intraday calls 5th Oct
Buy on dip is advisable, Don't want Risk then avoid trading today
BUY Abirlanuvo-1017 arround 985 for 1017-1026+ with sl 960
BUY HDIL-335 arround 310 for 335-340+ with sl 298
BUY Jindalswhl-1838 arround 1775 for 1980+ with sl 1750
BUY IDFC-154 arround 145 for 155+ with sl 141
Strong & Weak futures
This is list of 10 strong futures:
Orchid Chem, IOB, Jindal Saw, Ranbaxy, Educomp, Ansal Prop, Bhushan Steel, Uco Bank, ICICI Bank & Bharat Forg. And this is list of 10 Weak futures: Tulip, Idea, Finance Tech, GVK Power, Suzlon, Tata Tea, Voltas Ltd, MTNL, Dish TV & BEML.
Nifty is in Up trend
NIFTY FUTURES (F & O):
Below 5055 level, selling may continue up to 5034-5036 zone and thereafter slide may continue up to 5022-5024 zone by non-stop.
Hurdle at 5080 level. Above this level, expect short covering up to 5087 level.
Cross above 5106-5108 zone, can take it up to 5124-5126 zone by non-stop. Supply expected at around this zone and have caution.
On Negative Side, rebound expected at around 5016-5018 zone. Stop Loss at 5003-5005 zone.
Short-Term Investors:
Bullish Trend. 3 closes above 4790.00 level, it can zoom up to 5155.00 level by non-stop.
BSE SENSEX:
Lower opening expected. Recovery should happen.
Short-Term Investors:
Short-Term trend is Bullish and target at around 17671.82 level on upper side.
Maintain a Stop Loss at 16613.22 level for your long positions too.
INVESTMENT BUY:
Buy WOOLITE MERCANTILE COMPANY (BSE Cash)
Bulls may hold on gains today.
1 Week: Bullish, as per current indications.
1 Month: Surprisingly going up, opposite to bearishness.
3 Months: Bullish, as per current indications.
1 Year: Surprisingly going up, opposite to bearishness.
Buy COMPUCOM SOFTWAR (BSE Cash)
Surprisingly gone up, but sideways pattern may emerge.
1 Week: Bullish, as per current indications.
1 Month: Surprisingly going up, opposite to bearishness.
3 Months: Surprisingly going up, opposite to bearishness.
1 Year: Bullish, as per current indications.
| FII trading activity on NSE and BSE in Capital Market Segment(In Rs. Crores) | ||||
| Category | Date | Buy Value | Sell Value | Net Value |
| FII | 01-Oct-2009 | 4334.59 | 3358.13 | 976.46 |
| DII trading activity on NSE and BSE in Capital Market Segment(In Rs. Crores) | ||||
| Category | Date | Buy Value | Sell Value | Net Value |
| DII | 01-Oct-2009 | 1326.97 | 1658.6 | -331.63 |
Global Cues & Rupee
The Dow Jones Industrial Average closed at 9,487.67. Down by 21.61 points.
The Broader S&P 500 closed at 1,025.21. Down by 4.64 points.
The Nasdaq Composite Index closed at 2,048.11. Down by 9.37 points.
Indian currency markets were closed on Friday for a national holiday.
Interesting findings on web:
Stocks meandered Friday, at the end of a second straight week of losses, as investors worried that a worse-than-expected jobs report was further evidence that the rally has gotten ahead of the recovery.
The Dow Jones industrial average (INDU), the S&P 500 (SPX) index and the Nasdaq composite (COMP) all lost a few points.
The Dow fell 21.61, or 0.2 percent, to 9,487.67, its lowest close since Sept. 4. The index fell as much as 79 points during trading.
The broader Standard & Poor's 500 index fell 4.64, or 0.5 percent, to 1,025.21, and the Nasdaq composite index fell 9.37, or 0.5 percent, to 2,048.11.
RUSSELL580.2-3.55-0.61%
TRAN3692.73-18.97-0.51%
UTIL367.25-2.93-0.79%
S&P 100475.48-1.23-0.26%
S&P 400663.43-6.46-0.96%
NYSE6674.57-43.48-0.65%
NAS 1001662.49-3.92-0.24%
A modest slide left stocks lower for a second week, the first consecutive drop since July. The Dow Jones industrial average fell for a fourth day.
"The [jobs] report was a disappointment, but a recovery is not going to go in a straight line," said John Wilson, chief technical strategist at Morgan Keegan.
The advance was part of a bigger run up that has propelled the leading indexes for roughly 7 months straight. The advance has been driven by slowly improving economic news and tremendous amounts of fiscal and monetary stimulus.
But lately, a number of the reports have been missing expectations, including readings on jobs, manufacturing and consumer confidence earlier this week.
Analysts said many investors unloaded shares following the disappointing data earlier in the week, leaving few sellers on the sidelines when the jobs report was released prior to Friday's opening bell. As the session has played out, the market has also drawn support from chart-based buying that kicked in after major indexes dropped below key levels.
Despite the market's recent struggles, many longtime investors remain confident that there is room for continued improvement in corporate profits and stock prices thanks in part to spending by the government and businesses to replace the traditional role of the U.S. consumer.
While market participants have winced at several of this week's big-picture reports, the data haven't yet sparked widespread talk of a so-called double-dip recession in which the U.S. would suffer a second downturn before it has fully recovered from the one that began in late 2007.
"It's kind of impressive how the market has held up today," said Uri Landesman, portfolio manager at ING Investment Management in New York. "I'm still feeling as if I can add a bit of risk here and hold some less-than-high-quality names. Yeah, I may have to take a little bit of pain in the short term, but I like the potential for upside looking further out."
With nerves running high, stocks have fallen in seven of the last eight days. The Dow has lost about 4.3 percent since coming within 82 points of the 10,000 level on Sept. 23.
Bruce Shalett, managing partner, Wynston Hill Capital in New York said the jobs report was "a reminder that while things are not as dire as they were a year ago, we still have a lot of work to do."
Many found the relatively calm response to the jobs report encouraging, taking it as a sign there are still investors willing to use the dips to pick up stocks they consider cheap.
"Pullbacks are going to constantly be used as opportunities to get into the market," said Hank Smith, chief investment officer of equity at Haverford Investments in Radnor, Pa.
"There's been a lot of talk particularly in the last couple of months that we're seeing a turnaround in unemployment, and obviously that's not the case," said Dan Cook, senior market analyst at IG Markets in Chicago.
Employers cut 263,000 jobs from their payrolls in September after cutting a revised 201,000 in August, the Labor Department reported Friday morning. Economists were expecting 175,000 jobs cuts, on average, according to Briefing.com.
The unemployment rate, generated by a separate survey, rose to 9.8%, a 26-year high. That was in line with economists' forecasts and up from the 9.7% rate in August. Most economists expect the national unemployment rate to hit 10% by year end, although in a number of states it is much higher.
The report is often the most anticipated piece of economic news each month because an eventual drop in unemployment is key to sustained recovery.
"There's been a lot of talk particularly in the last couple of months that we're seeing a turnaround in unemployment, and obviously that's not the case," said Dan Cook, senior market analyst at IG Markets in Chicago.
"We're seeing reminders here that recoveries are often choppy," said Don Rissmiller, chief economist at Strategas Research Partners in New York.
Referring to a term analysts use to describe a quick, sharp economic rebound, he added: "If we are having a V-shaped recovery, it's only in certain sectors, or it's happening abroad, not in the U.S."
However, some participants remain concerned that the market's 60% gain since March -- and its best quarterly performance since 1998 -- may have gotten ahead of the broader economy, which remains in recession.
"As with the ISM and Chicago PMI declines reported earlier in the week, the jobs data have raised questions about the breadth and sustainability of the auto-led third-quarter bounce in sales and output," says Action Economics.
"There's a lot of caution and second guessing," says Kurt Karl, chief U.S. economist at Swiss Re. "To a certain extent we got ahead of ourselves in pricing in a robust 'V' recovery, and we're just not going to have that in the next few months -- that's what these numbers are saying."
"Clearly the jobs report was disappointing; there's no way to sugarcoat it," says Phil Orlando, chief equity market Strategist at Federated Investors. But, he adds, "Our view is that recession ended in the second quarter, and none of this data dissuades us from this view. We continue to believe that third- and fourth-quarter GDP will be positive -- and we also think that third and fourth quarter earnings will be very strong."
We've had a couple of speed bumps, with manufacturing data and jobless claims that have created essentially a 6% selloff in the S&P over last two weeks, says Orlando. "What this does is give investors who have missed this rally an opportunity to put some cash to work," he says. "Our forecast has been that any 5% to 10% pullback in stocks would be met with a wave of cash looking to find a place in the equity market."
"[E]conomic data rarely move in a consistent pattern ... we should not be surprised that there are bumps in the road," Joel Naroff of Naroff Economic Advisors wrote in a note to clients. "Unfortunately, investors want the latest data to always be better than the previous ones and that is unrealistic. Thus, they react wildly."
Naroff and other economists pointed out that a huge chunk of September's job losses came from the government and therefore, private-payroll losses weren't as bad as the headline number would make it seem.
"If, as I suspect, the October numbers turn out to be a lot better, we will all come back to the conclusion that the economy is moving out of the recession but the recovery is likely to be quite sluggish," Naroff said.
A separate government report showed that factory orders plunged in August versus forecasts for a rise. The Commerce Department said factory orders fell 0.8% versus forecasts for a flat reading. Factory orders rose 1.4% in the previous month.
The market's optimism has been tested by economic data that have either weakened or fallen short of expectations, a disappointment after several months of hopeful signs from key industries like housing and manufacturing. That has led investors to question whether the 50 percent surge in stocks over the past six months can be sustained.
The fourth quarter may not be as stellar. Analysts expect the market to drift over the next few weeks as investors await companies' earnings reports and their forecasts for the coming months. The last big pullback in the market came in the weeks before second-quarter earnings were announced in July.
"October is shaping up to be a challenging month for investors," said Brent McQuiston, a vice president at WealthTrust-Arizona.
Strong earnings could help offset any growing concerns about a recovery and stabilize the market, he said, but solid revenue growth is what is needed to put the market on "firm footing." In the second quarter, many companies' sales were disappointing, and it was only through cost-cutting that profits were able to rise.
Meanwhile, the International Monetary Fund said a double-dip recession is possible.
Policy makers are likely to continue backing a weak dollar until the economy shows substantial improvement, Pimco's Bill Gross told CNBC. Worse-than-expected unemployment data reinforced that the country is still struggling to escape the worst downturn since the Great Depression, said Gross, co-CIO of Pimco, which runs the world's largest bond fund. The Fed is likely to keep interest rates low which in turn weakens the dollar -- but don't expect any government officials to officially endorse a low currency.
"The strong dollar is always the policy so to speak," Gross said during an interview. "One of the ways as a country to get out from under a debt burden is to devalue."
News that Wal-Mart's (WMT) chairman predicted a slow economic recovery and challenging business conditions also weighed on equities.
Wal-Mart [WMT 49.08 0.08 (+0.16%) ] shares ticked higher after Chairman Rob Walton warned that the retailer would ride out what is expected to be a slow US recovery, while its Asian operations should do better.
Troubled lender CIT (CIT, Fortune 500) launched a debt-exchange plan as part of its efforts to restructure and avoid bankruptcy. But the company said if the plan is not successful, it will likely file for Chapter 11 protection.
Apple (AAPL, Fortune 500) shares gained after both Morgan Stanley and UBS issued bullish notes on the company's forecast.
First Solar rose 4.3% after Standard & Poor's said the Tempe, Ariz.-based maker of solar power modules will be added to the S&P 500, replacing Wyeth, which is being bought by Pfizer.
IBM (IBM) shares also moved higher, bucking the market downtrend.
General Electric (GE) said it was considering an IPO for its NBC Universal unit after overatures from Comcast (CMCSK).
Shares of Echo Global Logistics (ECHO) begin trading Friday after the freight and cargo company raised $80 million in a share offering.
Among other companies in the news Friday, Accenture (ACN) posted fourth-quarter earnings per share (EPS) of $0.63 (excluding a $0.24 restructuring charge), vs. $0.67 EPS one year earlier, on a 14% revenue decline. Wall Street was looking for $0.63. The company declared a $0.75 annual cash dividend, an increase of 50%. Accenture also said its board approved moving from an annual to semi-annual schedule for dividend payment starting in the third quarter of fiscal 2010.
Immucor (BLUD) posted first-quarter EPS of $0.30, vs. $0.28 EPS one year earlier, on a 14% revenue rise.
Standard Microsystems (SMSC) posted second-quarter non-GAAP EPS of $0.08, vs. EPS of $0.46 one year earlier, on a 23% revenue decline. The company expects a 9%-15% sequential increase in third-quarter revenue. Wall Street was looking for breakeven EPS.
Global Payments (GPN) reported first quarter EPS of $0.71, vs. EPS of $0.71 one year earlier, despite a 9% revenue rise. The company noted unfavorable foreign currency trends. Wall Street was looking for EPS of $0.65.
New York Times led the decliners in the S&P 500 index with a loss of 5.6% followed by losses in Goodyear Tire of 5.4%, in Motorola Inc of 4.5%, in Johnson Controls of 4.4% and in DR Horton Inc of 4.6%.
Invesco Ltd led gainers in the S&P 500 index with a rise of 5.5% followed by gains in AIG 5.3%, in E*Trade Financial of 5% and in BB&T Corp of 4.6%.
Recovery-sensitive tech and industrial stocks were also depressed today, with Cisco, HP, Boeing and Caterpillar rounding out the Dow's bottom five.
Pepsi [PEP 60.90 2.44 (+4.17%) ] rose 4.2 percent after Deutsche Bank raised its price target on the stock.
Next week's other key reports include the ISM nonmanufacturing index for September and weekly initial jobless claims.
Next week, investors will be keeping an eye on the dollar for any insight on which way stocks are going. Plus, we'll get readings on the services sector, which accounts for 70 percent of economic activity, and reports from major retailers on September sales. And, earnings season unofficially kicks off with a report from Alcoa [AA 12.82 -0.10 (-0.77%) ] on Wednesday.
The CBOE Volatility Index, widely considered the best gauge of fear in the market, ticked higher, ending the week at 28.63.
Oil,Gold & Currencies:
U.S. light crude oil for October delivery fell 87 cents to settle at $69.95 a barrel on the New York Mercantile Exchange.
COMEX gold for December delivery rose $3.60 to settle at $1,004.30 an ounce.
The dollar tumbled versus the euro and the yen, resuming its recent plunge against a basket of currencies.
The dollar fell against the euro for a second day after Group of Seven finance chiefs refrained from calling for measures to stop the U.S. currency's decline.
The greenback also declined against 14 of its 16 major counterparts on speculation Federal Reserve officials this week will reiterate interest rates will be kept at a record low. The yen pared earlier gains against the dollar as Japanese Finance Minister Hirohisa Fujii said the government will intervene if the yen moves in a "biased direction."
"The G-7 simply maintained the same statement from the last meetings without addressing the dollar weakness," Takashi Kudo, director of foreign-exchange sales at NTT SmartTrade Inc., a unit of Nippon Telegraph & Telephone Corp. "As jobs data deteriorate, the Fed won't be able to raise borrowing costs anytime soon. This view will continue to cause the dollar to fall."
The dollar fell to $1.4637 per euro as of 11:07 a.m. in Tokyo from $1.4576 in New York on Oct. 2. The yen was at 89.84 per dollar from 89.81 in New York. It earlier climbed to as high as 89.23. The euro strengthened to 131.50 yen from 130.90 yen.
The dollar fell after G-7 finance chiefs meeting in Istanbul over the weekend stopped short of sounding alarm at the dollar's 14 percent decline against a basket of currencies since March.
Huge Rhetoric
"Excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability," G-7 ministers and central bankers said in a statement after talks on Oct. 3, repeating language they used in April.
A weaker dollar risks hurting economies outside the U.S. by making the exports of companies such as Japan's Canon Inc. more expensive. The Dollar Index, which tracks the greenback against the currencies of six trading partners including the euro and yen, lost 0.4 percent to 76.766.
"Given the huge amount of rhetoric from various officials leading up to the meeting, warning in particular about excessive currency strength against the dollar and the negative impact on economic recovery, the relatively weak statement leaves the door open to further dollar weakness over coming weeks," Mitul Kotecha, head of global foreign-exchange strategy in Hong Kong at Calyon, wrote in a report dated today.
New York Fed President William Dudley is set to speak in New York today, while Kansas City Fed President Thomas Hoenig will speak at an economic forum in Denver tomorrow.
U.S. Jobs
The Labor Department on Oct. 2 reported employers eliminated 263,000 jobs in September after a revised reduction of 201,000 in the previous month. The median forecast of economists surveyed by Bloomberg News was for a decrease of 175,000. The unemployment rate rose to 9.8 percent.
The benchmark interest rate is 1 percent in the 16-nation euro area, compared with as low as zero in the U.S., attracting investors to European assets. The European Central Bank will keep its main refinancing rate unchanged at the Oct. 8 meeting, according to all 53 economists surveyed by Bloomberg.
"The ECB is likely to leave rates unchanged this week," said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. "Given Europe's rate advantage over that in the U.S., the euro will probably be bolstered."
Bonds:
Treasury prices tiptoed higher, lowering the yield on the benchmark 10-year note to 3.21% from 3.18% late Thursday. Treasury prices and yields move in opposite directions.
What to expect:
MONDAY: Supreme Court meets; ISM services index; Fed's Dudley speaks
TUESDAY: IMF meeting; Fed's Fisher, Hoenig speak; Earnings from Yum Brands
WEDNESDAY: Weekly mortgage applications; weekly crude inventories; consumer credit; Earnings from Costco, Family Dollar, Alcoa
THURSDAY: Chain-store sales; foreclosure report; BOE, ECB rate decisions; weekly jobless claims; wholesale trade; Fed's Hoenig speaks; Earnings from Pepsi, Marriott, Chevron (interim)
FRIDAY: Market peak 2-year anniversary (Dow at 14,164.53); international trade
Goldman Owed $1 Billion if CIT Goes Bankrupt: Report
Goldman Sachs [GS 179.61 0.62 (+0.35%) ] would be due a $1 billion payment if troubled commercial lender CIT [CIT 1.17 0.11 (+10.38%) ] were to file for Chapter 11 bankruptcy, the Financial Times reported on Sunday, citing people familiar with the matter.
The report said Goldman would be owed the payment under a $3 billion rescue finance package it gave to CIT in June 2008, before the U.S. government bought $2.33 billion of CIT preferred shares in December.
According to the FT, CIT "would be required to pay a make-whole amount" that totals $1 billion under that agreement.
Goldman is likely to agree to allow CIT to delay payment on some of the amount, according to the report. Beyond the $1 billion payment from its rescue package, Goldman would also receive payment from credit insurance it holds if CIT were to go bankrupt.
Goldman and CIT could not be reached for comment.
Banks Should 'Pick Up' Crisis Bill: BoE's Tucker
Deputy Governor of the Bank of England Paul Tucker has suggested a levy on banks that could be used to pay the costs of future financial crises, the Daily Telegraph reported.
Tucker said the threat of a levy could act as a deterrent against reckless behavior in the banking sector, the newspaper reported.
"If banking sees that in systemic crises, the banking industry would have to pick up the bill, I would like to think that would change incentives and behavior," the Telegraph quoted him as saying.
Tucker, who is in charge of the Bank of England's financial stability functions, made the comments at an Institute of International Finance (IIF) conference running alongside the International Monetary Fund annual meeting in Istanbul, the Telegraph said.
US Led Group Joins Race to Buy Volvo from Ford: Report
A U.S.-led consortium has entered the race to buy Volvo from Ford [F 6.84 -0.13 (-1.87%) ], the Financial Times reported, in a challenge to China's Geely Automotive, which confirmed its interest in the money-losing Swedish carmaker last month.
Citing people close to the sale, the FT said the Crown consortium has fully secured financing from U.S. private equity groups. But the consortium is also seeking additional backing from Swedish investors to signal its intent to keep Volvo in the country, according to the FT.
The Crown consortium is fronted by former Ford director and turnaround specialist Michael Dingman and former Ford and Chrysler executive Shamel Rushwin, the people told the FT.
The FT reported another informed person as saying the U.S. consortium had offered significantly less than Hong Kong-listed Geely, but that both plans involved similar plans for more than $3 billion of additional investment in Volvo.
The FT quoted a person close to the sale saying Geely had offered just less than $2 billion for Volvo. Other media reports have put the price tag at around $2.5 billion.
A Ford spokesman was not immediately available for comment.
A Saab spokeswoman declined to comment.
3 More Firms Get OK to Buy Toxic Assets
Three more large investment firms have raised sufficient capital to participate in the joint partnership with the government to purchase toxic assets from banks.
The Treasury Department said Alliance Bernstein and BlackRock, both headquartered in New York City, and Wellington Management, based in Boston, had all raised the $500 million minimum to begin operations.
Those three firms join the first two to clear all the hurdles for participation last Wednesday, Invesco and the TCW Group.
The goal of the program is to rid banks of bad loans so they can resume more normal lending, which is key for sustaining any economic recovery.
With the three new additions, the total purchasing power to obtain banks' soured assets has increased to $12.27 billion, Treasury said.
The government effort, known as the Public-Private Investment Program, or PPIP, has been plagued by delays and some analysts wonder how successful it will be in buying banks' bad assets.
But Treasury officials have expressed optimism about the program, predicting that the remaining four firms who are seeking to participate will qualify by the end of this month.
"The PPIP continues to grow," Treasury Assistant Secretary Herb Allison said in a statement Sunday. "Private capital is being drawn into the market for legacy securities and taxpayers are being given a chance to share in the profits."
In July, Treasury said that nine firms had qualified to participate in the PPIP program and they were given time to raise at least $500 million each, money that will be matched from the government's $700 billion bailout program.
The announcements in recent days that funds have begun to receive support from the government comes a year after Congress first approved the bailout effort, known as the Troubled Asset Relief Program.
Then-Treasury Secretary Henry Paulson had obtained congressional approval for the effort by saying its major goal would be to buy bad assets from banks.
However, that goal was shifted almost immediately to direct injections of capital into banks after government officials decided that the financial crisis was worsening too quickly and it would take too long to get the toxic asset purchase program up and running.
Treasury said that so far private investors in the five firms have come up with $3.07 billion, which Treasury has matched equally.
In addition, the firms will be able to borrow an additional $6.13 billion from Treasury to bring the total amount available to purchase toxic assets to $12.27 billion.
The government's current goal is to provide $30 billion in Treasury investment to all of the funds participating. With contributions from the private sector, that would push the total available to buy toxic assets to $40 billion.
BofA Board Feels Pressure to Tap Replacement CEO
The Bank of America board is feeling pressure from investors to find a replacement for departing Chief Executive Officer Ken Lewis before the end of the month, CNBC has learned.
The decision "will likely happen in weeks, not months," a person close to the Bank of America [BA 51.40 -0.71 (-1.36%) ] board said. A decision on the timing will likely come sometime this week.
The general consensus of the board is to have a selection ready by the board meeting scheduled at the end of October. Whether the new CEO will be permanent or on an interim basis will depend on how old the selected person is.
If the selection is for an interim CEO, that person will likely stay for a year or two rather then a few weeks.
There is a growing chorus of analysts that say the current list of Bank of America insiders being considered for the job isn't good enough and that the company needs to look outside.
Possible candidates could be Bank of New York Mellon Chairman and CEO Robert Kelly or BlackRock Chairman and CEO Larry Fink. Bank of America holds a 49 percent stake in BlackRock, but Fink has said he isn't interested in the job.
Another possibility that many insiders and analysts are tipped as a good interim CEO is former Fleet CEO Chad Gifford, but Gifford is playing down the idea of him taking the job.
China Calls for Automatic IMF Voting Adjustments
China on Sunday called for an overhaul of the International Monetary Fund's voting system with automatic adjustments to give more say to rising economic powers.
In a statement to the IMF's steering committee, Yi Gang, a vice central bank governor, laid out China's broad vision for reforms at the Fund, emphasizing that Beijing wanted the organization to play a bigger role in regulating global financial markets but only so long as developing nations were given more clout.
"The IMF should establish a system to automatically adjust (voting) quotas and to reflect changes in countries' economic status in a timely manner," Yi said in comments posted on the central bank's website.
Because countries need to pump money into the IMF for any given quota increase, China's proposal would increase Fund resources as it shifts voting power from over-represented rich countries to fast-growing emerging nations.
Yi said "a major reason" why international institutions had failed to anticipate the global financial crisis was that they lacked adequate representation from emerging economies.
He also said the IMF should desist from simplistic analyses of national economic policies, a thinly veiled warning to the organization to avoid criticizing on Beijing's controversial, tightly managed exchange rate regime.
Best Way Forward
Yi said the IMF had many channels to raise cash but that increasing quotas was the best way.
China pledged this year to give the IMF up to $50 billion by buying bonds, but, like Russia and Brazil, it made clear that its contribution would not be permanent unless developing countries were given more power.
He also said Beijing thinks the IMF has a role to play in keeping exchange rates stable. "It should strengthen its supervision of international capital flows and encourage the relative stability of exchange rates of the main reserve currencies," he said.
Group of 20 rich and developing nations agreed last month that the IMF should make recommendations about how countries can adjust their policies to better balance the global economy.
Getting big exporting nations such as China to increase consumption is one essential part of rebalancing, but Beijing has bristled at suggestions that it should let the yuan appreciate to curb reliance on exports and help meet that goal.
No Simplistic Assessments
While Yi did not explicitly mention the yuan, he was firm in drawing a line in the sand.
"The IMF should strengthen its supervision of all major financial markets and it should comprehensively consider all policies of its member states," he said. "However, it should not simplistically, mechanically assess individual policies."
Yi told Reuters on Saturday that China's exchange rate policy was very clear and that it had no intention of changing it.
While Beijing has repeatedly declared it is moving to allow more currency flexibility, the central bank has kept the yuan almost flat against the U.S. dollar since July 2008, when the global financial crisis began worsening.
On China's domestic outlook, Yi said the economy, which grew 7.9 percent year-on-year in the second quarter, was developing "better than predicted" and that fiscal and financial risks were "under effective control."
"At the same time, China will also be vigilant and guard against all kinds of latent risks, including inflation," he said.
China's consumer prices have fallen for six straight months, but economists think the pace of decline may have bottomed out, setting the stage for a potential rebound in inflation, fueled by a record surge of bank lending in the first half of this year.
Yi said the global economy had taken a turn for the better, but that the foundations of recovery were not solid yet.
"The major risks to the global economy include trade and investment protectionism and lack of coordination in macro-economic policies," he said.
Will the G7 Become the G2?
The Group of Seven rich nations hopes to decide its future as an institution on Saturday, with
the United States pushing for the creation of a smaller core group that would include China, a G7 official said.
The official, speaking on condition of anonymity, said Washington wanted to see the G7 supplanted in global economic policymaking by a Group of Four that would bring the United States, Europe and Japan together with China.
The official was speaking ahead of a meeting of G7 finance ministers and central bankers in Istanbul later on Saturday.
A U.S. Treasury spokeswoman declined to comment. British finance minister Alistair Darling said, "These proposals have been around for a long time ... You shouldn't read too much into these proposals."
He added, "It is not our position that the G7 is going to be wound up."
Other officials also suggested the G7 would continue to exist, but with a diminished role.
"We will talk about how the G7 will work on, how its role will be in future ... for example the frequency of G7 meetings," said German deputy finance minister Joerg Asmussen.
"In the German view, the G7 should be something like a preparatory body" for meetings of the larger Group of 20 nations, which includes big developing economies such as China and India, he added.
Policymaking
For more than a decade, the G7 dominated international policymaking. But the financial crisis has undermined its power, as economies such as China have become key to managing the global recovery.
Any formal move to supplant the G7, which comprises Britain, Canada, France, Germany, Italy, Japan and the United States, would likely be diplomatically complex and controversial.
Its top finance officials have traditionally met several times a year, seeking to guide foreign exchange rates and other markets through communiques released after their meetings.
But the group's role has appeared in doubt since early this year, when the G20 became the main forum for debating the financial crisis. The G20 has agreed in principle to tighten financial regulation and try to reduce trade imbalances that destabilise the global economy.
"The G7 is not quite dead, but it is losing its relevance," the IMF's managing director, Dominique Strauss-Kahn, was quoted as saying by Emerging Markets magazine on Saturday. "It's on its way to extinction."
Tensions over foreign exchange rates are underlining the difficulty that the G7 is having in staying at the centre of global policymaking.
Persuading China to appreciate its tightly controlled yuan currency is widely seen as crucial to correcting trade imbalances, but China is not a member of the G7.
Japan has sounded keen to preserve the G7 as an important body. On Friday, Bank of Japan Governor Masaaki Shirakawa said the G7 remained a more convenient forum to discuss foreignexchange rates than the G20, because G7 members all had major financial markets.
But some other countries appear unconvinced. Canadian Finance Minister Jim Flaherty said that because discussion of global imbalances would inevitably include the yuan and the impact of the weak U.S. dollar on other economies, global currency discussions needed to extend beyond the G7.
Prince Alwaleed Urges US to Sell Citi Stake: Report
Prince Alwaleed bin Talal, a big investor in Citigroup, urged the U.S. government to sell its stake in the bank as soon as this year to boost investor confidence, Emerging Markets magazine reported.
"The earlier the U.S. government exits its investments in those companies, the better," as long as the withdrawal is not done in a way that hurts the prices of U.S. banking stocks, the Saudi billionaire was quoted as saying in an interview published on Sunday.
"We need to give confidence back to the shareholders and investors that these companies are moving along without government support."
A series of bailouts during the financial crisis has left the U.S. government with a 34 percent stake in Citigroup, after the bank obtained $45 billion from the government's Troubled Asset Relief Program.
Sources told Reuters last month that Citigroup [C 4.52 -0.01 (-0.22%) ] was talking to U.S. officials about how the government should shed its 7.7 billion shares in the bank.
Alwaleed, who owns part of Citigroup through his investment firm Kingdom Holding, has said little in recent months about the stake. Kingdom owned 3.6 percent of the bank in July 2007 and five months later Alwaleed said he was among investors who agreed to put more money into the bank.
Operating Profit
Citigroup is expected to return to the black on an operating basis next year at the earliest, Alwaleed was quoted as saying in the interview.
"Citigroup has learned a huge lesson. The worst is behind them right now," Alwaleed said, adding that the bank's $100 billion of tangible common equity, "the highest in the industry," and the large scope of its operations meant its future was "very bright."
The bank has been profitable on a net basis in each of the last two quarters because of one-time gains and accounting items, but has not posted a quarterly profit from its main operations since 2007.
In the wake of the financial crisis, U.S. regulators have been discussing the problem of banks becoming "too big too fail" -- since the collapse of a big institution could undermine the entire banking system, governments can find themselves forced to spend huge sums supporting debt-ridden and unprofitable banks.
But Alwaleed said the solution to this problem was not breaking up big banks, and that he did not expect the U.S. government to decide to do this.
"Any failure of a broken-up bank is still going to impact the whole system. You need to fix the problem, not a symptom of the problem," he was quoted as saying.
Roubini Says Stocks Have Risen 'Too Much, Too Soon, Too Fast'
New York University Professor Nouriel Roubini, who predicted the financial crisis, said stock and commodity markets may drop in coming months as the gradual pace of the economic recovery disappoints investors.
"Markets have gone up too much, too soon, too fast," Roubini said in an interview in Istanbul on Oct. 3. "I see the risk of a correction, especially when the markets now realize that the recovery is not rapid and V-shaped, but more like U- shaped. That might be in the fourth quarter or the first quarter of next year."
Stocks have surged around the world in the past six months as evidence mounts that the economy is emerging from its deepest recession since the 1930s. The Standard & Poor's 500 Index has soared 51 percent from a 12-year low in March while Europe's Dow Jones Stoxx 600 is up 48 percent. The euphoria contrasts with the cautious tone of Group of Seven policy makers, who said after meeting in Istanbul over the weekend that prospects for growth "remain fragile."
"The real economy is barely recovering while markets are going this way," Roubini said. If growth doesn't rebound rapidly, "eventually markets are going to flatten out and correct to valuations that are justified. I see a growing gap between what markets are doing and the weaker real economic activities."
'Anemic' Recovery
The International Monetary Fund predicts the global economy will expand 3.1 percent in 2010, led by growth in Asia, after a 1.1 percent contraction this year. That is still "anemic" and "very weak," Roubini said.
U.S. stocks fell last week after manufacturing expanded less than anticipated and unemployment climbed to a 26-year high, fueling concern the economy is rebounding more slowly than forecast.
Gains in the S&P 500 have pushed valuations in the index to more than 19 times reported operating profits from the past year, data compiled by Bloomberg show. That's near the most expensive level since 2004.
The performance of the U.S. economy is probably more sluggish than reflected in stock markets, risking a correction in equities, Nobel Prize-winning economist Michael Spence said last month. U.S. stock-market investors have "over processed" the stabilization of growth in the world's largest economy, Spence said.
Creating Bubbles
The global equity rally has added about $20.1 trillion to the value of stocks worldwide since this year's low on March 9. Governments have poured about $2 trillion of stimulus into the global economy while central banks have cut interest rates to close to zero in efforts to revive growth.
"In the short run we need monetary and fiscal stimulus to avoid another tipping point and to avoid deflation, but now this easy money has already started to create asset bubbles in equities, commodities, credit and emerging markets," Roubini said. "For the sake of achieving growth stability again and avoiding deflation, we may be planting the seeds of the next cycle of financial instability."
Jobless Rate Likely to Pass 10%: Greenspan
Former Federal Reserve Chairman Alan Greenspan predicts that the unemployment rate will push past 10 percent and stay at that level for a while.
"Pretty awful" is how Greenspan describes Friday's report that the unemployment rate has risen to 9.8 percent.
He says the growing number of Americans who have been out of work six months or longer is of particular concern because jobless workers lose skills over such a long period.
Greenspan says he would advise President Barack Obama to focus on getting the economy going, but not to go too far.
He says a second economic stimulus is not called for because less than half of the current stimulus is in effect and because the nature of the recovery is not yet clear.
Greenspan spoke Sunday on ABC's "This Week."
Stores Brace for Another Christmas with Scrooge
In the retail business, it is never too early to think about Christmas. So a lot of people are thinking about it, and taking surveys to test the mood of the American consumer, and deciding that this Christmas will be as bad as last — which is to say, one of the worst on record.
Retailers are relieved to hear that prediction. Flat sales this holiday season would at least mean that things had stopped getting worse.
"It's reflective of this 'new normal' we're in," said James Russo, vice president for global consumer insights at the Nielsen Company. "Flat is good."
Over all, the retailing industry posted a sales decline of about 2 percent last Christmas season, the weakest performance since the late 1960s, when the Commerce Department began tracking holiday sales figures. Results for stores that sell clothing and luxury goods were far worse, typically declining by double digits. By contrast, several reports published in the last few days, including surveys by Nielsen and Deloitte, forecast no change in holiday sales from last year to this year.
While recent economic reports have been mixed, several indicators suggest the economy is beginning to improve. But the turnaround, if it is real, has yet to filter through to retail sales, which are closely tied to the unemployment rate. That rate worsened more than expected in a government report on Friday, rising to 9.8 percent.
Analysts say that many consumers are still worried about their jobs, their stock portfolios and the value of their homes. They remain hamstrung by a tight credit market. Few experts foresee a robust recovery in consumer spending until the unemployment rate starts heading down, perhaps sometime next year.
If a mood of thrift and penury continues into the holiday season, retailing analysts said the beneficiaries, not surprisingly, would be discount and dollar stores, warehouse clubs and Internet retailers, as shoppers across all income levels spend less and make fewer trips to stores.
A holiday study published by Nielsen this week found that 85 percent of households expected to spend the same or less this year than last year.
People are also continuing to nest in their homes. This Christmas, sales of necessities and items associated with at-home entertainment are expected to fare best: cookware and other kitchen sundries, consumer electronics, DVDs, alcohol, tobacco and bed and bath accessories. The Nielsen report said upscale retailers should consider stocking practical items because affluent households may forgo jewelry and designer bags for the likes of generators, fireplace accessories, kitchen gadgets and family games.
As has been the case throughout the recession, higher-priced categories like jewelry, sports equipment and vacations are expected to be hurt most. Industry experts said that would probably lead merchants of those items to offer compelling discounts, some of which will pop up before Thanksgiving.
Indeed, Moody's Investors Service said in a recent research note that while clothing retailers had brought their inventory in line with weaker demand, the holiday season "may be more promotional than anticipated, as consumers have learned to delay shopping in anticipation of higher markdowns."
Already, major big-box chains are jockeying for the discretionary dollars of consumers.
Wal-Mart said this week it would bring a $10 toy section back to all of its stores, repeating a successful strategy from last Christmas. It will offer many more toys, for a wider variety of age groups, at that price. The offers will include classic board games like Monopoly, childhood favorites like Barbie dolls and Tonka trucks, a Hot Wheels Trick Track and a Lego Bionicle Legends set. Additionally, Wal-Mart said it would match any local competitor's advertised offer on the same toy if the price fell below $10.
On Tuesday, Kmart published a "Fab 15" toy list, highlighting a layaway program that lets consumers reserve popular items early, pay over time, then pick up their purchases before the holidays arrive.
The stores may have good reason to begin competing for consumers' Christmas dollars before Halloween even rolls around. According to Wal-Mart's customer research, 70 percent of consumers are planning to start their holiday toy shopping before Halloween.
Analysts closely watch discount chains because when consumers begin spending discretionary dollars after an economic downturn, they typically do so at discount and value-priced retailers first. As time goes on and the economy recovers, consumers move up to specialty retailers. Many analysts have said that if consumers spend more this holiday season at the likes of Wal-Mart and Costco, that bodes well for specialty stores come 2010 and 2011.
Mr. Russo said studies by Nielsen had found that consumers were indeed "expressing a desire to move back into the discretionary categories although — and this is really key — at moderate levels."
In another positive sign, Ted Vaughan, a partner in the retail and consumer products practice at BDO Seidman, said, "Retailers are starting to ramp up their inventory purchasing" for next year, referring to a BDO Seidman survey of chief financial officers at major chains.
The International Council of Shopping Centers, an industry trade group, published one of the most optimistic of the holiday reports so far, forecasting a 1 percent year-over-year sales increase in November and December for stores open at least a year.
"Does the retail industry need a miracle to have positive year-over-year sales growth during the 2009 holiday season?," the report said. "No, but should you see Kris Kringle at the Macy's Thanksgiving Day Parade, put in a request for one anyway!"
Fed Needs Goldilocks for Roach Motel Check-Out: Caroline Baum
If only the moderator had called on me, I might have gotten an answer to my questions and left with more confidence in the Federal Reserve's ability to pull off its exit strategy without a hitch.
Speaking at a conference in Washington last week sponsored by the Cato Institute and Shadow Open Market Committee, a group of self-appointed Fed watchers, Fed Vice Chairman Don Kohn reiterated the conditions and tools for withdrawing excess liquidity already outlined by Fed chief Ben Bernanke.
The tools include raising the interest rate the Fed pays on reserve balances to put a floor under short-term rates; draining reserves via outright sales of securities or reverse repurchase agreements; and allowing loans made under the Fed's "unusual and exigent circumstances" authority to wind down, paring the central bank's balance sheet through natural attrition.
That's not an option with the long-term securities the Fed has purchased, and continues to purchase. If the Fed perceives spreads between Treasuries and mortgages, for example, to be "distorted," or if long-term interest rates don't rise with increases in the Fed's target rate, the Fed "could consider sales of those assets," Kohn said.
That statement presumes the Fed knows the right level for spreads, according to Ram Bhagavatula, managing director at Combinatorics Capital LLC, a hedge fund in New York.
"In 2007, Bernanke said spreads were too tight. Last year, spreads were too wide," he said. "How do they know what's right?"
'Just Right'
In fairy-tale land, Goldilocks may be able to tell when the porridge is "too hot" or "too cold," but how do a handful of humans know when it's "just right?" That's a tough call in any environment; the difficulty is compounded when the discerner is also the distorter-in-chief.
"Once the Fed got involved in the credit side of the equation," buying mortgage-backed securities to keep home-loan rates low, "they destroyed information in the private markets," Bhagavatula said.
Yields on all debt securities, not just MBS, have narrowed relative to Treasuries this year. How much is the result of the Fed's outright purchases and how much is natural healing? Are investors buying junk bonds because they have absolute value or provide a good return on a risk-adjusted basis?
There's another problem with Kohn's comment, one that had me squirming in my seat at the Sept. 30 conference. It was a little less than a year ago, in that same auditorium at Cato, that Kohn gave an elegant defense of the Fed's hands-off approach to asset bubbles.
Selective Prescience
With the benefit of hindsight -- after fanning the bubble, watching it burst and cleaning up the mess -- Kohn said he was still skeptical about the Fed's ability to identify an asset bubble in time to lean against it and unconvinced that using monetary policy to check speculation would have benefits that outweigh the costs.
How is it the Fed can be so prescient when it comes to credit spreads and interest rates and so clueless when it comes to asset prices? And why is Kohn willing to intervene in one case and not lean in the other, using monetary policy to take some of the wind out of economy-destabilizing bubbles? Supervision isn't a substitute for monetary policy. No amount of regulation -- more, better, different -- can counteract the powerful incentive of easy money.
Policy Asymmetry
I didn't get a chance to ask my question, and I doubt Kohn would have answered it to my satisfaction. To think that the Fed, or anyone, can discern market distortions in a "structured economic environment," as a Tokyo reader referred to the U.S. economy, is ludicrous.
"It makes the exit strategy difficult to execute," Bhagavatula said.
Exiting is never easy. The history of Fed policy in the modern era is one of asymmetric responses, in more ways than one.
First, the Fed doesn't tolerate deflation, or a decline in the price level, even if it's the good kind. Technological innovation enables businesses to produce more with less. The economy grows, prices fall, real incomes rise. What's not to like?
Prices can also decline because demand collapses. That's the Great Depression scenario, with prices, output and wages all falling.
The second asymmetry is evident in interest-rate changes. The Fed is "quick to ease and slow to tighten," Bhagavatula said, pointing to the 1994 tightening episode as an exception. "The record shows rates go down precipitously and up slowly."
Exit Hurdles
He doesn't expect this time to be different. Yes, the Fed wants to do the right thing and raise rates preemptively to maintain price stability. Bernanke and Kohn are dedicated civil servants who made decisions under the worst of circumstances for the good of the nation, not for their personal aggrandizement.
It's always easier to check in to the Roach Motel than check out, politically and, this time, practically. Banks are holding $854 billion of excess reserves in their accounts at the Fed compared with an average of $1 billion to $2 billion before the crisis. Eventually the Fed will have to suck them up to avert inflation.
Add to that the age-old problem faced by policy makers, and you can understand why the exit is fraught with risks. The decision to withdraw monetary accommodation is based on "a forecast of economic developments, not on current conditions," Kohn reminded us last week.
We all know how that worked out in the past.
Asia:
Asian stocks fell for a third day, led by technology and mining companies, after economist Nouriel Roubini said share prices may drop and a report showed the U.S. lost more jobs than estimated.
Samsung Electronics Co., which gets 19 percent of sales from America, dropped 2.9 percent, and Honda Motor Co., which generates 47 percent of its revenue in North America, retreated 1.5 percent. Mitsubishi Corp., which derives almost half of its sales from commodities, lost 1.9 percent after oil and metal prices decreased.
The MSCI Asia Pacific Index declined 0.3 percent to 114.11 as of 10:14 a.m. in Tokyo. The gauge fell 2.8 percent last week, the biggest drop since the five days ended Aug. 21, on concern a seven-month rally outpaced the prospects for an economic recovery.
"The fundamentals of the global economy will improve rather slowly, and we'll continue to see some of the excitement cool down," said Tomochika Kitaoka, a senior strategist at Mizuho Securities Co. in Tokyo.
South Korea's Kospi Index dropped 1.6 percent and New Zealand's NZX 50 Index lost 0.4 percent. Japan's Nikkei 225 Stock Average added 0.1 percent, while Australia's S&P/ASX 200 Index gained 0.3 percent.
Futures on the S&P 500 added 0.3 percent. The gauge retreated 0.5 percent in New York on Oct. 2. Payrolls dropped more than economists had estimated in September, a Labor Department report showed. Orders placed with U.S. factories fell 0.8 percent in August, the Commerce Department said, while economists had forecast orders would be unchanged.
U.S. Demand
Asian exporters fell on concern U.S. demand is faltering. Samsung Electronics, the world's largest maker of computer- memory chips, declined 2.9 percent to 769,000 won. Honda lost 1.5 percent to 2,630 yen.
Mitsubishi Corp. fell 1.9 percent to 1,744 yen. Its smaller rival Mitsui & Co., which gets 38 percent of sales from commodities, dropped 2.8 percent to 1,093 yen.
Crude oil slid 1.2 percent on Oct. 2, the most in a week. A gauge of six metals, including copper and nickel, fell 2 percent in London, adding to the previous day's 2.8 percent drop.
The MSCI gauge has climbed 62 percent from a five-year low on March 9 as stimulus measures worldwide dragged economies out of recession. Stocks on the index traded at 22.4 times estimated earnings. That's still higher than 17 times for stocks on Standard & Poor's 500 Index in the U.S.
"Markets have gone up too much, too soon, too fast," Roubini, the New York University professor who predicted the financial crisis, said in an interview in Istanbul on Oct. 3. "I see the risk of a correction, especially when the markets now realize that the recovery is not rapid and V-shaped, but more like U-shaped. That might be in the fourth quarter or the first quarter of next year."
Michael Geoghegan, HSBC Holdings Plc's chief executive officer, is convinced there will be a second global economic slump and as a result doesn't want the bank to grow too fast, the Financial Times cited him as saying.
Nikkei 225 9,736.63 +4.76 ( +0.05%).(08.35 AM IST)
Japan's Nikkei share average edged up 0.2 percent on Monday on gains in bank shares and retailers after touching a 10-week low on concern over the fragility of the U.S. economic recovery.
A surge in shares of Fast Retailing (9983.T), which said on Friday that same-store sales at its Uniqlo casual-clothing chain in Japan in September jumped 31.6 percent from a year earlier, helped pull the Nikkei into positive territory.
Advances in banking shares .IBNKS.T also lifted the market. Shares in lenders have recently been battered by worries that lenders may come out with share offerings in the face of a global regulatory push for banks to carry bigger capital buffers.
But exporters such as Kyocera (6971.T) and Honda Motor (7267.T) retreated on lingering concern that the yen's recent strength may eat into their overseas profits, while construction firms .ICNS.T extended their losses after falling in the past few weeks.
"While the (U.S. jobs) data was bad and optimism about the U.S. economy may have receded, I do not think market players think that this means that the outlook for the U.S. economy is ruined," said Hideyuki Ishiguro, supervisor at Okasan Securities' investment strategy department. "I think it just means market sentiment has returned to neutral for the time being," Ishiguro added.
The Nikkei was up 17.55 points or 0.2 percent at 9,749.42 .N225, after falling as low as 9,713.92, its lowest since July 23.
The broader Topix fell 0.1 percent to 873.44 .
HSI 20378.04 +2.55 +0.01% (08.37 AM IST)
Hang Seng Index opens 32 points lower on Mon
Hong Kong stocks fell on Monday morning, with the benchmark Hang Seng Index opening 32 points lower at 20,338.17.
The Hang Seng China Enterprise Index, which tracks the overall performance of 43 mainland Chinese state-owned enterprises on the Hong Kong Stock Exchange, opened 43 points lower at 11,483.74.
PetroChina<601857><0857><PTR> rose 0.70% and opened at HK$8.58. Sinopec<600028><0386><SNP> grew 0.31% from the previous closing to HK$6.39.
SHANGHAI Stock Exchange:
•The SSE will close from October 1 (Thursday) to October 8, 2009 (Thursday) and open for trading on October 9, 2009 (Friday).
Glorious Property tumbles 14.8% on HK debut.
Irico launches TFT-LCD glass substrate project in Zhangjiagang (5 Oct)
Henkel eyes further growth in China
Baidu launches wireless search service in Japan
China imposes anti-dumping tax on PVC imports
Fortescue misses funding deadline for CISA deal
Vanke, COFCO Property JV buys land in Beijing for RMB 2.93 bln
Bengang Steel forecasts loss of up to RMB 1.5 bln in Jan-Sep
GM opens science lab in Shanghai
JPMorgan retains "neutral" rating for Greentown
Morgan Stanley assigns "buy" rating for Shimao Property
Shanghai Dragon to sell four assets, earning RMB 119 mln
China Unicom starts pre-sale of iPhone
China South Locomotive wins contracts worth RMB 72.4 bln
IMF announces China, world growth forecasts
CNOOC may buy into Ugandan oil project
China vows to curb aluminum smelting
China Real Estate seeks to IPO in US, raise $200 mln
CITIC Real Estate to sell Beijing firm for RMB 1.31 bln
UC RUSAL revives HK IPO
COSCO operates container terminals in Greece
Powerlong Real Estate lowers IPO price
Greenland Group buys land in Shanghai for RMB 7.25 bln
Giant Interactive sees Q3 revenue down 20%-25%
INVESTMENT VIEW
India Road Construction: Policy changes in favour of private developers
Key Beneficiaries: C&C, Valecha Engineering, Unity Infra, IRB Developers, Sadhbhav Engineering, HCC, IVRCL, NJCC, Madhucon and L&T
The regulatory framework is being tweaked to improve the risk-return perception. The key policy changes in recent times or potential amendments affecting highways and roads are discussed below. Inspite of delays and re-runs of RfQ rounds of several of the projects in the pipeline because of the changes.
Pre-qualification criteria
Recently, projects that have not attracted bids (38 of 60) were modified to reflect more realistic costs, thus, attracting bidders in the next round of bidding. The cap on the
number of financial bids (six) has been removed. Instead, now the bidders should have experience (Threshold Technical Capacity or TTC) of executing projects worth 200%
of the project bid on. The industry is demanding a reduction of the threshold to 100%.
However, NHAI will have the flexibility to reduce the TTC by 50% of the Total Project Cost (TPC), that is: provide for TTC to be one-and-a-half times of TPC. This is expected to increase the competition for smaller roads. However, very few players would be able to pre-qualify for the larger road packages without partnering with large foreign developers/construction companies.
Modification of minimum equity holding criterion on cards
In response to the industry demands, the government is now considering modifying the minimum equity provision to promote investments in the sector. Relaxation of this clause should also lead to matching risks and investor profile. For example, the construction companies should be allowed to exit once the construction is done or the construction risk is eliminated. The present agreement requires the developers to hold at least a majority stake (51%) in the project for the first three years and 26% thereafter.
Changes to tolling policy will increase toll rates
In order to attract developers to take traffic risks, the government has modified the tolling policy to include a 3% (without compounding) fixed escalation plus 40% of change in Wholesale Price Index (WPI). This change results in higher toll-rates to developers. For structures (bridges, bypass or tunnels), the toll fee will be linked to the capital cost instead of length implying a greater linkage between the cost of construction and toll tariff. A provision exists for charging an overloading fee, if a weighbridge is installed at a toll plaza. Given the rampant practice of overloading on Indian roads, the implementation of this rule is circumspect.
Timing of viability gap funding
Those projects that had received a viability gap funding were facing the problem of timing of cash flows as half of the viability gap funding was paid during construction and the other half during the first five years of commencement date. The government, in turn, has decided to meet the funding gap upfront, which has made such projects more attractive.
Land acquisition
Land acquisition has been a major impediment for road project execution. The government had proposed transferring 50% of land at the time of the award and the remaining during construction. To facilitate execution further, it has now planned to hand over 80% of land at the time of the award and the remaining during construction. Separately, there were projects that were not awarded commencement certificates due to the inability of the government to acquire 5-10% of land.
The private developer and lenders were not allowed to collect toll until the commencement certificate was awarded. Now, the private developers will be allowed to collect toll if they deposit 80% of the estimated cost of construction on the undeveloped stretch of road.
Termination clause
By introducing a termination clause, the NHAI essentially stripped the concessionaire off of upside for taking traffic risks. According to the clause, the NHAI could end the concession period if the traffic increases beyond the designed capacity of the road for more than three years. However, the industry is lobbying strongly against this provision and we expect relief in the near future.
Conflict of interest clause
Under the present scenario, two different bidders cannot directly/indirectly hold more than 5% in the other. This threshold was raised from 1%. Furthermore, it excludes banks, insurance companies, pension funds and public financial institutions from this clause. Though this hike is expected to bring in more investments in the sector, it might not be sufficient as a PE fund typically holds more than 5% stake in companies, thereby still invoking this clause. It is likely that the limit will be raised to 25% as appealed by the investor class.
(Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.)
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Arvind Parekh
+ 91 98432 32381
