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B U S I N E S S

Rate cut unlikely, CRR hike on cards: Experts 
Mumbai, October 7
India Inc’s increasing clamour for a policy rate cut is unlikely to be heeded by the Reserve Bank when it meets on October 30 for half-yearly review of monetary policy, though interest rates appear to have peaked, economists have said.“I do not expect RBI to tinker with its policy rates. While they appear to have peaked, the RBI is unlikely to signal any cuts,” Crisil’s director and principal economist, D K Joshi said here.

Industry calls for softer interest rates
New Delhi, October 7
The country’s two leading industry lobby groups today urged the Reserve Bank of India (RBI) to reduce interest rates to sustain 9.0 per cent economic growth, ahead of the month-end mid-term review of monetary policy by the central bank.

Tackle excess liquidity, bankers to RBI 
Mumbai, October 7 
With foreign exchange reserves rising by a whopping $ 11.9 billion during the week ended September 28, bankers feel RBI should think out of a way to tackle excess liquidity flows instead of another hike in the cash reserve ratio (CRR) or the market stabilisation scheme (MSS). While CRR is a percentage of bank deposits in cash to be kept with RBI to help it control liquidity in the system, MSS is borrowing by government to drain out liquidity.


 

EARLIER STORIES

 

NACIL may offload 15 pc stake
Kolkata, October 7 
National Aviation Company of India Ltd (NACIL), the new avatar after the merger of Air India and Indian Airlines, was likely to offload 15 per cent of its equity through an initial public offer (IPO), NACIL chairman V Thulasidas said.

Tax Advice
Resident required to pay tax on total world income
by S.C. Vasudeva
Q My son is employed with Infosys and is presently posted in the USA on work permit. His stay in the USA is less than 180 days during the financial year 2006-07, in addition to the emoluments he receives in there, on which he pays income tax as per the rules in that country, he also receives his basic pay in India. 

Market Update
Avoid over-leveraged positions

A fter coming within striking distance of the 18000-marks, bulls failed to breach the psychological hurdle as investors and traders resorted to book profits. Volatility was the order of the week with markets witnessing curt crashes and swift recoveries. For the week ended October 5 Sensex rose by 2.8 per cent and Nifty gained 3.27 per cent for the week. The sensex has gained 27 per cent from a three-month closing low on August 21, 2007.

  • Blue Star

 
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Rate cut unlikely, CRR hike on cards: Experts 

Mumbai, October 7 
India Inc’s increasing clamour for a policy rate cut is unlikely to be heeded by the Reserve Bank when it meets on October 30 for half-yearly review of monetary policy, though interest rates appear to have peaked, economists have said.“I do not expect RBI to tinker with its policy rates. While they appear to have peaked, the RBI is unlikely to signal any cuts,” Crisil’s director and principal economist, D K Joshi said here.

A cash reserve ratio (CRR) hike, could, however, be on the cards, he added.

While economic growth could slow down this year compared to last year’s growth, falling below 9 per cent, because of the RBI’s tight monetary policy, the economists warned of a possible increase in inflation to 4.5-5 per cent levels by end-December from the present below 3.5 per cent level. 

Inflation has increased to 3.42 per cent for the week ended September 22 as against 3.23 per cent in the previous week.

The RBI’s focus would be on curbing the excessive liquidity prevalent in the system and hence a CRR hike is a possibility, IDBI Capital’s MD & CEO, Sushil Muhnot, said. With dollar inflows very high and unlikely to decrease in the near term, Muhnot felt that the apex bank might resort to a CRR hike.

While such a hike would help suck out liquidity, it would impact banks negatively as they would not get any interest on the amount parked with the RBI.

The other alternative is to enhance credit, which would call for a cut in rates, “but I don’t see that happening just now,” Muhnot said.Standard Chartered Bank’s Senior Economist (South Asia), Shuchita Mehta, said that a 0.50 per cent hike in CRR was very much possible but whether the RBI would effect it this month-end itself or a little later remained to be seen. 

A continuation of the tight monetary policy was, therefore, almost certain, the economists said.

On inflation, they said that the base effect has so far kept inflation at low levels while the rupee appreciation too has helped in cushioning the country against imported inflation.

“But the base effect is beginning to wear off and this combined with global crude prices remaining firm, could push inflation upward,” said Mehta.

“However, I expect inflation to be at the 4-4.5 per cent level by end-this fiscal and well within the RBI’s comfort level,” she said. — PTI

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Industry calls for softer interest rates
Tribune News Service

New Delhi, October 7
The country’s two leading industry lobby groups today urged the Reserve Bank of India (RBI) to reduce interest rates to sustain 9.0 per cent economic growth, ahead of the month-end mid-term review of monetary policy by the central bank.

While the Confederation of Indian Industry (CII) said high interest rates regime was affecting investments in the country, the Federation of Indian Chambers of Commerce and Industry (Ficci) said profit margins of firms were being squeezed by hardening of interest rates over the last one and half years, as well as appreciation of the rupee.

“The snap poll revealed that 69 per cent of the CEOs expected the interest rates to be lowered to about 12 per cent (Prime Lending Rate) from the current level of 13.25 per cent,” a CII statement said.

It said India would need investment rates more than 36 per cent of GDP to achieve 10 per cent growth in medium term, which is important to increase per capita income and reduce income inequalities.

Ficci urged the RBI to unveil a softer interest rate regime to spur credit growth. The chamber’s review of the credit needs of some important sectors revealed that agriculture, food processing and home loans were some of the areas which required special attention of the regulator.

“There is need for direct agriculture lending for investments in agri-marketing infrastructure by corporates in sectors such as construction of warehouses, post-harvest management facilities, collection centres, grading centers and cold chain transportation without any upper ceiling,” a Ficci statement said.

The RBI is scheduled to announce its policy review on October 30 and is expected by the industry to relax the monetary stance, especially since inflation is well below its target of 5 per cent for this fiscal.

The central bank has raised interest rates five times since mid-2006, most recently in March. At a July review, it held rates steady but raised banks’ reserve requirements to mop up funds that could fuel inflation.

In the July review, the central bank kept the reverse repo rate unchanged at 6 per cent. It also kept the repo rate steady at 7.75 per cent but raised the cash reserve ratio by 50 basis points to 7 per cent.

Inflation is under control and has declined to 3.23 per cent for the week ending 15 September 2007. However, bank credit has declined from a high of about 33 per cent in June 2006 to about 23 per cent in August 2007. RBI’s efforts to manage liquidity seemed to have worked. However, this has had a lagged impact on the industrial output. IIP growth declined in July 2007 to 7.1 per cent from 13.2 per cent in July 2006.

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Tackle excess liquidity, bankers to RBI 

Mumbai, October 7 
With foreign exchange reserves rising by a whopping $ 11.9 billion during the week ended September 28, bankers feel RBI should think out of a way to tackle excess liquidity flows instead of another hike in the cash reserve ratio (CRR) or the market stabilisation scheme (MSS). While CRR is a percentage of bank deposits in cash to be kept with RBI to help it control liquidity in the system, MSS is borrowing by government to drain out liquidity.

The apex bank has hiked CRR thrice this year, which was hurting banks as they do not earn any interest on it. Also, interest income through advances has been sluggish due to muted credit offtake, which has grown only 21 per cent so far this year, against 31 per cent in 2006.

“The secular trend is that India will continue to receive large inflow of foreign capital. RBI should sharply cut the reverse repo rate or re-introduce ceiling on the daily mop-up under the liquidity adjustment facility,” banking sources told PTI.Between April and July rupee found support around Rs 40-41 versus the US dollar. However, after the apex bank removed the ceiling of Rs 3,000 crore under the LAF in the first quarter review of monetary policy in July, the currency had been steadily appreciating.

Led by heavy intervention from RBI to check appreciating currency, India’s foreign exchange reserves rose by a record $ 11.9 billion during the week ended September 28 to top $ 248 billion as foreign portfolio investors poured money into India.

Though RBI hiked the cap in MSS by Rs 50,000 crore to Rs 2 lakh crore, bankers feel it was not enough to drain out excess liquidity. 

The cost of MSS borrowings to government this year could be over Rs 10,000 crore against about Rs 3,500 crore last year.

Last week, excess liquidity in the economy prompted RBI to intervene vigorously in the money market through reverse repo, an overnight instrument through which apex bank sucks out liquidity, to mop up Rs 50,000 crore.

“A sum of Rs 50,000 crore is a huge amount to be absorbed on which the apex bank is paying out 6 per cent. This is entirely because of RBI’s intervention in the forex market,” a forex dealer said.

Last week, RBI Governor Y V Reddy said monetary regulation of domestic market has become complicated due to globalisation of financial markets. — PTI

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NACIL may offload 15 pc stake

Kolkata, October 7 
National Aviation Company of India Ltd (NACIL), the new avatar after the merger of Air India and Indian Airlines, was likely to offload 15 per cent of its equity through an initial public offer (IPO), NACIL chairman V Thulasidas said.

He said although the decision of diluting equity and to what extent lay with the government, his personal view was that the company was likely to offload 15 per cent of its shares.

The IPO would be floated once the merger of Air India and Indian Airlines was complete and operations of both airlines were totally integrated.

Before the IPO, the company would offer employee stock options (ESOPs) to its staff, he told reporters here at the launch of direct flight of Air India Express from Kolkata to Singapore last night.

Post merger NACIL would have 34,000 employees on board, he said, adding ESOP scheme would be announced shortly.

Asked whether the IPO proceeds would be partly used to finance aircraft purchase, Thulasidas said the idea was to make NACIL a more business-like entity.

The company had already placed orders for 111 aircraft, of which 16 had been delivered and the rest would be delivered over the next three to three-and-half years. NACIL would have to shell out Rs 45,000 crore, for which it would have to borrow.

While ‘Indian’ would be phased out over time, the carrier would be called Air India for both domestic and overseas destinations. Also, Alliance Air would become a part of Air India. — PTI

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Tax Advice
Resident required to pay tax on total world income
by S.C. Vasudeva

Q My son is employed with Infosys and is presently posted in the USA on work permit. His stay in the USA is less than 180 days during the financial year 2006-07, in addition to the emoluments he receives in there, on which he pays income tax as per the rules in that country, he also receives his basic pay in India. Whether he is again liable to pay income tax on the US income or not because he will be treated as a resident in India for the year under consideration and if this income is not taxable, then under which section it is exempted and also clarify whether this income is require to be shown in the income tax return of my son or not? 

— Amita Aggarwal, Ludiana 

A: Your son being a resident and ordinary resident, would be required to pay tax on the total world income. It would thus include even the income earned in USA. However, in accordance with the double-tax avoidance agreement with the USA, the amount of tax paid by your son in the USA would be adjusted against the tax payable in India. The claim for such adjustment should be supported by an evidence for the tax paid in the USA. 

Joint account 

Q I am a retired defence officer. I have few accounts in post office monthly income scheme. These are in joint names of myself, my son and daughter-in-law. Some accounts are of my savings and retirement benefits and some accounts are from my son. As per M.I.S. deposit scheme, the depositor’s share in a joint account is taken as one half (when there are two joint holders) and as one third - when there are three joint holders vide notification no. GSR-706E - D/5.9.2000. Now, my query is that the amount of interest to be taken into account should also be half or one third as the deposits stand. So far, I was including total amount of interest in my gross income and submitting IT return accordingly. My son and daughter-in-law are also paying their own IT and have their own income and PAN card. 
— R.N. Dogra, Jalandhar 

A. The income tax is payable by an assessee on his income. The income chargeable to tax is always ascertained with reference to the source of the capital. In your case, the amounts deposited in post office under various schemes are out of your savings and retirement benefits. In my opinion, therefore the interest earned on such an account should be taxable in your hands. The joint holders may be entitled to receive the money at the expiry of the term of deposit in accordance with the circular quoted by you but the amount deposited in post office has not originated from their sources and therefore, the interest income cannot be bifurcated/trifurcated simply because the account has been opened in the joint name of two/three persons.

Exempt income 

Q. Against Schedule E1 of Form ITR-2, the details of ‘exempt income’ is required to be mentioned. Kindly advise, whether the interest on PPF account, which is credited in the account at the end of financial year and not paid in cash, is required to be shown or not keeping in view the relevant instructions attached with the form, which says that the details may be filled in cash basis unless there is any requirement/provision to declare them on accrual basis?
— J.C. Batra, Panchkula

A. The column relating to ‘exempt income’ in the return form should include the interest credited in the PPF Account as the same forms part of exempt income.  ITR-1/ITR-2 

Q I am a govt employee and want to avail rebate of Rs 1 lakh saving and Rs 22,000 interest rebate against house building loan of Rs 8 lakh from ICICI Bank, sanctioned in 2004. Please let me know which ITR-I or ITR-2 to be filled for assessment year 2007-08? Which common ITR-2/ITR-1 is to be filled for interest rebate and if any interest received from old FDR also guide the sections of IT? 
— R.S. Arora, Amritsar

A. The deduction allowable in respect of the repayment towards house building loan is covered within the overall limit of Rs 1 lakh specified in Section 80C of the IT Act, 1961. The total deduction allowable to you towards the savings and repayment of house building loan would, therefore, be Rs 1 lakh. In your case, Form ITR-1 can be used for declaring the salary income. The deduction under Section 80C can be claimed in such return. The interest received on FDRs can also be declared in ITR-1. The interest paid on the amount borrowed for construction/acquisition of a house is allowable as deduction against the income from house property In case you have an income from house property, the applicable form would be ITR-2. 

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Market Update
Avoid over-leveraged positions
by Lalit Batra

After coming within striking distance of the 18000-marks, bulls failed to breach the psychological hurdle as investors and traders resorted to book profits. Volatility was the order of the week with markets witnessing curt crashes and swift recoveries. For the week ended October 5 Sensex rose by 2.8 per cent and Nifty gained 3.27 per cent for the week. The sensex has gained 27 per cent from a three-month closing low on August 21, 2007.

It has been another positive week for the bulls with bears managing to make a special appearance towards the end on Friday. A new peak is something most market players are getting used to. But volatility would continue to be the order in the near term.

With result season around the corner, technology numbers, especially that of Infosys would be closely tracked on October 11. The market will be keenly watching developments on the political front as India’s political crisis over a controversial nuclear deal with the United States could enter a decisive phase as the government and its Communist allies hold talks to resolve their bitter row. A joint panel formed to try and end the face-off will make a fresh attempt to convince Communist leaders, who have threatened to end their support to Prime Minister Manmohan Singh’s coalition if it pursues the historic pact. Profit booking and international cues are other important developments that would be tracked by market men. Investors are advised to stay cautious and avoid taking over leveraged positions.

Blue Star

Blue Star is involved in the design, manufacturing, installation, commissioning and maintenance of large air-conditioning plants and leads the domestic central air-conditioning market. The company has a leadership position with a 30 per cent market share.

The growth prospects of the company in this business are closely linked to the level of infrastructure activity in India. The emergence of the organised retailing sector that encompasses various areas like restaurants, entertainment centres, departmental stores and also the development of export-oriented zones and software parks has created big opportunities for the growth of company’s business at a strong pace.

For Blue Star’s commercial refrigeration business, where the company has a 25 per cent market share, it expects a strong ramp-up from the cold-chain space, where, as per the management, real investments would only start kicking in 2009 onwards. 

Overall, Blue Star’s cooling products business is in for a strong growth trajectory in the future, with kickers provided by both the room air conditioner and commercial refrigeration business. Moreover, on the back of higher volume sales and low cost supplies from the Himachal plant, the company is expected to improve the segment’s profitability going forward.

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