How the stock market works : Part 2 ( Be Smart Investor)

Before Reading part 2 kindly read part 1 first  here
How the stock market works : Part 1 ( Be Smart Investor)
Now lets start the part 2

There was this village where one day a man appeared and said that he wanted to buy monkeys. He said that he would pay a hundred rupees per monkey. The villagers caught all the monkeys in the neighborhood and sold them to him for a hundred rupees each.
Soon another man appeared and said that he would pay two hundred rupees for each monkey. But there weren't any more monkeys around. They were all owned by the first man.
So the villagers went to him and said that they were willing to take the monkeys back and return his money. But the monkey owner was unwilling to sell. The villagers raised the offer price to Rs 150 per monkey, then Rs 175 and finally to Rs 199 but the man just didn't want to sell, even though he clearly didn't have any use for the monkeys.
Eventually, just to see whether he would sell, they offered him Rs 200 but he still refused.
The villagers were puzzled by this.
Finally, one of them figured out that there must be someone else who was going to come to the village and offer even more money for the monkeys.
Convinced that this was the real explanation, they went and offered the man Rs 300 for each monkey and sure enough the man accepted.
Joyous at having landed such a good deal, they quickly paid him off before he changed his mind and took possession of the monkeys. The man went away with his money and presumably lived happily ever after.
The villagers waited for the next buyer. And waited. And waited. But no one ever appeared who wanted to buy a monkey.
But wait. If you think you've guessed the moral of the story, you are wrong because the story isn't over yet. This story isn't quite the same as the monkey story you may have got in one of those chain-fowarded emails.
In my version, there was another village nearby. In this village a man appeared one day and offered a thousand rupees each for a goat. Now goats were valuable, but not as much as a thousand rupees so the villagers sold the goats to this man. A similar thing happened here too.
A second man appeared, offered two thousand for each goat, the first man refused and eventually the villagers ended up buying the goats back for Rs 3,000 each.
Here too, the two men disappeared and no one ever came and offered so much money for a goat again. But there was a difference. Goats aren't monkeys. They could be milked every day and the milk was good and healthy. In fact I've heard that Gandhiji preferred goat milk. Even the goat droppings could be used as fuel, though I'm not sure of that. When the goats eventually grew too old to be milked, the villagers could kill them for mutton. All in all, it wasn't a complete disaster.
But the monkey-owners were not so lucky. Since these weren't demat monkeys, they actually had to be kept in one's house. The monkeys ate too much, shouted and shrieked all day and sometimes bit people. Eventually, when it became clear that the monkeys were worthless, their owners abandoned them and tried to forget about their losses. And that's the moral of the story. In the stock markets today, there are good companies that are overpriced and there are worthless companies that are overpriced.
Moral - If you are going to be a fool and pay absurd prices because you think that a greater fool will appear in the future, make sure you buy a goat and not a monkey.

How the stock market works : Part 1 ( Be Smart Investor)

Once upon a time in a village, a man appeared and announced to the villagers that he would buy monkeys for $10 each.
The villagers, seeing that there were many monkeys around, went out to the forest and started catching them. The man bought thousands at $10 and as supply started to diminish, the villagers stopped their effort.
He further announced that he would now buy at $20. This renewed the efforts of the villagers and they started catching monkeys again.Soon the supply diminished even further and people started going back to their farms.
The offer increased to $25 each and the supply of monkeys became so little that it was an effort to even see a monkey, let alone catch it!
The man now announced that he would buy monkeys at $50! However, since he had to go to the city on some business, his assistant would now buy on behalf of him.
In the absence of the man, the assistant told the villagers; "Look at all these monkeys in the big cage that the man has collected. I will sell them to you at $35 and when the man returns from the city, you can sell them to him for $50 each.

"The villagers rounded up with all their savings and bought all the monkeys. Then they never saw the man nor his assistant, only monkeys everywhere! Now you have a better understanding of how the stock market works.

wonderful example of financial management

A beggar to another beggar: I had a grand dinner at Taj yesterday.

How? The other beggar asked.

First beggar: Some one gave me a Rs 100/- note yesterday.

I went to Taj and ordered dinner worth Rs 1,000/-, and enjoyed the dinner.

When the bill came, I said, I had no money.

The Taj manager called the policeman, and handed me over to him.

I gave the Rs 100/- note to the police fellow, and he set me free.

A wonderful example of financial management indeed utilizing resources up to max to get best possible outputs

TAX : Poor Man's Burden

1) Qus.: What are you doing?
Ans.: Business
Tax : PAY PROFESSIONAL TAX
2) Qus.: What are you doing in Business?
Ans.: Selling Goods.
Tax : PAY SALES TAX
3) Qus.: From where are you getting Goods?
Ans.: From other State/Abroad
Tax : PAY CENTRAL SALES TAX, CUSTOM DUTY & OCTROI
4) Qus.: What are you getting in Selling Goods?
Ans.: Profit.
Tax : PAY INCOME TAX
5) Qus.: How do you distribute profit ?
Ans : By way of dividend
Tax : PAY DIVIDEND DISTRIBUTION TAX
6) Qus.: Where you Manufacturing the Goods?
Ans.: Factory.
Tax : PAY EXCISE DUTY
8) Qus.: Do you have Staff?
Ans.: Yes
Tax: PAY STAFF PROFESSIONAL TAX
9) Qus.: Doing business in Millions?
Ans.: Yes
Tax : PAY TURNOVER TAX?
Ans : No
Tax : Then pay Minimum Alternate Tax
10) Qus.: Are you taking out over 25,000 Cash from Bank?
Ans.: Yes, for Salary.
Tax : PAY CASH HANDLING TAX
11) Qus.: Where are you taking your client for Lunch & Dinner?
Ans.: Hotel
Tax : PAY FOOD & ENTERTAINMENT TAX
12) Qus.: Are you going Out of Station for Business?
Ans.: Yes
Tax : PAY FRINGE BENEFIT TAX
13) Qus.: Have you taken or given any Service/s?
Ans.: Yes
Tax : PAY SERVICE TAX
14) Qus.: How come you got such a Big Amount?
Ans.: Gift on birthday.
Tax : PAY GIFT TAX
15) Qus.: Do you have any Wealth?
Ans.: Yes
Tax : PAY WEALTH TAX
16) Qus.: To reduce Tension, for entertainment, where are you going?
Ans.: Cinema or Resort.
Tax : PAY ENTERTAINMENT TAX
17) Qus.: Have you purchased House?
Ans.: Yes
Tax : PAY STAMP DUTY & REGISTRATION FEE
18) Qus.: How you Travel?
Ans.: Bus
Tax : PAY SURCHARGE
19) Qus.: Any Additional Tax?
Ans.: Yes
Tax : PAY EDUCATIONAL, ADDITIONAL EDUCATIONAL &SURCHARGE ON ALL THE CENTRAL GOVT.'s TAX !!!
20) Qus.: Delayed any time Paying Any Tax?
Ans.: Yes
Tax : PAY INTEREST & PENALTY
21) INDIAN : Can I die now??
Ans : No, wait we are about to launch the FUNERAL TAX Budget 2012

BSE starts delivery-based stock F&O

In a move that will be closely watched by other bourses, the Bombay Stock Exchange (BSE) has decided to introduce delivery-based stock futures and options contracts (F&O) from February. The move comes six months after the capital market regulator gave the go-ahead for delivery-based stock derivatives.

“Effective February 1, trading on all existing single stock F&O contracts expiring on or after April 13, 2011, will be delivery-based,” said a BSE circular released on Monday. “All single stock F&O contracts expiring on February 10 and March 17 will continue to be cash-settled. There will be no change in other contract specifications like size, strike intervals, number of strikes for options, expiry day, and calculation of settlement price. Final settlement will be on expiry + three business days,” added the circular.

This has been a long-standing demand of a large section of market players which feels the current practice of cash settlement leads to excessive speculation.
Under the delivery-based system, also known as physical settlement, the contracts have to be settled with the underlying stocks instead of cash. Many believe since the contracts are currently settled in cash, there is a disconnect between prices in spot and derivatives markets.

The National Stock Exchange, which has a monopoly in the equity derivatives segment, has continued with the cash settlement mechanism in the derivatives arena. It has, however, switched to the European style of contracts, wherein the contract can be squared off only on the day of expiry (maturity).

Experts say it is a bit too early to comment whether delivery-based stock derivatives will manage to generate volumes. The initial response needs to be looked at, they add.

“The initial response to the physical settlement in stock F&O is likely to be lukewarm. However, volumes should pick up gradually,” said K Subramanyam, AVP – institutional clients (derivatives), Asit C Mehta Investment Intermediaries.

“The introduction of physical settlement in stock F&O might be the trigger to boost volume in stock lending and borrowing (SLB) mechanism as well,” he added.

The SLB mechanism will indeed play a crucial role in the development of delivery-based stock F&O contracts. For long, it has been said there is no robust SLB market in India. Hence, delivery-based equity derivatives cannot be introduced. Interestingly, a section of analysts believes SLB will take off automatically once delivery-based derivatives are allowed.

“Unless the SLB mechanism takes off in India, physical settlement in stock futures and options may not work,” said T S Harihar, co-head (Institutional Derivatives), ICICI Securities. “At present, people are not finding SLB lucrative,” he added.

BSE 4 SCRIPS 5 DAYS SUSPEND FROM 03-02-2011 AND 12 SCRIP SUSPEND FORM 24-02-2011 TILL COMPLIANCE FOLLOW UP

Trading Members are hereby informed that, the under mentioned 12 companies, have failed to comply with various provisions of the Listing Agreement till quarter ended September 2010 –

Sr.No. Scrp Code Company Name
1           500045        Bellary Steels & Alloys Ltd
2           530887        Incap Financial Services Ltd
3           522059        Indage Vintners Ltd
4           507150        India Sugars & Refineries Ltd
5           523230        Jalpac India Ltd
6           531131        Mascon Global Ltd
7           512424        MTZ Polyfilms Ltd
8           532117        Platinum Corporation Ltd
9           532791        Pyramid Saimira Theatre Ltd
10         513412        Alcobex Metals Ltd
11         511031        Integrated Finance Company Ltd
12         523770        Intergrated Digital Info Services Ltd

Consequently, trading in securities of these 12 companies will be suspended w.e.f. Thursday, February 24, 2011; on account of non-compliance with the provisions of the Listing Agreement, for the following period(s) –

 (i)  In case, the company complies (to the satisfaction of the Exchange) with all the provisions of the Listing Agreement on or before Monday, February 14, 2011; trading in securities of the company will be suspended for Five Trading Days i.e. upto Thursday, March 3, 2011.
 (ii)   In case a company complies (to the satisfaction of the Exchange), with all the provisions of the Listing Agreement on or before Friday, March 11, 2011; the trading in securities of a company will be suspended for 30 days i.e. upto Friday, March 25, 2011.
(iii)       However, in case the company fails to comply with the provisions of the Listing Agreement, to the satisfaction of the Exchange on or before Friday, March 11, 2011; the suspension will continue till such time the Company complies with the procedure prescribed for revoking suspension in a scrip.

It may be noted that suspension of trading in securities of a company will be revoked only if the company has complied with all the provisions of the Listing Agreement upto the latest quarter for which the compliances are required.

Further, the Trading Members are also hereby informed that, the under mentioned 4 companies, have failed to comply with various provisions of the Listing Agreement within the specified time limits , till quarter ended September 2010.


Sr. No.  Scrip code        Name of the company
1             532161              Baffin Engineering Projects Ltd
2             531494              Navkar Builders Ltd
3             531962              Valley Indiana Leisure Ltd.
4             524796              Vardhaman Laboratories Ltd

The trading in the securities of above mentioned 4 companies will be suspended for 5 trading days from Thursday, February 3, 2011 to Wednesday, February 9, 2011 (both days inclusive), on account of late compliance with the provisions of the Listing Agreement.

Source: http://www.bseindia.com/cirbrief/new_notice_detail.asp?noticeid={68A37AA5-F74A-4F43-AFB6-016B626A3163}noticeno=20110125-13&dt=1/25/2011&icount=13&totcount=31&flag=0

Expectations from Budget 2011 - service tax

As a run up to Budget 2011, the previous article in this column had addressed the expectations with respect to the service tax rate and the resolution of the several complexities in service tax law which continue to bedevil companies. This article examines certain other service tax related issues which need to be addressed as well as the possible extension of the service tax to certain new services.

There has been an enduring challenge in service tax on the point in time when the tax becomes applicable. The tax is presently chargeable on provision of services but is payable upon receipt of consideration for such services. Budget 2011 may introduce rules for ‘Point of Taxation’ for services provided or received in India. Last year, the Central Government had issued the draft rules in this regard. The rationale behind issuance of these draft rules was to not only have a smooth transition from the present regime to the GST regime but also provide lucidity and certainty in the matter of the levy and collection of service tax. The draft rules cover the following aspects:

the point of taxation in case of changes in the rate of service tax or upon the imposition of the tax on new services
the point of taxation in case of continuous supply of services
linking the payment of tax to the events of the provision of service, raising of the invoice or receipt of payment for services provided or to be provided, based on whichever has occurred the earliest in time.
The draft rules are in effect a fundamental change from a cash system to an accrual system of taxation. However, the moot point is that the draft rules do not lay down any guiding principles with respect to the time of availment of the input tax credits on services. Thus while there are stringent rules for payment of tax on the output services, there is an absence of beneficial rules for availment of credits. It is hoped that Budget 2011 would address this aspect of availment of credit as well, in addition to possibly enacting the draft rules. Further, it is also hoped that these rules are made clear and simple in order that litigation is avoided in future.

Another area of service tax law which has been problematic is the importation of services. The levy of tax on imported services, under the reverse charge mechanism, was introduced in 2006. Budget 2011 is expected to bring about clarity on taxability of services under these provisions where payments have been made by an Indian entity for services procured from outside India and used in projects executed outside India. The problem arises because the terms used in the relevant provisions, such as ‘place of business establishment of a service provider’ and ‘place of business of a service recipient’ have not been defined. It is hoped that Budget 2011 would bring about clarity in the phraseology of the underlying provisions, thereby removing ambiguity and bringing out the real intention of the legislature.

Further, in order to bring about parity between the State VAT and the service tax laws, Budget 2011 is expected to expand the definition of works contract service under service tax and cover, in their entirety , those contracts that are covered in State VAT laws. Moreover, the relevant composition scheme could be extended to such expanded activities/ contracts. In a situation where common input goods are used for contracts where full tax is paid and also for contracts under the composition scheme, Budget 2011 may make suitable amendments to enable CENVAT credit claims to be made on a pro-rata basis. Under the works contract composition scheme, it is expected that Budget 2011 would exclude the value of all services that are provided during the execution of a works contract from the gross value charged where service tax is already paid by the respective service providers. Also, in Budget 2010, there was no reduction in the rate of tax on the composition scheme of 4%, consequent to the reduc\tion of the service tax rate from 12% to 10%. It is thus reasonable to expect that the rate of tax on the composition scheme is at least reduced to 3% from 4%.

Finally, Budget 2011 may also resolve the issue pertaining to lease of vacant land. Typically, the consideration received towards lease of vacant land comprises of upfront fee i.e. lease premium and the nominal fee i.e. lease rent. Lease premium is paid for transferring the right to possess and enjoy an immovable property while lease rent is paid for continuous use and enjoyment of such property. Budget 2011 should bring about clarity on taxability for lease transactions with respect to the consideration received on such transactions and it should be clarified that only the lease rent is liable to the service tax and not the lease premium.

Moving away from the issues that need to be addressed, let us quickly consider those services which are currently not taxed and which could be brought within the purview of the levy. Broadening the service tax base has been the constant endeavour of the Central Government and accordingly it is fair to expect that the Government may take this initiative further by introducing certain new categories of taxable services. To name a few, retail trade in select areas, gas and water distribution, research and experimental development services in various uncovered areas such as social sciences and humanities, besides the perennial ones of legal services and rail transport, could be brought within the tax net. The possibility of introduction of a negative list of services is very remote and such an introduction will only be a reality in the GST regime.

It is hoped that the Government will be pragmatic in its approach to service taxation and use Budget 2011 as an opportunity to rationalize and simplify the tax .

The whens and hows of Budget preparation

North Block, which houses the finance ministry, wears the look of a fortress these days. The finance minister’s pre-Budget consultations with various groups are over and outsiders, including journalists, are not allowed inside the building now. Preparations for Budget 2011-12 are in full swing. Intelligence Bureau sleuths in plain clothes are watching each and every movement of the team which prepares the Budget documents.
The Budget cycle normally starts towards the end of September and lasts till May in the next financial year. On the presumption that the Budget shall be presented at 11 am on the last working day of February, the Budget Division in the finance ministry prepares a comprehensive schedule for carrying out Budget preparation activities. The Budget is prepared by the Budget Division on the basis of detailed estimates of expenditure and receipts received from various departments and ministries.

The Budget process begins with the issue of the Budget Circular, normally in the month of September. The circular is issued with the purpose of providing guidance to ministries in framing their revised estimates for the current year and Budget Estimates for the ensuing financial year, for further rendition to the Budget Division.

The following two months — October and November — are devoted to follow-up action on the Budget circular that includes coordinating with various ministries and departments, procuring data for the receipts Budget and scrutiny of estimates by ministries for pre-Budget meetings.

In mid-December, ceilings of expenditure are finalised and communicated to various ministries by the first week of January. Within one week of the communication of ceilings, the ministries render statement of Budget estimates to the Budget division. Estimates of borrowings and revenue are also made in December, while those for major subsidies and defence expenditure are made by the last week of January.

In the first week of January, the finance minister starts consultations with sectoral representatives, such as economists, industrialists, trade unions, regulators, to get their suggestions on Budget.

During this period, ministries also send their Plan estimates. All expenditure estimates are also made by the first week of February and printing of Budget documents begins. The printing gets over by February 25, with the finance minister’s speech, which is protected because of the high level of secrecy surrounding the Budget. Even the finance minister cannot take the speech home or lock it up in his own drawer. After going through the speech, he has to return it to the additional secretary for safekeeping.

After the presentation of the Budget, it is debated in Parliament, but not on the same day.

After the general discussion on the Budget is over, Parliament is adjourned for a fixed period, when the demands for grants of the ministries and departments are considered by parliamentary committees. These committees have to submit their report to the Lok Sabha within a specified period.

The whole process of voting the Budget involves voting for demands for grants, passage of Appropriation and Finance Bills. Once these are done, these Bills get the President’s nod.

BUDGET TIMELINE
* February 22: Finalisation and printing of Budget at a Glance
* February 25: Finance minister’s Budget speech and key features of Budget
* February 26: Summary for the Cabinet
* February 27/28: Obtaining approval of the PM to the ‘Summary for the President’
* February 27/28: President’s recommendations
* February 28: Obtaining approval of the Cabinet to the Budget proposals
* February 28: Presentation of the Budget in the Lok Sabha
* Second week of March: Passing of vote on account by the Lok Sabha
* Second/third week of March: Passing of vote on account by the Rajya Sabha
* As per business: General discussion, FM’s reply and laying of reports by standing committees; Voting for demands for grants
* April: Passing of appropriation Bill, finance Bill in the Lok Sabha and Rajya Sabha
* First week of May: President’s Assent to the appropriation Bill and finance Bill

As the whole process of voting the Budget goes beyond a current financial year, there is a provision for the government to carry on by passing a vote on account.

There is a need for maintaining secrecy, accuracy and timeliness in the work related to the preparation of Budget. All the statements, information and inputs require intensive checking with special attention given to the manually generated statements, for which an additional level of check is to be ensured. The list of such statements allocated amongst the staff and officers is circulated internally every year in the Budget Division.

The Budget is kept a top secret mainly due to indirect tax proposals, which, if leaked early, can result in hoarding. At least a month before the presentation of the Budget, entry to North Block is restricted and all communications of the officials working on the Budget are monitored. Introduction of the Direct Taxes Code and Goods & Services Tax is likely to make the annual Finance Bill less relevant. This would lift the veil of secrecy that currently surrounds around tax-related proposals in the Budget.

FinMin sure of tabling financial reform Bills in Budget session

The finance ministry on Friday exuded confidence on moving ahead with financial reform Bills in Parliament’s Budget session, slated to start from February 21.

This is despite expectations of a stormy session, given the unresolved standoff on the Opposition’s insistence on a Joint Parliamentary Committee (JPC) probe into the telecom spectrum controversy.
The Bills include amendment of the Insurance Act to raise the cap on foreign direct investment in private sector insurance companies to 49 per cent from the present 26 per cent and the one on pension reforms.
“We expect to introduce the Insurance Amendment bill, the Pension Fund Regulatory and Development Authority Bill, the Banking Regulations (Amendment) Bill, LIC (Amendment) Bill, Factoring and Assignment of Receivables Bill and the Sarfaesi Bill,” a key ministry official said here.

Driving growth
Financial sector reforms are expected to be the next driver of economic growth.The political maneuvring space to push these was missing when the Left parties were supporting the 2004-09 UPA government. Once the Left withdrew support, a few months before UPA-I’s term ended, the government was able to table the Insurance Laws (Amendment) Bill in the Rajya Sabha.

The Bill is with the Standing Committee on Finance. Apart from the FDI cap issue, it aims at statutory powers to the pension regulator, which has been acting as an interim watchdog.

The pensions Bill is deemed necessary to push the New Pension System (NPS), formally open to all citizens. Unlike the old pension system for government employees, NPS is based on defined contributions. All central government employees are already part of NPS since January 1, 2004, and many state governments have also opted for it. However, citizens have opted for it in very minute numbers only.

Others
The Banking Regulations (Amendment) Bill, among other issues, aims to raise the voting power of foreign entities in private sector banks in proportion to their stake, against the current cap of 10 per cent.

The LIC (Amendment) Bill is to raise the paid-up capital of the state-run insurer to Rs 100 crore from Rs 5 crore at present, to bring it at par with private sector insurance companies.

The Factoring and Assignment of Receivables Bill, 2010, proposes to regulate this sector and offer stamp duty exemption for this business. The factoring business means selling of account-receivables by the owner of a company to a third party at a discount for meeting cash needs. This business has not made much progress due to lack of a consolidated framework.

The Bill amending the Sarfeasi Act (on securitisation and reconstruction of financial assets) proposes a computerised ventral registry to keep records of loans mortgaged by securities.

The registry, once operationalised, would help check fraud in the sale and mortgage of property, by providing to a bank or a buyer its details at the click of a computer mouse.

These Bills, if enacted, says the government, would help realise the projections for expanding the Indian economy by nine per cent next year.

Salaried taxpayers may be spared filing returns

Salaried taxpayers with no other income could get a respite from filing tax returns. The income-tax (I-T) department is open to examining a proposal to exempt them from the annual chore.
Asked whether the department would think about doing away with income-tax returns for employees, who had no other income apart from salaries in a financial year, Central Board of Direct Taxes (CBDT) Chairman Sudhir Chandra said the department would certainly consider the proposal.

He agreed that for a substantial chunk of salaried employees, savings bank interest is the only additional income and that in most cases, this not substantial. This proposal, if approved, will benefit a large section of people and would reduce the I-T department's workload in a big way.

Of the country’s 35 million taxpayers, roughly half are salaried employees.

The proposal to do away with returns for salaried taxpayers was earlier internally mooted within CBDT a few years ago. The argument in favour of the proposal was that income records for this class of taxpayer were available with both employers and banks.

In an interaction with mediapersons today, Chandra also promised small taxpayers another major relief. He said the I-T department is planning to release all small-value refunds before March 31. "I will ask my officials to give most refunds by the end of the current financial year," he said.

“We will try to clear most refunds in a month. At least small refunds can be given by March 31,” Chandra added. The newly-appointed chairman said he would communicate this to his officials.

Some of the refunds will be given to taxpayers directly through State Bank of India under the refund banker scheme.

NO PAIN
What is the proposal?
Scrap returns for those with no other income apart from salary

What is the logic?
Records for these taxpayers are held by employers and banks

What is the upside?
Will benefit several taxpayers and reduce I-T dept’s workload

Under this, tax refunds are sent to taxpayers by SBI, either through the electronic clearing service mode or in physical form. The scheme was launched four years ago in Delhi and Patna and later extended to other cities.

In 2009-10, the I-T department gave over Rs 58,000 crore in refunds, which was 50 per cent more than the previous year. CBDT has increased its target for processing refunds to Rs 70,000 crore in the current financial year. Refunds increased by 19.5 per cent to Rs 44,000 crore up to December, 2010.

The I-T department has opened a Central Processing Centre in Bangalore for faster processing of claims for electronically-filed returns. It will roll out three more centres in the Manesar, Pune and Kolkata. While the first two will come up within a year, the third will be operational in two years.

CNBC-TV18 Poll: RBI may hike repo, reverse repo by 25 bps

The RBI and government's desperation to fight inflation has prepared the markets for a rate hike on January 25. According to CNBC-TV18 poll of bankers and economists, majority expect RBI to hike repo and reverse repo rates by 25 basis points each. Only a minority 6% expect a larger hike of 50 basis points.
Will the RBI revise its FY11 inflation forecast higher? Fifty percent of those polled see RBI revising their inflation forecast to 6. 5% from 5.5% currently, 25% see it revised to 6-6.5% and only 6% see the RBI's forecast to be above 6.5%. Nineteen percent expect no change in the forecast.

Inflation, therefore, continues to be a bigger worry for the markets than the tight liquidity condition. That's why 94% of those polled do not expect any change in the cash reserve ratio, which is the percentage of their deposits that banks must keep with the RBI as cash.

Market also does not expect RBI to cut SLR further from 24%. Instead majority expect RBI to keep open the second liquidity facility which allows banks to borrow from the repo window twice every day. Despite tight liquidity condition, market does not expect banks to hike their lending or borrowing rates anytime soon.
So, even with risng prices and tight monetary condition, growth for the current fiscal year remains intact. Nifty four percent of bankers and economists polled do not any change in the RBI's FY11 growth projection from the current 8.5% with an upward bias, whereas 6% expect it to be lowered to 8-8.5%.

RBI favours subsidiary structure for foreign banks

The Reserve Bank on Friday came out with a discussion paper suggesting that foreign banks should be incentivised to operate in India as wholly-owned subsidiaries, as against the current system of having presence through branch network.

Discussion paper

The discussion paper on which RBI has invited comments from stakeholders by March 7 says, “On balance, the subsidiary model has clear advantages over the branch model despite certain downside risks ...There may be a need to incentivise the subsidiary form of presence of foreign banks.''

Under the wholly-owned subsidiary (WOS) form, a foreign bank will have to operate as a locally incorporated legal entity and will be subject to the domestic laws such as the Companies Act and the Banking Regulation Act.

At present, there are 34 foreign banks operating in India, with five major banks, including StanChart, HSBC, Citibank and Deutsche, accounting for over 70 per cent of the total asset size.

With regard to repatriation of profits by foreign banks, it said the WOS form be allowed to pay dividend to the parent bank, like the domestic banks.

To encourage existing foreign banks to convert into WOS, the discussion paper says the subsidiaries should be given preferential treatment for opening of branches as compared to those foreign banks which operate through branches.

The paper points out that the government has already clarified that a company with a foreign holding of over 50 per cent is a foreign company.