Rama Krishna Vadlamudi, BOMBAY January 10, 2010

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CONTENTS PAGE

1 PM Manmohan Singh is talking up the economy! 1

2 Argentine president sacked its central bank governor! 2
3 Woes of life insurance companies continue 2
4 General insurance companies are reeling under losses 3
5 Mark Mobius is bullish on Emerging Markets’ equities 3
6 IRDA penalizes eight insurers for various violations 3
7 Currency Futures volumes shoot up as rupee appreciates 4
8 SEBI mandates standard lot sizes for derivatives 4
9 The after-effects of global financial meltdown still linger on 5
10 Will they, won’t they? 5
11 GST implementation gets postponed 6

Prime Minister Dr Manmohan Singh is talking up the economy!:

Prime Minister Dr Manmohan Singh seems to be talking up the economy with his pet
theme of ‘Nine to ten per cent growth’ while speaking to Indian diaspora in New Delhi
on Friday. Interestingly, the PM does not give any timeline for achieving that target
growth rate; nor does he give any indications about how he is proposing to convert his
noble intentions into a ground reality. To be fair to the economic scholar, one should say
he was candid enough to admit that: “I cannot say that we have delivered in full measure
on the enormous promise and potential of our country!”

Let us examine another thundering statement from the country’s CEO in another time
period and in a different context: “We will soon gain mastery over inflation.” What a
contrast it turned out to be with food inflation touching all-time high rate 20 per cent
now! Significantly, his statement was more than five-year old when the then WPI
inflation was more than eight per cent. Even after five years and three months (his
‘mastery-over-inflation’ speech was made on September 4, 2004), the Government does
not seem to have got any clue to arresting the run-away food inflation the masses have
been suffering all these years. Even his economic advisor and former RBI Governor, Dr
C Rangarajan once boasted that India had slain the inflation monster for good.
 Rama Krishna Vadlamudi, BOMBAY January 10, 2010
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Meanwhile, other policymakers, like, the Finance Minister Pranab Mukherjee, Planning
Commission deputy chairman, MS Ahluwalia, chairman of the Economic Advisory
Council in the Finance Ministy, Kaushik Basu, want us to believe that India is poised for
double-digit growth next year, that is, 2010-11. One way it’s good that all the
policymakers have been trying hard to push up the growth rate of the economy with their
‘pep talk.’ If we start thinking that the economy is recovering, it increases our confidence
about the future. This positive sentiment feeds on itself, like a self-fulfilling prophecy,
and may perk up our spirits and the level of economic activity may go up eventually. In
fact, in 1937, “Think and Grow Rich,” a book by Napoleon Hill egged on readers to
adopt a positive mental attitude and channel the power of the subconscious mind so that
real wealth would follow. It seems our economic choreographers are following the
footsteps of Napoleon Hill. Let us hope their ‘pep talk’ would really work at the ground
level!

Argentine President sacked its central bank governor:

After YV Reddy took over as Governor of Reserve Bank of India in 2003, there was
intense speculation in the media about the simmering differences between him and the
then Finance Minister, P Chidambaram over RBI’s autonomy. May be, India is not alone
in having differences between central bankers and the Government authorities.

Martin Redrado, Governor of Central Bank of Argentina, officially known as BCRA-

Banco Central de la Republica Argentina, was dismissed by an executive order from the
country’s president Cristina Fernandez after the former refused to use country’s foreign
exchange reserves to repay its foreign debts. The Governor was asked by the President to
transfer USD 6.5 billion of forex reserves into a government fund. Its forex reserves are
to the tune of USD 48 billion according to the latest available figures for December 2009.
Argentina is having a mounting debt problem. This year, it needs to repay foreign debt to
the tune of USD 13 billion. In December 2001, it defaulted on its USD 80-billion debt
obligation leading to economic chaos in the country.

Media reports suggest that the Governor has merely stepped down for the time being and
is challenging the decision of the President in a court of law, arguing the President does
not have the authority to sack him. There seems to be a long-drawn legal battle ahead.

Woes of life insurance companies continues:

Even after 10 years of existence, the life insurance industry in the private sector is yet to
find its feet as far as profits are concerned. They have pumped in huge amount of capital
to increase their business. While business growth is good, they seemed to have got it
wrong when it comes to profit-making. LIC of India, the country’s biggest life insurer has
made a net profit of Rs 957 crore in 2008-09, a rise of 13 per cent over the previous year;
while the total life insurance industry recorded a total loss of Rs 4,878 crore against a loss
of Rs 3,414 crore in the previous year. In 2008-09, the biggest losers are Reliance Life

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 Rama Krishna Vadlamudi, BOMBAY January 10, 2010
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Insurance, ICICI Pru Life Insurance, Birla Sun Life Insurance, Tata AIG Life Insurance
and HDFC Standard Life Insurance with losses of Rs 1,085 crore, Rs 780 cr, Rs 702 cr,
Rs 565 cr, and Rs 503 respectively. The only private sector life insurers who made a net
profit in 2008-09 are Met Life, Kotak Mahindra, Shriram and Aegon Religare with
nominal profits of Rs 15 crore, Rs 14 cr, Rs 8 cr and Rs 4 cr respectively.

As can be seen from above, it will take some more years before these companies break
even in their operations. Meanwhile, some of these loss-making life insurance companies,
like, Reliance and HDFC Standard, are in a hurry to monetize their businesses by going
for public issues. In this regard, the market is awaiting guidelines from IRDA, the
insurance regulator in India.

General Insurance companies are reeling under losses:

The profitability of general insurance companies is no different and in fact is much worse
than that of life insurance companies. According to IRDA, the total profit of the general
insurance companies has plunged by 82 per cent to Rs 398 crore in 2008-09 compared to
the previous years. The biggest profit makers are (with net profit in Rs crore for 2008-09
in brackets): United India (476), New India Assurance (224), Bajaj Allianz (95), ICICI
Lombard (24) and Cholamandalam (7). Among the top losers are (with net loss in Rs
crore for 2008-09 in brackets): National Insurance (149), Future Generali (85), Bharti
Axa (58), Oriental Insurance (53) and Reliance (52). The losses are due to the 37-per cent
increase in underwriting losses to Rs 5,326 crore in 2008-09 compared to previous year.
Moreover, investment income in 2008-09 was hit by the stock market crash in that year.

Mark Mobius is bullish on Emerging Markets’ equities:

Mark Mobius, the fund manager known for his financial wizardry, says Emerging
Markets are likely to hit fresh highs in 2010. He says they are finding opportunities in all
EMs, especially, China and Brazil. He is favouring Russia, India and Turkey also.
Emerging Markets are likely to grow four times faster than the developed economies.
Even though the current valuations are not as cheap as they were in December 2008, he
finds opportunities for good and solid companies. Valuations are currently in the middle
of their historical 10-year range. He is bullish on commodity and consumer stocks. In
India, he is seeing opportunities in materials, financials and information technology.
However, he cautions there will be corrections along the way in bull markets and we can
expect corrections of 15 to 20 per cent. This investment guru is executive chairman,
Templeton Asset Management.

IRDA penalized eight insurers for violations:

IRDA, the insurance regulator, penalized several insurers for various violations in 2008-
09. General Insurers who were penalized were with the amount of penalty in brackets:
Reliance General Insurance (Rs 20 lakh), New India Assurance (Rs 7 lakh), National

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 Rama Krishna Vadlamudi, BOMBAY January 10, 2010
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Insurance Co (Rs 7 lakh), ICICI Lombard General Insurance (Rs 5 lakh), HDFC Ergo
General Insurance (Rs 5 lakh), IFFCO-Tokio General Insurance (Rs 5 lakh) and United
Indian Insurance (Rs 2 lakh). While in life insurance players, Max New York Life
Insurance paid a penalty of Rs 5 lakh for regulatory violations.

Meanwhile, Cholamandalam MS General Insurance and Star Health Allied Insurance fell
short of meeting the mandatory solvency ratio of 1.5 in 2008-09, as per IRDA. The
former has got a solvency ratio of 1.02 and the latter 1.38. In the life insurance segment,
all the 22 players met this criterion.

Currency Futures Volumes shoot up as rupee appreciates:

Currency Futures volumes on the two exchanges where they are actively traded have
gone up substantially this month as the rupee started to appreciate against the US dollar.
The total turnover of currency futures on NSE and MCX-SX has touched a peak Rs
32,000 crore or USD 7 billion on January 7th. The average daily total turnover on these
two bourses this year is Rs 24,940 crore or USD 5.44 billion which is significantly higher
than previously. The turnover is boosted by sudden volatility in the rupee against the
dollar. The rupee (USD-INR) has appreciated up to 45.60, a 15-month high, on January
7th. The rupee appreciated by about 100 paise in the last one week alone. It started at
about 46.60 on the first day of the week and touched a high of 45.60 before closing at
4.80 at the end of this week.

By the way, what are currency futures? Who can trade in them? How to profit from the
rupee volatility using currency futures trading in India? If you want to know about all of
them, JUST CLICK:

Currency Futures in India and status check

www.scribd.com/doc/21686968

SEBI mandates standard lot size for derivatives:

SEBI has standardized the lot size for derivatives contracts in the Futures and Options
segment of the stock market with effect from March 31, 2010. SEBI has further
instructed stock exchanges to revise the lot size every six months based on the average of
the closing price of the underlying security for last one month. The revised lot sizes are:

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 Rama Krishna Vadlamudi, BOMBAY January 10, 2010
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Price Band Lot Size Price Band Lot Size

No of
Rs shares Rs No of shares
≥1601 125 101 - 200 2,000
801 - 1600 250 51 - 100 4,000
401 – 800 500 25 - 50 8,000
201 - 400 1,000 < 25 A multiple of 1,000

Source: SEBI

Lot size is the number of shares of the underlying security of the particular derivative
contract. As per the new table, if the current market price of say, company A’s share, is
Rs 150, then the lot size of its derivative contract shall be 2,000 shares of that particular
company. And if another company’s price is Rs 500, then the lot size shall be 500 shares
of that company. Market men are of the opinion this move would boost volumes.

The after-effects of the global financial meltdown still linger on:

WorldSpace has abruptly closed down its Indian operations, based in Bangalore, sending
its 300-odd employees (including 150 employees on contract) in India into a state of utter
shock and confusion. These employees are still not sure whether they would get their
final settlement dues even as all of them lost their jobs. WorldSpace is a satellite radio
service provider with the parent company based in the US. A few weeks back
WorldSpace was sold to Liberty Media. Nobody is sure about the fate of its 1.5 lakh
subscribers, who paid Rs 2,000 per year for its radio services. The world is still grappling
with the after-effects of the global financial meltdown.

Will they, won’t they?

Even as the Prime Minister has been trying his best to talk up the economy, the
mandarins in New Delhi have been trying their best to add to the confusion about the
timing of the withdrawal of monetary and fiscal incentives bestowed on the economy
following the Lehman Brothers collapse in September 2008. While the Finance
Secretary, Ashok Chawla, says the time is ripe for exiting the economic stimulus as the
GDP had grown by 7.9 per cent during the second quarter of this year, other officials
seem to be having a different opinion. The new Chief Economic Advisor in the Ministry
of Finance, Kaushik Basu, says the present spiraling food inflation (at around 18 per cent
as of now) cannot be tackled with monetary tightening by RBI. He cautions the present
food inflation has to be tackled with the help of supply-side mechanism.

The Finance Minister, Pranab Mukherjee, too seems to be veering towards postponing the
exit strategy for another three to four months until he is fully sure of the economic
recovery across all segments of the economy. Even the deputy chairman of Planning
Commission, MS Ahluwalia, is toeing the line of Finance Minister saying that there is no
need for haste in withdrawal of stimulus. Meanwhile, the US and Europe seem to be not

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 Rama Krishna Vadlamudi, BOMBAY January 10, 2010
www.scribd.com/vrk100 vrk_100@yahoo.co.in
MY BLOG: www.ramakrishnavadlamudi.blogspot.com
in favour of implementing an exit strategy for the time being. Economists, like, Paul
Krugman, argue that the US may not start raising its rates until the unemployment rate in
the US starts coming down and the job recovery takes place. So, these economists are of
the opinion that the US may not resort to any exit strategy till the end of 2010. Is there
any method in their maverick pronouncements? The million-dollar question seems to be:
“will they, won’t they?” – even as the market players keep guessing about the exit
strategy of the Governments.

GST implementation is likely to be postponed:

Present indications are that the implementation of the Goods and Services Tax-GST is
likely to be delayed by another year. First, it was believed it would get implemented from
April 1, 2010 as part of the Government’s efforts to reform indirect taxes in India. The
Empowered Committee of State Finance Ministers has been advised by the Finance
Minister to bring their comprehensive recommendations to him by the end of January. In
all likelihood, GST implementation may not see the light of the day for the time being.

To know more about GST and its implications for the stock market, JUST CLICK:

Goods and Services Tax-GST-First Discussion Paper

www.scribd.com/doc/20582103

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