16.04.2009

Politics & the Nation

• Almost half of the nation goes for polls today.
• Take a look at this graphic.

Finance & Economy

• Infy's numbers leave everybody guessing about the future of IT services in the country
• Infosys, the country's bellwether IT firm gave a cautious guidance for the current year.  Nobody seems to be interested in taking note of the strong performance put in for the FY 2008-09.  Infosys’ full-year (2008/09) results were more or less on par with its strong performance in the previous years (revenue grew 30% year-on-year to Rs 21,693 crore, while profit jumped 28.5% to Rs 5,988 crore), but the attention was fully focused on the company's guidance. 
• Perhaps this is the first ever time that the company has forecast a 'no growth' or decelerating growth scenario.  The company's stock took some beating at the bourses.
• Read this report to get a feel of the situation in the IT sector today.

• Record MTM losses stare Ranbaxy on account of forex derivative contracts
  
• Though it may be a little queer for us to discuss any particular company's transactions, this one particular company's transactions educate us quite a bit on the options front.  Hence we decided to make a note of it.
• Ranbaxy Laboratories, India’s largest drugmaker by sales, may be sitting on mark-to-market (MTM) losses of over Rs 2,500 crore on foreign currency derivatives transactions entered into with various banks.
  
• Reportedly the company entered into “forex options strips” contracts with a foreign bank for hedging its dollar receivables from exports for eight years. 
  
• A 'strip' is a series of options maturing on certain dates over a time period, usually with a specified frequency. These contracts have to be settled on a monthly basis, and settlements with the bank started in June 2008. 
  
• It's not unusual for exporters to enter into options contracts to manage exchange rate risk. In a simple options contract, an exporter who expects the dollar to fall against the rupee buys an option from a bank by paying a small premium. The option allows the exporter to sell its dollar receivables at a pre-determined rupee price. In case the dollar rises, all that the exporter loses is the premium paid for buying the option, which is set off by the gain that the exporter will make due to the dollar’s rise against the rupee, because the exporter can earn more rupees for every dollar it sells in the market. 
  
• Complications on these deals arise, when exporters start selling options to banks. In this case, Ranbaxy bought “put options” — the right to “sell” dollars to the bank at a pre-determined exchange rate — and sold “call options” to the bank, giving the bank a right to “buy” dollars from Ranbaxy at a pre-determined exchange rate. Since the dollar has risen, contrary to what Ranbaxy expected, the bank is now exercising the “call options” at Ranbaxy’s peril, resulting in losses. 
  
• What did this teach us?  Playing in futures and options markets is not for the faint hearted.  The profits or losses can be so wild that it is only people with nerves of steel that can withstand them.
• Will banking become boring?
  
• In the context of the world sitting up and taking adverse notice of the humungous pay packages that bankers received and the havoc wreaked by them with all their exotic product innovations, one of our favourite Professors from IIMA, Mr. T.T. Ram Mohan wonders whether banking will become boring in future, in his op-ed piece in ET today.  He feels that financial regulation is in for a sweeping overhaul and identifies three key elements of regulation that are poised to change the face of the financial sector. 
  
• The first is that capital requirements for banks and other financial intermediaries will go up.  This is bound to reduce the profitability of banks and even depress output.  Since loss of output as a result of financial crisis can be anywhere between 5% and 45% of GDP, reduced profitability of the banks is the choice that would be tolerated.
  
• Secondly, regulators are going to be far more sceptical about the supposed benefits of financial innovation.  Securitization of credit is seen as having laid the seeds for the present global financial and economic turmoil.  Financial innovation of this sort has spurred growth in the financial sector in ways that were either illusory or harmful.  The financial sector itself constituted an excess both in terms of its relative size in economies and the sort of returns it generated. It is unlikely that banks will hereafter be able to launch product innovations at will.  Hence the caution on the part of the regulators.
  
• Thirdly,  we must expect constraints on bankers’ pay. Regulators will insist that incentives for bankers be based on measures of performance that better reflect risk and the long-term performance of banks. More importantly, higher capital requirements and lower profitability in banking will limit rewards in the financial sector. Outsized bonuses will not be passé but they will be more difficult to come by. 
  
• He concludes that while bankers will not exactly be starving, some of the hype, glamour and danger associated with it will certainly see a change for the better.
  
• Telecom penetration
  
• Rural penetration at 13% lags far behind urban penetration at 81%. 
  
• As of January 2009, only 3,000 of the 7,871 towers proposed by the USOF in June 2007 were ready. India with 60% mobile network coverage lags behind Pakistan with 90%, China with 97% and South Africa with 100%. 
  

Agriculture

• India's organic product certification process
  
• We have noted about organic farming and products in our blog on a few occasions earlier.  But how do we know that a certain produce is organically produced?  It becomes important in the context of the fact that India produced around 3.9 lakh tonne of certified organic products which includes all varieties of food products like basmati rice, pulses, honey, tea, spices, cotton, garments, etc. India exported 86 items in 2007-08 with the total volume of 37,533 metric tonnes.
  
• There is a certain certification process carried out by APEDA which accredited about 16 certifying bodies for the purpose.  These certifying bodies have to follow the National Programme for Organic Production (NPOP) norms relating to standards for organic production. 
  
• The NPOP standards for production and accreditation have been recognised by European Commission, Switzerland and USDA as an equivalent programme of their countries. With this recognition, Indian organic products duly certified by the accredited certification bodies of India are accepted by the importing countries. Therefore, the role of certification bodies is very important in promotion of organic products exports. 

International

• The worst of the times are behind us?
• If the Global confidence levels are to be taken seriously, this appears so.  The Bloomberg Professional Global Confidence Index climbed to 21.2 in April from 5.95 in March, the biggest increase since the survey began in November 2007. A reading below 50 means pessimists outnumber optimists. Sentiment climbed the fastest in Asia and the US as respondents around the world became more confident the worst may be over for their economies. 
• Apart from this Index, what are the other pointers that indicate better times?
  
• Positive news from Citigroup, Wells Fargo, Goldman Sachs 
  
• Fall in borrowing costs for banks in London market 
  
• Reduction in TED spread to 95 bps from Oct peak of 245 bps 
  
• 13.7% rise in MSCI World Index 
  
• 31% rise in US banking stocks 
  
• US Fed’s quantitative easing 
  
• Tokyo’s $156-b stimulus plan 
  
• Falling rates across the world
  
• What did the G20 summit do that can help India?
  
• In a very thought-provoking article Ramgopal Agarwala likens the recently concluded G20 summit decisions to the rearranging of chairs even as the Titanic was sinking.  He says that India should better explore the possibility of quickly concluding the regional trade initiatives that have come half way and also take leadership in creating, nurturing and satisfying the regional demand in Asia.  Worth a read.  Take a look.  Read the last two paragraphs, if you don't have time for the entire article.
  

Technology

• What is virtualization in the context of IT services?  What phases are seen in it?
  
• The existing installed base of servers is 30 mn and is expected to grow four times in the next 10 years.
  
• In data centre business, the cost of procurement is only 20 to 25%.  The remaining 75% is spent on maintenance, operations and people costs.  In a five year lifycycle of a data centre, for every dollar spent on server hardware, about 50 centrs is spent on power and cooling.
  
• Hence the importance of virtualization of servers.  This can increase the number of servers and allow the increased utilization of physical space and lower power consumption costs.
  
• Virtualization 1.0 was centred around managing IT and capital costs.  While it was successful it did not extend to major applications.
  
• Virtualization 2.0, the current version, is about vitualization of servers to save physical space, power costs.  Highly successful in compacting servers of non-core functionality.  The next plunge would be to extend it to mission critical applications.
  
• Virtualization 3.0 would be extending it to the desktop.  In this phase, software could be given as a service or utility computing model.  
  
• In a nutshell, virtualization can be seen as essentially the isolation of one computing resource from another.
• An interview from a Microsoft honcho in this regard is worth a read.  Do so here.  It is very educative.