Crude breaches $100; So what?

Quoting at $98.49 a barrel, crude violates the $100 psychological level. Since crude surged to a record $147.27 a barrel on July 11, it has tumbled by over $40, or more than 27 percent. Still, prices remain close to 14 percent higher this year than in 2007, and a barrel of benchmark crude still fetches four times what it did five years ago.

Now hang on, don’t rush to the gas stations. The dollar has breached Rs.45/- level, so you pay almost the same in dollar terms, pal ! Mukesh Ambani’s mole in cabinet has already sounded you out ;-)

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They just don't `get it'

It’s results season again. I glanced at the results of ICICI Bank and HCC.

For ICICI, the net profit for the quarter fell by 6.07% (Rs.728 crore) in relation to Q1-07-08 (Rs.775.08 crore). Nothing unusual, given the sluggish business sentiment tempered by high interest rates. But something else rankles. The bank’s non-tax provisions and contingencies (for bad debts / bond trading losses) rose nearly 43.5 per cent to Rs 792.49 crore during April-June this year, compared with Rs 552.27 crore during the corresponding period last year. The increase in interest rates and adverse market conditions hit the bank’s trading portfolio and treasury income by Rs 594 crore. This is for a bank that is quick to grab an opportunity, having an agile management that is high on financial savvy and in using sophisticated risk management systems. CFO Chanda Kochar can play down the worries on the lines that the provision levels are `nearly’ the same as in earlier quarters, but they are mistakes in a row just yet. An indication that they are clearly losing sight of the market risks.

For HCC, revenues grew 22% to Rs.895 crores (Rs.731 crores for Q1-07-08 quarter) but PAT slipped to Rs.31 crores as against Rs.34 crores. What stands out is a provision of Rs 50.6 crores on account of foreign exchange losses on foreign currency loans including FCCB. This is bad choice of debt since prudence demands raising Foreign currency loans only if you have foreign currency income to hedge its exchange risk. But construction companies merrily used FCCB route to bet on rising values of land banks and a seemingly ever appreciating rupee (so that they will end up repaying less as Rupee gets stronger). But the trends reversed, the tide ebbed and they realized they were swimming naked.

Where did they let up? Were they not forewarned of the risks by smart managers that signed up for such financial arrangements? The numerous credit crises from the past (remember the great depression, the asian meltdown) has destroyed the idea that unregulated financial markets always efficiently channel savings to the most promising investment projects. Several Indian companies took on unsustainable debts, pushed around by I-bankers and other “debt merchants” who made a quick buck by disregarding risks. While this happened, our central bankers though a little unnerved by the swelling forex reserves, were still marveling at the creativity of capitalism. When the bust came, most borrowers / bond traders aiming to make quick bucks on currency / bond appreciation were left catching the hot end of the rod.

So I begin to distrust the individuals in charge as also our macro economists. Neither `get’ the true picture of the flip side of risks they assumed. The I-bankers that peddled these instruments never really understood it themselves to explain it to the borrowing clients. Now I see the same pattern in the manner in which both RBI and Finance Ministry handle the oil price shock and resulting inflation in commodity prices. Finance minister can hide behind his oft-quoted statement `it is imported inflation’ only for so long. He may have to soon come up with a plausible defense. Clearly, arresting inflation and maintaining price stability is an important task of the central bank as is ensuring financial stability. But this dimension is completely absent from the macroeconomic models now in use. In addition, since financial stability these days also depends on avoiding deep recessions, stabilizing the business cycle should also be of the concern of the central bank.

But that is at a macro level and CFOs can’t rely on that to shield their individual risks. ICICI treasury has clearly goofed up by ignoring cyclical nature of bond yields. Their bet on junk bonds went haywire. HCC and other construction majors played fast and loose with FCCB for long gestation projects where eventual profits (as and when they come) might have already been eroded by the exchange risks they suffer here and now. Stock prices have also fallen so badly that the lenders would not want to exercise the loan conversion (into equity) option attached to these bonds. They are reeling the under grave liquidity crisis in their home markets and could do well with a cash pay back.

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So here are the lessons. Never miss the wood for the trees. Look at the indicators. Stock markets don’t beat down stocks without reason; and you can’t blame it all on bad sentiment alone. So Ms.Kochar and Mr.Ajit Gulabchand, it's time to roll up your sleeves and begin to see risks from a mile. That’s when you can claim you're really `getting it’.

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Art of going naked

Now some reverse sweep.

A few months of living with an appreciating rupee it seems had robbed our exporters of their art of making profits from currency fluctuation. Now the Rupee has been depreciating since June, our IT vendors have been steadily making – yeah, you guessed it – losses.

Here is the score card. HCL Tech – $65-75 million; TCS - $12 million; Mindtree - $3 million; Biocon - $ 7 million.

These are violent times in the currency markets and no one can accurately predict the direction of a currency. In the best of times, sometimes it pays to go naked. I had figured it out more than a month back, well almost!

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Best hedging strategy : Go Naked

CFOs are taking it on the chin again. Earlier they got the stick from their boards for not foreseeing the fall of the dollar. Now they are held guilty of not anticipating a Rupee fall. Poor bean counters, they’ve nowhere to hide.

Before the mortgage crisis hit the developed world, the surge of dollars into India strengthened the Rupee. It gained about 12% from Rs.44 to Rs.39 and all hell broke loose with India’s exporters. Businesses had to protect their margins and they sold dollars forward hoping the currency to keep its downward drift. Now the reverse is happening. The Rupee has weakened by 7% and is touching 42.50 to the dollar. There is an opportunity loss (of Rs.2.50) here since the exporters have already sold their dollars forward (at Rs.40). For those exporters who have taken leveraged options (selling 2 calls and buying 1 put to maintain a zero cost hedge), they face a cash loss since two calls would be exercised by the option buyers against one put exercised by the exporter.

Heads I win, tails you loose, huh….? Take my word. When you earn exchange windfalls next time, book those profits into a separate Exchange Fluctuation Reserve and don’t take credit for it as business income in your revenue account. The surplus realization is anyway available to you in the form of working capital. You didn’t earn it because of your endeavors. It just happened. Not many CEOs will like it, I know! Use the same reserve to write off losses you suffer when exchange rates turn adverse, some day in future. That way your ass won’t get laid on that fired up grill. No risky hedges called for; just go naked.
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Where is the Rupee headed?

Does anyone really care?

Currency markets, like their stock market cousin spring surprises when people least expect. Almost all exporters and dollar earners and spenders were caught off guard by the recent depreciation of the Rupee. While dollar earners lose the forward premium, the (oil) importers (dollar spenders) never bothered to cover their exposures. Who ever thought appreciation of the greenback?

The reasons for the sudden reversal were not far to seek.

(1) Recovery of the US dollar;
(2) Increased dollar buying by oil companies to meet rising oil import bill;
(3) Sinking capital inflows, choking the supply of dollars; and
(4) Unwinding of positions that were betting on rupee surge.

So where is Rupee headed? Surging oil import bill and expectations of moderating export growth suggest a worsening current account deficit this fiscal, likely to edge past 2% of GDP. It is said that a $10/bbl increase in crude price jacks up the trade deficit by around $6.5-7.0 billion. Higher global crude oil prices also boost remittances, but the net effect of higher oil prices on the current account deficit is still a large negative.

Back in 2002 when the first draft of Goldman Sachs BRIC report was in print, the rupee was at 49 to the dollar. The BRIC report forecast (and still does) that India would be the third-largest economy in the world by 2050 with an amazing 9% growth per year for fifty years. But something went unnoticed - it was in dollar terms. It also said in the first six years the rupee would be stronger by about 13%, which is exactly where it is today. Call it Goldman’s magic touch or just luck. For after all, the rupee didn’t get from 49 to 42 in a steady linearity. It rode up to almost Rs.38 to the $$ before getting to where it is today. So I think the flip flop will continue.

I pity all $$ borrowers that had raised ECBs and left the proceeds unhedged assuming a forever strong rupee. They should be losing some sleep now. The currency — like the broader economy — is mainly reacting to some near-term headwinds that have brought about a welcome correction in hype over the India story. India certainly has a story; at a very basic level. It could do with better education, healthcare and public infrastructure. The Rupee will find its own level depending upon how RBI is coping with its routine of non-intervention, trying to keep volatility low and creating awareness about risk and currency hedging.

Most importantly the Government has to learn to deal with political shocks – finding the Rs 60,000 crore largesse to farmers, then the Rs 25,000 cr largesse towards the government employees happiness fund. All of it will have an impact on fiscal deficit even if it keeps huge oil subsidy as an off-budget item.

So it is total chaos out there. Don’t fret over a number. Stick around and watch the fun and cash in on an opportunity as and when it shows up.
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"ICAI, cast the (AS-32) net wide"

Ok. After the goons make away with the loot, the police arrive. Reads like a climax of a celluloid potboiler? In a way, it is. I am referring to the ICAI’s late awakening to the realities of forex derivative exposures (AS-32) by companies. Here are my safety net guidelines I gave almost two months back. (Me pretty fast, you see :-)

Industry chambers oppose it because they say MTM losses are notional (obligations don’t crystallize until the contract matures or is canceled by the party exposed to it) so long as the positions are open and hence cannot account for it accurately. But they miss the point. Disclosure of MTM losses have only the effect of a provision and not that of a definite charge against profit. So even if those losses don’t crystallize (or it ends in a profit if the sentiment reverses) they can be written back and added to the revenue account as prior period profits (just like tax credits). The only downside is for a trader that sells out fearing dent in share prices over the short term. But then that is their risk reward, so no tears to shed.

But I worry another aspect. Exotic swaps that have a multi-currency structure (fixing the $/Re.rate on the basis of prevailing price of Japanese Yen or Swiss Franc) may not find takers in the event of a crisis. For such products, literally there is no market during such downturns. So MTM would mean bringing the value of the contract to absolute zero or having to make 100% provisioning. These structured products are often sold by foreign banks and the swaps are traded in overseas markets. Now my question is, would it be prudent to MTM the exposure on a cut-off date (say 31st March) or right from the date a party enters into a contract on a daily / weekly basis? Would they have to be accounted for in quarterly results as well?

ICAI will have to explain to avoid any factual distortions in financial presentations. By the way, does AS-32 cover these shenanigans too? I think they should.

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Differential CRR? That's financial racism.

Finance Minister Chidambaram has a pet peeve. When inflation goes up by a few ticks and he turns to RBI governor Y.V.Reddy for advise, the guv is equally clueless. He knows nothing more than to hike CRR by 25 bps.

A hike in CRR by two tranches of 25 bps each from 7.5% to 8.0% was announced recently by the RBI to suck out excess liquidity from the banking system. But is that enough? It is this predictability that erodes the significance of RBI moves on the economy itself. But stock market nevertheless looks to RBI for direction.

This morning I found Ashok Khemka arguing for nuanced CRR Policy. His key points –

a) Why impose a flat CRR of 8% on all banks’ deposits that looks like a virtual tax? It’s only the sinning few that is responsible for incremental foreign exchange that adds to liquidity. Deposits in domestic currency do not damage the economy. So why not switch to differential CRR on selective foreign exchange inflows (NRI deposits, FII / PE / Hedge Fund inflows) only?

b) Sterilization (mop up of foreign currency by RBI from open market) initiatives have become expensive as reflected by the rise in T-bill yields from 7.4-7.6% from 6.6-7% as was earlier. This taxes the entire economy for the sins of a few.

c) Levy the higher CRR in the designated currency itself. This obviates RBI having to go in for forex mop up later to maintain the exchange rates. RBI can also make that currency reserve available to the needy to buy assets abroad and negates any adverse effect from currency mismatches in international trades.

Great points. But I see those recommendations calling for containment of liquidity by slapping penalties. It is not equal to identifying a mature mechanism that uses the liquidity inflows which is the need of the hour. It amounts to saying `No’ and that is the easiest part. I would look for ways to use that liquidity into creating better infrastructure before foreign investors find another profitable destination outside India. Money is fungible and investors don’t waste much time if they feel they are not welcome here.

Differential treatment is bad. It will mean financial racism. Never do that. Get smart and keep giving them those incentives. You can make hay only while the sun shines on you. Now it is sunny days for emerging markets, especially us. Don’t get smug. Go build better roads, dams, bridges, airports whatever. Don’t slam the door shut on investors. Remember what made Dr.Manmohan Singh open up reforms gate in 1991? We were almost broke. Now don’t get to that point again!

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Towards a forex derivative safety net

Soon credit rating agencies will have to factor in solvency of customers before they evaluate and grade banks for their financial stability.

Here are a few more skeletons falling off the cupboard of ICICI bank – customers taking it to court for alleged mis-selling of derivative contracts. Obviously the bank will plead the customer was fully aware of his downside risks while entering the contract. Unless the parties settle for out of court settlement, it could lead to a protracted legal battle.

But I suggest a few measures the banks could take before they enter into complex derivative contracts with customers –

Enter into contracts only with customers that have relationships with the bank for over 5 years;

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Begin relationships with smaller sized contracts – say $ 100,000 ; every year the deal size can go up by 2x;

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Go by net worth linked limits for contract sizes – say aggregate exposure should not exceed 25% of customers’ net worth;

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Banks should make provisions for net exposure on a risk weighted average basis, of about 50% of negative outcome on the day of entering the contract;

All contracts should carry personal guarantees of MD /CEO and all executive directors of the customer to make good the losses to the bank if the customer defaults on its obligations under the contract;

RBI should set up a neutral authority –someone like a Notary Public- to endorse the fact that the bank has explained all possible outcomes of a derivative contract and the customer has completely understood all its risks and grant a certificate to this effect. This NOC should be a pre-condition for entering into a derivative contract. The fact of obtaining of NOC and the extent of its risky exposures should be informed to stock exchanges by the customer where it is listed within 3 days of grant of NOC by RBI.

Update : More spillover – Sundaram Brake Linings v. Kotak Mahindra Bank

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"CYA guys.. Now..!"

Ila Patnaik makes her case why RBI should be cutting interest rates right now. (hat tip : Ajay Shah)

Her theory goes so long as there is scope for arbitrage between interest rates in US and India, dollar inflows will continue to drive the inflation and Rupee up. This relationship between Rupee rise and inflation (owing to upsurge in dollar flows) in the Indian economy – where interest rates are higher than that in the US - creates an anomaly in that a cut in interest rates will not only help rein in inflation by slowing down $$ inflows, it will also arrest the surge of the Rupee.

Ms.Patnaik has this view that since US economy is sliding into recession, Fed has more reasons to cut US interest rates. I see that move could further sex up high interest destinations like India (for not just FII/FDI/ECB flows, but also to NRI remittances) and the deluge will only accelerate. Traditional methods that soak up liquidity viz. OMO by RBI, CRR hike etc., meant to rein in inflation and arrest the rupee rise will only add to inflationary liquidity in the system. In effect, a higher interest rate regime instead of containing inflation will end up exacerbating it.

So here you have a paradox. Normally when you cut interest rates, it could lead to inflation propelled by higher credit off-take. But in our peculiar economic situation driven by excess liquidity and a rising rupee, cutting interest rates can effectively arrest dollar deluge as well as the Rupee rise – the twin goals that RBI is struggling to achieve.

Sound argument. But I say the Indian borrowers of foreign currency (ECB/FCCB) in recent times have large bets on a falling dollar to benefit from the exchange rate arbitrage. I doubt whether our CFOs are equipped with rate sensitive AWACS that scan early symptoms… A sudden reversal in RBI stance could wreck many a business and could rock the stock market sentiment as well. So RBI should give out early warnings.

The least that RBI Guv Dr.Reddy could do is to signal them “CYA guys… Now !”

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Back to gold standard...?

Here is a new insight into our swelling foreign exchange reserves.

The frenetic build-up of forex reserves has lost pace with reserves growing by only $1.2 billion during the week ended November 30 to $273.5 billion. Of the $1.2-billion increase in reserves, $546 million came from an increase in the value of gold. The increase in foreign currency assets was just only $694 million - according to the figures released by the Reserve Bank of India (RBI) in its weekly statistical supplement (WSS).

The RBI has the challenge of maintaining the desired level of liquidity in the market, which it has been through sale of bonds. But this too entails a cost as these bonds need to be serviced at fairly high rates.

Should RBI dump the dollar and switch to good old gold standard, at least a part of its kitty…? If you look at the way the dollar is plunging against global currencies, it makes awesome sense….

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Gisele Bundchen should stick with me

I am concerned for the stunning super model Gisele Bundchen - not that she’s losing any of her luscious curves. She’s sexy as ever. But just how wise has she been in switching to Euro?

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Even Central Banks, having spurned the chance to diversify out of dollars when a euro could be bought for 86 cents, are unlikely to want to switch now when the price is close to $1.50. Against conventional benchmarks like purchasing-power parity, the euro looks dear against the dollar. So it could be a bad time to swap from one horse to another.

The Economist concludes a full blown dollar collapse could be disastrous. What lends the dollar's decline an air of crisis is that the world's bloated currency reserves are crammed with depreciating dollar assets. Foreign-exchange stockpiles have almost tripled to $5.7 trillion since the beginning of the decade. China alone has $1.4 trillion of reserves. Japan's $1 trillion or so make it the second-largest holder. To the extent that dollar-holders act like an informal cartel, the biggest dollar-holders will set an example. Japan seems unlikely to start selling its huge dollar reserves—if anything it might intervene to prevent the dollar falling further against the yen. A crash might be averted if China holds fast too, because it recognizes how self-defeating dumping dollars would be to such a large owner of American assets.

In this period of swelling reserves, the dollar has retained its pre-eminence. It still accounts for nearly 65% of identifiable currency-stockpiles, according to the latest IMF data. This is broadly in line with its historical share. Factor in the dollars hoarded by China and Middle Eastern oil exporters (not included in the IMF breakdown) and the dollar's share may be higher still.

The dollar's place as a reserve currency always seems to be questioned when it falls. Weakness in 1977-79, 1985-88 and 1993-95 was each time met with predictions that governments were about to switch their reserves into another currency. A burst of high inflation, which undermined the dollar in the late 1970s, made that slide as serious as today's scare is. Between 1978 and 1980 the Treasury sold $6.4 billion of “Carter bonds”, mostly denominated in Deutschmarks, to raise funds to defend the dollar. In January 1980 the gold price reached a record $835 (around $2,250 in today's prices) as investors sought an alternative store of value. And when the dollar fell to ¥81 in 1995, many—including the Economist —saw it as the beginning of the end of its reserve-currency status.

So I lay my bets on the greenback still. Someone please ask Gisele to stick with me -)

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Clueless RBI opens flood gates

The rise of the mighty Rupee against a weak dollar has forced RBI to relax its currency regulations. It goes with the usual refrain - “one more step towards full capital account convertibility”. Gee, making a virtue out of necessity? Not so nice, Guv…! How many more steps left? Story behind the story is RBI just woke up and realized that they've lost control of their own industry. Now they're desperately scrambling to get back on their feet. Left with not many options, it opened the floodgates wider praying that some of the incoming dollars may flow back too. Now, know your limits –

- Individuals can remit up to $200,000 against $100,000
- Companies allowed to invest overseas up to 400% of net worth overseas against 300% till now

- Partnership firms also allowed to invest overseas 400% of net worth
- Ceiling on portfolio investments by companies raised to 50% of net worth from 35%
- The requirement of 10% reciprocal shareholding in listed Indian companies done away with for overseas portfolio investment
- Companies can prepay ECBs up to $500 million against $400 million now
- Mutual funds allowed to invest an aggregate of $5 billion overseas against $4 billion now

Will it cause a dent ? I doubt. There are not many parking bays available for the greenback than emerging markets. No other market in the world is yielding returns as do emerging markets (EM) like India. China and Brazil have become way too overstretched. Developed markets have been consistent underperformers. That leaves the dollar to leave Indian shores only when Indian companies begin repaying or foreclosing their ECB borrowings made earlier. That’s wheels-within-wheels scenario since prepayments shall be triggered only if there are significant dollar earnings from exports, which is too much to ask when every dollar of export is fetching less and less Rupees. Add to that the Fed rate cuts. The recent 50 bps rate cut by the Fed on September 18 has only accelerated the inflows - FII reacted by increasing their investments in India with $1.54 billion of investments in just 3 days between September 19-21. RBI may use its sponge to mop up dollars, but in July alone, it bought back $11.42 billion.

How much more can it suck in? And is it advisable? Well, I’ve dealt with that already.

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Complex hedges and the quant threat

O.K. So our IT CFOs are getting smart. They no longer settle for currency markets to determine their future. Joining the global trend of using exotic hedges to protect their realizations, they too are getting used to clever bets.

Check this out. Under the tailormade transaction known as STRIPS in market parlance, the corporate can settle the dollar every week, fortnight or month over the next few years, through what’s called a “series of options”. For years few bothered to use it, but in recent weeks there has been a flurry of activity. In the last one month, deals worth $100-200 million have been struck almost everyday.

Good. But coming to think of it, it’s a bet. The management strategizes, the operations team executes, marketing sells it and bills the client. All of them work so hard - only to stake it all in a quant bet? Here I risk sounding like your grandfather. But I am a sworn enemy of anyone trying to define a future thro quant theories and complex hedges. How many CFOs understand the complexity of hedge before they book one? After all, CFO is only an employee and not a shareholder who's ass is on the line if his call goes wrong. At best, he's a bean counter and can plead mea culpa... Since when has anyone been endowed with the power to call future course of a currency !

This seems to be the thrust of A.V.Rajwade’s article in BS. He says some instruments are so complex that it can take investment banks' computers entire weekends to value them! Can't agree more. The best hedge I go is constant investment in R&D led innovation to reduce costs, improve operational logistics and expand margins without affecting the cost to consumer. The day you think that's not possible and wait for exchange rate hedges to save your bottomline, it's time you exit the business and head for the hills. Because, you're on your way down...

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Go short on India's IT vendors

Wharton’s Jitendra V Singh advises Indian companies to recast their business models to suit the rising Rupee than to expect the RBI to intervene. In support of his argument, he draws the parallel of how Japanese Automakers during the `80s reacted to the rising yen by shifting their low margin operations (and costs) to manufacturing locations in the US. That had the twin advantage of margin protection and reduction in protectionist backlash since the jobs have now turned American.

Is that a good comparison, Mr.Singh ? Check some facts out.

India’s leading IT vendors like TCS, Infosys, Wipro and Satyam squeezed out higher margins (27-30%) from clients not just because of availability of low cost workforce or a weaker rupee, they have also been benefitting from complete exemptions from Indian Income Tax (33.6%) on export income till recently. If operations are shifted out, the tax savings foregone will dent their margins.

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Many state governments also gave them land on long term low leases to build massive complexes to house their army of coders in thousands. These benefits cannot be expected from foreign governments. Moreover, the resale value of their Indian real estate would tumble triggered by the sudden over supply because the governments may choose to terminate their leases if they move out. Now that's a double whammy.

As of now bulk of the revenues of India’s IT vendors come from mainstay operations like ADM, BPO, low end process automation, testing and validation services. Revenues from high end segments like consulting, process automation, license fee, and remote infrastructure / Data centre management have been insignificant. With competing global majors like IBM, Accenture and EDS setting shops in India, wages are also on an upswing. Shrinking supply of competent engineers, higher visa costs and attrition have also not been helping matters either.

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Thus changing their product mix now would mean India's IT vendors having to make significant investments in R&D (read future) to develop high end utility products and building deep domain expertise in clients’ businesses that guarantees productivity improvements upfront (in other words, to partake in clients' business risks also) like the global majors do. These adjustments may (or not) yield gains in the long term, but right now they call for larger cash outlay and would also mean giving up on margins. Neither can the Indian IT vendors be too sure of their own ability to cope if pitted against the behemoths that knew this high end terrain better.

That's why I recommend a sellout. And if they don’t, go short'em all....

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The brief Rupee gig

Equity markets needed an excuse to correct and they took to US subprime woes and unwinding of Yen carry like bees to honey. Result, Yen is appreciating against the USD and USD is appreciating against a basket of currencies including the Indian Rupee. It was almost a celebration when INR touched Rs.41.385 against the USD after hovering around Rs.40.50 levels since mid July with no signs of a recovery.

Traders might be under the impression that the U.S. has exported some of its subprime risk to Europe and, as a result, will be able weather most of the risk of a subprime fallout. But it's a mistake to think they exported all of it. Many U.S. banks have a lot of assets not only in mortgages but in real estate. If foreclosures spike, then banks could suffer an even worse fate. The deep gash in the US economy is for real. I don’t think the dollar rally is sustainable. If it gets better, the US currency and bond yields would rise and the dollar will slide. If it gets a whole lot worse, the dollar's still going to slide.

For example, if the stock market gets a lot worse, foreigners will start to panic about their investments in the U.S. But even if the panic subsides, the dollar's value still might decline if investors go back to their favorite trade: shorting the dollar against a basket of currencies.

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Don't rush to buy those IT stocks now... The Rupee rally is still not done.

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The trouble with more's

Rupee appreciation has cheered many a big corporates that had huge forex loans. But CFOs and auditors are jammed over its presentation to the taxman.

That is, the forex gain has two accounting options.

The gain can be (a) credited to the Profit & Loss Account or (b) represented in the Balance Sheet by crediting the gain to Fixed Asset account (reducing the cost of the asset).

Most big companies are unwilling to take the forex gains to P&L account. The forex gain, as income would increase their Minimum Alternate Tax (MAT) ) liability, which is often kept pushed to the floor. There is some confusion over prescriptions in Accounting Standards (AS-11 by ICAI) and what the law provides (Sch.VI of The Companies Act, 1956)

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A windfall doesn't always mean all round cheer, right...?

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Renaming greenback

I had recently posted on Chinese surplus ($22.5 billion) and its swelling forex reserves ($1.2 trillion).

Now follows the story of India’s forex groundswell ($214.83 billion) over the weekend. Still we have no trade surplus (as china has) - since our currency exchange rate is integrated well into the global financial system because of which we have an appreciating rupee. Chinese RMB (Yuan) is artificially kept undervalued by about 30% and that accounts for its mighty trade surplus.

Earlier the RBI used to release annual reports on currency reserves. The one linked here is an extract from RBI’s supplement for the week ended 6th July. Talk of changing times….

Chinese had better yield to fervent appeals by U.S Treasury to loosen up RMB. Ben Bernanke gets a stress attack each time he crunches the U.S. trade deficit numbers. Hounded by the treasury, he might as well rename $ as RMB if China doesn't relent....

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Now join the chorus

Just as we thought the sub-prime mortgage woes have abated in the U.S, the after shocks begin.

Going by the news from the Wall Street, two credit-rating agencies stripped away the fragile masks of shaky mortgage securities held by Hedge Funds, exposing their worthless sides. Alarms also were sounded yesterday for the nation's banks when the Federal Deposit Insurance Corp. is looking "very carefully" at how many banks are holding junk mortgage paper, particularly a tainted and repackaged version of the risky junk bonds, known as collateralized debt obligations (CDOs.)

An estimated $1 trillion of CDOs are said to be held by over leveraged funds that could be the first to crack. Ripple effect is sure to be felt across the global economy thanks to the flatness of the financial world.

Infosys Q1-08 results unmasked the first roadkill of a surging rupee. With the stream of bad news that we keep hearing from the U.S, the scope for near-term recovery of the dollar is getting remote.

You chose a flat world…. Now join the chorus – “God bless America !”

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Communism in China ? Are you kidding ?

The turn of events in China clearly shows that capitalism doesn’t need democracy. Capitalism’s wide diffusion of economic power offers enough incentive for investors to take risks with their money. But capitalism doesn’t necessarily provide enough protection for individuals to take risks with their opinions.

But that’s old news. The latest is that the Chinese are ready to walk the extra mile and do the unthinkable – To let private equity manage a piece of their huge forex kitty, shaming even the most capitalist of countries that view private equity with skepticism. In one final fling, Chinese are ready to consign to hell the Mao Zedong brand of philosophy that shunned private enterprise. I like that gutsy bit - no place for anything that stands in the way of progress – not even venerated ideology.

As per plans, the Chinese government would acquire a $3 billion stake in the Blackstone Group, the private equity firm, in the country’s first effort to diversify its $1.2 trillion in foreign-exchange reserves beyond US treasury bills and into commercial enterprise.

An investment agency modeled after Temasek (the investment arm of the Singapore government and owned 100% by the Ministry of Finance) in China would effectively create the world’s largest hedge fund – voila ! Some analysts say that the China fund’s investment of billions of dollars in the global financial markets could push global asset prices higher, affecting American and European stocks, bonds and interest rates, as well as the value of energy and natural resources in Africa and the Middle East.

Full story here.

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Dr.Manmohan Singh, Mr.P.Chidambaram and Guv Y.V.Reddy- even you are having problems with the surge of $$ inflows, aren't you ?...and you wrung your hands in despair while letting the Rupee appreciate...look at your smart neighbour and take a leaf or two - NOW...!

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