FInancial Advisor Practice Journal by www.journaloffinance.in

1. Ghost Protocol;
Volume 68 / February 2012
F IN A N C IA L A D V IS O R
PRACTICE JOURNAL
JOURNAL OF THE SECURITIES ACADEMY AND FACULTY OF e-EDUCATION
SAFE UPDATES – KEEP INFORMED
The Securities Academy and Faculty of e-Education
Editor: CA Lalit Mohan Agrawal

2. Ghost Protocol;
INDEX
Month: February 2012
Title: Ghost Protocol – Will US Economy Save The World Again?
Editor : CA Lalit Mohan Agarwal
68th Financial Advisor Practice Journal
S.No. Section Name Topic
1.1 Editorial Preamble: Ghost Protocol Schadenfreude
1.2 Stock Markets Souring Sentiment On India
3rd Week of December: Sensex up 247 points Sensex to face many headwinds ahead
4th Week of December: Sensex down 284 points Sensex, Nifty plunge 24% in a ‘terrible’ year
How could you allocate your assets in 2012?
1st Week of January: Sensex up 413 points India’s Sensex gains in New Year’s Eve
2nd Week of January: Sensex up 287 points Sensex posts highest weekly close in five weeks
3rd Week of January: Sensex up 584 points Sensex gains for 3 consecutive weeks
4th Week of January: Sensex up 495 points Rupee, Sensex climb to 11-week high
2.1 Indian Economy India Must Leave Inaction Behind
2.2 International US Dollar Regaining Ground
Will the US economy save the world again?
2.3 Warning Signals Europe’s Vicious Spirals
The Straits of America
Emerging Markets: Will it fall in 2012?
India’s Year of Living Stagnantly
3.1 Currency Market Address Basics
3.2 Commodity Market Duty hike on Gold
4 Financial Sector – Transforming Tomorrow World Economic Forum
4.1 Financial Advisors Beating the Burnout at Davos
4.2 Financial Planners The Great Transformation: Shaping New Models
4.3 Risk Management Consultants Taking Back Globalisation
High Food Prices: A Blessing in Disguise?
4.4 Credit Counsellors Leaders slam eurozone 'foot-dragging' on debt
4.5 Issues Of The Present Fallout from the crisis could last the rest of this decade
At World Economic Forum, Fear of Global Contagion Dominates
5. Central Banks European Banking Authority Stress Tests
6. Inflation Inflation: Tackle it Effectively
7 Knowledge Resource India’s Anti-Corruption Contest
The World’s Major Economies Share Many More
Words From The Managing Trustee
Vulnerabilities Than Is Commonly Supposed.

3. Ghost Protocol;
Editorial preamble
1.1 GHOST PROTOCOL
幸灾乐祸
The protracted financial and economic crisis
discredited first the American model of capitalism, and
then the European version. Now it looks as if the Asian
approach may take some knocks, too. Coming after the
failure of state socialism, does this mean that there is
no correct way of organizing an economy?
In the aftermath of the subprime crisis and the
collapse of Lehman Brothers, fingers were pointed at
the United States as an example of how badly things could go wrong. The American model further
weakened first by the Iraq invasion, and then by the financial crisis. Anyone who dreamed of the
American way of life now looked stupid.
Immediately after Lehman Brothers’ collapse, German Finance Minister Peer Steinbrück put this
diagnosis as a challenge not only to the US, but also to other countries – notably the United Kingdom –
that had “Americanized” their financial system. The problem, Steinbrück argued, lay
in over-reliance on highly complex financial instruments, propagated by globalized
American institutions.
Criticism of America did not stop there. Steinbrück’s successor, Wolfgang Schäuble,
persisted in the same tone, attacking “clueless” American monetary policy, which
was supposedly designed only to feed the American financial monster.
But such criticism ignores the problems faced by banks that did not use or deal in complex financial
products. Bank regulators had long insisted that the safest possible financial instrument was a bond issued
by a rich industrial country; then the outbreak of the eurozone’s sovereign-debt crisis, with its roots in lax
government finance in some countries.
Critics now had a new focus. Naturally, many conservative Americans were
delighted by the imminent failure of what they saw as Europe’s tax-and-spend
model, with its addiction to a costly and inefficient welfare state. They were not the
only critics. The chairman of China Investment Corporation, Jin Liquin, commented
skeptically on a proposed Chinese bailout of Europe, which he called “a worn-out
welfare society” with “outdated” welfare laws that induce dependence and sloth.
But such criticism captures only one small part of Europe’s difficulties. The fiscal problems of Greece
and Spain were also the result of spending a great deal on high-technology and high-prestige projects:
facilities for the Olympic Games, new airport buildings, and high-speed train links. And Spain and Ireland
before the crisis did not have a fiscal problem, owing to the rapid economic growth produced by a real-
estate boom that seemed to promise a new era of economic miracles.
One of the most widely used Chinese terms of recent years is 幸灾乐祸 (xìng zāi lè huò), best translated
as “schadenfreude”: to rejoice in other people's misfortune.
Asian critics looking at America and Europe could easily convince themselves that the Western model of
democratic capitalism was collapsing.

4. Ghost Protocol;
But haven’t similar capital investments and soaring property prices also been an
increasingly important part of China’s transformation since the 1990’s? Chinese
citizens are now not only frustrated with the high-speed trains’ increasingly
obvious imperfections and inadequacies, but are also wondering whether their
government has set the right priorities.
Shadenfreude comes in several flavors. Russia’s Prime Minister Vladimir Putin
and Argentina’s President Christina Kirchner liked to think that their versions of
a controlled economy and society built in the aftermath of default on foreign debt
offered a more viable alternative to cosmopolitan international capitalism. Both
now face major problems with disillusioned populations.
In short, the world’s major economies share many more vulnerabilities than is
commonly supposed.
A response to global challenges based simply on schadenfreude may promote a
short-term sense of well-being, as people often like to think how lucky they are
to have escaped a mess that originated elsewhere. But soon they encounter their
own problems; indeed, today’s global economy is a riot of slipping economic
models. And tomorrow the cacophony will be even louder.
So, is there any absolutely sure way of organizing economic life? If the quest is for a way of securing
perpetual security or dominance, then the answer is “no.” In a market economy, however, competition
rapidly leads to emulation, and high profits associated with an original innovation turn out to be
transitory. From a longer-term perspective, there are only temporary surges of relative wealth, just as
there are only temporary surges of apparent success in a particular way of doing business.
During the Industrial Revolution in Western Europe in the late eighteenth and early nineteenth centuries,
the pioneers and innovators in textiles, steel, and railroads were not, on the whole, rewarded with
immense riches: their profits were competed away. The late nineteenth and the twentieth century
produced a different sort of growth, because public policies and resources could be used to protect
accumulated wealth from the otherwise inevitable erosion stemming from competitive pressure.
Underpinning comparisons of different models is the wish to find an absolutely secure way of generating
wealth and prosperity, and the belief that a sensibly ordered state could somehow capture and eternalize
the fruits of economic success.
Like it or not, states cannot organize themselves in that way any more than individuals can.

5. Ghost Protocol;
1.2 STOCK MARKETS
Souring Sentiment on India
India is definitely not in the good books of brokerages as Ruchir Sharma,
MD & global head of emerging markets at Morgan Stanley points out, the
sentiment on India is souring. In his book - Breakout Nations, Sharma says
the focus must shift to other emerging economies beyond China and India.
The operating assumption is that the bear market regime is still on. We
know that the popular thing to ask just now is will 2012 be any different
from 2011 and the key thing to remember here is that markets don’t care
about calendar years. So just because a new year begins doesn’t mean a
new trend is about to begin.
The bear market regime looks most entrenched in emerging markets. The
big surprise in 2011 is how resilient the US market has been and the fact
that the Q4 of this year, the US economy in the midst of all this talk of a global slowdown is likely to post
a GDP growth rate in the 3.5% to 4% range, which is an extraordinary performance.
However, many emerging markets, which we thought were going to be the superstars, are being
questioned. So, at this time last year, the big debate was that when will India overtake China as the fastest
growing economy in the world, that debate is now being turned on its head which is that both India and
China are slowing down and the question is which economy will slow down even more in 2012?
The trend reversals take place just when the conventional wisdom becomes very
strong. So, over the past decade, it became popular to say- the decline of the West
and the rise of the rest. That trend could well start showing some signs of reversal,
the two economies showing the maximum resilience at this stage are US and
Germany in the midst of this entire turmoil.
In US and Germany even the expectations became very low and hence, those
expectations are now being easily surpassed. At the same time, in the emerging markets expectations got
too high, in terms of what they could achieve, and those are now being undershot. Markets trade at the
margin, in terms of what the rate of change is and the rate of change seems to be more positive in those
markets and more negative in emerging markets.
On the US dollar I am more confident. The US dollar over the past decade, on an inflation
adjusted trade weighted basis has lost one third of its value. We were looking at some of
our long term charts and it shows that the US dollar now is at the cheapest level it has
ever been in its history. So, it is competitive and a lot of the emerging market currencies
have become quite expensive and so the big reversal is taking place.
For many foreign investors a big part of the returns in emerging markets, over the past few years came
from currency appreciation and that trend has exhausted itself. Hence, I think that in the US dollar today
is quite likely that the bear market we saw in the dollar, over the past decade where it lost a third of its
value is coming to an end and we are likely to see a higher dollar versus many currencies over the next
few years. However, these currency trends take a long time to play out but that’s the sort of nature of
game in currencies, where the trends tend to reverse.

6. Ghost Protocol;
There has been a lot of talk here about the rupees performance and how its one of the worst performing
currencies in the world. We think it was high time that the rupee corrected. At our per capita income, we
need an undervalued currency not an overvalued currency to be able to grow.
The rupee now has corrected for that. If you look at it on inflation adjusted
basis, on a three-year basis the rupee has virtually unchanged.
So, this has really been an event of this year and markets always do that,
which is that they don’t price something in for long time and then in a digital
manner they price something in a very short span of time which is what has
happened with the rupee. Barring some sort of macro economic crisis, it does seem to me that the rupee’s
big decline is over but all the other emerging market currencies are still quite overvalued.
The Indian stock market today is back to where it was in December 2005 in on inflation-adjusted terms. But,
the behavior of the Chinese market is in fact more disturbing. The Chinese stock
market today is basically where it was 5 years ago. It is even worse if one does
an inflation adjusted return.
But the real story here to me and the real risk could be China which is that
people are so used to seeing China print growth numbers of 8-9% every year.
If China grows at less than 7% even for a couple of quarters in 2012 that could
really shock a lot of people because no one expects China to do that. Since
1997, China has not recorded a growth rate of less than 8% in any single year. To see them adjust to that
realty could be something, which could send a lot of tremors in the global market.
China has accounted for about 50% of incremental oil demand over the past decade and 75% of
incremental oil demand over the past three years. If China has a bit of a wobble it may sort of contaminate
the whole emerging market universe. Then you end up getting a clearing out process, where some of the
commodities importing nations gain the new leadership and a new bull market begins on the back of this.
But the market has been sensing much more trouble than what the analyst have let on. However, in emerging
markets, the way we are positioning ourselves in the coming decade will be very different from the past
decade. The leaders of the past decade included commodities, were all driven by the China growth story and
we think that in the decade going forward, it is bound to change as most things do once the decade is over.
Sentiment about India has already soured quite a bit. And, there is no
catalyst apart from lower commodity prices which gets us a sustainable
bounce. We cannot have a bull market begin where every time the index in
India goes up by 5-10% because of global factors; commodity prices led by
oil also go up by 5-10% that becomes self defeating. We need that
psychology to break for us to get a sustainable advance. Until then it’s hard
to sort of get out of this bear market regime.
In the previous bull market, which took place from 2003-2007, we were
pretty clear about that, but that was due to global factors, including what
happened in India. However, what we got was that emerging markets had a terrible time in the 1990s and
their balance sheets were cleaned out after that both at the corporate level and at the government.
Valuations became very cheap and then from 2003 we have this flood of easy money, starting out from
the US and booming demand in the developed world that shot up the emerging market growth rates.

7. Ghost Protocol;
So, emerging markets till 2002 were averaging a growth rate of about 3.5%, from 2002 onwards the
growth rate doubled to 7% and that was the average till 2007. What happened in India was exactly similar
that a growth rate was 5.5-6% and 2003 onwards our growth rate went up to 8.5-9%.
Hence, everyone here in India thought this is about us, but in fact it was a rising
tide that was lifting all boats and that boom came to an end in 2007, when in
2009 and 2010 we all used monetary and fiscal stimulus to try and revive that
boom, which took place from 2003-2007 and we were able to carry that on for a
short while. However, in the end what's happening in India is that the growth
rate is coming back to its trend line of possibly around 6-7%.
Some people tell that in India if you get a growth rate of 6-7%, it is still very good compared to what the
global economy is going to see. However, the point here is few things need a major adjustment process. A
lot of our companies, our macro economic finances are geared towards the growth rate of 8-9% and that
adjustment to a 6% growth rate or 7% growth rate really requires a lot of pain, especially at our sort of per
capita income level.
Also, the signaling process is not that strong currently. If you look at the priorities of the government, its
still is very much about how to redistribute the pie rather than grow the pie. When that’s happening that is
not a very encouraging sign. The incentive is still to get something like a Food Security Bill passed rather
than get any major new reforms passed. That’s what they did in 2003 to 2007 where they spent a lot, but
they were able to sustain because of high revenue growth. Now it’s the opposite, which is that they think
that this revenue growth slowdown is just temporary in nature and it will end soon and we can sustain this
spending. But, this growth rate is not going back to 8-9% any time soon and we can’t keep spending at the
way that we did over the past five to seven years.
That is a real disappointment to people like us who want the India story to shine out there. Investors are a
fickle minded lot and what they tell you today, you should not take too seriously because often in six-12
months the views can change. But a lot of hype about India is deflating very quickly.

8. Ghost Protocol;
3rd week of December 2011: Sensex up 247 points
Daily review 16/12/11 19/12/11 20/12/11 21/12/11 22/12/11 23/12/11
Sensex 15,491.35 (112.01) (204.26) 510.13 128.15 (74.66)
Nifty 4,651.60 (38.50) (68.90) 148.95 40.70 (19.85)
Weekly review 16/12/11 23/12/11 Points %
Sensex 15,491.35 15,738.70 247.35 1.60%
Nifty 4,651.60 4,714.00 62.40 1.34%
Sensex to face many headwinds ahead
BSE gains over 1%, broader market down
India's benchmark share indices ended over 1% higher in
the week to December 23. However, the broader market
continues to remain weak as investors shunned
investments in mid-caps and small-cap shares. For the
week ended December 23, the 30-share Sensex ended at
15,738.70 up 247.35 points or 1.60%. The S&P CNX
Nifty closed at 4,714 rising 62.40 points or 1.34%.
On Monday, Markets ended lower for the fourth straight
session, slumping to fresh 2-year lows in intra-day trades,
after recent data vindicated that India's economic growth is slowing down. The Sensex touched a fresh 28-
month low of 15,191 and the Nifty touched a low of 4,560, the lowest level for both indices since
21/08/2009. On Tuesday, share indices ended lower further for the 5th straight session.
On Wednesday benchmark shares indices ended over 3% higher, snapping a five day losing streak. On
Thursday, share indices ended higher again, led by banks after slump in food inflation to 4-year lows,
rekindled hopes of rate cut by the central bank sooner than expected. Food inflation eased sharply to 1.8%
in the year to December 10, from an annual 4.35% rise in the previous week. Food inflation fell sharply to
a near four-year low as prices of essential items like vegetables, onion, potato and wheat declined.
The RBI governor Thursday said that India’s GDP will be below 7.6%. In its second quarter review of
monetary policy 2011-12 the central bank had revised the baseline projection of GDP growth for 2011-12
downwards to 7.6% from 8% earlier. Indian stocks ended lower on Friday; on rising concerns that India's
growth is likely to be lower than the central bank's revised forecast of 7.6% for 2011-12.
This week trading volumes were thin due to the upcoming Christmas holidays. The trend may continue in
the coming week as well with many markets shut for year-end holidays. For the Indian markets, next
week will be important given the F&O expiry on Thursday. Markets will also be partly driven by the
political developments, as the parliament resumes after the Christmas break to debate the New Lokpal
Bill. Focus may soon shift to January and outlook for New Year.
Foreign institutional investors have been selling everyday in our market. They have been net sellers of
local stocks worth more than $500 million so far in 2011, a far cry from record net inflows of more than
$29 billion in 2010. The market sentiment also dampened after global equity research firm CLSA cut its
forecast for Indian economic growth to 6.7% for the current fiscal year from its earlier projection of 7.3%,
as high interest rates take a toll, with policy inertia and corruption scandals hurting confidence.

9. Ghost Protocol;
4th week of December 2011: Sensex down 284 points
Daily review 23/12/11 26/12/11 27/12/11 28/12/11 29/12/11 30/12/11
Sensex 15,738.70 232.05 (96.80) (146.10) (183.92) (89.01)
Nifty 4,714.00 65.00 (28.50) (44.70) (59.55) (21.95)
Weekly review 23/12/11 30/12/11 Points %
Sensex 15,738.70 15,454.92 (283.78) (1.80%)
Nifty 4,714.00 4,624.30 (89.70) (1.90%)
Sensex, Nifty plunge 24% in a ‘terrible' year
The BSE Sensex closed 0.6% lower on Friday and posted
its first annual fall in three years as a combination of near
double-digit inflation, high interest rates, slowing domestic
growth and policy inaction turned off investors already
shaken by global headwinds.
The benchmark's fall in 2011 was only the second annual
decline in a decade. The Sensex ended down 0.57% at
15,454.92 on Friday.
‘Terrible' and ‘peculiar' is how market-men described calendar 2011.
The benchmark indices fell 24 per cent and the Indian market was
among the worst performer in the world during the year.
Market experts are of the opinion that high interest rates, rising inflation,
leadership crisis, slower GDP growth rate and the depreciating rupee
still continue to be major concerns.
The year started with rising crude oil prices due to political turmoils in
oil-producing countries such as Libya. By then Europe had already
become a worry with countries like Greece and Ireland having run up
huge debts. But what triggered the fall in the markets was the August
downgrade by Standard & Poor's of the US ratings. Soon, markets the
world over lost ground. Indian markets followed suit.
The depreciation of the rupee was the last straw for the Indian markets. The falling rupee accompanied by
rising crude oil and fertiliser prices, squeezed profit margins of companies. The BSE Bankex fell 32 per
cent this calendar year, while IT and pharma indices fell 15.62 per cent and 13.2 per cent respectively.
The BSE FMCG index, the best performing sector for the year, grew about 9.3 per cent during the year.
Volumes in the cash market dropped through the year while that of the derivatives market increased.
There was not good news in the IPO market either. According to estimates, a total of Rs 14,000 crore was
mobilised through IPOs. IPOs finished up the wealth of the investors. Retail investors were caught at the
fag end of the bust. Most of the scrips are trading 70-80 per cent below their listing prices.
This year was terrible for our markets. Next year may also start on shaky ground. Corporate earnings need
to grow, only then will the confidence among the investors come back.

10. Ghost Protocol;
Yearly/Quarterly Review
Month December December December December March June Sept. December
2007 2008 2009 2010 2011 2011 2011 2011
Sensex 20,206.95 9,647.31 17,464.81 20,509.09 19,445.22 18,845.87 16,453.76 15,454.92
Points Base (10,559.64) 7,817.50 3044.28 (1,063.87) (599.35) (2,392.11) (998.84)
% Base (52.26%) 81.03% 17.43% (5.19%) (3.08%) (12.69%) (6.07%)
Dalal Street sheds 24.64% in 2011 on interest rates, inflation, rupee fall, global uncertainties
The bellwether BSE Sensex shed 24.64% in 2011 in the wake of high inflation, higher interest rates,
depreciating local currency, slowing domestic growth and global uncertainties. This is the first annual fall
in the Sensex in the last three years. Seven out of 13 sectoral indices on the BSE have done worse than the
BSE Sensex in 2011, while only the fast-moving consumer goods (FMCG) index bucked the trend and
ended the year with positive returns of over nine per cent.
The Sensex had reflected the general negative sentiment, when it closed 0.57% or 89 points down at
15454.92 points on the last day of 2011 on Friday. For the full year, the Sensex shed 5,054 points from its
2010 close of 20,509.09 points.
However, in dollar terms the fall of the Sensex is even steeper at 36.74%. A depreciating rupee, usually,
erodes the take-home value of foreign institutional investors' (FII) investments. The Dollex-30 index of
the BSE, which captures the dollar value of Sensex, slid from 3,761.83 points at the end of 2010 to
2,379.90 points on Friday. The fall in the Dollex-30 could be attributed to a steep fall of about 16% in the
rupee against the dollar in 2011. The rupee, which touched Rs 43.85 per dollar on July 27, closed at Rs
53.01 on Friday.

11. Ghost Protocol;
How could you allocate your assets in 2012?
It's that time of the year when investors ask what the coming year
will hold for them. If only the markets go by predictions, we could
all be rich. Since they don't, it is not a great idea to reallocate assets
based on the market view alone.
Taking a market view means tuning the allocation to macro realities
so that losses are reduced. The tactical asset allocation exercise is,
therefore, about risk assessment of risk factors, and the agility to rework if assumptions don't materialise.
The negative run in the equity market has made everyone anxious. Bad news comes in every day and the
markets are enveloped by pessimism. Many see 2012 as a lost year
for equity since the much-needed economic reforms, may not
happen. Corporate profitability has taken a hit and lower industrial
production numbers point to lower growth in sales. There is also
little hope of foreign investors returning to India with a high
allocation since the macro-economic fundamentals do not look good.
There are two points to consider before deciding on equity allocation
in 2012. First, the equity markets lead the changes in the economic
cycle. This means that the markets will bottom out much before all the indicators turn positive. To wait
for things to improve before making an investment means to make a late entry, this also translates into a
delayed participation in the next up cycle. Second, bear markets require an acute eye for a bottom-up
investing, choosing companies carefully for their ability to bounce back.
Investors were enamoured in 2011 by the high returns on short-term debt
and deposits. In 2012, if the interest rate policy eases due to a lower
inflation level and the need to support economic growth, these products
will be the first to respond to such changes. The return in short-term debt
will directly map where the policy rates are and will come down with it.
Fixed maturity plans and deposits may begin to offer lower interest rates,
and slowly, move down in the popularity stakes.
Gold has been the default choice for investors who did not like the risk
of the equity markets and high rates of inflation. As we look at 2012, it
is obvious that the circumstances that pushed up gold prices may not
continue in the future. If no new shocks are expected, gold can begin its
long-awaited correction.
Any contraction in the economic cycle is not good news for real
estate or commodities. At the turn of the cycle, both real estate and
commodities tend to suffer a correction, many a times doing so
ahead of the cycle.
Allocating assets means acting on the basis of information we now
have, and making decisions in the present after making reasonable
assumptions about the future. The focus needs to be on risk, not
return alone. We will then know what to look for and the kind of adjustments to make in the future.

12. Ghost Protocol;
1st week of January 2012: Sensex up 413 points
Daily review 30/12/11 02/01/12 03/01/12 04/01/12 05/01/12 06/01/12
Sensex 15,454.92 63.00 421.44 (56.72) (25.56) 10.65
Nifty 4,624.30 12.45 128.55 (15.65) 0.30 4.15
Weekly review 30/12/11 06/01/12 Points %
Sensex 15,454.92 15,867.73 412.81 2.67%
Nifty 4,624.30 4,754.10 129.80 2.81%
India’s Sensex Gains in New Years Eve
Indian stocks advanced this week on hope that 2012
will be different from 2011 and the central bank may
cut borrowing costs to stoke economic growth as
inflation slows. The BSE India Sensex rose 2.67
percent to 15,867.73 this week, the most since the
period ended Dec. 2. The S&P CNX Nifty rose 2.81
percent to 4,754.10.
Globally, Tim Condon of ING Financial Markets
believes that it is going to be another year of ranged
trading for risk assets. "The data has come in pretty
solidly out of the US and that’s helping sentiment to some degree, but the situation in the eurozone
remains very difficult and investors are going to be dealing with uncertainty on the European debt crisis at
least into the beginning of the year. So, choppy conditions are probably going to prevail."
2nd week of January 2012: Sensex up 287 points
Daily review 06/01/12 09/01/12 10/01/12 11/01/12 12/01/12 13/01/12
Sensex 15,867.73 (34.08) 350.37 10.77 (138.35) 117.11
Nifty 4,754.10 (4.10) 106.75 11.40 (29.70) 34.75
Weekly review 06/01/12 13/01/12 Points %
Sensex 15,867.73 16,154.62 286.89 1.81%
Nifty 4,754.10 4,866.00 111.90 2.35%
BSE Sensex posts highest weekly close in five weeks
The BSE Sensex rose to its highest weekly close in five weeks on Friday, on hopes renewed policy
reforms by the government and easing inflation will give a much needed boost to the country's slowing
economy. "There is a growing consensus that we are going to see good news on the policy front by the
government. Secondly, one is getting more comfortable with the way macroeconomic indicators have
behaved in the last few days.
India formally eliminated restrictions on foreign investment in its single-brand retail sector, opening the
door to the likes of Swedish furniture giant IKEA to open stores in Asia's third-largest economy. The
government is also drawing up plans to allow foreign airlines to invest in its hard-pressed airline sector.

13. Ghost Protocol;
3rd week of January 2012: Sensex up 584 points
Daily review 13/01/12 16/01/12 17/01/12 18/01/12 19/01/12 20/01/12
Sensex 16,154.62 34.74 276.69 (14.58) 192.27 95.27
Nifty 4,866.00 7.90 93.40 (11.50) 62.60 30.20
Weekly review 13/01/12 20/01/12 Points %
Sensex 16,154.62 16,739.01 584.39 3.63%
Nifty 4,866.00 5,048.60 182.60 3.75%
Sensex gains for 3 consecutive weeks,
Up 8% on FII money
The market showed excellent performance for the third
consecutive week led by strong inflow of money, tracking
positive global cues.
Gradual easing of funding problems in the eurozone,
improvement in the economic data of United States,
appreciation of rupee and October-December quarter
earnings helped the market to rally nearly 8% in three
weeks.
Indian markets were among the top gainers in Asia. The
Nifty jumped 3.75% for the week while the Sensex added
584 points or 3.63% in the last five trading sessions.
Foreign institutional investors stepped into India with strong footing, taking exposure to about Rs 6,000
crore worth of equity shares since the beginning of 2012, very encouraging as compared to net sellers of
Rs 3,642 crore in 2011. The BSE index, which slumped almost a quarter in 2011, has risen nearly 8
percent since the New Year began.
Morgan Stanley said it expects the Sensex to rise 14 percent in 2012 on the likelihood of better returns on
investments and attractive valuations on an absolute basis.
Neeraj Dewan, director at Quantum Securities said, "The Vodafone (VOD.L) judgment is also good for
market... it will boost foreign investment in India." The Supreme Court ruled on Friday that the country's
tax office has no jurisdiction over Vodafone's (VOD.L) purchase of mobile assets in India, which comes
as a relief to the telecom giant that has been fighting a $2.2 billion tax bill in a long-running dispute.
“First, the global markets are supporting and then we are hoping that some action will be taken by
Reserve Bank of India (in the policy review next week)," Dewan said.
India's headline inflation slowed in December to a two-year low as food price pressure eased
dramatically, but manufactured products inflation edged up from November.
The rupee notched up a third consecutive week of gains, rising 2.41 percent. It was the biggest weekly
rise since last week of October, according to Thomson Reuters data.

14. Ghost Protocol;
4th week of January 2012: Sensex up 495 points
Daily review 20/01/12 23/01/12 24/01/12 25/01/12 26/01/12 27/01/12
Sensex 16,739.01 12.72 244.04 81.41 Republic 156.80
Nifty 5,048.60 (2.35) 81.10 30.95 Day 46.40
Weekly review 20/01/12 20/01/12 Points %
Sensex 16,739.01 17,233.98 494.97 2.96%
Nifty 5,048.60 5,204.70 156.10 3.09%
Rupee, Sensex climb to 11-week high
Sensex ends above 17K this week
The Sensex rose for a sixth straight session on Friday to a 11-week
high as foreign investors continued to buy local stocks on indication
of a policy shift towards reviving growth, with an increase in global
risk appetite also aiding sentiment. Foreign funds have pumped in
more than $1.5 billion into beaten-down Indian shares this month, in
sharp contrast to net outflows of about $500 million in 2011.
Reliance Industries and Infosys led the rise. Reliance rose 3.7%,
while Infosys jumped 2.2%
The Federal Reserve surprised financial markets by saying it
expected to leave U.S. benchmark borrowing costs at effectively zero
until at least late 2014, considerably later than some investors had
expected. And at home, an unexpected cut in the cash reserve ratio
(CRR) by the Reserve Bank of India boosted investors' sentiments in
the market. The RBI in its third quarter policy review cut the CRR,
the amount against deposits which commercial banks have to keep as
liquid assets such as cash, by 50 basis points to 5.5% from 6%. This
step will release Rs 320 billion into the system.
The main 30-share BSE index closed 2.96% up at 17,233.98, its highest closing level since November 9.
Jagannadham Thunuguntla, head of research at SMC Investments and Advisors said, "I think it's because
of loads and loads of liquidity and above that the Fed statement that probably they will keep interest rates
low till late 2014. Its value taking plus liquidity support."
The benchmark has added about 11 percent so far this year. It had shed nearly a quarter last year, making
it one of the worst performers in the world.
"This is tomfoolery. We were the worst performing market last year and the best performing market this
year. What has changed? Nothing," said Arun Kejriwal, a strategist at Research firm KRIS. He said
foreign institutional investments, an improved rupee and ground-level pessimism of last year have driven
the stocks up this month.
The rupee touched an 11-week high on Friday on the back of dollar inflows with a growing number of
foreign exchange dealers and treasury officials saying that the local currency is on course to gain further
in the coming weeks. The rupee rose 1.5% from Wednesday's close of 50.11 against the dollar to end the
day at 49.31 to the USD, with the gain fuelled partly by exporters selling dollars after being caught on the
wrong foot in terms of the direction of the currency.

15. Ghost Protocol;
2.1 INDIAN ECONOMY
India Must Leave Inaction Behind
Many Indians are entering 2012 with a sense of unease. The
economy is slowing, infrastructure remains terrible, poverty is
ever-present, and corruption seems an intractable problem.
These are all legitimate concerns. But, please, take a step back
and look at the big picture. And take another step back and look
at the really big picture.
For most of the past 2,000 years, wealth and power were
concentrated in those parts of the world with the largest populations - that is, the civilisations of what is
today India and China. Then, around 500 years ago, the countries of Europe began their dominance. The
industrial revolution allowed, for the first time in human history, small states to accumulate wealth and
power out of proportion to their populations.
With the 21st century well underway, it is becoming clear that the past 200 years have been a deviation.
The big nations - China and India - are making a comeback, and we are now returning to the historical
norm. But size itself does not automatically confer either wealth or power. A big state still has to take the
right steps to maximise its natural advantage.
So, when we ask if this will be a good century for India, we are really asking what India is doing to
convert its size into increased wealth and power. The answer is: so far, not much. Look at what China has
accomplished in the past three decades. It has transformed from an agriculture-driven to a manufacturing-
driven economy. Its per capita GDP has grown ten-fold. It has built over a thousand universities,
achieving the fastest increase in university enrolment in the history of mankind. Life expectancy at birth
has increased from 66 to 73 years, and the infant mortality rate has decreased by 60%.
Chinese checkers
China's economic strength has funded an increasingly forceful foreign policy. It is building
a world-class navy, striking long-term deals for resources in Africa and South America,
and - closer home - securing potential strategic footholds in India's
backyard. China is busy constructing commercial ports in Pakistan,
Myanmar, Bangladesh and Sri Lanka in what analysts have called a "string of pearls"
strategy. If commercial ports one day lead to basing rights for China's navy, this string of
pearls could well strangle India.
Looking out from Beijing, China's leaders see around them a host of weak states, and only one thing
standing between them and complete domination of the entire Asian continent: a powerful India.
Enter the Elephant
India has several important advantages over China. If it uses them correctly,
it can credibly challenge China's would-be supremacy in Asia.
First, India has demographic tailwinds that China can only dream of. China's
disastrous one-child policy has turned that country (1.8 births per woman
and 20% of the population under the age of 15) into the demographic

16. Ghost Protocol;
equivalent of a Western European nation. India, by contrast, is not only large like China, but also young
(31% of population under 15) and growing (2.7 births per woman).
Second, India's corporate sector is far stronger than China's. Indian
businesses, led by English-speaking management of global calibre, will
conquer global markets, just as American businesses did in the second
half of the 20th century. Most companies in China, where domestic
power derives from connections with the state and where export cost advantages depend on an under-
valued currency, lack the capacity to become true multinationals.
Third, India has the most talented base of technology workers in the
world. Currently they are under-utilised in the outsourcing sector. India
must take them out of the back office (where they use their minds to
develop intellectual property for overseas clients) to the front office
(where they will develop intellectual property for Indian firms). Indian firms that move from back office
to front will capture far more of the global value chain in technology than they do currently.
These are just some of the advantages that can give India's economy the
sustained growth it needs to fund a more aggressive foreign policy against
China. Already India has begun to replace its ageing military hardware.
Only a strong economy can ensure India has the capacity to match China's
ongoing defence build-up. Only a strong India can halt and roll back
China's incursions into the Indian Ocean area.
Above all, India has one more thing that China does not: a relationship
with the US bolstered by shared values. The two democracies have come
a long way since the US slapped sanctions on India following the 1998
nuclear tests. Now they consider themselves strategic partners, and are
cooperating across a wide range of matters, from trade to military training to intelligence sharing.
But the US and India need to do more. They need to develop an alliance that is as broad, deep and strong
as the Anglo-American alliance was in the 20th century. Just as the US and the UK worked together to
preserve freedom last century, so must the US and India this century.
As the great nations of Asia re-emerge from centuries of economic stagnation, China has gotten a big
head start. If the 21st century is to be a good one for India, it must leave inaction behind and begin on the
path to global power. 2012 would be a good time to start.

17. Ghost Protocol;
2.2 INTERNATIONAL
US Dollar Regaining Ground
Portuguese-speaking concierges have of late been much in demand in
New York hotels. A record number of Brazilians are floating around
the city on shopping expeditions and could do with all the local help
possible. The people of a country with one of the most expensive
currencies in the world are flocking to a nation where the currency is
about as cheap as it has ever been.
Adjusting for relative inflation differentials, the US dollar by mid-2011
was at the lowest level against currencies of its trading partners in its
floating rate history, which dates back to the end of the Bretton Woods system in the early 1970s.
While the Brazilian real is an extreme case, lying at one end of the valuation
spectrum, the multilingual cacophony on Fifth Avenue suggests tourists
from other parts of the world too are finding the US a bargain. Tourism on
its own hardly dictates a currency's trend but other data - from US exports to
foreign direct investment, or FDI, inflows - reaffirm the greenback's highly
competitive position.
After steadily declining for many
decades, the US share of global exports is
beginning to tick higher from a low of 8% in 2008. FDI inflows have
picked up meaningfully over the past decade and are currently running
at 1.5% of US GDP compared to the mere 0.5% share in 2002. These
flows are all working to narrow the US current account deficit from a
peak of nearly 7% of GDP at the height of the US consumption boom
in 2007 to 3% now.
The long-talked-about trade imbalance should narrow even more in the years ahead as the US import bill for
energy falls further and some manufacturing moves back home. These trends are already in progress but are
yet to be recognised by the conventional wisdom.
From a low of 68% in 2005, the US is now 78% self-sufficient in terms
of its overall energy needs. The ramp up in production of shale gas with
new technological breakthroughs has played a meaningful role in cutting
down the US import bill for energy. Perhaps more surprisingly, US
imports of oil too have declined over the past five years, not just due to
weak demand but also on account of an onshore production boom in
places such as North Dakota, higher efficiency as well as greater use of
biofuels and unconventional liquids such as shale oil.
Meanwhile, a recent report by the Boston Consulting Group, or BCG, suggests that the US manufacturing
sector is set for a major revival. China used to be the clear choice to build a manufacturing plant for
global suppliers because of its low-cost labour, cheap currency and significant government incentives to
attract foreign investment. But over the past five years, the renminbi has appreciated 20% against the
dollar and China's annual inflation rate has averaged 1% more than that of the US inflation. Pay and
benefits between 2005 and 2010 rose 19% annually for the average factory worker in China while the cost
of employing US labour increased by only 4%.

18. Ghost Protocol;
BCG estimates that by 2015, manufacturing in the US will be just as economical as in China for many goods
made for North American consumers.
With multinationals likely to bring some production work for the North
American market back to the US, the country's trade deficit could further
narrow. The situation was very different a decade ago when China was
just joining the WTO and the US dollar was in the midst of a powerful
bull market. Between 1991 and 2001, the greenback appreciated by more
than 30% on a trade-weighted and inflation-adjusted basis. That
undermined the competitiveness of the manufacturing sector and
contributed to the record widening of the US current account deficit. The
dollar bear market of the past decade more than reversed the earlier gains
with currencies of many emerging
markets rising the most instead.
The Brazilian real appreciated by more than 200% against the dollar over
the past decade, followed by other commodity-exporting currencies such
as the Russian rouble and the Chilean peso that more than doubled in
value during that period. Booming exports, surging capital inflows and
stable to falling inflation rates, all abetted the trend of emerging market
currency strength.
However, as is the nature of markets, the pendulum swung too far and is
probably now retracing its path. Many emerging market currencies have
depreciated significantly against the dollar over the past few months. The
popular explanation is that the currency weakness is a function of
heightened risk aversion arising from troubles in euroland. That can
explain some of the volatility, but the bigger story may well be that the
dollar is on a comeback trail as many of factors that led to its decline and
the rise of emerging market exchange rates have exhausted themselves.
Some of the world's weakest currencies in 2011 belonged to those
countries running a large current account deficit and with inflation rates
much higher than the US. The South African rand, the Turkish lira and
the Indian rupee fell by 15-20% against the greenback. The current
account deficits of these economies ran at anywhere between 3% and
9% of GDP while inflation was close to double digits in India and
Turkey. Similarly, the Brazilian real, the Chilean peso and Polish zloty
declined by around 10% largely due to their current account deficit
positions of 2.5-5% of GDP though all of these countries had less of an
inflation problem.
To be sure, if capital flows return with the sort of fervour seen in many years of the past decade, then the
large current account deficits will get funded easily and not be a drag on the currencies. However, risk
appetite is unlikely to get anywhere near as high as in the heydays of the 2000s. The psychological scars
suffered during the serial financial crises take a long time to heal, and so will keep risk-seeking behaviour
in check. Further, the domestic fundamentals of many emerging markets are deteriorating now after the
vast improvements from the low expectations base of a decade ago.

19. Ghost Protocol;
Traditional metrics such as inflation rate differentials and current account positions that long dictated
exchange rate movements but were forgotten in the last decade's mad rush to chase growth in emerging
markets are back on the ascendant and that situation is likely to persist for the foreseeable future. Valuation
has never been a good timing tool on the currency marketplace and deviations from fair value can persist for
years at a run. Usually, some catalyst is needed to correct the misalignment, and once the process begins, it
can happen in very quick time.
In this regard, the sharp weakness of many emerging market currencies over
the past few months and, conversely, the sudden strength of the dollar is not
strange behaviour. Interestingly, while the rupee's recent fall appears dramatic,
on a three-year basis, the Indian currency is, in fact, unchanged on an
inflation-adjusted and trade-weighted basis.
While the rupee now appears to have more than made for its past overvaluation, currencies such as the
Brazilian real still have a very expensive feel about them. Relatively high commodity prices are
preventing a bigger decline of the real. When commodity prices come unhinged due to a likely fall-off in
commodity demand from China, the real will correct rather abruptly.
The real story here is that the dollar appears to have turned the corner after a
decade of underperformance. Its fundamentals are improving as evident in the
narrowing current account gap and the underlying US economy is more
competitive than it has been in a long time.
On the other side of the equation, many economies from those in Europe to the
big emerging markets are grappling with all sorts of local problems and their
exchange rates are no longer that competitive. Markets always price in any change at the margin and the
dollar could be in a bull market for the next few years as its fundamentals improve relative to the rest of
the world. Fifth Avenue may yet again become a primarily English-speaking zone.

20. Ghost Protocol;
Will the US economy save the world again?
Just when it seemed the end was near, Uncle Sam
seems to be coming back, staggering to his feet like
Bruce Willis in one of the old Die Hard movies.
In case you missed them, the plots are all roughly
the same: despite a hangover and a bit of flab,
armed with just a revolver and a pack of cigarettes,
Bruce saves the day - no matter how many machine
guns and explosives the baddies have, or how
muscular they might be.
A number of the latest indicators suggest that after
years of beating, there's a chance that Uncle Sam
may be on the verge of just this kind of last reel Hollywood comeback.
Certainly there are plenty of reasons we shouldn't expect Uncle Sam to come tottering out of the flames
now, if ever. Although the Iraq war is purportedly over, an endless, expensive war in Afghanistan
continues - at least $113 billion in 2011 alone. Between wars and social spending, the massive
government deficit keeps getting more massive. The expensive yet inadequate health-care system eats
13% of GDP and seems likely to grow even more expensive as the Baby Boomers get older.
Nor are things much better outside the government; Over 1.5 million homes are in foreclosure, and
another 3.5 million homeowners are late with their mortgage payments. Unemployment is officially 8.6%
but unofficially some economists say it may be nearer to 20%. Even, Americans themselves aren't very
optimistic about the situation. Yet almost despite itself, the American economy seems to be looking up.
The endless euro crisis is one reason. In investing as in most of life, it's always the
alternative that counts, and right now, in comparison with Europe, the US looks
positively stable. With a euro collapse still a real possibility, many investors have been
looking West.
S&P may now say Treasury bonds are just AA+, but the investment world evidently
disagrees - or at least thinks the other alternatives are worse. Treasuries rose nearly
30% this year, bid up in part by investors seeking a safe haven. All that demand has
helped push yields on the 10-year bond down to just 1.9%, making them essentially
zero after inflation. In September, they dropped even further, to 1.67%, their lowest level since 1945.
US stocks had a good year too - relatively. Most of the world's major stock
exchanges fell a quarter or more in 2011, making the S&P 500's flat performance
(actually a decline of .003%) seems like a sort of triumph. Some of these numbers
were driven by fear, but other homegrown indicators are also positive.
Private sector hiring is up in the US - 325,000 new jobs in December, much higher than
the forecast number of 178,000 jobs. Layoffs seem to be bottoming out.

21. Ghost Protocol;
Construction and manufacturing are both up, slightly. Perhaps most positively of
all, demand for steel is actually higher now in the US than in Europe or Asia.
US oil imports have tumbled in the past few years, thanks in part to the rapid
growth of natural gas production. Imports have declined from 60.3% in 2005 to
49.3% in 2010, driven by a rise in biofuel production and new drilling in the Gulf
of Mexico. At the same time, the discovery of vast deposits of shale gas is leading
some analysts to predict that the US will eventually become a net natural gas
exporter. At present, government analysts estimate that there is enough gas around
now to sustain the country at present rates of consumption for more than a century
- double their reserve estimates just two years ago.
US companies are also sitting on at least $2.1 trillion in cash - some of it
retained profits, some of it loan proceeds - all of it waiting to be ploughed
into something. These iron mountains might seem prudent at the moment,
given fears of a new credit crash, but between restless shareholders,
leveraged-buy-out buccaneers, and legislators hungry for cash, the situation
won't last forever.
The United States of America is the richest economy in the world. There
are any numbers of great universities, a solid corporate legal structure,
fabulous logistics networks, and as an added bonus, wages that haven't really risen in 40 years.
Historically, too, investors should be reassured by the US. No matter how hard times might be or how
strongly anti-business the rhetoric gets, the government has almost always found a place for business in
the lifeboat. For better and worse, commercial interests have been looked after by virtually every
president since the early days of the Republic.

22. Ghost Protocol;
2.3 WARNING SIGNALS
Europe’s Vicious Spirals
The euro crisis shows no signs of letting up. While 2011 was
supposed to be the year when European leaders finally got a grip
on events, the eurozone’s problems went from bad to worse. What
had been a Greek crisis became a southern European crisis and
then a pan-European crisis. Indeed, by the end of the year, banks
and governments had begun making contingency plans for the
collapse of the monetary union. None of this was inevitable.
Rather, it reflected European leaders’ failure to stop a pair of
vicious spirals.
The first spiral ran from public debt to the banks and back to public debt. Doubts about whether
governments would be able to service their debts caused borrowing costs to soar and bond prices to
plummet. But, critically, these debt crises undermined confidence in Europe’s banks, which held many of
the bonds in question. Unable to borrow, the banks became unable to lend. As economies then weakened,
the prospects for fiscal consolidation grew dimmer. Bond prices then fell further,
damaging European banks even more.
The European Central Bank has now halted this vicious spiral by providing the
banks with guaranteed liquidity for three years against a wide range of collateral.
Reassured that they will have access to funding, the banks again have the
confidence to lend.
Cynical observers suggest that the ECB’s real agenda is to encourage the banks to buy the crisis
countries’ bonds. But that would only further weaken the banks’ credit portfolios at a time when
European regulators are desperate to strengthen them. The ECB’s decision to provide the banks with
unlimited liquidity does not solve governments’ debt problems, nor is that its intent. But it at least
prevents the debt problem from creating banking problems, which, in turn, worsen the debt problem
without end.
Europe’s second vicious spiral runs from fiscal consolidation to slow growth and back to fiscal
consolidation. Tax increases and cuts in public spending are still needed; there is no avoiding this reality.
But these demand-reducing measures also reduce economic growth, causing deficit-reduction targets to be
missed. Getting fiscal consolidation back on track then requires more spending cuts, which depress
growth still further, causing budget performance to worsen even more.
At some point, recession and unemployment will provoke a political reaction.
Angry electorates will boot out austerity-minded governments. And uncertainty
about what kind of governments come next will not reassure investors or positively
influence growth.
Interrupting this second vicious spiral will require jump-starting growth, which, under current
circumstances, is easier said than done. The external environment is not favorable. Economic growth in
the United States is still weak, and growth in emerging markets seems poised to slow.
So what are Europe’s policymakers to do? Nothing is guaranteed. But Europe can still escape its vicious
spirals if everyone does their part.

23. Ghost Protocol;
The Straits of America
Macroeconomic indicators for the United States have been better
than expected for the last few months. Job creation has picked
up. Indicators for manufacturing and services have improved
moderately. Even the housing industry has shown some signs of
life. And consumption growth has been relatively resilient.
But, despite the favorable data, US economic growth will remain
weak and below trend throughout 2012. Why is all the recent
economic good news not to be believed?
First, US consumers remain income-challenged, wealth-challenged, and debt-
constrained. Disposable income has been growing modestly – despite real-wage
stagnation – mostly as a result of tax cuts and transfer payments. This is not
sustainable: eventually, transfer payments will have to be reduced and taxes raised to
reduce the fiscal deficit.
At the same time, US job growth is still too mediocre to make a dent in the overall
unemployment rate and on labor income. The US needs to create at least 150,000
jobs per month on a consistent basis just to stabilize the unemployment rate.
Indeed, firms are still trying to find ways to slash labor costs.
Moreover, the recent bounce in investment spending (and housing) will end, with
bleak prospects for 2012, as tax benefits expire, firms wait out so-called “tail
risks” (low-probability, high-impact events), and insufficient final demand holds
down capacity-utilization rates. And most capital spending will continue to be devoted to labor-saving
technologies, again implying limited job creation.
At the same time, even after six years of a housing recession, the sector is comatose.
With demand for new homes having fallen by 80% relative to the peak, the downward
price adjustment is likely to continue in 2012 as the supply of new and existing homes
continues to exceed demand. Up to 40% of households with a mortgage – 20 million –
could end up with negative equity in their homes. Thus, the vicious cycle of
foreclosures and lower prices is likely to continue.
Given anemic growth in domestic demand, America’s only chance to move closer to its potential growth
rate would be to reduce its large trade deficit. But net exports will be a drag on growth in 2012, for several
reasons:
· The dollar would have to weaken further, which is unlikely, because many
other central banks have followed the Federal Reserve in additional “quantitative
easing,” with the euro likely to remain under downward
pressure and China and other emerging-market countries still
aggressively intervening to prevent their currencies from rising
too fast.
· Slower growth in many advanced economies, China, and
other emerging markets will mean lower demand for US exports.

24. Ghost Protocol;
·
Oil prices are likely to remain elevated, given geopolitical risks in the Middle East,
keeping the US energy-import bill high.
It is unlikely that US policy will come to the rescue. On the contrary, there will be
a significant fiscal drag in 2012, and political gridlock in the run-up to the
presidential election in November will prevent the authorities from addressing
long-term fiscal issues.
Given the bearish outlook for US economic growth, the Fed can be expected to
engage in another round of quantitative easing. But the Fed also faces political
constraints, and will do too little, and move too late, to help the economy
significantly. Moreover, a vocal minority on the Fed’s rate-setting Federal Open
Market Committee is against further easing. In any case, monetary policy can
address only liquidity problems – and banks are flush with excess reserves.
Most importantly, the US – and many other advanced economies – remains in
the early stages of a deleveraging cycle. A recession caused by too much debt
and leverage (first in the private sector, and then on public balance sheets) will
require a long period of spending less and saving more. This year will be no
different, as public-sector deleveraging has barely started.
Finally, there are those tail risks that make investors, corporations, and consumers hyper-cautious: the
eurozone, where debt restructurings – or worse, breakup – are risks of systemic consequence; the outcome
of the US presidential election; geo-political risks such as the Arab Spring, military confrontation with
Iran, instability in Afghanistan and Pakistan, North Korea’s succession, and the leadership transition in
China; and the consequences of a global economic slowdown.
Given all of these large and small risks, businesses, consumers, and investors have a strong incentive to
wait and do little. The problem, of course, is that when enough people wait and don’t act; they heighten
the very risks that they are trying to avoid.

25. Ghost Protocol;
Emerging Markets
Will Emerging Markets Fall in 2012?
Emerging markets have performed amazingly well over the last seven years. In many cases, they have far
outperformed the advanced industrialized countries in terms of economic growth, debt-to-GDP ratios,
countercyclical fiscal policy, and assessments by ratings agencies and financial markets.
As 2012 begins, however, investors are wondering if emerging markets may be due for a correction. The
World Bank has just downgraded economic forecasts for developing countries in its 2012 Global
Economic Prospects, released this month. For example, Brazil’s annual GDP growth, which came to a
halt in the third quarter of 2011, is forecast to reach 3.4% in 2012, less than half the 7.5% rate recorded in
2010. Reflecting a sharp slowdown in the second half of the year in India, South Asia is slowing from a
torrid six years, which included 9.1% growth in 2010. Regional growth is projected to decelerate further,
to 5.8%, in 2012.
Three possible lines of argument – empirical, literary, and causal, each admittedly tentative and tenuous –
support the worry that emerging markets’ economic performance could suffer dramatically in 2012.
The empirical argument is simply historically based numerology: emerging-market crises seem to come
in a 15-year cycle. The international debt crisis that erupted in mid-1982 began in Mexico, and then
spread to the rest of Latin America and beyond. The East Asian crisis came 15 years later, hitting
Thailand in mid-1997, and spreading from there to the rest of the region and beyond. We are now another
15 years down the road. So is 2012 the year for another emerging-markets crisis?
The hypothesis of regular boom-bust cycles is supported by a long-standing scholarly literature, such as
the writings of the American economist Carmen Reinhart. But I would appeal to an even older source: the
Old Testament – in particular, the story of Joseph, who was called upon by the Pharaoh to interpret a
dream about seven fat cows followed by seven skinny cows.
Joseph prophesied that there would come seven years of plenty, with abundant harvests from an
overflowing Nile, followed by seven lean years, with famine resulting from drought. His forecast turned
out to be accurate.
Fortunately, the Pharaoh had empowered his technocratic official
(Joseph) to save grain in the seven years of plenty, building up sufficient
stockpiles to save the Egyptian people from starvation during the bad
years. That is a valuable lesson for today’s government officials in
industrialized and developing countries alike.

26. Ghost Protocol;
For emerging markets, the first seven-year phase of plentiful capital flows occurred in 1975-1981, with
the recycling of petrodollars in the form of loans to developing countries. The international debt crisis that
began in Mexico in 1982 catalyzed the seven lean years, known
in Latin America as the “lost decade.”
The turnaround year, 1989, was marked by the first issue of
Brady bonds (dollar-denominated bonds issued by Latin
American countries), which helped the region to get past the
crisis.
The second cycle of seven fat years was the period of record
capital flows to emerging markets in 1990-1996. Following the
East Asia crisis of 1997 came seven years of capital drought.
The third cycle of inflows occurred in 2004-2011, persisting
even through the global financial crisis. If history repeats itself, it
is now time for a third “sudden stop” of capital flows to
emerging markets.
Are a couple of data points and a biblical parable enough to take
the hypothesis of a 15-year cycle seriously? Perhaps, if we have
some sort of causal theory that could explain such periodicity to
international capital flows.
Here is a possibility: 15 years is how long it takes for individual
loan officers and hedge-fund traders to be promoted out of their
jobs. Today’s young crop of asset pickers knows that there was a
crisis in Turkey in 2001, but they did not experience it first hand.
They think that perhaps this time is different.
If emerging markets crash in 2012, remember where you heard it
first – in ancient Egypt.

27. Ghost Protocol;
India’s Year of Living Stagnantly
Will 2012 prove to be a year of renewal for India, or
another annus horribilis? No country progresses unerringly,
but India cannot afford another politically and economically
torpid year like 2011. For India, last year is a year best
forgotten.
India has been so deeply mired in political paralysis that the
Nobel laureate economist Amartya Sen recently said that
the country has “fallen from being the second best to the
second worst” South Asian country, and that it is currently
“no match for China” on social indicators. This is a damning comment on a country that held such
promise just a short time ago.
In early January, the American social critic James Howard Kunstler described India as “a nation with one
foot in the modern age and the other in a colorful hallucinatory dreamtime.” Kunstler’s view is harsh, but
perhaps prophetic: India’s “climate-change-related problems are doing heavy damage to the food supply.
Their groundwater is almost gone. The troubles of the wobbling global economy will take a lot of pep out
of their burgeoning tech and manufacturing sectors.”
Indeed, suddenly, India’s economy has begun spinning out of control. Last year, the country’s GDP
growth slowed, manufacturing plummeted, and inflation and corruption grew uncontrollably. Elected and
unelected government officials alike, including cabinet ministers, members of parliament, and civil
servants, were implicated in corruption scandals. For the first time ever, India’s government failed to
enact even a single piece of legislation, much less undertake any economic reforms, restore price stability,
or address widespread civil disorder.
As the Indian business analyst Virendra Parekh has observed: “The second fastest-growing economy in
the world now has the unenviable distinction of having the fastest falling financial markets in Asia.”
Moreover, “the fortunes of the rupee are….tightly linked with the euro, which is in the throes of an
existential crisis...” Furthermore, weaknesses in agriculture, energy, infrastructure, and governance have
all contributed to India’s current crisis, and the crisis will most likely continue in 2012.
Another concern is nuclear power. In 2008, the United States and India agreed to a civil nuclear deal that
would allow India to expand its nuclear-power capability. In 2010, India’s parliament passed the Civil
Liability for Nuclear Damage Bill, a precondition for activating that agreement.
But, following Japan’s Fukushima nuclear disaster in March 2011, safety concerns surrounding nuclear
power are large and mounting.
Local farmers, fishermen, and environmentalists have spent months protesting a planned six-reactor
nuclear-power complex on the plains of Jaitapur, south of Mumbai. In April, the protests turned violent,
leaving one man dead and dozens injured. India will certainly see more anti-nuclear clashes in 2012.
At the heart of India’s current malaise is a paradox: rapid growth in real income has not been matched by
genuine advances in living standards. If the country’s fundamental problems are to be addressed, India
needs a government with the determination, integrity, and intelligence to meet the complex demands of
modern governance in the twenty-first century.

28. Ghost Protocol;
3.1 CURRENCY MARKET
Address Basics
The recent depreciation of the rupee to historic levels has created a near-
panic situation. Various solutions are being proffered: from interventions
by the RBI to curbs on forex outflows. A calmer assessment of the
situation makes it clear that the panic is misplaced and what is needed is
deeper introspection. We need solutions rather than knee-jerk reactions
and short-term fixes.
But, markets are like a pressure cooker. Every one hears the whistle and
heads for the door. Very few people actually see the pressure building.
The pressure has been building because the macroeconomic situation
over the last couple of years has turned adverse and we have not taken
enough steps to address the issue early enough.
All the ingredients for the rupee fall have been there for some time: for the last year, portfolio flows have
slowed down or even partially reversed, our current account deficit will shoot beyond the 3% target, the
European crisis has reduced global liquidity, a lot of borrowings from 2007 are due for repayment now,
our inflation has been high and FDI has slowed down significantly. So, rather than 'handle' the rupee fall,
we should try and manage the underlying causes that have led to rupee falling.
Most of the underlying causes - inflation, euro crisis, repayments, etc - are beyond our control. So what
needs to be done is: (a) give growth impetus as inflows will increase the moment confidence in our
growth is back, (b) boost inflows, especially long-term flows, and (c) reduce foreign exchange volatility.
For getting growth back, the script is becoming clearer: we need fiscal control and easier interest rate
scenario. There seems to be a consensus that if interest rates are hiked any more, it will start affecting
growth. This means that the responsibility of tackling inflation now rests with the government with fiscal
measures. It needs to reduce the fiscal deficit and, at the same time, initiate supply-side reforms. This will
get confidence in growth back.
We also need to boost inflows - rather than impose curbs on foreign exchange outflow. Inflows are
usually in three forms: short term, medium term and long term. Short term is usually debt and quasi debt.
The RBI has already eased the curbs on such short-term lending to boost inflows. The medium-term forex
reserves essentially consist of portfolio inflows in the Indian stock markets. Last year has been bad for FII
investments as we have seen net outflows. But once growth returns, so will the FIIs. FDI represents the
long-term forex reserves. These can improve only if we start taking hard decisions about foreign
investments – Because foreign investment without allowing majority controlling stakes is equal to
portfolio investments. So far, policy ambiguity has led to investors postponing FDI investments.
Lastly, we need to ensure that rate adjustments are continuous and not have the kind of sharp volatility we
have witnessed. This can be done by classifying our forex reserves in more granular terms and having a
lot more information around kinds of flows, the composition of reserves, etc. More information and
discussion would mean quicker short-term adjustments rather than a huge pressure build-up and a large
adjustment in one quarter.
No doubt these are tough times. And alot of the above is easier said than done. But we should use the
rupee fall as a catalyst to address deeper economic issues and get India on the growth path once again.
But the margin for error is now small and getting smaller. We need to act now!

29. Ghost Protocol;
3.2 COMMODITY MARKET
Duty Hike on Gold
Consumers will have to shell out more for gold and silver jewellery, bars and
coins. The cash-strapped government on raised import and excise duties on gold
and silver, hoping to mop up about 600 crore in additional revenue and contain
its burgeoning current account deficit as the financial year draws to a close.
Platinum and diamonds, too, will now attract an import duty of 2%.
A government notification said customs and excise duties would be levied on
the value of gold and silver instead of a fixed amount. This will allow the
government to benefit from the rise in gold prices. Ad valorem duty, which rises
automatically when the value of a product goes up, is preferred from the point of
view of tax policy as its facilitates easier credit besides capturing value addition at each stage.
While the import duty on gold has been fixed at 2% of the value instead of the earlier Rs 300 per 10
grams, that on silver has been pegged at 6% against Rs 1,500 per kg. Excise duty on gold has been fixed
at 1.5% of the value against the earlier rate of Rs 200 per 10 grams. Silver will attract excise of 4%
compared to Rs 1,000 per kg earlier.
At a 2% rate, the import duty on gold will double to over Rs 540 per 10 grams at current prices. The old
rates were fixed four to five years ago. In the last few years, prices have increased substantially so the
change has been made to bring duties in line with market prices.
India is the world's largest importer of gold. The metal is the third-largest import item
after crude oil and capital goods. In 2010, about 92% of India's gold demand was met
through imports and the rest from recycled gold and other sources. "Gold imports
alone have contributed nearly 40 basis points to the 130-basis-point increase in India's
current account deficit between FY08 and FY11," global research firm Macquarie said
a recent report. In first three quarters of FY12 alone, India imported $45.5 billion
worth of gold and silver, up 53.8% over the year-ago period.
"The move is possibly aimed at easing the negative balance of payments position as gold and silver
imports have grown despite prices rising," said Madan Sabnavis, chief economist at Care Ratings. "Unlike
other raw materials like machinery and fertilisers, gold and silver don't add to economic productivity as
they are stashed away in bank lockers or cupboards."
India's bullion traders stayed away from placing fresh orders after a nearly 90 percent hike in gold import
duty was announced. In the short term traders and consumers may hesitate to buy into higher prices, the
increased duty is unlikely to have significant impact on India's gold appetite in the longer term, traders
and analysts said. Some time later people will digest the price rise.
India is the world’s largest importer of gold and its households have the largest holdings
of the metal, according to data from the World Gold Council. Gold is popular for
cultural, historical and financial reasons. Gold is seen as a safe haven that will preserve
a family’s wealth over generations. There is more trust in gold bullion than paper assets
such bank deposits, stocks and bonds as they have protected people throughout the
world from periods of deflation (banks and governments can go bust) stagflation (paper
money and bonds lose value), and hyperinflation (paper money and bonds really lose value).

30. Ghost Protocol;
4. FINANCIAL SECTOR: TRANSFORMING TOMORROW
World Economic Forum
As per a 'Call for Action' report published by Geneva-based World Economic Forum (WEF) ahead of its
annual summit in Davos, Switzerland, "The world faces significant and urgent challenges that weigh
heavily on prospects for future growth and on the cohesion of our societies." Among the major challenges
for 2012, the report listed out issues like decelerating global growth and rising uncertainty, high
unemployment and potential protectionist policies of different countries.
The call to tackle these challenges has been made by the 11-member Global Issues Group (GIG) of the
WEF, which comprises of IMF Chief Christine Lagarde, World Bank President Robert Zoellick, WTO
Director-General Pascal Lamy, OECD Secretary- General Angel Gurria, among others.
4.1. FINANCIAL ADVISORS:
Weigh impact on investors:
Beating the Burnout at Davos
Burnout is a condition associated with exhaustion, stress,
pessimism, cynicism, withdrawal and a bunker mentality.
These symptoms are worrying in an individual, but can be
disastrous in world affairs. In the run-up to the annual
meeting of the World Economic Forum in Davos, there is a
distinct sense of burnout in the air. I hope that this year's
meeting will help to form a new model of leadership capable
of overcoming this malaise.
After a year characterised by major upheavals, many feel like
we are watching a global system disintegrate: financial and debt crises, unemployment, political paralysis,
social inequality, food and energy crises, and the list goes on. Faced with so many simultaneous and
interrelated problems, our leaders are stretched to their limits.
At the same time, the systems and safeguards that underpin our existence as a
global community are struggling to cope with today's complex set of risks. The
usual reaction to all this is to call for stronger leadership. Yet, events during the
past year have shown, time and again, the limits of leadership in its traditional
form.
Preoccupied with domestic concerns, rushing from one crisis to the next, leaders
have made little tangible progress. Instead, we have mainly witnessed short-term
fixes in a rapidly unravelling world. No wonder, then, that ordinary people are
losing trust in our leaders. The various 'Occupy' and 'Spring' movements around
the world are signs of this understandable frustration and distress.
There is an urgent need to act. As well as finding new models to collaboratively
address all our globalchallenges, we also need to form a new-model of leadership
that is effective in the modern world: leadership that emphasises both vision and
values in order to overcome the current challenges. It is this combination that can
provide leaders with a compass to guide their decision-making.

31. Ghost Protocol;
Vision is needed to interpret and deal effectively with a globalised world.
Technological progress, interconnectivity and the dispersion of power have all
contributed to a complex new reality, which requires clear-sightedness.
Vision is also vital to enable leaders to glimpse the opportunities that lie ahead and
rigorously pursue them, rather than succumbing to the paralysis of burnout. Values are
needed to create trust and underpin any action taken. But the values of true leadership must go deeper
than short-term shareholder profit or the next election poll; only then will there be a real connection and
meaningful interaction, between the people and their leaders.
In today's world, both power and information are widely dispersed, and, therefore,
decisions can only be implemented if people understand the rationale behind them.
Vision provides the long-term reason and values provide direction and purpose.
It is telling that, despite the dire economic outlook, we have reached record
participation numbers for our 2012 annual meeting in Davos. This demonstrates the fact
that leaders feel the need to come together in order to collectively and collaboratively
address the daunting global challenges that lie ahead of us. Davos provides a real
opportunity for leaders from business, government and civil society to hone a collective
vision and build collaborative values.
This annual meeting, in particular, will be important if we are to replace our current
radar system of short- term, situational crisis management, with a compass providing
clear direction and guidance based on long-term values. The main topic on the top of
everyone's minds in Davos will inevitably be the rebalancing and deleveraging that is
reshaping the global economy.
But let us not forget that the purpose of the annual meeting is also to ensure that leaders exercise their
responsibilities with moral integrity, and that the entrepreneurial spirit is harnessed for the public interest.
The theme of this year's annual meeting is The Great Transformation: Shaping New Models, precisely
because we are in an era of profound change that urgently requires new ways of thinking instead of just
more business-as-usual.
Leadership based on vision and values will go a long way to regaining trust and beating the burnout, but
only if leaders themselves can prove through concrete actions that social responsibility and moral
obligations are not just empty words.