Falling dollar: Beginning of end for Indian IT sector and major exporting economies

Since 2002, the U.S. currency has fallen 40 percent against the Canadian dollar, 33 percent against the euro, weakened 24 percent compared with the British pound and 15% compared with the Japanese yen. There are various reasons for this sudden fall in U.S. dollar. U.S.A. has a very large current account deficit, about 5.9% of GDP and very low interest rates, as low as 1.5%. Hence there is little motivation for the other countries to buy U.S. securities at such a low rate. Due to low interest rates, the American citizens have a low savings to income ratio. As spending increases, so do the imports.

However if the dollar continues to weaken at an alarming rate, then it may have a direct impact on U.S. imports. Its imports will fall resulting in reliance on manufacturing industries in the States itself. Until earlier, manufacturing and exports caused work to shift to low-cost destinations such as China, Korea and India. No wonder, China doesn’t want to revalue its currency.

As for India, its IT sector exports are worth about Rs. 70,000 crore. A large workforce depends on this sector. If the U.S. cuts it’s spending on the sector, it could have far reaching unpleasant consequences on the Indian IT sector. This could lead to reduced salary and workforce, which would in turn lead to reduced disposable income from the Indian working class across major exporting sectors such as IT, textile, jewellery and automotive parts.

Also, there are various sectors, which directly drive the revenue of the IT sector. These are banking, retail and insurance. Due to reduced per capita income in the U.S. worsened by the housing sector slump, these sectors may slow down and cause trouble to the Indian IT sector.

Fitch reviews India’s local currency rating

On Tuesday, 15^th July, Fitch (a global ratings agency) lowered India’s domestic currency rating to negative from stable. The reason mentioned was the central government’s worsening fiscal position. However the outlook on India’s foreign currency rating is stable. Earlier, in August 2006, Fitch had raised India’s domestic currency rating by one level to BBB-. James McCormack, head of Asian sovereign ratings at Fitch said that the rating remains the same; only a negative outlook has been put to it. The government proposes to control the deficit within 2.5% of GDP in 2008-09. According to Fitch, the central government’s deficit this year will be larger than that predicted in the budget.

Fitch is looking at a deficit close to 6.5% of GDP for the next fiscal year. This can be attributed to higher subsidies, interest payments and public wages, along with bonds issued to oil and fertilizer companies. FIIs feel that the impact of this review would be felt more severely on the equity markets than in bonds. It could see withdrawal of funds by foreign institutional investors, both from equity and debt markets.

Foreign Institutional Investor (FII) is a term used mainly in India to refer to an investor - mostly of the form of an institution or entity, who invests in the financial markets of a country different from the one where in the institution or entity was originally incorporated, in this case India. FIIs usually follow norms, which don’t allow them to invest in a country that has been allotted a certain grade. In such a scenario, the FIIs would pull out the dollars and push the rupee to 44-levels. Then the rate hike by the Central Bank would be necessary to prevent the Indian currency from deteriorating.

However, India can have some temporary respite. Strength and support to the external side is provided by the fact that India has a foreign exchange reserve of over USD 300 billion. It now remains to be seen whether the above speculations prove to be true and how the central government copes with the situation.

Time for euro to replace dollar as the de-facto world reserve currency

The de-facto world reserve currency refers to a currency in which the majority of international transactions take place.

Since the time after the Second World War, the de facto world currency has been the United States dollar. During that war, the U.S. provided support, medical help and ammunitions to its allies, demanding gold payments in exchange. By then, the Bretton Woods agreement was established by which banks of issue were required to redeem their currency in gold bullion or in U.S. Dollar- which in turn were redeemable in gold bullion at the rate of $35/troy ounce (1 troy ounce = 31.1034768 g). After the war ended in 1945, bulk of the world’s gold was lying in the U.S. vaults. Henceforth, the dollar became the undisputed global reserve currency. Some countries like Ecuador, El Salvador, and Panama have gone a step further and eliminated their own currency in favour of U.S. Dollar.

The United States took advantage of this fact and printed dollars in huge quantity. It exported large chunks of dollars, paying for commodities, tax cuts, wars abroad, spies and politicians world over. This measure could not affect the inflation back home. It got it all for a free!! Outside U.S., 2/3^rd of most of the reserves of the other countries is in U.S. dollars. In 1971, when some countries tried to sell their dollars in return for gold, U.S. defaulted on its payment and the Bretton Woods Agreement was smashed. To regain the trust of the world in the paper dollar, U.S. bullied OPEC to sell oil in dollars only. Now the countries had to keep the dollars to buy the much-needed oil. Oil replaced gold as the foundation to stop dollar from sinking.

But, in late 1999, Euro was established and months later, Iraq announced that thereafter it would sell oil in euros only. Then, the U.S. for obvious reasons invaded it. In 2004, Iran proposed the setting up of an oil bourse to sell oil in euros only. India and China have also supported this decision. It makes sense for Europe and Japan too, to buy and sell oil in euros as the euro is far more stable than the debt-ridden dollar.

The world would now have to start stalking up euros and sell back dollars. But the U.S. can’t accept even 1/10^th of the world’s dollars as its economy would crash. What would happen to U.S. then? A re-run of Germany post 1929?

Anheuser -Busch accepts InBev takeover bid for $50 billion

US brewing giant Anheuser-Busch agreed to a $50 billion takeover by Belgium-based InBev NV, which in turn will create the world's largest beer maker. Anheuser-Busch was started 148 years back in St. Louis, when Eberhard Anheuser bought Bavarian Brewery in 1860. Later on, his son-in-law Adolphus Busch took over and then began the Busch family’s dominance. InBev was formed when Leuven-based Interbrew SA bought Sao Paulo- based Cia.de Bebidas das Americas, or AmBev, in an $11 billion transaction. Its portfolio includes more than 200 brands.

This takeover comes after a month of court fights and public disputes over the future of Anheuser-Busch. InBev’s improved purchase offer of 70-dollar-a-share has put an end to their hostility. Three months earlier, it had offered 65-dollar-a-share. Once this deal gains regulatory approval, it would be the largest in alcoholic drink history and the second biggest of a U.S. consumer-goods company. The combined company will be called Anheuser-Busch InBev. The combination of Anheuser-Busch and InBev will create the global leader in the beer industry and one of the world's top five consumer products companies. It would offer consumers about 300 brands, including Anheuser's Budweiser and Bud Light and InBev's Stella Artois and Beck's.

The company will make St. Louis, Missouri the headquarters for the North American region and the global home of the flagship Budweiser brand. Anheuser-Busch will get two seats on the new company's board, its current president and CEO August Busch IV and another current or former director from the Anheuser-Busch Board.

The expanded company will aim to have leading positions in the world's top five markets - China, U.S., Russia, Brazil and Germany and balanced exposure to developed and developing markets. The transaction will create significant profit potential both in terms of cost savings and revenue enhancement.

BEWARE MARKET WILL FALL MORE AFTER SOME TIME

friends, Some people are under the impression that the market has fallen by some accident and that it should be much higher than what it is today.BEWARE of this psychology.Market earlier was propped up by people like Anil Ambani and KPSINGH OF DLF ans hundreds of others who wanted to collect money from market at HIGH PREMIUM.That game is over.Rather it was a scam and several so called industralists , merchant bankers, media tycoons and analysts were involved.Now that their job is over they are not interested in propping up the market and have sold off and are leaving the market( if at all they have not left it).So dont get trapped in it again at high level.Market MAY SHOW SOME BOUNCE OF ABOUT 5 % OR 10% IN INDEX.Please understand that it is VERY EASY TO MANIPULATE ANY INDEX SINCE IT CONSISTS OF A FEW HEAVY WEIGHTED STOCKS LIKE RELAINCE, ONGC, WIPRO, ITC , HIND LEVER, INFOSYS etc.You can manipulate a few of these stocks to make it appear as if the market has fallen or risen.NOW THEIR GAME IS TO MAKE YOU SELL IN FEAR I,E, MAKE THE MARKET DROP SO LOW THAT YOU WILL BE AFRAID THAT YOUR MONEY WILL BE WIPED OUT. SO SELL AND RETRIEVE SOME OF IT.Well they will play a game of hide and seek and try to grab some more of your money. Dont fall in their trap.Sell when market goes up and then wait for the market to fall.MOre financial companied in USA are going to fail like BEAR STEARNS. Lehman Brothers are next in the list and JPMORGAN may not be far behind.Citi Bank may also become bankrupt.GENERALMOT ORS. ONCE UPON A TIME THE BIGGEST COMPANY IN THE WORLD IS ON THE VERGE OF DECLARING BANKRUPTCY.OIL PRICE WILL SOON BE USD.170/BARREL and if USA attacks Iran then it will be USD200. SO beware.So you can imagine how it will affect us? you and me?SELL AT EVERY RISE and dont buy.

source : http://finance.groups.yahoo.com/group/indianstockmarket