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Thursday, November 29, 2012

Euro Eases Up Against The Dollar, Fiscal Policy Now Main Focus For The US

The Euro eased up against the US Dollar during early trading on Thursday, but losses were limited after statements from US policy makers re-ignited hopes that a deal could be struck to help avoid sharp fiscal tightening which may hurt the global economy.

For the time being, the US fiscal cliff issue seems to be the dominant theme with a lot of politicians and policy makers trying to broker a deal with the White House to avoid a crisis.

Even President Barack Obama went on to state on Wednesday that he hoped an agreement with Congress could be reached well before Christmas. Only time will tell how this one plays out.

Fed set for additional QE in 2013.

 Frustrated with the lack of substantial job gains, many Fed officials want the bank to continue buying long-term Treasurys even after Operation Twist expires. The purchases would be in addition to the $40B a month of mortgage-backed securities that the Fed's been scooping up. Under Twist, the bank's been paying for the long-term Treasurys with short-term paper, but as the latter is running out, the Fed will have to print money to keep the program going.

S&P affirms China's rating at "AA-."

 S&P has reiterated China's sovereign long-term rating at "AA-" and its outlook at stable, citing "strong economic growth potential, (a) robust external position, and the government's relatively healthy fiscal position." Despite the conservative nature of China's new Politburo Standing Committee, S&P reckons that "efforts toward deepening structural and fiscal reforms are likely to continue."

Italian 10-year yields fall to two-year low in auction.

Italy has sold €2.98B of 10 year bonds at a yield of 4.45%, down from 4.92% in a previous auction and the lowest in two years. The government also issued €3B of five-year paper at 3.23%, down from 3.8%. The total sale of €5.98B was at the top end of the government's target of €4-6B. In the secondary market, 10-year yields were -7 bps at 4.53% midday in Europe.

India to hold vote on foreign supermarket stake.

The Indian government has buckled to intense pressure and agreed to votes in both chambers of parliament over its controversial proposal to allow foreign retailers to own up to 51% of domestic supermarkets. While the votes will be symbolic, a loss for the government will be a setback in its attempts to reform the economy and spark growth, while the likes of Wal-Mart (WMT) also have a lot riding on the outcome.

Wednesday, November 28, 2012

Euro Steps Away From Highs, Focus Shift To The US

The Euro backed off the previous session's 1-month high against the US Dollar during the Asian session on Wednesday when relief about a new debt deal for Greece transformed into widespread unease about the looming US fiscal crisis.

While a plan to cut Greek debt and allow the nation to secure more financial aid in order to avoid a chaotic default has been approved, skepticism grew over the lack of details on how the Greeks plan to implement the reforms needed to meet these targets.

Meanwhile, The US Congress pushed toward compromise on Tuesday on a deal to avoid looming tax increases and spending cuts coming up next year. No agreement has been reached just yet, despite growing pressure less talk and more action.

Greek deal could see countries take losses.

The measures that the Troika has agreed to in the deal to release a long-delayed €34.4B tranche of Greece's bailout will reportedly only bring the country's debt-GDP down to 126.6% by 2020 and 115% by 2022, not the respective 120% and 110% that was advertised. Officials are studying further ways to reduce Greece's loans, but it could mean that eurozone nations will have to take losses on the debt they hold.

Steel industry unable to adjust to economic realities.

The steel industry is suffering from chronic overcapacity, with production ability of 1.8B tons but expected 2012 orders of just 1.5B tons. And instead of cutting back, the sector is building more mills, often supported by governments. Major problems include the fragmentation in the industry and the political difficulties of closing plants - witness ArcelorMittal's (MT) travails in eastern France, where the government has threatened to nationalize one of the company's mills

French unemployment hits 14-year high.

The number of job seekers in France rose 1.5% in October to 3.1M, the highest since April 1998, with the increase the 18th in a row. The Labor Ministry said that because of the struggling economy, the figures could get even worse. The government hopes that corporate tax rebates and other measures that are due to come in next year will kick-start the economy and bring unemployment down.

Tuesday, November 27, 2012

Outlook for Indian gold demand jumps.

Demand for gold in India, one of the world's largest markets for the metal, is forecast to rise to 800 metric tons in 2012, well above a prior prediction of 650-750 tons. The increase in the outlook follows a pick-up in purchases during the festive season and comes despite government efforts to restrict gold sales amid concerns about India's current account deficit.

OECD takes axe to world growth forecasts.

 The OECD has cut its prediction for global growth to 2.9% this year from a previous forecast of 3.4%. In its twice-yearly report, the organization also said growth in 2013 will increase to 3.4% rather than 4.2%. The OECD cut its estimates for the U.S. as well - predictably warning about the fiscal cliff - and said the eurozone will shrink in 2012 and 2013 before recovering in 2014.
Greece is one of the most indebted countries in Eurozone. So much so, that it is almost on the verge of bankruptcy. In the past, many options have been explored to reduce the country's debt. And in the latest move, both Eurozone and International Monetary Fund (IMF) have taken the matter in their hands. Both these institutions have clinched an agreement to reduce Greece's debt by 40 bn Euros to approximately 124% of the Gross Domestic Product (GDP) by 2020. To reduce the debt, interest rate will be cut on the loans given to Greece. For some loans maturity will be extended with the option to defer the interest payments. It has also been agreed that Greece will be given some financial assistance to fulfill its debt obligations provided it meets certain conditions. This is likely to reduce the uncertainty in Eurozone and strengthen the Euro.

While these steps will reduce the debt burden on Greece, it would be interesting to see whether Eurozone members will write off some of the loans as a part of debt reduction program. If that is done, the member nations who have lent to Greece may incur a huge loss. Hence, that possibility appears remote as of now. But if Greece diligently implements its austerity plans, a haircut on the existing debt is not ruled out completely. 

Moody's has said that it is maintaining its stable outlook on India's rating.

In some good news to the Indian government which has been facing flak on economic front, credit rating agency Moody's has said that it is maintaining its stable outlook on India's rating. However, it has warned that several challenges still remain. The most important being the country's fiscal deficit. Economic growth has slowed in India in recent months, and the country has suffered mild erosion in its economic profile, with widening trade and current-account deficits.

The central government's fiscal deficit exceeded official projections for the year ended March 31, 2012, reaching 5.9% of GDP. In addition, inflation remains stubbornly high despite the Reserve Bank of India's (RBI) tightening policies. The government in-order to raise revenues has tried several methods but has found little success in that. The government must find ways to reduce the fiscal deficit that threatens to undermine the country's credit standing and possibly trigger a downgrade to junk status.

Finance Ministers Secure Greek Deal, Euro On The Up

After a brief retreat from recent highs against the US Dollar, the Euro once again found itself within reach of these highs as Euro zone finance ministers and the International Monetary Fund finally came to an agreement on how to reduce Greece's debt.

The breakthrough came after 12 hours of talks in a third meeting where the outcome was to go ahead and release urgently needed loans to keep the near- bankrupt Greek economy afloat.

As a result, the Euro appeared to strengthen against the US Dollar directly after news and details of the new deal was first released to the press.

S&P applauds French reform proposals as it maintains its rating.

S&P has reiterated France's AA+ rating and its negative outlook, and warned that the government is likely to miss its 2013 deficit target of 3%, forecasting that the gap is likely to be 3.5%. However, S&P applauded the government's reform proposals, saying they will "improve the country's growth potential." S&P's action - or lack thereof - follows this week's downgrade from Moody's, which is more skeptical about France
The Cabinet Committee on Economic Affairs (CCEA) may just have a solution to India's fuel import bill problem.  The CCEA has made it mandatory for oil marketing companies, namely Bharat Petroleum Corporation Ltd (BPCL), Hindustan Petroleum Corporation Ltd  (HPCL) and Indian Oil Corporation (IOC) to blend 5% ethanol with petrol. Since ethanol is cheaper than petrol this can help reduce our fossil fuel dependence. While the blending of fuels has been going on for the past 2 years, a clear policy directive was absent. This new directive makes blending compulsory. Ethanol gives better mileage, lowers pollution emissions and is cost effective. A litre of petrol costs around Rs 70 while ethanol costs Rs 40 a litre. Over a billion litres of ethanol will be needed for this blending program. However, India has no supply shortage since the country produced over 2.2 bn litres in FY11. It may be a drop in the ocean, but this will help India's fiscal deficit.

FDI inflow in India is rising but not enough.

There has been a significant growth in foreign capital in India. From 1.1% of capital investments in FY05, foreign capital accounted for 8% in FY11. But is this likely to continue? Foreign inflows have been pouring into the country from foreign institutional investors (FIIs) and FDI (foreign direct investment). But what India really needs is the latter if it wants to take GDP growth to the next level. As today's chart of the day shows, FDI inflow in India has grown over the years but is still a small quantum. In fact, in the first half of 2012 (1HFY13) FDI has contracted 42.8% to US$ 10.4 bn, according to figures by the United Nations Conference on Trade and Development. The reasons are not hard to find. Lack of meaningful reforms and scandals rocked the government and compelled rating agencie s to downgrade India. Once this happens, cost of borrowings goes up making many projects unviable for foreign investors. Regulatory hurdles are also plenty. But all is not so bleak. One has seen investments shoot up in the Indian auto space in recent times. And it is hoped that FDI in retail should also pick up. But it goes without saying that the government will have to be more aggressive if the steady flow of FDI has to keep up in the coming years.

Thursday, November 22, 2012

Yen Takes A Hammering Against The US Dollar & Euro

The Euro took off and posted a 6-month high against a floundering Japanese Yen on Wednesday and also recouped some losses against the US Dollar in the process.

The strong movement on the Euro came after Euro Zone politicians beefed up efforts to reach a deal over aid for debt troubled Greece.

The Japanese Yen has been losing ground against its major rivals for weeks and also fell against the US Dollar yesterday, as further speculation that the Bank of Japan would come under political pressure to ease its already loose monetary policy further once again came to the fore.
What do you think India's GDP per capita would look like in the year 2060? This is certainly an extremely long term projection but the one that is majorly driven by demographic and economic factors we believe and not influenced that much by debt concerns plaguing most of the developed world. Thus, as today's chart of the day highlights, while aggregate GDP in Asian nations of China and India will increase a great deal, India will still have GDP per capita that is one fourth that of the US in 2060. The study has been done by OECD and it has inferred that India's economy will become a bit bigger than America's by 2060 and China's a lot. But due to India's huge population, the per capita number may not look that large.

No s. 2(22)(e) “Deemed Dividend” if loans & advances given as quid pro quo

ACIT vs. G. Sreevidya (ITAT Chennai)

The assessee, a substantial shareholder of a closed held company, availed of a loan from the company. She claimed that the said loan was not assessable as “deemed dividend” u/s 2(22)(e) as she had given a personal guarantee and collateral security to a third party to enable the company to avail of credit facilities and in return she was entitled to withdraw funds from the company as and when required by her for personal purposes. The AO rejected the claim though the CIT(A) accepted it. On appeal by the department, HELD dismissing the appeal:
 Every payment by a company to its shareholders may not be a loan/ advance so as to come within the ambit of s. 2(22)(e). In the present case, the amount was withdrawn by the assessee from the company only to meet her short term cash requirements. By virtue of offering personal guarantee and collateral security for the benefit of the company, the liquidity position of the assessee had gone down. In the strict sense, the amount forwarded by the company to the assessee was not in the shape of advances or loans. The arrangement between the assessee and the company was merely for the sake of convenience arising out of business expediency (Pradip Kumar Malhotra 338 ITR 538 (Cal) & Creative Dyeing & Printing 318 ITR 476 (Del) followed).

Wednesday, November 21, 2012

Japanese Yen On The Back Foot Against Dollar & Euro

The Japanese Yen tumbled further down to a 7-month low against the US Dollar on Wednesday and went on to reach similar low levels against the Euro.

The poor Yen form is a direct result of political pressure on the Bank of Japan's central bank as it is being pushed into implementing more radical monetary expansion policies.

Meanwhile, the Euro remained steady close to recent 2-week highs against the US Dollar. The currency is buoyed by optimism that Euro Zone finance ministers will agree to release funds to Greece after all the endless debate on ways to reduce Greek debt to more sustainable levels.

RBI has banned banks from giving loans for gold purchase.

Gold has provided shine to many an investor portfolio. But it has also tainted the country's current account deficit position. In fact after oil, gold imports form the largest part of the current account deficit. As a result, the government has been taking several steps to discourage the purchase of gold in the country. One was to raise the import duty on gold to 4% earlier this year. But that has not really affected the dynamics of gold buying in the country.

Now the Reserve Bank of India (RBI) has banned banks from giving loans for gold purchase. As a result, banks would be unable to lend funds for buying gold in physical form or in the form of ETFs. However, banks would still be able to lend to genuine jewelers and jewellery manufacturers. This move is expected to sieve out the speculators from entering the gold market and thus curb volatility in the prices of the metal. It must be remembered that India is one of the largest gold importing country in the world. As a result, its gold purchases have also contributed to the increase in global prices to some extent. 

Tuesday, November 20, 2012

Eurozone again expected to delay approving Greek aid

European finance ministers are due to meet in Brussels today, when, it was once hoped, they'd finally authorize more bailout money for Greece, but that prospect is apparently looking unlikely. Ministers will also have to work out how to plug another €15B hole in the country's finances, over and above the bailout already agreed. The gap was created by giving Greece another two years to cut its budget deficit.

BOJ resists political pressure for more easing.

As expected, the Bank of Japan has resisted political pressure and refrained from further easing measures at its latest policy meeting. The bank maintained its key interest rate at 0-0.1%, its asset fund at ¥66T ($812B), monthly purchases of government bonds at ¥1.8T, and a credit-lending facility at ¥25T. However, the bank is expected to announce stronger measures at its next meeting in December

Moody's recently downgraded France's credit rating

France is the latest nation to face the humiliation of a debt downgrade. Credit rating agency, Moody's recently downgraded France's credit rating from Aaa to Aa1. The agency cited three main reasons. These include a weak long-term economic growth outlook, uncertain fiscal outlook and inability to withstand further shocks within the zone.

The nation has seen a sustained loss in economic competitiveness and structural rigidities don't help matters much. France also doesn't have access to a national central bank for debt financing in the event of a market disruption. Given the current negative outlook on the nation's sovereign rating, an upgrade is unlikely over the medium term. However if France successfully implements reforms and fiscal measures, this may strengthen growth prospects. The protracted Euro debt crisis needs a resolution. Soon.

Interest paid on borrowing for acquiring house deductible u/s 24(b) & 48

ACIT vs. C. Ramabrahmam (ITAT Chennai)

The assessee borrowed funds for purchasing a house. The interest paid on the said loan was claimed as a deduction u/s 24(b). When the house was sold, the interest paid on the said loan was treated as “cost of acquisition” and claimed as a deduction u/s 48 in computing the capital gains. The AO held that as the interest had been allowed as a deduction u/s 24(b), it could not allowed again in computing capital gains. The CIT(A) allowed the claim. On appeal by the department to the Tribunal, HELD dismissing the appeal:

Deduction u/s 24(b) and computation of capital gains u/s 48 are altogether covered by different heads of income i.e., income from ‘house property’ and ‘capital gains’. Neither of them excludes the other. A deduction u/s 24(b) is claimed when the assessee computes income from ‘house property’, whereas, the cost of the same asset is taken into consideration when it is sold and capital gains are computed under section 48. There is no doubt that the interest in question is an expenditure in acquiring the asset. Since both provisions are altogether different, the assessee is entitled to include the interest at the time of computing capital gains u/s 48.

Bad loans at Spanish banks rise again.

Non-performing loans held by Spanish banks increased to yet another record high of 10.7% of their outstanding portfolios in September from 10.5% in August. The bad debt increased by over €3B to €182.3B, while total loans edged up to €1.7T, or 170% of Spain's GDP.

White House eyes slashing $150B in tax breaks.

The Obama Administration has reportedly proposed axing $150B of tax breaks over ten years as part of negotiations to avert the fiscal cliff. These include $28B for fossil fuel companies, $77B connected to inventory valuation, and $13B in low capital-gains rates for P-E funds, VC firms, and real-estate transactions.

Monday, November 19, 2012

Should US join OPEC?

The Organization of Petroleum Exporting Countries (OPEC) is always talked about when it comes to international oil. The organization made up of 12 oil producing countries effectively controls a large part of the global supply of oil. As a result their actions pretty much determine international oil prices. But recently there is another country that has emerged as a major oil producing country. This country is none other than US. Owing to improved technology and techniques, US is set to become the largest oil producing nation by 2020. As per the International Energy Agency, it would surpass Saudi Arabia in terms of oil production. But unfortunately this glory is expected to last for only 5 years. After that it would take the second seat below Saudi Arabia. Nevertheless given the fact that it would be a major oil producing nation, the question now is should it join OPEC? After all the ability to pump 11.1 m barrels of oil per day by 2020 should earn it this status. Whether it will happen or not is something that remains to be seen.

SEC rebukes ratings agenices.

The SEC yesterday criticized ratings agencies in an annual report, saying that S&P (MHP), Moody's (MCO), Fitch (FMLCF.PK) and two smaller firms don't always follow their own standards when rating deals. All nine firms reviewed in the report had "poor documentation" and "inaccuracies" when counting analysts' votes in a decision. The SEC hasn't determined whether its findings represent a "material regulatory deficiency."

Fed sets out stress-test requirements for banks.

 The Fed's stress tests on the banks will require lenders to show they can withstand a "Severely Adverse Scenario:" a recession in which unemployment rises by over 400 bps, GDP declines 5%, equity prices fall more than 50% (along with the VIX jumping 70%), and residential and commercial property values slump over 20%. It sounds harsh, but it's still not as bad as what happened from 2007-09. Capital plans are due on Jan. 7.

Japan downgrades economic outlook yet again.

With Japan looking like it's sliding into recession, the government has downgraded its economic outlook for the fourth consecutive month, the longest stretch since the financial crisis. In its monthly report, the government blamed the "deceleration of the world economy" as it cut its assessment of consumption, investment, corporate profits and the job market.

India probes Wal-Mart over investment.

India's Enforcement Directorate is reportedly investigating allegations that Wal-Mart (WMT)breached forex rules when it invested $100M via a convertible debenture in a unit owned by Bharti Enterprises, the U.S. company's partner in a wholesale joint venture. The probe could delay parliamentary discussions next week over the government's policy to allow foreign companies to enter India's retail sector

Sunday, November 18, 2012

CPI seen falling.

 CPI data for October is due out this morning, with economists expecting that inflation fell to +0.1% on month from 0.6% in September, while the core figure stayed at +0.1% for the fourth month in a row. "There isn’t much pricing power,” says economist Russell Price. "Inflation is a second-tier concern for the Fed right now. Growth is by far their biggest focus." Yesterday, FOMC minutes showed that the debate is growing over using the specific triggers of inflation and unemployment for for guiding monetary policy.

Greece bond auction looks to have secured debt payback.

 Greece should be able to redeem €5B of T-bills owed to the ECB on Friday after raising €4.06B in a sale of bills, above the government's target of €3.125B. Primary dealers have until Thursday to submit non-competitive bids, which is likely to bring the total above €5B. The auction came after eurozone finance ministers yesterday granted Greece an extension of two years to meet its deficit-GDP targets, although the eurogroup and IMF are in open conflict about the timing of its debt-GDP targets.

Chinese trade surplus increases by 16%.

China's trade surplus widened to a larger-than-expected $32B in October from $27.7B in September, helped by an 11.6% annual gain in exports and a weaker-than-expected 2.4% increase in imports. Political tensions showed up in the numbers as imports from Japan slumped 10.1%. Exports to the U.S. rose 9.1%, while those to recession-wracked Europe declined 8%.

Eurozone seen delaying Greek aid despite budget approval.

 Greece's parliament last night passed the country's 2013 austerity budget, which the government hopes will clear the way for the Troika to release the latest €31B tranche of its bailout. Eurozone finance ministers are due to discuss the issue at a meeting today, although they're not expected to approve the funds as they first want to agree on how to make Greece's debt more sustainable. The agony continues.

Japan may be in recession as GDP contracts in Q3.

Japan's GDP shrank 0.9% on quarter in Q3, as expected, deteriorating from +0.1% in Q2. The economy was hurt by sharp declines in capital expenditure and exports, as well as by a more moderate fall in private consumption. Economics Minister Seiji Maehara said Japan may have fallen into recession, and reiterated his call for the Bank of Japan to pursue more easing. However, the BOJ is expected to leave policy unchanged at a review next week.

IEA: U.S. to become world's top oil producer by 2017.

The U.S. will surpass Saudi Arabia and Russia to become the world's largest oil producer by 2017 and become "all but (energy) self-sufficient" by 2030, the IEA predicts in its annual World Energy Outlook. The forecast highlights how the U.S. shale revolution is changing the energy sector, although analysts warn that the nature of shale production means that the growth the IEA predicts isn't guaranteed.
The problem of poor liquidity and price manipulation by big investors may soon be a thing of the past. In 2010 itself, the Securities and Exchange Board of India (SEBI) had directed listed companies to have at least 25% shareholding. The deadline was later deferred to June 2013. Public sector entities need to have minimum 10% public holding by August 2013. At the end of quarter ended June 2012, just 16 listed PSUs and 200 private sector companies had public shareholding less than 10% and 25%, respectively. Today's chart of the day shows five major listed entities that are still non-compliant with the minimu m public shareholding guideline. In order to prohibit compani es from evading the law, the SEBI has planned to shift non-compliant stocks to 'trade-for-trade' basket of scrips. Stocks in this segment have to be backed by compulsory delivery of shares. Besides, these shares are not part of the futures & options segment. Hence, investors tend to avoid them. Not wanting to meet such a fate, promoters, including the government may approach markets soon for diluting their shareholding. Thus, by mid of next year, the primary and secondary markets may see a flurry of activity. Investors though must be very careful and selective about the stocks they wish to invest in.

Sunday, November 11, 2012

Eurozone set to again delay Greek aid.

Eurozone finance ministers look increasingly unlikely to agree to unlock the next €31.5B tranche of Greece's aid program at a meeting on Monday, with the FT reporting that the Troika is still divided on how much debt relief Greece needs and who will carry the losses from reduced debt repayments. Greece is fast running out of cash but needs to return €5B to the ECB on Friday, so a stopgap bit of jiggery-pokery wouldn't be a surprise

France heads for recession .

France's GDP will slide 0.1% in Q4, the country's central banks predicts. With the bank also estimating that Q3 GDP fell 0.1%, that would put France in recession. German Finance Minister Wolfgang Schaeuble is so worried about the decrepit state of the French economy that he's asked the government's council of economic advisers to consider writing a report on what France should do to turn it around, Reuters reports.

CBO warns that U.S. could tip over fiscal cliff into recession...

The CBO yesterday gave its view of how precipitous the drop from the fiscal cliff would be, forecasting that it would cause GDP to shrink 0.5% next year and unemployment to climb to 9.1% from 7.9%. However, growth would be stronger in the long run. If the cliff is avoided, the economy would expand 1.7% but would still remain "below its potential." President Obama is due to have his say later today.

Diageo to buy India's United Spirits for $2B+.

Diageo (DEO) has agreed to acquire a 53.4% stake in India's United Spirits for $2.1B following months of negotiations. The price represents a decent-sized premium, as United Spirits has a market cap of about $3.3B. The transaction should boost Diageo's presence in the world's largest whiskey market.

China's Gold Demand expected to grow 1%

We know that China is the largest consumer for a range of industrial commodities like iron, copper, coal etc. However, its love for the yellow metal is unknown. Fathom this. In this year, China's gold demand is expected to grow 1% to 860 tonnes. This would effectively mean that China will overtake India as the world's biggest consumer of gold. As per consultancy firm Thomson-Reuters, China's jewellery demand will be at 520 tons while investment demand is expected to be at 270 tons for the year. The balance 70 tons will come from industrial consumption. It may be noted that in 2011, China's mine output was just 371 tons. So, effectively, China imports a lot of gold to satisfy its domestic demand. And increasing demand from China this year means that the gold prices are likely to stay firm.While the record high of $1,920 per ounce is still far away, the China factor may well see the same being breached soon.  

Thursday, November 8, 2012

Japanese Yen Moves Up To A 1-Month High vs The Euro

The Japanese Yen reached out and touched a 1-month high against the Euro on Thursday, as concerns over US fiscal issues on the horizon weakened the risk appetite of investors.

The Dollar and Yen have remained stronger against most of their major counterparts today.

The greenback though, has stayed weaker against the Yen following Obama's victory over Republican challenger Mitt Romney, which has boosted expectations from investors that the Federal Reserve will maintain monetary stimulus.

Romney is known to have disagreed with the Fed's measures to stimulate the economy and had said that he would replace Chairman Ben S. Bernanke at the end of his term in January 2014.

I foresee that the majority of the markets focus for the rest of the year, will be the so called "fiscal cliff" while for now, we can expect some post-election bounce in the Dollar

The Euro had initially stepped up higher after the Greek parliament approved the government's austerity measures, which was required in order to secure the next installment of bailout money from international lenders.

But the Euro could not hold on to these gains and quickly surrendered before going on to reach it's lowest level against the Yen in about a month.

The fiscal cliff is a term referring to the $607 billion in tax increases and spending cuts set to be implemented in 2013, that is unless congress decides and acts otherwise. In the meantime, I expect that Investors will be purchasing safe currencies like the U.S. Dollar and the Yen.

The Dollar earlier stood at $1.2754 per Euro and had dropped 0.1% to 79.90 Yen, having dropped as much as 0.4% on Wednesday. The Euro has declined by 0.3% to 101.90 Yen.

The Euro has traded near a two month low in the run up to an European Central Bank (ECB) meeting today. ECB President Mario Draghi has said that Europe's debt crisis is affecting Germany.

A report due out today, by the Federal Statistics Office in Wiesbaden, is forecast to show that exports in Germany have likely declined by 1.5% in September from August.

Most Economists expect the that the central bank will keep its benchmark rate unchanged at 0.75%.

The market's concerns are reflected in the fact that the Euro has remained weaker even after Greece's Prime Minister, Antonis Samaras, had secured approval of austerity measures needed to unlock bailout funds earlier today.

As there is still uncertainty and concern about whether or not Greece will be able to secure the next tranche of aid at the next European Union summit, we are seeing the Yen and the Dollar being bought as investors seek safety.

The Australian Dollar rose against most of its major counterparts following the release of data that had shown that Australian employers had added 10,700 more jobs in October, a figure much larger than what most economists had expected.

The Aussie earlier stood at NZ$1.2748 and $1.0408.

BOE leaves rates unchanged.

The Bank of England has left its benchmark interest rate at 0.5%, while its £375B asset purchase program - which ended on October 31 - remains on the shelf for the moment. Next up very soon is the ECB.

Greece passes more austerity, unemployment keeps climbing.

 In the face of some of the heaviest protests yet, Greece's Parliament - as expected - last night passed austerity measures demanded by the Troika. The action should set the stage for release of the next tranche of bailout funds. Separately, unemployment rose to a fresh record high of 25.4% in August, with the youth rate at 58%. There are now more Greeks without jobs than with.

Japan in first current account deficit since 1981.

Japan swung to its first current account deficit since 1981 in September, with the gap coming in at an adjusted ¥142B ($1.8B). Economists attributed the figure largely to one-off factors such as a surge in iPhone imports, and don't expect deficits in the coming months. Still, for some the shortfall is a sign Japan is nearing the point at which it won't be able to finance its mammoth debt from domestic sources only.

No religion like “Hinduism” & worship of Hindu Gods is not “religious purpose”

Shiv Mandir Devsttan Panch Committee Sanstan vs. CIT (ITAT Nagpur)

The assessee trust was set up with the object of “worship of Lord Shiva, Hanumanji, Goddess Durga and maintaining of temple” and “to celebrate festivals like Shivratri, Hanuman Jayanti, Ganesh Uttasav, Makar Sankranti”. It applied for a certificate under section 80G. S. 80G (5) provides that the trust should be established for a “charitable purpose”. Explanation 3 to s. 80G provides that “charitable purpose” does not include a purpose which is of a “religious nature”. S. 80G(5)(iii) also stipulates that the trust should not be expressed to be for the benefit of any particular religious community or caste. The CIT rejected the application on the ground that the assessee was set up for “religious” purposes. On appeal by the assessee to the Tribunal, HELD reversing the CIT:

The objects of the assessee is not for advancement, support or propagation of a particular religion. Worshipping Lord Shiva, Hanumanji, Goddess Durga and maintaining the temple is not advancement, support or propagation of a particular religion. Lord Shiva, Hanumanji & Goddess Durga do not represent any particular religion. They are merely regarded to be the super power of the universe. Further, there is no religion like “Hinduism”. The word “Hindu” is not defined in any of the texts nor in judge made law. The word was given by British administrators to inhabitants of India, who were not Christians, Muslims, Parsis or Jews. Hinduism is a way of life. It consists of a number of communities having different gods who are being worshipped in a different manner, different rituals, different ethical codes. The worship of god is not essential for a person who has adopted Hinduism way of life. Therefore, expenses incurred for worshipping of Lord Shiva, Hanuman, Goddess Durga and for maintenance of temple cannot be regarded to be for religious purpose (Commissioner of Hindu Religious and Charitable Endowments vs. Sri Lakshmindra Thirtha Swamiar 1954 SCJ 335 & T. T. Kuppuswamy Chettiar Vs. State of Tamil Nadu (1987) 100 LW 1031 followed).

To be an “intangible asset” u/s 32(1)(ii), the rights must be “in rem” & transferable. A “non-compete right” is not an “intangible asset” though “goodwill” is

Sharp Business System vs. CIT (Delhi High Court)

 The assessee, a joint venture of Sharp Corp, Japan, and L&T Ltd, paid Rs. 3 crores to L&T as consideration for the latter not competing with the assessee for 7 years. The assessee claimed that the non-compete fee was revenue in nature. It also claimed, in the alternative, that the rights under the non-compete agreement were an “intangible asset” u/s 32(1)(ii) eligible for depreciation. The AO, CIT(A) & Tribunal rejected the assessee’s claim. On further appeal by the assessee before the Tribunal, HELD dismissing the appeal:

(i) The advantage derived by the assessee from the non-compete agreement entered into with L&T is for a substantial period of 7 years and ensures a certain position in the market by keeping out L&T. The advantage cannot be regarded as being merely for facilitation of business and ensuring greater efficiency & profitability. The advantage falls in the capital field (Eicher 302 ITR 249 (Del) distinguished; Pitney Bowles 204 Taxman 333 (Del) followed);

(ii) The non-compete rights cannot be treated as an “intangible asset” u/s 32(1)(ii) because (a) the nature of the rights mentioned in the definition of “intangible asset” spell out an element of exclusivity which enures to the assessee as a sequel to the ownership. But for the ownership of the intellectual property or know-how or license or franchise, it would be unable to assert the right “in rem”, as against the world. In the case of a non-competition agreement, it is a right “in personam” where the advantage is restricted & does not confer an exclusive right to carry-on the primary business activity. (b) Another way of looking at the issue is whether such rights can be treated or transferred. Every species of right spelt-out such as know-how, franchise, license etc. and even those considered by Courts, such as goodwill, can be said to be alienable. Such is not the case with an agreement not to compete which is purely personal (Techno Shares & Stocks 327 ITR 323 (SC), Hindustan Coco Cola Beverages 331 ITR 192 (Del) & B. Ravindran Pillai 332 ITR 531 (Ker) distinguished)

Wednesday, November 7, 2012

Dollar Falls After Obama Win Makes Way For Monetary Easing

The US Dollar fell against the Japanese Yen in Asia on wednesday as US President Barack Obama,beat out his challenger,Mitt Romney,in a close election race.

So what I'm noticing is a consensus amongst investors that U.S. Monetary policy will remain loose under Obama, and this translates to the Dollar being sold. Bear in mind though, that shorting of the Dollar might not last as long as many may project, as the U.S. still faces a monumental fiscal challenge. Unless congress acts, U.S. citizens face more than $600 billion in tax increases and spending cuts due to be implemented in 2013.

Romney in his lead up to the election had stated that he disagrees with the Federal Reserve measures to stimulate the economy and that he intended to replace Chairman Ben S. Bernanke at the end of his term in January 2014

As we see lower U.S. yields on Treasuries and higher stock prices, the tendency will remain for the Dollar-Yen in particular to fall.

The Dollar earlier today was down by 0.4% to 80.07 Yen while the Euro was little changed at 102.99 Yen. The Australian Dollar rose 0.2% to $1.0454.

As for the Euro, demand remained sluggish ahead of Greece preparing for a vote on austerity measures which it needs in order to keep its bailout on track.

Greece's 300-seat Parliament will today debate 238 pages of austerity measures, which include the raising of the retirement age by two years to 67 and doing away with Christmas and holiday payments for pensioners.

Legislative approval is an initial necessary step and the first of the parliamentary votes required by Monday in order to unlock a 31 billion Euro ($40 billion) tranche of international aid.

Greek Prime Minister Antonis Samaras faces defections from his three-party coalition which has to convince European Union leaders that the Greek government is serious about remaining in the Euro and that it will implement reforms.

Besides Greek issues, demand for the Euro was also influenced ahead of data today that may could provide evidence that the region's debt crises is worsening in the region's core economies.

German industrial production is expected to have fallen for a second month probably in September, down 0.7% from August. Other data may show that Euro region retail sales dropped by 0.1% in September.

As the U.S has taken some limelight from the Euro recently, I expect that we could see a sell off in the Euro in the medium term as Europe's issues begin to take centre stage again.

Greeks strike ahead of the latest crucial austerity vote.

 Thousands of Greeks are holding a second day of a general strike to protest the latest round of austerity, which the country's parliament is expected to authorize this evening in a vote. The approval of the €13.5B of wage cuts and tax hikes by 2016 is vital for Greece to receive the latest €31B tranche of its bailout before it runs out of money. Also critical is a vote on the 2013 budget, due on Sunday.

Stock futures drop as Washington gridlock seems set to continue.

 U.S. stock futures were lower premarket (see below) following Barack Obama's re-election as President, although European shares were solidly higher. While the uncertainty that so distracts investors is over, the gridlock in Washington appears set to continue after the Republicans retained the House and the Democrats the Senate. And now the election is over, attention turns to the fiscal cliff, which is less than eight weeks away.
Giving thumbs up to President Obama's victory in the US polls, the benchmark indices in Indian equity markets were amongst the top gainers in Asian region today. The BSE Sensex was trading higher by around 111 points at the time of writing. Other major Asian markets closed higher today while Europe also opened on a positive note.

Companies have been piling on cash in their balance sheets.

The crisis that began in 2008 seems to have taught the corporate world an important lesson. It is necessary to hold cash. This could be one of the reasons why companies have been piling on cash in their balance sheets. This appears to be a worldwide phenomenon as per the Economist. One reason for keeping cash on the books could be the lack of an investment opportunity. Another could be that the companies wish to remain prepared given the economic uncertainty haunting the globe. After all US is on the verge of a fiscal cliff. Euro zone's crisis does not appear to be easing off. At the same time the dragon nation China is showing signs of a recession. The Middle East political scenario is heated up as well. During such times of uncertainty cash is always king. At lea st the corporate world appears to think so. However, when interest rates are abysmally low in most parts of the world a question that pops into mind is whether this cash is earning healthy returns? The obvious answer to this is of course not. Cash is most productive when applied in attractive investments. But when things are as volatile as what we see in the current scenario the attractiveness of an investment opportunity is dicey. At such times it is better to be safe than to be sorry.

India-Swiss DTAA: Shipping profits not taxable in India even if there is a PE

ADIT vs. Mediterranean Shipping Co. S.A (ITAT Mumbai)

The assessee, a Swiss company, earned shipping profits. Article 7 of the India-Swiss DTAA excluded shipping profits from its ambit. Article 22 of the DTAA provided that any other income not specifically dealt with would be taxable only in Switzerland and not in India. The assessee claimed that in accordance with Article 22, its shipping profits were taxable only in Switzerland. However, the department held, relying on Gearbulk AG 184 Taxman 383 (AAR), that as shipping profits had been “dealt with” in the DTAA, Article 22 would not apply and the income would be assessable u/s 44B of the Act. It was also held that even if Article 22 (1) applied, as the assessee’s agent in India constituted a PE, the shipping profits were assessable to tax in India under Article 22(2). The CIT(A) accepted the assessee’s stand that Article 22 of the DTAA applied to it. He further held that though the assessee’s agent was its’ PE, the income from the ships was not “effectively connected” with the PE as the ships were owned by the assessee and not by the agent. On appeal by the department, HELD by the Tribunal:

(i) Article 22 (1) provides that items of income of a resident of Switzerland “which are not dealt with” in the foregoing Articles of the DTAA shall be taxable only in that State. The department’s argument that by agreeing to exclude shipping profits from Article 8 as well as Article 7 of DTAA, it has been “dealt with” and, therefore, Article 22(1) shall not apply is not correct. The expression “dealt with” contemplates a positive action and it is necessary that the relevant article must state whether Switzerland or India or both have a right to tax such item of income. Vesting of such jurisdiction must positively and explicitly stated and it cannot be inferred by implication. It is also the view of the Competent Authorities in the letters exchanged that shipping profits would be governed by Article 22 & not s. 44B of the Act (Gearbulk AG 184 Taxman 383 (AAR) not followed);

(ii) As regards Article 22(2), the agent did constitute a PE as it (the agent) was legally and economically dependent on the assessee and the assessee was managing and controlling some of its business operations in India through the said agent. However, the property in respect of which the shipping income was received by the assessee was not “effectively connected” with the PE. Economic ownership has to be taken as the basis or criteria to apply the concept of “effectively connected with. Since the economic ownership of the ships cannot be allocated to the PE but always remained with the assessee, it cannot be said that the property in the said ships is “effectively connected” with the PE in India (Sumitomo Mitsui Banking Corp followed)

Tuesday, November 6, 2012

Euro Down To 2-Month Low, US Election Race Hots Up

The Euro dropped close to a 2-month low versus the US Dollar on Tuesday, after growing uncertainty over a Greek parliamentary vote on austerity steps needed for Athens to secure international aid came to the fore.

On Wednesday, the Greek parliament will decide to either approve or reject the government's proposed measures which include cost cuts and tax hikes that should amount to 13.5 billion Euros ($17 billion) by 2016.

Meanwhile, most investors are also adopting a 'wait- and-see' approach ahead of a tight US presidential race. It might not be such a bad idea to get away from trading for a day or two and let the dust settle before returning to your platform.

Japanese economic picture gets gloomier.

Japan's coincident composite index, which consists of 11 key indicators, dropped 2.3 points on month in September to 91.2. That's the sixth consecutive month of declines and prompted the government to say the economy is at a "turning point" toward the downside rather than "pausing," as was the case in August. The data strengthens the fear that Japan is on the verge of recession.

Germany heading for contraction.

 Germany's composite PMI fell to 47.7 in October from 49.2 in September, which, says Markit, "raises the likelihood of an outright GDP contraction during the final quarter of the year." Meanwhile, the eurozone figure of 47.7 is consistent with a quarterly fall of 0.5% in GDP, and the pace of decline in France's private sector in the past two months "has been the sharpest since the post-Lehman slump in early 2009."

U.S. stock futures rise as Americans head to the polls.

U.S. stock futures and EU shares were higher this morning (U.S. time) as Americans headed to the polls. The gains came despite the uncertainty caused by the tightness of the presidential race and the strong chance that Congress could again end up divided and deadlocked. Stocks that could apparently do well if Barack Obama wins include healthcare services, homebuilding, and food and staples retailing, although banks could sell off. "Mitt Romney stocks" include coal, specialty retail, managed care and telecommunications services

Monday, November 5, 2012

US Dollar & Euro Rising To The Occasion

The US Dollar rose to a 2-month high against a basket of major currencies on Monday after last week's US job data highlighted relatively solid US economic fundamentals.

The US Dollar and the Euro also hit a 5-week low although uncertainty over Tuesday's elections in the US seem to have hindered decisive breaks for the time being.

So, all focus now shifts to the US presidential elections. With so much uncertainty surrounding this period, there will be a collective sigh of relief from investors when the election is over.
The recent cut in cash reserve ratio (CRR) was clearly not appealing enough to Finance Ministry. For it wanted more. A cut in repo rate would have meant pressure on banks to cut lending rates. If not private sector at least the PSU ones. The lower rates could have in turn offered a feel good sentiment about GDP growth prospects. Alas, none of that materialized!

But worth noting that even the 0.25% CRR cut offered additional liquidity to the tune of Rs 175 bn to banking system. Just that very little may find its way into banks' loan books. At least the historical data suggests so. In 1HFY13, bank credit has grown just 4.3% YoY. During this period, deposits and SLR investments have grown by 8.5% and 14.8% YoY respectively. This shows that the allocation of funds is skewed towards investments in government bonds. One reason for this could be that banks are apprehensive of loans turning bad. Hence the reluctance to lend aggressively. The other may be that the demand for capex related credit itself has dried up. Whatever the cause may be, the government seems to be the biggest beneficiary of the RBI's policy of gradually easing. Whether or not its fiscal consolidation plan works or not, the government has plenty of takers for its bonds amongst Indian banks. We wonder then what Mr FM is complaining about?
The Indian economy has continued to throw up one puzzle after another in recent years. Here's another one. RBI's recent reports have indicated that a strong reason why the inflation is high in India is because of the upsurge in both rural and urban wages. Now, this is interesting. The central bank seems to suggest that there is a labour shortage in India. But this certainly looks unlikely with the economy showing signs of slowdown and the general perception about employment also not being good. What then explains the rise in wages? We believe that the Government, with its employment guarantee schemes has set some kind of a floor on rural wages. And thus the urban industries such as construction need to pay significantly higher wages in order to lure rural people into urban areas. All this has led to wages rising without a commensurate increase in productivity. And this is a dangerous trend as per us. Unless compensated by higher productivity, the policy of offer ing a certain minimum wage will be yet another long term drag on the economy we reckon.

Home loan growth slumps.

The Reserve Bank of India (RBI) has cut the CRR rate in recent times. At the same time it has not hiked the interest rate any further. And to add to this the banks have been offering attractive schemes for housing loans. But despite all this housing loan growth has slumped to a 5 month low. As per the mortgage lenders, interest rates are not responsible for this slump. The reason is actually the higher property prices. Property prices have zoomed to touch new highs. And this has made homes more unaffordable to the public especially to the middle income households. As per the RBI and as reported by the Economic Times home prices rose by nearly 24.1% i n the quarter ended September 2012. This is higher than the aver age of 20% seen during the previous 2 years. As a result most people have preferred to defer their home purchases till prices ease a bit. This has reflected in the slump in housing loan growth seen in recent times.

Four banks must hold most extra capital-regulators.

Citigroup (C), Deutsche Bank (DB), HSBC (HBC) and JPMorgan (JPM) will have to hold an extra 2.5% of Tier 1 Capital on top of the 7% minimum required under Basel III rules, regulators said yesterday. Barclays (BCS) and BNP Paribas will need an extra 2%, while eight banks, including BofA (BAC) and Goldman Sachs (GS), will need 1.5%. Overall, 28 banks are considered "global systemically important" and have to hold extra capital.

Unemployment rate seen rising as election looms.

The last major piece of economic data before the election is due out this morning, with economists expecting that nonfarm payrolls increased by 125,000 in October. While that would be up from September's 114,000, it's still all very anemic and shouldn't be enough to bring down the unemployment rate at any great speed. Indeed, that figure is expected to rise to 7.9% after the surprise fall to 7.8% in September, which aroused its fair share of skeptics.

Despite part breach of s. 194C, no s. 40(a)(ia) disallowance permissible

CIT vs. Valibhai Khanbhai Mankad (Gujarat High Court)

The second Proviso to s. 194C read with Rule 29-D provides that no tax need be deducted at source if the sub-contractor produces a declaration in Form 15-I that he does not own more than 2 goods carriages and the assessee (payer) furnishes a declaration in Form 15-J to the CIT on or before 15th June of the FY. The assessee obtained Form 15-I from the sub-contractors but did not file Form 15-J with the CIT within the prescribed due date. The AO & CIT(A) held that as there was a breach of the requirement of s. 194-C, the assessee ought to have deducted TDS u/s 194-C and as it had failed to do so, the expenditure had to be disallowed u/s 40(a)(ia). On appeal by the assessee, the Tribunal (order included) reversed the lower authorities. On appeal by the department to the High Court, HELD dismissing the appeal:

Once the assessee obtained Form No.15-I from the sub-contractors whose contents are not disputed or whose genuineness is not doubted then the assessee is not liable to deduct tax from the payments made to sub-contractors. Once assessee is not liable to deduct tax u/s 194C then disallowance u/s 40(a)(ia) cannot be made. The assessee’s breach of the requirement to furnish details to the income tax authority in the prescribed form within prescribed time may attract other consequences but cannot result in a s. 40(a)(ia) disallowance.

Current Account defecit worsening.

Investopedia defines current account as the difference between a country's total exports and its total imports. It is considered to be an indicator of the trends in foreign trade. A current account deficit (CAD) indicates that the import bill is much larger than the total export. Having a deficit in the current account is not necessarily a bad thing in the short term. But if it continues for a longer time then it indicates that the country is becoming more and more a net debtor to the rest of the world. Not such a good position to be in. Unfortunately this is the position India is in. Over the last few years, India's current account deficit as a percentage of GDP has been rising. In fact the percentage in FY12 was as high as 4.2%. Though things are expected to improve next year but even then the projected percentage is still higher than what it was in FY10 and FY11. It even fares poorly compared to its Asian peers.

Thursday, November 1, 2012

Spain gains strength in fight against bailout request.

Spain’s central government budget deficit narrowed to 4.39% of GDP in January-September from 4.77% in January-August as revenue from sales tax (VAT) jumped 11% on year in September after an increase took effect. The fall in the deficit could help Spain resist calls for a bailout and achieve its target of reducing the overall public sector deficit to 6.3% this year.

Eurozone unemployment continues to march higher.

The eurozone unemployment rate rose to another record high of 11.6% in September from 11.5% in August and vs consensus of 11.5% also. The total number of unemployed increased by 146,000 to 18.49M. As you would expect, Southern Europe continues to bear the worst of it, with Spanish and Greek rates topping 25%.

Transfer Pricing ALP: Application of “Aggregation”/ “Portfolio Approach”

Atul Limited vs. ACIT (ITAT Ahmedabad)

The Tribunal had to consider the following transfer pricing issues: (i) whether the principle of “aggregation” or “portfolio approach” could be adopted so as to adjust the under-charge of one international transaction against the over-charge for another; (ii) whether an adjustment for the “difference in application” of the product by the customer could be made; (iii) whether an adjustment towards “quantity discount” could be made; (iv) whether the “tax avoidance motive” is relevant in invoking transfer pricing provisions; (v) whether (pre sub-sec. (2A) of s. 92CA) if the TPO determines the ALP of a transaction which is not referred to him, can the AO use the material to himself determine the ALP? HELD by the Tribunal:

(i) Rule 10A(d) defines the term “transaction” to include a number of closely linked transactions. The “closely linked transactions” are those which cannot be segregated and if segregated, cannot be evaluated adequately on a separate basis and it is impractical to determine the price of each individual product or transaction. This is also the purport of the OECD Guidelines. On facts, as the transactions are neither of same ‘product-line’ nor ‘routed-in-parts’, the ‘portfolio-approach’ is not called for (Tara Ultimo & UE Trade Corporation 45 SOT 197 (Delhi) referred);

(ii) An adjustment towards ‘difference in application’ i.e. that the ALP should be determined depending on what the end user uses the product for is not acceptable because the purpose for which the buyer uses the product has no relevance in fixation of sale price;

(iii) However, an adjustment towards ‘quantity discount’ is permissible because it is a common market practice that bulk purchasers are generally given some discount. The assessee has to show that such discount have been given to non AEs as well;

(iv) The argument that the department has to show “tax avoidance motive” before invoking transfer pricing provisions is not acceptable because the language used by the legislature is clear (Azetc Software 107 ITD 141 (Bang) (SB) followed);

(v) While it is true, as held in Amadeus India 246 CTR 338 (Del), that pre sub-sec. (2A) of s. 92CA, the TPO could not inquire into matters that were not referred to him by the AO, it is a fact that he could not make a reference to the TPO because the information about the transaction was not reported in Form 3CEB. The assessee cannot take advantage of its own mistake. Even if the TPO’s report on that issue is illegal, the AO is now aware of the fact that there is such an international transaction and he is empowered u/s 92C(3) to determine the ALP thereof.

No TDS obligation for general credit entry & so no s. 40(a)(i) disallowance. Even if TDS applicable, no s. 201 TDS liability if s. 40(a)(i) disallowance made

Pfizer Ltd vs. ITO (ITAT Mumbai)

The assessee made a provision for Rs. 10 crores in respect of payment due to various parties but did not deduct TDS thereon. The provision was made without making specific entries into the accounts of the parties. The assessee disallowed the expenditure in respect of the said provision u/s 40(a)(i) & 40(a)(ia). Next year the entire provision of expenses was written back and the actual amounts paid to the respective parties were credited to their respective accounts after deducting TDS. The AO held that despite such disallowance, the assessee was liable u/s 201 as an assessee-in-default for failure to deduct TDS. On appeal by the assessee, HELD by the Tribunal:

(i) As the provision was made without making specific entries into the accounts of the parties and the payee was not identifiable, the TDS provisions are not applicable. The whole scheme of TDS proceeds on the assumption that the person whose liability is to pay an income knows the identity of the beneficiary or the recipient of the income. The TDS mechanism cannot be put into practice until identity of the person in whose hands it is includible as income can be ascertained (IDBI vs. ITO 107 ITD 45(Mum) followed);

(ii) Once the amount has been disallowed u/s 40(a)(i) for non-deduction of tax, it cannot be subject to TDS provisions again so as to make the assessee liable to pay the tax u/s 201 & interest u/s 201(1A). If the AO’s view was accepted that the assessee was liable to pay the TDS not deducted, then a disallowance u/s 40(a)(i) and 40(a)(ia) cannot be made and those provisions may become otiose.
The yellow metal has seen some correction in price off late in US dollar terms. After reaching a high of US$1,790 at the start of October, it is hovering close to US$1,700 now. So, is this a sign that prices have reached unsustainable levels for a long term correction to seek in? Well, not really.

If one looks at the bottom line of gold mining companies, one would be surprised to know that they make only US$200 per ounce, as acceptable profits. This is when the price of gold is US$1700 per ounce. Rest of the money goes towards the operating cost. Thus, the belief that the current gold prices are in a bubble territory is not true. The cost of extracting gold is increasing which is increasing the prices. Also, it is interesting to note that the production of gold has remained flat or declined since 2000. When similar thing happened in 1970s the price of gold shot up considerably. Thus, with deficiency in supply, prices are bound to remain firm. Another interesting aspect is that even when the production increased steadily from 1981 to 2000, prices were more or less firm. This speaks about the everlasting demand for gold. So, the current correction is not worth fearing it seems.
This week's monetary policy announcement by the Reserve Bank of India (RBI) was as usual a much awaited one. The Finance Minister kept dropping his not-so-subtle hints on the need for a rate cut. But eventually, the RBI cut the CRR rate and left the key policy rates unchanged. It also revised expected GDP growth downwards and expected inflation rate upwards.

Now everyone is waiting patiently for the next meeting which is scheduled for the next quarter. The RBI governor has stated that he would review rate cuts at that time. So now the question is would he go ahead with a rate cut or not? There are two forces in play here. One the country's economic growth has slowed down. And higher interest rates would continue to play spoil sport. So there is tremendous pressure on this front to ease the interest rates. But the second side of the story is on the inflation front. Inflation rates have come down from the double digit numbers but continue to remain high. In fact, RBI's upward revision indicates that they would not ease anytime soon. Therefore reducing interest rates may lead the monster of inflation to rear its ugly head again.

The thing here is that the RBI would prefer to watch the government's commitment to policy reforms. If reforms go ahead as planned then inflation would come down. This in turn may prompt RBI to cut down the rate. But if the government falls back to its past avatar and starts dilly dallying again, then the RBI would be forced to maintain its hawkish stance.

Yen Edges Towards 4-Month Low, Euro Holds Firm

The Japanese Yen took a step down on Thursday as it edged closer to a 4-month low as investors viewed the Bank of Japan's latest easing steps in a more positive light.

The Euro and Dollar remained steady as investors look ahead to some crucial events in the US over the next few days, chief among them is Friday's jobs report and the US elections on Tuesday.
The Yen fell against all 16 of its major peers for a third consecutive day earlier today.

The Yen was down 0.4% to 103.75 per Euro on news that Panasonic Corp. has forecast the second largest loss in the company's history, saying the net loss may total 765 billion Yen in the year ending March. Nintendo Co., the world's largest maker of video game machines, also is struggling having cut its full year net income projection by 70% blaming a stronger Yen. This has caused concerns to mount that Japan's trade deficit will worsen.

As against the Dollar the Yen was down 0.3% to 80.04.

I think at this time, that we are heading into an era of Yen weakness on the back of expectations of additional monetary easing by the BOJ and very low earnings in the electronics sector coupled with the prospect of a widening trade deficit.

On Tuesday the BOJ had boosted its asset purchase program by 11 trillion Yen ($137 billion) to 66 trillion Yen, in order to stimulate growth through lower borrowing costs.

Japan currently has the biggest trade deficit for a fiscal half year, as imports exceeded exports by 3.22 trillion Yen in the six months ended 30th September.

In contrast, the Aussie was close to two week high following Chinese data that, as I expected, has shown that manufacturing has improved in what is the worlds second largest economy.

Increased Provisioning hit for Indian Banks

Just yesterday, the RBI increased the provisioning for restructured assets from the existing 2% to 2.75%. For the uninitiated, restructured assets are nothing but loans whose terms have been modified on account of deterioration in the financial health of the borrower. The central bank's announcement has come at a time when requests for loan recasts have hit an all-time high and are likely to cross Rs 3.25 trillion in the current fiscal. Data released by the Reserve Bank of India (RBI) suggests that corporate debt restructuring (CDR) cases shot up to 392 as on March 2012. This is a significant jump from 225 in March 2009. In fact, the total amount u nder CDR during this period has surged from Rs 958.15 bn to about Rs 2.06 trillion.

No wonder the RBI was prompted to raise the provisioning requirements. It is said that the increase in provision would shave off nearly 4% of the banks' profits. Though the banks may not be too happy with this move, any move in the direction of prudence is welcome. And more so at a time when the global financial system is suffering from the consequences of its past recklessness.

Spain remains mired in recession.

 Spanish GDP fell for the fifth consecutive quarter in Q3, dropping 0.3% on quarter vs consensus of -0.4%. Meanwhile, CPI rose to +3.5% on year in October from 3.4% in September

Japanese data points to Q4 contraction.

 Japanese industrial production slumped 4.1% on month in September vs -1.6% in August and -3.1% consensus. It's one of the largest declines in recent years and the third consecutive drop. Unemployment was unchanged at 4.2%, matching consensus, but household spending unexpectedly fell 0.9% vs a forecast for a rise of 0.9%.

Increasing Consumer Confidence Index (CCI) is a good sign for global economy.

Consumer Confidence Index (CCI) is a key lead indicator of economic activity in the country. It reflects the degree of optimism or pessimism that consumers have for the economy. Increased spending reflects optimism and vice versa. The good news is that the global consumer confidence index rose by one point to 92 in the third quarter. The improvement in the third quarter was driven by positive signs in US. However, a reading of below 100 signifies that overall the consumers are still pessimistic.

The story is different in the emerging markets. Consumer confidence is gaining momentum there. In fact, it is strongest in India and Indonesia. Recent policy actions in India have given the necessary boost to it. However, for the global index to rise above 100, environment in the Euro Zone economies must improve. Apart from policy moves, resolving the unemployment issues can help do the same.