the sudden downturn in the Indian economy that has analysts whispering about a possible full-blown crisis. "For a musician, it means fewer concerts even as everything has become more expensive – food, transport, electricity, cooking gas, even foreign travel. We artists like to eat and dress well, so for my family it means fewer outings, less money for the children's education, fewer acquisitions. No question now, for instance, of buying a computer for my kids."

Ali and his wife, Rozitaskeen, have two daughters and a son, aged 12, 10 and six, and they share a small house with Ali's three younger brothers, their families and his parents. The family is fairly typically middle class, but as a freelance musician Ali also belongs to the overwhelming majority of Indians (estimated at three-quarters of the working-age population) who do not have steady, full-time employment.

These people are the most vulnerable as India flirts with its biggest financial wobble for perhaps 20 years. Not since economic liberalisation unleashed private enterprise in the 1990s has there been such concern.

After the 2008 world economic crisis India recorded 9% GDP growth for at least two years but in recent weeks the rupee has tumbled, losing a sixth of its value against the dollar this month alone. Share prices have fallen, commodity prices are rising, investment is stalling, growth is slowing, and the government is staring at a huge balance of payments deficit. A sense of impending doom is building. Compounding the fears are signs that other emerging economies in Asia are also vulnerable, drawing inevitable questions as to whether this could turn into a repeat of the 1997 Asian financial crisis.

"It is a crisis," said economist Jayati Ghosh. "This is the big one. But it has been building up for a while due to many reasons: the growing current account deficit, the industrial slowdown, the lack of infrastructure development, the negative investment in the economy."

She sees the crisis as evidence that "the model of development which focuses only on GDP growth" has run its course. What is needed now is "wage and employment-led growth".

Other experts trace the problem to the failure of Manmohan Singh's government to push through structural reforms that could boost growth. The ruling Congress party's emphasis on huge government subsidy schemes, such as jobs for the rural poor, has added to an already high fiscal deficit.

"Just trying to accelerate growth from the present low level [annual GDP growth is now down to 5%] will help the economy," said economist Surjit Bhalla.

India imports much more than it exports, and so the current account deficit is at an unsustainable 4.8% of GDP. Until it is brought down, there can be very little hope of reviving investor confidence in the economy.

Gold has played an important role in skewing the trade deficit. A century ago, the economist John Maynard Keynes wrote that India's irrational love for gold was "ruinous to her economic development", and the obsession still runs deep. India's annual production of gold is barely 10 tonnes, so last year it imported 860 tonnes, which were made into jewellery or stored as coins and bars in family safes.

The government is now trying to stem the hunger for gold by increasing import duties. This has revived gold smuggling, a menace which in the 1960s led to the creation of the Mumbai underworld.

Jewellers are pushing for a more imaginative solution. It is estimated that households and Hindu temples are hoarding around 25,000 tonnes of gold bars and coins. Jewellers are lobbying government to implement a scheme that could unearth 10% of the treasure.

"It will meet the demand for jewellery for the next three years," said Vikas Chudasama, the secretary general of the All India Gems and Jewellery Association.

Economists and corporate bigwigs hope Singh's government comes up with other such solutions for resolving the economic crisis. The finance minister, Palaniappan Chidambaram, has tried to revive confidence by promising action, but major reforms have yet to be announced.

On the upside, this year's monsoon will lead to bumper agricultural production, and the cheaper rupee also comes with a thick silver lining. There will a surge in exports, especially in sectors such as information technology and pharmaceuticals, where India is a strong performer.

There is growing anxiety about the future, but India's middle class may not have lost faith yet in the possibility of economic regeneration.

RBI MEASURES:

RBI to scrutinise pending overseas deals in light of new norms

NEW DELHI: Faced with a steep fall in value of rupee, the Reserve Bank will scrutinise all pending applications, including that of Apollo Tyres, in the light of revised norms for outward investments. 

"All pending applications for overseas investment will be decided on the basis of new norms," a senior finance ministry official told PTI.

In order to check outflow of foreign exchange, the Reserve Bank had earlier this month imposed restrictions on Overseas Direct Investment (ODI) by Indian companies.

Under the new norms, corporates can acquire those businesses overseas which are 100 per cent of their networth under the automatic route, as against 400 per cent allowed earlier. Higher levels of ODI would now need prior approval from RBI.

According to sources, although the application of Apollo Tyres for its USD 2.5 billion (about Rs 14,500-crore) buyout of US-based Cooper Tire & Rubber Co was filed before the announcement of the new guideline, it would be scrutinised in the light of the changes in RBI norms.

"The acquisition is around 450 per cent of the networth of Apollo Tyres. This would necessitate that the deal be covered under the approval route," sources said.

Apollo Tyres, according to the deal structure, will raise USD 1.9 billion through bond market in the US to fund it purchase the overseas company. The deal was announced in June.

"Considering the current day rupee condition and CAD, it will be interesting to watch how RBI will respond to the Apollo Tyres' application," Chief Strategist at SMC Global Securities, Jagannadham Thunuguntla, said.

The RBI's decision to restrict outward investment by corporates came in the backdrop of rising Current Account Deficit (CAD) and declining value of rupee.

The CAD, which is the difference between the inflow and outflow of foreign currency, touched a record high of 4.8 per cent of the GDP in 2012-13 fiscal.

A high CAD is also putting pressure in the Rupee which tumbled to a life-time low of 65.56 to a dollar on August 22.

Why rupee has been depreciating against dollar: A historical Analysis

Indian currency i.e. rupee has been in news because of recent fall against the dollar. Rupee has fallen more than 15% in just 3 months time against dollar. India rupee has been depreciating against dollar for long time now. Post liberalization, the fall in the rupee against dollar has been rather steep. It is important to note that rupee has started falling against dollar more frequently after partial convertibility of rupee was introduced. The partial convertibility gave it more elbow room to automatically adjust against the dollar.

The history of rupee’s depreciation against dollar can be understood from the data given below:

It is very clear that rupee has fallen down against dollar substantially during last forty years, barring some exceptions. But have all currencies in the world fallen against dollar the same way as rupees. The answer is a firm no. In fact, China which is the fastest growing economy of the world has not experienced this kind of fall in it’s currency value. The data below shows this:

While Chinese currency fell against dollar from 1982 to 1994, it has almost got stabilized against dollar post that and has appreciated against dollar in recent times. So while Indian and China are often put in the same league as far as tow fastest growing economies of the world are concerned, the currency performance of rupee and Yuan has not been same.

So why it is that Indian rupee has fallen so fast against dollar? Second but the more relevant question that needs an answer. Why it is that rupee falls on some occasions so steeply against dollar, like the fall of rupee against dollar during last three months.  Let me give answer to the second question first. The factors responsible for fall of rupee were getting built over a period of time. Rising current account deficit, high inflation and policy paralysis were the factors that triggered fall in the value rupee all on a sudden, though they got built gradually over a period of time. The market needs a trigger for a value to appreciate and depreciate and traders often provide this trigger.

Now look at reasons behind long term fall of rupee. The most important factor to cause this fall is high inflation. Rising inflation makes our goods costlier. If the purchasing power parity has to hold good, which does hold good, the rupee has to adjust to the change in inflation against dollar. Let us look at an example to understand this. Imagine that only sugar is traded between India and USA. Suppose the price of sugar is Rs. 30 a kg in India and $1 a kg in USA. By this logic, $1=Rs.30. Now imagine that inflation in India is 10% per annum while in USA it is only 2%. So after one year sugar will sell at Rs. 33 a kg (10% of Rs.30 added to inflation) and $1.02 in per kg in USA.  These two new prices of sugar will set a new exchange rate which is 33/1.02. The new exchange rate after a year will be Rs.32.35.

The second factor causing long term depreciation in Indian rupee is the balance of trade position. International trade of a country shows how it is positioned in terms of demand for its currency. The demand for dollar happens in India because of the fact that Indians need dollar to import goods from all over the world. Rising demand for dollar adversely impacts rupee as people convert rupee into dollar to meet foreign exchange requirements. This puts Indian currency under stress.

The third important factor that impacts Indian currency is the flow of dollars in India in form of FDIs and FIIs. When the dollar flow increases in India, the value of Indian rupee appreciates. Indian rupee appreciated against dollar from 2002 to 2007 primarily because of this reason. This was the time when flow of dollar in India was very high due to booming stock market. But post 2008 crisis, this has not sustained.

While there are other factors which impact the value of Indian rupee against dollar, the three factors are key contributors in fall and rise of rupee against dollar.

ECONOMIC TIMES --

Why the current slowdown may be the worst ever for job-seekers

Naresh Lal, 23, had a dream. In 2008 he enrolled in an obscure engineering college in Indore where he paid an annual fee of Rs 4.5 lakh for a four-year course. Lal was the first in the family to go to college. "My father was happy that I'd be a software engineer and get a good job at one of the IT firms," says Lal.

It didn't quite work out that way. After graduating last year, Lal did not land a job for months. A move to Bangalore — the cradle of software services — followed, but the job didn't. Sporadically he would get leads of a recruitment drive from his friends and they would all flock to the IT firm's campus. "There would be a long line of 3,000-4,000 people," he says. Overwhelmed, companies would have little option but to call in just a fraction of that number for the interview, and ask the others to go.

In February this year, Lal moved out of Bangalore to Bhopal where he joined a small IT company. "They said they will start paying after three months," he says. Five months of working without pay wore Lal down, who early this month returned to Indore. "I had thought after my college I will ease my father's burden. I feel terrible that I am myself a burden today."

Lal (whose name has been changed as he did not want to reveal his identity) is not alone. Some 500 engineers graduate out of his college every year. Indore alone has roughly 150 such colleges. Across India, close to 17.6 lakh engineers graduated from 3,500-odd engineering colleges in 2012-13. Beyond the 2 lakh who would have passed from Tier I and II institutions, virtually all of the remaining may well be staring at a predicament similar to that of Lal.

"I haven't seen anything like this in my career since my early Infosysdays," says TVMohandas Pai, who joined the IT services giant in 1994, and is now chairman at Manipal Global Education. "Nobody is hiring — IT, manufacturing, infrastructure, construction, government...nobody. Jobseekers are despondent. They are losing hope."

The All-round Squeeze

India, the world's second-most populous country and home to the world's second largest workforce (469 million workers), has a problem. Sure, the ongoing economic slowdown and the accompanying woes — rising inflation and interest rates, a weakening rupee and stalled investments — will inevitably take its toll on jobs. Yet, a wide section of CXOs, HR honchos and employees that ET Magazine spoke to reckon that this is the worst job market since liberalisation in terms of severity, duration, sweep and scale.

Even the sudden crash precipitated by the global financial crisis five years ago and the aftershocks on the employment front appear less severe than the current scenario.

"In 2008, India never really saw gloom and doom. It was also very short. This time I cannot even begin to describe the mood. It is the most difficult job market that I have seen," saysArun Das Mahapatra, partner-in-charge, Heidrick & Struggles India, a global executive search firm. His firm has always been growing at 15-20% over the years but Mahapatra says this year he would be happy if he is able to do as much business as he did a year ago.

The Indian Economy

India has one of the largest and fastest growing economies in the world. Unfortunately it is also one of the poorest countries in the world. The main reason for this is the very large population that the country has. There has been strong growth in recent years as the government has made a concerted effort to improve the economic strength of the nation. There is however still a long way to go. There have certainly been areas of improvement but it has been very uneven. The result is a country in which there is a large high tech sector while at the same time a large percentage of the population is still engaged in traditional small scale farming.

For many years the Indian economy struggled due to poor government policy. There were way too many regulations designed to limit foreign investment. There was also a great deal of red tape that had to be navigated if you wanted to start a business. This had a serious impact on the economy and in the early nineties the government decided that liberalizing the economy would be the best way to encourage growth. In large part they have succeeded in doing this. Although agriculture still remains the largest industry in the country the growth has mainly been in the service and manufacturing sectors.

The growth of the Indian economy is somewhat unusual in that it has done so with very little export. Compared to a country like China that has relied heavily on manufacturing products for export India has exported very little. Most of the growth has been because of consumer demand within the country and by lots of travelers coming to India for health tourism. This has resulted in slower growth than China has had recently but it has also been more stable. India came through the recent global financial crisis virtually unscathed because so little of its economy depends on foreign trade.

One of the great strengths that India has as it attempts to grow its economy is its very good education system. India has become a major player in the high tech field because of its highly educated workforce. Unfortunately this education is very unevenly spread. A relatively small group of people receive a very good education while a much larger group receives little if any education. The result is that there is a fairly high rate of unemployment in India despite the economic growth of the country. Given the massive population this is unlikely to change anytime soon.

There are a few issues that are hindering the growth of the Indian economy that will need to be overcome. The biggest is a lack of resources, particularly in the energy sector. The country is heavily dependent on resources imported from other countries. The other big issue that will need to be dealt with is a need to improve the infrastructure. This is especially true when it comes to things like electricity.