Japan was hit by an earthquake of magnitude 8.9 on March 11. This massive earthquake led to major human tragedy in Japan killing more than 30000 people, leaving many injured, and many other still missing. The earthquake and the tsunami also struck nuclear installations in Fakushima Dai-chi power plant. Because of disruption in the power supply, the coolant cannot be supplied to the nuclear reactors in the required amount, which raises the risk of radiation leak. Already traces of radiations have been detected in some of the food items and the water in Tokyo, which is located 220 KM south of the Fakushima.

Impact on Japanese Economy - Since Japan meets about 30% of its energy from nuclear based power plant, power supply to most of the parts in the country has been affected leading to closure of many factories. There has also been widespread damage to the infrastructure because of which there has been supply disruptions of many of the critical raw material components. Most of the automakers including Toyota, Honda, and Nissan have closed their plants for the lack of raw materials, and the reduced power supply. Manufacturers of semiconductors, LCD displays, batteries etc have also shut down their plants for at least next 2-3 weeks. Some of the major ports of Japan have been affected by the crisis impacting both the exports and imports based industries in the country. According to one estimate, cost of reconstruction is expected to cross $300 Billion. Japan will find it difficult to fund this construction because of its high debt which is already 200% of its GDP. Also the country has witnessed lacklustre growth over last two decades, and this earthquake triggered crisis might further push Japanese economy in downward spiral.

Impact on World’s economy – Japan is the third largest economy in the World, after US and China. It is also the second largest buyer of US funds. Since Japan will need money to fund its reconstruction, it might cash in the US bonds. This will force US fed to buy these bonds, and which will induce liquidity crunch in the US market. Similarly Japanese investment firms have made lots of investment across world’s capital markets. The pullout of the Japanese fund might lead to fall in stock prices in these markets in short term. The other major impact of Japan’s earthquake will be on the crude oil. Since most of the nuclear power plants of Japan have went offline, Japan will depend more and more on crude oil to meet its energy needs. Japan has number of oil fired power plants, and to meet its energy needs, it might buy more oil from the world market. The crude oil prices, which were already on upward trend, will see a further spike as a result of this. The rise in crude oil prices will impact the world’s economy in short term. Japan is the major producer of many of the items including auto components, semiconductors, LCD displays etc. Disruptions to the production of these major items will lead to the supply chain disruptions of these items in the world market. This will delay the production of high end gadgets like smart phones, iPads, LCD TV, laptops etc and cars. This will make a dent in the manufacturers’ profit.

Impact on India economy – Indian stock market dropped by 0.8% on the news of Japanese earthquake. But the market recovered next day. Killer earthquake which hit Japan is expected to have a marginal impact on the Indian economy. Most direct impact will be the pull out of Japan’s investments in the Indian capital market. Japanese investment firms will draw money from the Indian market to fund the Japanese reconstruction. This will have a negative impact on the stock market in short term. Japanese have also made investment in number of important infrastructure projects in the country such as Delhi Metro, Delhi Mumbai corridor etc. These projects might see delay because of lack of availability of funds. Surge in the crude oil prices because of increased demand of oil in Japan will also impact the Indian economy which is already reeling under inflation. Automobile companies will be negatively affected by the crisis, since they depend on Japan for the supply of many of their critical auto components. Also because of increase in the value of Yen (as a result of lack of yen supply), there will be an increase in the cost of these auto components. Japan’s refinery capacities have also been affected by the quake. This will have positive effect on Indian petrochemical firms such as Reliance. Indian IT industry will be marginally impacted by the crisis, since most of the IT firms derive only 1-2% of their revenue from Japanese market. Only IT firm which has high exposure to Japan market is Nucleus Software Exports which derives 30% of its revenue from the country. Crisis will have a minor impact on Indian exports, since Japan accounts for less than 3% of total Indian exports. Thus the recent earthquakes which hit Japan will have marginal impact on Indian economy.

The union budget for the year 2011-12 was presented amidst an unstable macro-economic environment characterized by high inflation, high interest rates and a need for lowering the fiscal deficit. This budget has tried to balance the need for sustaining the growth of the economy along with controlling inflation and fiscal deficit. The government has tried to address all these issues to an extent through various measures, albeit the implementation of these measures can be very difficult.

The fiscal deficit target was lowered to 4.6% in 2011-12 from 5.1% in 2010-11 and is targeted to reach 4.1% and 3.5% in FY13 and FY14 respectively. This estimate is based on an optimistic growth in tax collections and a substantial decline in the subsidy bill. The government has assumed a growth in tax collections of 18% with a real economic growth of 9%, which seems highly optimistic and at the same time, is expecting to reduce the oil subsidy bill to INR 23,640 crores from over INR 38,000 crores in 2010-11. With the global crude prices touching $110 per barrel, this cannot be achieved unless the prices of petroleum products are increased substantially in the country, which can be very difficult to implement in the current political scenario. If we look at FY2010-11, even with proceeds from tax collections and telecom auctions exceeding the budget estimates substantially, the deficit for 2010-11 reduced very marginally, highlighting the additional expenditure requirements over the course of the year compared to the budget estimates. This can make it very difficult for the GoI to achieve the fiscal deficit targets mentioned in the budget.

The gross government borrowing is projected to decrease based on the budgeted fiscal deficit, which will bring the possibility of interest rates remaining under control and benefit the corporate sector with lower cost of raising funds. However, if the fiscal scenario turns out to be less positive than presented in the budget, the interest rates might go up. The surcharge on corporate tax has been brought down from existing 7.5% to 5%, however this has been neutralized by a increase of 0.5% in MAT. The excise duty was left unchanged, bringing a cheer especially for the automotive industry, which was expecting a rise in the excise duty. The service tax was also left unchanged, though some new services were brought under its ambit. The government has also committed to implement the DTC from April, 2012 and is hopeful of implementing the GST in 2012-13.The budget announced some important measures to aid the growth of the economy by increasing the budgeted outlay for infrastructure. Other measures such as increasing the FII investment limit in corporate bonds and reduction in tax withholding for investment in infrastructure bonds should aid the flow of funds to this sector. The government has announced incentives (such as according infrastructure status to cold chains) to support the development of supply chain & cold storage infrastructure for food grains and vegetables. The development of food supply chain infrastructure is very important to control the increasing food inflation. However, no concrete plans or steps were announced to control spiraling inflation figures and nothing was mentioned about the highly anticipated increase in FDI for the retail sector, which could improve the the food supply chain infrastructure.

Allocations for social sectors such as education, health and family welfare have been increased and allocation to agriculture has also been increased. The credit flow to agriculture is targeted to increase by INR 1,00,000 Crores and an additional 1% interest subvention to farmers repaying loans in a timely manner has been announced. However, policy level measures to aid farmers in increasing productivity were missing.

The government did not make any big reform announcements, but has tried to balance the objective of sustaining the growth along with lower fiscal deficit and lower inflation. We have to wait and see if the measures announced by the government will achieve this objective.

On February 11, 2011, Nokia and Microsoft announced their plans to form a strategic partnership to bring their strength and expertise together for creating new global ecosystem. Both the companies plan to combine their assets to produce innovative mobile products catering to the needs of consumers, operators and developers. Additionally, companies will also work to integrate new assets and new service offerings for new markets. These strategies are aimed to provide strong competition to their  rivals Google and Apple in the Smartphone market. Nokia has been consistently losing their market share in Smartphone market. As a part of this strategy, Nokia will be replacing their current mobile platform Symbian by Microsoft windows phone seven operating system on its devices as their primary smartphone platform. 

Nokia and Microsoft deal will be helpful to both the companies. Microsoft will be getting the advantage of Nokia’s vast network and dealers and stores, where Apple won’t be able to have stores for a long time to come. On the other hand, Microsoft has exceptionally great developer’s tools with .NET community and ecosystem. This partnership will help Nokia to comeback in the market which it lost to the likes of Apple's iPhone, and products based on Google's Android platform. The partnership had hurt the chances of Intel entering in mobile phone market. Microsoft is concerned about low adaption rate of windows 7 in the mobile market, but is confident of overcoming this challenge with hardware partner like Nokia.

With this deal, Microsoft gets instant share of 35% of world’s mobile phones. Microsoft has agreed to sell windows 7 operating system for Nokia phones at almost zero prices and to share profits generated from the ecosystem. Nokia has chosen Microsoft against Google Android. Surprisingly after the deal, Nokia’s shares fell 14 percent, the steepest slide since July 16, 2009. The deal is supposed to be a survival step in smartphone market, where company’s market share fell from 50.8% to 27.1% since Apple introduced iPhone in the market in 2007. Nokia also plans to optimize its R&D spending. Nokia’s current R&D expenses amount to 5.9 billion Euros ($8.1 billion), which is four times, that of Apple. Nokia also declared the plans to have two units, one is smart devices and another will be mobile phones. Partnership with Microsoft will play an important role in the smart phone division.

The biggest question mark after the partnership is over success of the deal. With complementary strengths of both the partners, it is clear that partnership will go a long way in helping Nokia to regain its share in the Smartphone market. The success of partnership also depends upon the competitor’s strategy. One of the elements to the success is its product design strategy. Overall the interest of both the companies is aligned to only one goal which is control over the smart phones business. With the sudden departure of Steve Jobs (who went on medical leave), it is feared that lack of innovative ideas might force Apple to go on back foot. Nokia should leverage this partnership with Microsoft to unleash latest innovative technology in the Smartphone market to regain the lost market.

Unique identification mission was launched by Indian government in year 2006 with the objective to provide identification to each citizen of the country. This identification was primarily meant to be used for efficient delivery of welfare services in the country. Wipro Limited is the consultant for design and project management phase of the project. There will be a 10 digit identification number on each card that will be used to serve multiple purposes. To ensure successful implementation, some critical information need to be collected about the user i.e KYR (Know your resident) fields (Name, Address, Gender and Date of birth), Photo and address verification, fingerprints on slap scanner and Iris scan.

Human Resource Development (HRD) ministry of India has taken the lead in the use of UID scheme. Under a new program, all school children will be provided an UID so that their progress across classes can be tracked. This will also help in monitoring the dropout rate and to control the dropout trend. Additionally, UID will help to keep a track of student’s movement across educational institutions, and their academic records. The mission will be run in coordination with civil society groups.

UID has generated new hope amongst people. Government of India feels that the system will help to curb corruption involved in its various rural programmes like Sarva Shiksha Abhiyan, Rural Health Mission, Bharat Nirman, National Rural Employment Guarantee Scheme etc. Government also hopes to control the rise of terrorism and crime in the country with the help of UID scheme.

UID will not only be resourceful for the State for proper administration but can be used to achieve diverse goals. These IDs can also be of use to Insurance companies, Banks and microfinance institutions, Income tax department, Mobile Service providers, Passport offices etc. In this case, UID will be a primary source of verification and will help in reducing time spent in verification process. The scheme can also be used to control the menace of “fake credentials” and identity cards such as “Ration card”, voter ID card etc. In case of UID, magnetic flash memory chip will be used to secure the true information about the card holder which may not be easily duplicated. UID can also be used to contain illegal migration in the country from the borders.

The key objective of the UID is to make the social services available to poor section of the nation.  As of 2010, approximately 37% of India’s population live below poverty line. To address this issue, the government of India has been striving to deliver the basic essentials to these poor people such as food. Fertilizers, fuel etc. Due to corruption and ignorance of the poor people (about the facilities they can avail), it was difficult for government of India to achieve their targets. The UID will play a fundamental role in helping the government to deliver these services to the people for which those are meant. 

Growing economy needs energy to grow and to sustain the growth rate. All major sectors of economy such as manufacturing, agriculture, construction, and service sector need energy in one form or the other for their normal functioning. Growth in the operation of these industries leads to increase in demand of energy. Only few countries have enough resources to meet their internal energy requirements of different sectors of economy, while others have to rely on supply of energy sources from foreign countries. India is one such country, which is heavily dependent on import of oil to meet its energy requirement. After the first discovery of crude oil in Digboi area of Assam in 1880’s, it has been successful in finding few more areas which have reserves of oil and gas but not sufficient enough to meet its ever increasing energy needs. India is the sixth largest consumer of Oil and imports 2/3rd of its required oil, which is sufficient to fulfil only 28% of its demand for energy. High demand of petrol and related products coupled with availability of low cost labour and low cost of infrastructure provided an excellent opportunity for international oil companies to come to India and invest in exploration, refining and distribution of oil. But due to government regulation, only two nationalized companies ONGC and Oil India Ltd are handling exploration and extraction activities and three more PSUs Bharat Petroleum, Indian Oil and Hindustan Petroleum have been entrusted the task of refining, distribution and marketing of petrol and diesel. It was only during the last decade that the private companies such as Reliance Petroleum and Essar have been given license to engage in exploration and extraction of crude oil. These companies had to shut down their retail distribution as it became economically unviable for them to sell at the regulated price.

Petroleum products, diesel in particular has played an important role in changing Indian economy from an agriculture based economy to an industrial economy. Indian government for decades has been trying to insulate the domestic prices from rise in international crude prices by subsidising major petroleum products. But due to strong dependency and wide use of these petroleum products it is clear that in the long run it will be unviable to sustain this subsidy.  So, the government has taken the first steps towards deregulation of these products by deregulating petrol prices to some extent. But prices for Kerosene which is supposed to be used by poor people to cook their food and light their houses, and diesel supposedly mainly used by farmers, industry and transporters is yet to be deregulated. According to a report by national council for applied economic research (NCAER) in 2005, 40% of the kerosene oil is said to be pilfered from the public distribution system. Since government subsidises this kerosene, it provides a lucrative though illegal opportunity of selling kerosene in the open market for unscrupulous people. Kerosene is also used to mix in diesel as prices of diesel are three time the price of kerosene oil.

Pilferage of such large amount of kerosene results from the severe incompetency of government in delivering subsidised kerosene to the poor people for which it is meant, or from the collusion of politicians and bureaucrats with oil mafia. Successive governments have failed to curb this menace. There are two areas where oil pilferage can happen. First is during transportation and second is during distribution through public distribution system. Laws to check petroleum products adulteration lacks teeth, which is evident from the fact that Mr. Popat Shinde, the main accused in the case of burning Additional district collector Mr. Sonawane to death was booked and arrested six times between 2003 and 2009, but is still out of jail and committing the same crime again. Although, kerosene is supposed to be used by poor people but in reality poor people still use wood from forests and the not so poor use LPG gas to cook. The fact that 40% of the kerosene marked for distribution being getting siphoned off, shows that subsidized kerosene is not reaching the intended target segment and this segment are buying it from the black market at higher rates. Since they are anyways buying it at higher rate, why not increase the price gradually so that black marketing and theft of kerosene can be stopped. Given below are few suggestions which can work as a food for thought for the Indian government to take some right and quick steps towards curbing this menace:

1. One way can be to outsource only the logistics and transport of petroleum products to some competent private company who can be held accountable (with suitable bank guarantee) for losses (if any) on the route.

 2. Better use of tracking technology for the vehicles used to transport these products, so that their routes and halts can be tracked, recorded and analysed. Driver deviating from their routes should be penalised.

3. The routes of the drivers should be changed frequently so that they will have to look for new customers every time their route is changed which will increase the likelihood of catching them.

4. Robust processes and checks to prevent and detect adulteration of fuel oil with kerosene or any other petroleum products. Mixing coloured chemical which can be detected in the tests is one way of setting such checks which although proposed, has not been implemented.

5. After implementation of UID, even public distribution depots can be replaced with automatic vending machines which will vend kerosene only to the card holder registered for that area and in the pre determined and allotted quantity.

6. Stringent laws under essential commodities act and quick completion of petroleum products theft and adulteration cases. 

7. The subsidy on the kerosene should be gradually taken off to reduce the gnawing gap between the price of kerosene (Rs 12 per litre) and price of diesel (Rs 37.76 per litre).

The inflation rate in the country touched a high of 18.32% for the week ended December 25, 2010 and it came down marginally to 16.91% in the first week of the New Year. Before that the food inflation went up to 19.90% from 14.44% in a month’s time from November, 2010 to December 2010. This high jump in the food prices has been on account of rise in prices of vegetables on wholesale market by 58.58%, of which the price rise in Onions is a major reason followed by rise in prices of products like egg, meat and fish, which became costlier by 20.83%, fruits by 19.99% and milk by 19.59%. Meanwhile in non-food item category, prices of fibres and minerals have gone up by 35.53% and 30.58% respectively.

Steep rise in onion prices in the country has been seen as a major reason for the high food inflation. Maharashtra, the largest Onion producer centre in India was affected by unseasonal rains, which led to huge damage to the Onion farmers and in turn resulted in shortage of Onions across the country. Our neighbour, Pakistan also banned the export of Onion via land route, in order to control the rising prices in their own country because of the scarcity of Onions. Beside the increase in prices of food and non-food items, other key factors which led to high inflation are skyrocketing energy costs, changing climatic conditions (and its associated effects on agriculture), increasing demand for food products caused by a growing population and an expanding economy.

The high inflation adds inefficiencies in the market and makes it difficult, especially for the consumer goods companies by affecting their costs and also their sales. Rising inflation will require the consumers to spend more on the same amount of items bought earlier, forcing them to reduce their consumption. This will impact the sales of the consumer and food companies. The rising costs will increase the input costs, especially for the food companies and in turn hitting their margins. If these companies decide to increase their prices to protect their margins, the customers are likely to switch to cheaper brands affecting their long term prospects. In the past, these companies followed the strategy of safeguarding their brand by not increasing the prices or increasing them marginally and expected the inflation to ease out very soon. We have to wait and see if this strategy does work out in the current scenario. This high inflation rate is also expected to slow down the growth in the economy, due to effects of lower consumer spending and low industrial investments.

The UPA government is trying out various measures to bring down the inflation and control the rising prices. However, since the current inflation rise is driven by increase in prices of vegetables and fruits, it is more difficult to control these prices given the fact that these items cannot be stored for longer duration like other commodities. Even the role of RBI is limited here, given that the current inflation rise is being driven by supply side constraints. The government is reviewing the exports of all the essential commodities and is also easing import regulations to encourage the imports of these essential commodities. It has also initiated stringent action against black marketers and middle men who are trading in essential commodities and spurring up the prices. However, all these measures can only provide short term relief. Government should initiate long term measures to avoid a large food scarcity scenario in the country. Policy level measures must be initiated to improve the supply chain & distribution for essential food items such as vegetables, meat, fruits, milk products etc by reducing pilferage and wastage.

The high rates of inflation are hindering the future growth prospects of the Indian economy and are also worsening the living conditions of the Indian middle class. We have to wait and see if the Government can control it and tame the rising food prices. One also needs to keep a tab on impending action by RBI on inflation, whose option has become limited after the industrial growth plunged to an 18 month low of 2.7%.

India is the second largest two wheeler market in the world after China. Demand for two-wheelers is up by 24.52% from 2009 to 2010 with total sales of 10.5 million units. The motor cycle segment contributes around 80% of the two wheeler market. The key factors driving the growth are huge demand for two wheelers from rural India, availability of easy financing options and lack of quality public transport infrastructure. The world’s largest two wheeler company, Hero Honda Motors Limited is the leading player in the Indian market. Hero Honda is a joint venture between India’s Hero group and Honda Motor Company of Japan. Hero Honda leads the market with the total unit sales of 4,600,130 two-wheelers in the year 2009-10. Company recorded a profit figure of Rs. 2231.83 Crores in the FY 2009-2010, with 23.6% growth in unit sales.   

Recently the 26 years old partnership saw a turn, when Hero group and Honda Motors decided to part ways, with Honda motors selling its entire stake in Hero Honda Motors Limited. Shareholding pattern of Hero Honda consists of 26.2% with Hero group (Indian promoter), 26% with Honda Motors (foreign promoter), 31.75% with foreign Institutions, 7% with general public and rest 10% is with financial institutions, banks and mutual funds etc. Honda Motors stake in the company has a market value of nearly $2 billion which will now be taken by the Hero Group’s Munjal family.  Till now Honda Motors has provided the technology support for the products and Hero Honda has manufactured and sold the products through its large dealership network. Honda is being paid royalty on each product sold by Hero Honda. The strong technological prowess of Honda group with strong dealership network of Hero has made the partnership as one of the most successful JV in the history. As per the sources, Honda and Hero were sparring on issues such as increasing royalty and spare part purchases through Honda Motorcycles and Scooters India, which Hero group had been resisting since long time. Also now Honda group wants to focus on its wholly owned Indian unit established in the year 1999.

Under the new terms agreed between the two parties, Hero Honda will continue producing and selling all the current models in the market. The company will be free to develop new products to sell in domestic and international markets and to acquire new technology. Honda officials said that there is also a plan to grant new licenses for the new products which will be introduced under the new brand. As per the terms and conditions of the separation, the R&D support from Honda will continue till 2014 i.e Hero has four years to catch up on their R&D processes.

There are certain key issues which are coming in light after the Hero – Honda split. One, by 2015, it will be mandatory for all the two wheelers to meet the BS IV norms. In order to meet this requirement, manufacturers would need to make large investments in technology. Honda is well versed with the fuel injection system, which is required to meet the emission norms, while the Hero group would lose this technology know-how as a result of the split. Secondly, Hero Honda is facing problem with the unmentioned royalty amount payable to Honda. Hero group also fears that company would be forced to pay huge expenses to Honda for Technology support till the next stage of emission norms.

Both Hero and Honda have future plans to exploit opportunities after the split. Honda’ first move will be to introduce two entry level bikes in India. With increasing costs in Japan, Honda has decided to manufacture the product locally. The company is coming up with a two and a four wheeler plant in Rajasthan. The company has announced to invest Rs. 500 Cr in the Rajasthan plant with annual capacity of six lakh units. It may be possible that company will bring its two wheeler and four wheeler brands under one umbrella. On the other hand Hero is planning to explore international markets such as Latin America, Africa and South East Asia. Also company will start sourcing the technology from other global markets.

This stake sale will allow Honda Motors to expand their presence in India and launch newer brands in the two wheeler segment. For Hero Honda, it is important to retain their large dealership network and make sure their confidence is not dented due to the split in the JV. It  should also take measures to build the technological capabilities at Hero Honda.

Teaser loans have interest rate that is 1-2% lower than the prevailing interest rates in the market and that low interest rate is offered for specific time period, say 1 to 2 years. After the honeymoon period (initial years where they have to pay low rate of interest) the borrower needs to move to floating interest rate existing at the specified time.

In India, teaser home loans were introduced in January 2009. The initiative which was first introduced by State bank of India (SBI) was soon followed by other banks. In the present scenario where interest rates are supposed to increase in near future, home loan borrowers found the concept of teaser loans very attractive as they would have to pay low interest in the initial phase, but they seemed to ignore the fact that after completion of the honeymoon period, when the borrowers will start repayment at the floating rate, the shift in the EMI will be huge, resulting in disruption in their financial planning. The same results in increased default payments affecting the asset quality and profitability of the banks.

During last few months, RBI has expressed discomfort with banks who are lending home loans at teaser rates. In its second quarter review of monetary policy the limit for asset provision in the case of teaser home loans was raised from 0.4% to 2%. This will restrict the ability of banks to offer loans at lower interest rates in initial years. RBI was also concerned that borrowers were not intimated properly about how floating rates are estimated and what will be the implication of teaser rate after the initial low interest period. RBI also pointed out that the banks have been ignoring the repayment capacity of the borrowers while offering home loan rates. RBI also expressed concern about the fact that normal home loan borrowers are not savvy to estimate the impact of increased home loan rates after few years, and might default once the rates start rising.

From the total home loan portfolio of State bank of India i.e Rs. 80,000 crore, teaser loan account for Rs. 20,000 crore and approx 3% is estimated as the default rate of the teaser rate. For HDFC, teaser loan portfolio accounts for 27% of its retail home loans i.e. 17,500 crore. Union Bank of India disbursed approx. 3000 cr. rupees under the Teaser home loan scheme.  Between March 2009 and December 2009, the home loan portfolio of banks and other housing finance companies grew by approx 9%. SBI who was the first one to start the scheme grew its home loan portfolio by approx 25%.

Housing development and finance corporation (HDFC) has extended the scheme four times from December 2009. HDFC Chairman Mr. Deepak Parekh said that lenders of teaser loans should withdraw the scheme as RBI is quite unhappy with the product because customers are not able to realise the implication of teaser loans after the honeymoon period. HDFC has extended its teaser home loan scheme in October where borrower will pay 8.5 in first year (April 2011) and 9.5 in second year (April 2012). These rates were revised from previous rates of 8.25% and 9% for first year and second year respectively. The move was taken with the fear of losing their market share to the rival banks. Now, HDFC is not in favour of extending this scheme taking into consideration the additional asset provisioning mandated by RBI.

On the other hand State Bank of India says that the bank is still positive about their special loan scheme (Teaser home loans) despite RBI's additional provisioning on the scheme. SBI Chairman Mr. O P Bhatt said that teaser loans are useful to create demand when country is going through tough phase. As per Mr. Bhatt, the rate of interest charged from the borrower in first year is lower than their paying capacity and increase in the subsequent years is justified as the borrower's capability to service the loan is likely to increase. Currently SBI is charging interest rate at 8% for first year and 9% for second year.

The demand for residential loans has been rising since last few months and is expected to grow because of the upcoming affordable housing projects by many of the real estate developers. According to one of the rating agencies in India, it is estimated that from the total bank's home loan portfolio of approx 3.4 trillion in September 2010, 20-25% was linked to teaser loans rates.

As per experts, the provision mandated by RBI for teaser loans will affect the profitability of the bank in long run and banks will not be able to continue with the scheme. The future of the teaser loans will highly depend on the move by the SBI. If SBI withdraws this scheme, other banks may also follow suit.

Teaser home loans have led to an increase in the demand for residential property among other things due to incentive of paying lower interest rate for initial years supported with low cost housing offered by many developers. In December 2008, SBI was able to improve its market share of home loans by approx 18% with the help of teaser loan scheme. However, the decision of RBI to hike key policy rate, and increase standard asset provisioning have made it difficult for the banks to continue the offer of teaser home loan schemes. This is likely to impact the demand for housing and put downward pressure on the real estate stocks. The latest loan-for-bribe scandal will also impact the real estate sector, as the banks are likely to toughen the terms of loans for real estate companies squeezing the liquidity in the market

Booz Allen Hamilton (BAH) hit Wall Street on 17^th of this month and has raised about $238 million with its initial public offering (IPO) of stock. Based in Virginia, Booz Allen primarily provides management and technology consulting to the U.S. government, with a focus on defence, intelligence and civil issues (98% of its revenue in FY10 was derived from the U.S. government). This IPO follows the recent trend of private equity firms taking their leveraged buyout companies to public over the last 2 quarters. A 16% gain in U.S. stocks since the end of June has helped PE firms sell shares in a dozen of their companies, with 10 trading above their IPO price, compared with less than half of those that went public in the first six months. In case of BAH, its majority stake owner Carlyle Group (which bought approximately 80% of stake in BAH in 2008) has diluted almost 9-10% of its stake in the company. In the filing, the company had stated that part of the proceeds will be used to pay off about $545.2 million in debt that has been added to its books at the time of its leveraged acquisition by Carlyle.

This IPO has again opened up a controversial topic: whether it is really worth for a consulting firm to go for public money by sacrificing its age-old partnership culture. Is it really worth it when you consider all the hassles of SEC reporting and Sarbox compliance issues for a listed company? Market experts have been speculating over the last two years (since its acquisition by Carlyle) that the firm is bound to go public at some point or the other, as the PE firm did not really have any other exit option. Due to conflict-of-interest rules, Carlyle could not shop the company, which provides advice to government agencies on technology acquisitions, to strategic investors or rivals. But this exit route, while favourable to Carlyle Group, may have detrimental impact on the unique work culture and business strategy of Booz Allen, as has been speculated by business columnist Steven Pearlstein in his Washington Post article. Carlyle had acquired almost 80% of BAH’s stake for a total pay-out of $2.54 billion, which included a cash pay-out of $1 billion. But as in the case of most leveraged buyouts, it has already recouped more than 50% of the cash investment in the form of a special dividend pay-out by the company in the last financial year to the tune of over $500 million. The filing showed that revenue increased 18% to $5.12 billion in the fiscal year, while the profit is only $25.4 million, a profit margin of 0.5% which is very low for a consulting firm. This shows the impact of the special dividend pay-out. A company with this profit level is not going to be an attractive investment in an IPO, which was reflected by the fact that most of the share subscription has been at the lower end of the price spectrum of $17-$19 as specified in the filing document. Having said that, Carlyle has still made an approximate return of 100% at the listing price of $17. Also the spin-off of Booz Allen’s slow growing private and international consulting arm from its highly profitable government consulting business has contributed towards augmenting Carlyle’s total return.

So the IPO seems to be an attractive business for Carlyle Group. What remains to be seen is whether it will benefit Booz Allen, its employees and its government customers. BAH has a strong corporate partnership-driven culture that stresses quality, collaboration and putting customer interests before its own. Its steady growth in sales and profits has been organic, the result of sustained investment in people and technology without resort to costly and culture-diluting acquisitions. Booz Allen chief executive Ralph Shrader has particularly stressed this point in his post-listing press conference that the culture, the management team or the core values would remain uncompromised even after the firm goes public. But sceptics are raising their concerns. It has happened once before in the past when in 1970 Booz Allen went public for a short span of time before becoming private again. At that time the company executives had realised that the public shareholders’ expectations and regulatory compliances are in opposition to its unique business model. So who can assure that history will not repeat itself? Once there is a slowdown in the government-contracting sector, the company could be forced to chase low-margin contracts or buy up mid-size competitors in order to meet analysts’ and investors’ expected double-digit earnings. This could seriously lead to an erosion of Booz Allen’s unique work culture and its competitive advantages. Whether this will happen in reality is still left to be seen. Meanwhile sceptics are not getting over-enthusiastic about this supposedly landmark IPO, which could very well lead to some other consulting firms going public.

RBI released its second quarter review of monetary policy on 2^nd Nov 2010. Most of the changes announced were in line with the market expectations. Both the Repo rate and reverse rate were hiked by 25 basis points, raising repo rate to 6.25 %, and reverse repo rate to 5.25 %. The CRR rate was left unchanged.

The changes were introduced with an aim to curb the inflation and asset price increase. The food price inflation has touched 13.75 % that has been a cause of concern for policy makers. On the manufacturing side, the inflation has been on constant rise driven by both supply and demand factors. In addition, the commercial bank credit has increased to 83 % against 35 % last year. This has created credit crunch in the money market. The rise in repo rate and reverse repo rate is expected to rein in the demand for credit. The decreased demand of credit will affect the demand side of the inflation thereby containing the inflation.

RBI also announced major policy changes with respect to real estate sector. Real estate sector has recovered very well from the low of last economic recession. In some markets such as Mumbai, the prices have doubled in last one year for some major projects. This might lead to another asset price bubble in the real estate sector. To counter this, RBI has announced some measures in context of lending to this sector. It has reduced loan to value ratio for house loans at 80%. Additionally, standard asset provisioning for teaser home loan rates has been hiked to 2% from 0.4 %. RBI has also proposed to increase the risk weights for residential housing loans of Rs 75 lakhs and above to 125 % irrespective of its LTV levels.

The measures introduced by RBI are going to have both direct and indirect impact on the fortune of the real estate sector. Teaser home loan rates have been under constant scanner of RBI. Under teaser home loan, a mortgage loan is charged very low interest rate in the initial years. However, after 2-3 years, the rates are linked to floating home loan rates that are in most cases higher than the low interest rates in the starting years. Owning a house has been the dream of middle class all over the world, and Indian middle class is no different. In its pursuit of this dream, an individual might be enticed by low rates offered in initial years under teaser home loans. He might not carry due diligence on what will be the rates after initial years and if the rates rise, such individuals might default which might lead to subprime like crisis. RBI wants to avoid such situation, and has thus increased the capital provisioning (by banks) for teaser home loan rates. This is going to affect the demand in real estate at least in short term. Nearly 20-25% of banks’ outstanding housing loan portfolio of around INR 3.4 trillion is linked to teaser rates as on 30 September, according to rating agency Crisil Ltd. The increase in asset provisioning will put brakes on the use of such teaser home loans. Thus, residential buyers will have to borrow money at higher rates under normal home loan schemes. The increased rates will mean lower number of people buying houses. However, in the long term, this is going to protect the residential buyers from unanticipated increase in interest rates.

RBI has capped the loan to value (LTV) ratio for home loans at 80%. Some of the Indian banks such as ICICI have disbursed home loans up to 90% of the value. Thus, home buyers will be able to borrow lesser amount in the new policy regime. This will decrease the demand for residential real estate. However, this might have an indirect positive effect on the dynamics of real estate sector. Most of the houses are registered at prices lower than their true value because of high stamp duty. Now since LTV has been reduced to 80%, there will be a lesser tendency to register houses at lower values. Higher registered value will enable a residential buyer to borrow extra money from the banks (as compared to the case when houses were registered underpriced). This will increase the tax collection for real estate. Along with the rationalisation in the stamp duty, this policy change will reduce the amount of black money flowing to real estate.

Finally RBI has increased the risk weights for home loans of INR 75 lakhs and above to 125 %. Thus, banks will have to allocate extra capital for such high loans, and thus will have lesser inclination to finance such loans. This is surely going to impact the premium segment where prices are in the range of INR 1 crore and above. Indiabulls Real Estate and HDIL will be severely affected since they have high exposure to premium segment. Overall, this measure will have very less impact on the fortune of real estate sector. This is because more than two-third of the demand in real estate sector is from affordable segment where houses are priced below INR 30 lakhs.

Overall, we can say that the policy announcements made by RBI will have a neutral effect in the short run. But in the long run, it is going to have positive impact in terms of protection provided to borrowers (in form of brakes on teaser home loan rates), and in terms of registration of houses at their actual value.