Technically analyze the markets

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Asset Bubble Simplified

Asset Bubble Simplified
Wanna know what is an Asset bubble and how its created just read

Once there was a little island country. The land of this country was the
tiny island itself. The total money in circulation was 2 dollar as there
were only two pieces of 1 dollar coins circulating around.



1) There were 3 citizens living on this island country. A owned the land. B
and C each owned 1 dollar.

2) B decided to purchase the land from A for 1 dollar. So, A and C now each
own 1 dollar while B owned a piece of land that is worth 1 dollar.

The net asset of the country = 3 dollar.



3) C thought that since there is only one piece of land in the country and
land is non produceable asset, its value must definitely go up. So, he
borrowed 1 dollar from A and together with his own 1 dollar, he bought the
land from B for 2 dollar.

A has a loan to C of 1 dollar, so his net asset is 1 dollar.

B sold his land and got 2 dollar, so his net asset is 2 dollar.

C owned the piece of land worth 2 dollar but with his 1 dollar debt to A,
his net asset is 1 dollar.

The net asset of the country = 4 dollar.



4) A saw that the land he once owned has risen in value. He regretted
selling it. Luckily, he has a 1 dollar loan to C. He then borrowed 2 dollar
from B and and acquired the land back from C for 3 dollar. The payment is by
2 dollar cash (which he borrowed) and cancellation of the 1 dollar loan to
C.
As a result, A now owned a piece of land that is worth 3 dollar. But since
he owed B 2 dollar, his net asset is 1 dollar.

B loaned 2 dollar to A. So his net asset is 2 dollar.

C now has the 2 coins. His net asset is also 2 dollar.

The net asset of the country = 5 dollar. A bubble is building up.



(5) B saw that the value of land kept rising. He also wanted to own the
land. So he bought the land from A for 4 dollar. The payment is by borrowing
2 dollar from C and cancellation of his 2 dollar loan to A.

As a result, A has got his debt cleared and he got the 2 coins. His net
asset is 2 dollar.

B owned a piece of land that is worth 4 dollar but since he has a debt of 2
dollar with C, his net Asset is 2 dollar.

C loaned 2 dollar to B, so his net asset is 2 dollar.

The net asset of the country = 6 dollar. Even though, the country has only
one piece of land and 2 Dollar in circulation.



(6) Everybody has made money and everybody felt happy and prosperous.

(7) One day an evil wind blowed. An evil thought came to C's mind. 'Hey,
what if the land price stop going up, how could B repay my loan. There is
only 2 dollar in circulation, I think after all the land that B owns is
worth at most 1 dollar only.'

A also thought the same.



(8) Nobody wanted to buy land anymore. In the end, A owns the 2 dollar
coins, his net asset is 2 dollar. B owed C 2 dollar and the land he owned
which he thought worth 4 dollar is now 1 dollar. His net asset become -1
dollar.

C has a loan of 2 dollar to B. But it is a bad debt. Although his net asset
is still 2 dollar, his Heart is palpitating.

The net asset of the country = 3 dollar again.

Who has stolen the 3 dollar from the country ?
Of course, before the bubble burst B thought his land worth 4 dollar.
Actually, right before the collapse, the net asset of the country was 6
dollar in paper. his net asset is still 2 dollar, his heart is palpitating.

The net asset of the country = 3 dollar again.



(9) B had no choice but to declare bankruptcy. C as to relinquish his 2
dollar bad debt to B but in return he acquired the land which is worth 1
dollar now.

A owns the 2 coins, his net asset is 2 dollar. B is bankrupt, his net asset
is 0 dollar. ( B lost everything ) C got no choice but end up with a land
worth only 1 dollar (C lost one dollar) The net asset of the country = 3
dollar.





************ ****End of the story******* ********* ********* **

There is however a redistribution of wealth.

A is the winner, B is the loser, C is lucky that he is spared.

A few points worth noting -



(1) When a bubble is building up, the debt of individual in a country to one
another is also building up.



(2) This story of the island is a close system whereby there is no other
country and hence no foreign debt. The worth of the asset can only be
calculated using the island's own currency. Hence, there is no net loss.

(3) An overdamped system is assumed when the bubble burst, meaning the
land's value did not go down to below 1 dollar.



(4) When the bubble burst, the fellow with cash is the winner. The fellows
having the land or extending loan to others are the loser. The asset could
shrink or in worst case, they go bankrupt.

(5) If there is another citizen D either holding a dollar or another piece
of land but refrain to take part in the game. At the end of the day, he will
neither win nor lose. But he will see the value of his money or land go up
and down like a see saw.



(6) When the bubble was in the growing phase, everybody made money.

(7) If you are smart and know that you are living in a growing bubble, it is
worthwhile to borrow money (like A ) and take part in the game. But you must
know when you should change everything back to cash.



(8) Instead of land, the above applies to stocks as well.

(9) The actual worth of land or stocks depend largely on psychology.

WHAT IS BASEL II ACCORD

BASEL II ACCORD

Managing risk has become the single most important issue for the regulators and financial institutions. Over the years, these institutions have realized the cost of ignoring this risk. However, growing research and improvements in information technology have improved the measurement and management of risk.

Capital adequacy of a bank has become an important benchmark to assess its financial soundness and strength. The idea is that banks should be free to engage in their asset-liability management as long as they are backed by a level of capital sufficient to cushion their potential losses. In other words, capital requirement should be determined by the risk profile of a bank.
The Basel Committee on Banking Supervision (BCBS) was established in 1974 to facilitate information sharing and cooperation among bank regulators in major countries. It came out with the Capital Accord (Basel I) in 1988, which was very successful with more than 100 countries accepting it as a benchmark. Basel I was criticized due to its arbitrary nature of both the risk classes and risk weights. A Revised Framework, popularly known as Basel II Accord, was released on June 26, 2004.
The main feature of Basel II is that its structure rests on a set of three "mutually reinforcing" pillars, namely,
1. capital requirements
2. supervisory review
3. market discipline
Pillar 1, capital requirements is based on the banks own measure of risks. There are three major types of risks associated with banks: -
• Market Risk
• Credit Risk
• Operational Risk
Pillar 2, supervisory review is intended to ensure that banks have adequate capital to support all the risks in their business determined both by Pillar 1 and by supervisory evaluation of risks not explicitly captured in Pillar 1.
Pillar 3, market discipline is intended to complement the first two pillars and to encourage market discipline by developing a set of disclosure requirements, which will allow market participants to assess the capital adequacy of the institution.

Through this approach Basel II aims to correct most of the deficiencies that Basel I had suffered from. The new standards are more risk sensitive to business type and assets classes. This approach is multi-dimensional and focuses on all the operations of the bank. Accordingly banks, which have a larger risk exposure, will have to set apart more capital to meet the unexpected losses that go with it. The new framework intends to improve safety, soundness in the financial system and enhance competitive equality.
Basel II will have a major impact on the banking industry. With capital requirements loaded in favour of larger banks having better systems and consequent ability to benefit from the lower capital that goes with implementing more advanced approaches, the banking industry will witness a spate of large scale mergers, especially between internationally active banks, in their struggle to remain competitive.
Basel II would ensure a greater amount of financial stability in the economy. The capital requirement for each bank would be more closely tailored to various risks run by each bank. It provides incentives to adopt the latest advances in the field of risk management. A fine-tuned credit assessment processes will help the banks to 'risk price' their loan products better.
Basel II also suffers from various criticisms. It is said that risk-sensitive approaches will have pro-cyclical effects that will aggravate the booms and busts and thereby affect the real economy. The capital requirements will drop at the peak of economic cycles and increase at the bottom of cycles when capital can be more scarce and expensive.


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Inflation in emerging economies

Inflation in emerging economies
An old enemy rears its head

Emerging economies risk repeating the same mistakes that the developed world made in the inflationary 1970s

EVEN as America's economy teeters on the brink of recession and many European economies are slowing, central bankers in rich countries fear rising inflation. Yet the risks they face are smaller than those in emerging economies, where inflation has risen far more over the past year to its highest for nine years. There are also an alarming number of similarities between developing economies today and developed economies in the early 1970s, when the Great Inflation took off. Are the young upstarts heading for trouble?

China's official rate of consumer-price inflation is at a 12-year high of 8.5%, up from 3% a year ago (see chart 1). Russia's has leapt from 8% to over 14%. Most Gulf oil producers also have double-digit rates. India's wholesale-price inflation rate (the Reserve Bank's preferred measure) is 7.8%, a four-year high. Indonesian inflation, already 9%, is likely to reach 12% next month, when the government is expected to raise the price of subsidised fuel by 25-30%.


Inflation in Latin America remains low relative to its ignominious past. Even so, Brazil's rate has risen to 5% from less than 3% early last year. Chile's has leapt from 2.5% to 8.3%. Most alarming are Venezuela, where the rate is 29.3%, and Argentina. Officially, Argentina's inflation rate is 8.9%, but few economists believe the numbers. Morgan Stanley estimates that the true figure is 23%, up from 14.3% last year.

Indeed, official figures understate inflationary pressures in many emerging economies. Widespread government subsidies and price controls are one reason, and price indices are often skewed by a lack of data or government cheating. China's true inflation rate may be higher because the consumer-price index does not properly cover private services. Delays in data collection in India can mean big revisions to inflation: the final number for early March was almost two percentage points higher than the original. The latest wholesale-price inflation rate might therefore be pushed up to 9-10%. If measured correctly, five of the ten biggest emerging economies could have inflation rates of 10% or more by mid-summer. Two-thirds of the world's population may then be struggling with double-digit inflation.

The recent jump has been caused mainly by surging oil and food prices. For example, in China food prices have risen by 22% in the past year, whereas non-food prices have gone up by only 1.8%. Governments have responded with more price controls and export bans. India's government has suspended futures trading in several commodities, which it blames (wrongly) for high prices. In the short run such measures may help to cap inflation and avoid social unrest, but in the long run they do more harm than good. Preventing prices from rising reduces the incentive for farmers to increase supply and for consumers to curb demand, prolonging the very imbalance that has stoked prices.

Some central banks, including those in Brazil, Indonesia and Russia, have nudged up interest rates this year. But they have not kept pace with inflation, so real rates have fallen and are now negative in most countries, with a few exceptions such as Brazil, Mexico and South Korea. Russia's main policy rate of 6.5% is almost eight percentage points below its inflation rate. China's real lending rate is minus 1%.

Many policymakers in emerging economies argue that serious monetary tightening is not warranted: higher inflation, they say, is due solely to spikes in food and energy prices, caused by temporary supply shocks and speculation. Higher interest rates cannot call forth more pigs or grain. They expect inflation to ease later this year as higher prices prompt an increase in supply (food prices have started to edge down over the past month) and as sharp rises in commodity prices drop out of year-on-year comparisons.

Yes, food inflation is likely to slow later this year; but that does not mean rising headline inflation can be ignored. The synchronised jump in global food prices suggests that there is more to the story than disruptions to supply. Prices are also rising partly because loose monetary conditions in emerging economies have boosted domestic demand. These economies have accounted for over 90% of the increase in global consumption of oil and metals since 2002 and for 80% of the rise in demand for grain. This partly reflects long-term structural forces, but it is also the product of a money-fuelled cyclical boom. Peter Morgan, of HSBC, says that the initial shock to food prices may have come from the supply side, but the strength of income and money growth helps to validate higher prices. Were monetary conditions tighter, rises in food prices might be offset by declines elsewhere, keeping inflation under control.

Another reason why central banks cannot ignore agflation is that it can quickly spill over into other prices. Food accounts for 30-40% of the consumer-price index in most emerging economies, compared with only 15% in the G7 economies (see chart 2). So food prices weigh more heavily on inflation expectations and hence wage demands than in the rich world. Tighter monetary policy would help anchor expectations and stop higher commodity prices spreading into the wider economy.

Analysis by Goldman Sachs, for 1990-2007, confirms that in emerging markets, higher food prices did seem to push up other prices. In most developed economies the link from food to non-food inflation was statistically insignificant. Besides the larger share of food, this has two causes: central banks' credibility is weaker in most emerging economies, so that inflation expectations are less firmly anchored; and real wages tend to be less flexible. Both increase the risk of a price-wage spiral.

Philip Poole, also of HSBC, says that many emerging economies have run out of spare capacity because investment has not kept pace with economic growth. Hence firms are more likely to pass on cost increases. In both Brazil and India capacity utilisation is at record rates. Brazil's unemployment rate is at its lowest for almost 20 years. China, though, may still have some slack, thanks to strong investment.

The second-round effects of rising food prices are already visible in most economies. Andrew Cates, of UBS, calculates that in both Asia and Latin America the core rate of inflation (ie, excluding food and energy) has risen by one percentage point in the past year, to 3.4% and 6.2% respectively; in eastern Europe it has risen by three points, to 7.4%, largely because Russia is overheating. (In contrast, average core inflation in rich economies has barely budged.) Inflationary expectations are rising and workers clamouring for pay increases. In a survey of inflation expectations in Argentina, the average reply for the next 12 months was 36%. Russian wages are rising at an annual rate of almost 30%.
Turning off the tap

Some countries look more prone to rising inflation than others. From an analysis of wages, inflation expectations, demand and capacity pressures, and monetary growth, Mr Cates infers that Argentina, Brazil, India, Russia and the Middle East oil exporters face the biggest risks in the months ahead. Pressures seem less great in China, Mexico, South Korea and Turkey.

Clearly, monetary policy needs to be tightened. Instead, it has in effect been loosened: real interest rates are generally lower than they were a year ago. Short-term interest rates are also unusually low relative to nominal GDP growth (a crude gauge of where rates should be), which implies that monetary policy is very loose (see chart 3). The broad money supply has grown by an average of 20% over the past year in emerging economies, almost three times the pace in the developed world (see chart 4). Russia's money supply has swelled by fully 42%.

Add all this up, and emerging economies bear strong similarities to rich countries in the 1970s, when the Great Inflation took off. A synchronised boom in the world economy has caused commodity prices to surge. Governments have responded with subsidies and wage and price controls. Official statistics understate price pressures. Economies are running at full pelt. Money-supply growth is soaring. Inflation expectations are not anchored and labour markets are fairly rigid, increasing the risk of a spiral in wages and prices.

According to conventional wisdom, the monetary-policy mistakes that caused the Great Inflation are much less likely today because central banks are independent of politicians. But unlike the Federal Reserve and the European Central Bank (ECB), many central banks in emerging economies (notably China, India and Russia) are not fully independent. In another echo of the 1970s, they often face intense political pressure to hold rates low to boost growth and jobs.

Emerging economies are also in danger of repeating the blunder of central bankers in the rich world in the 1970s: they focus on core inflation as a reason for holding interest rates below the headline inflation rate. But negative real interest rates then further boost demand, while rising inflation expectations trigger bigger pay claims. Unless central banks tighten their grip soon, inflationary expectations could surge.

Central banks' monetary independence is also severely constrained by governments' desire to hold down currencies at a time when international capital is highly mobile—a problem the developed world did not face three decades ago. When central banks intervene in the foreign-exchange market to prevent a currency appreciating, they have to print money to buy dollars, which boosts domestic liquidity. The Fed's recent interest-rate cuts have made it even harder for emerging economies to tighten policy. If they raise rates they attract bigger capital inflows, and the extra intervention required to hold down their currency fuels inflation further, defeating the rate rise.

The central banks of both China and India have raised banks' reserve requirements several times this year to try to mop up excess liquidity, but they have left interest rates unchanged. The recent slide in the rupee leaves the Reserve Bank of India with more room to raise rates, but it has been slow to act. Hong Kong and the Gulf states, which still peg their currencies tightly to the dollar, have even been forced to cut interest rates, although their buoyant economies need tighter policy.

You might suppose that a downturn in America would tend to slow the emerging economies, but they have continued to sprint. Although emerging economies may have decoupled from America, their monetary policies have not. As a result, a slowing United States could perversely prove inflationary for them. The more the Fed cuts, the stronger the growth in liquidity and domestic demand in the developing world. In turn, this means higher commodity prices, which further squeeze American incomes and spending, prompting the Fed to push interest rates even lower. One way to regain control of interest rates is to impose tougher temporary restrictions on capital inflows. For example, in March Brazil introduced a 1.5% tax on foreign investment in government bonds. However, most studies suggest that capital controls do not work well in the long term.

To many Western economists and policymakers the solution is simple: emerging economies should allow more flexibility in their exchange rates. This would permit them to raise interest rates, and a stronger currency would help to curb import prices. But the links between exchange rates and inflation are complicated. Stephen Jen, of Morgan Stanley, argues that revaluation could encourage investors to expect further appreciation, which would attract yet more inflows of hot money and so exacerbate inflation. This is the problem that China now faces.

The only way to stem speculative inflows is to revalue a currency by so much that investors do not expect a further rise. But how much is that? Take the yuan. Mr Jen reckons it is already near “fair value” against the dollar, judged by such things as relative productivity growth and the terms of trade. On the other hand, to eliminate China's current-account surplus, the yuan might need to rise by a staggering (and politically unacceptable) 100%.

Mohsin Khan, the IMF's director for the Middle East and Central Asia, made a similar argument last week for the Gulf states. They should not revalue or modify their exchange-rate regimes now, he said, although inflation is high and rising. Any move too small to alter investors' expectations could draw in more short-term capital and add to inflationary pressures.

With capital so mobile and America's monetary policy so loose, emerging economies have no easy fix for inflation. Interest rates clearly need to be raised by a lot, but a tidal wave of capital could either boost domestic liquidity or cause currencies to become overvalued. Brazil has allowed its currency to rise by more than 100% against the dollar over the past five years. This has helped to bring inflation down (though it is now rising again), but the real is now widely thought to be overvalued, pushing the current account back into deficit.
AP The only way is up

One solution is to tighten fiscal policy, which would reduce excess demand. Rapid growth in public spending is partly to blame for the excessive growth in Brazil's domestic demand. But fiscal tightening would be hard to justify in China, which already has a budget surplus. A larger surplus would boost domestic saving and hence the country's already large current-account surplus.

Either way, emerging economies need to accept that because their productivity growth is faster than the rich world's, their real exchange rates will have to rise over time. That must mean either a rise in the nominal exchange rate or higher inflation; they cannot escape both.

What does higher inflation in emerging economies mean for the rich world? Continued rapid growth in those economies means that the prices of food, energy and raw materials will remain high. In other words this is a permanent relative-price shock, not a temporary one. Yet this does not mean that commodity prices will keep rising at their current pace. Higher prices will encourage increased supply. And even if prices remain at today's levels, the 12-month rate of increase will decline, helping to ease global inflation.

There are also concerns, however, that after many years in which its exports have helped to hold down global prices, China is now exporting inflation in manufactured goods. Figures from America's Bureau of Labour Statistics show that after falling for several years, the prices of imports from China rose by 4.1% in the year to April, the largest 12-month increase since the series started in December 2004.
China's new export?

However, Jonathan Anderson, of UBS, reckons that the sudden spurt in the prices of Chinese goods is misleading. If you look instead at the dollar prices of Chinese re-exports from Hong Kong (a series with a much longer pedigree), mainland export prices have been rising by around 3% a year since 2004. And if export prices have picked up recently this is entirely because of the rise in the yuan against the dollar, not faster inflation in China.

In any case, the impact of China on global inflation depends on differences in price levels between countries, not on the rate of change in its export prices. China has helped to hold down inflation in developed economies because its goods are much cheaper and they are gaining market share, replacing more costly goods. This will remain true for many years. Competition from China also forces local producers to cut their prices and it curbs wage demands in rich countries. As China moves up the value chain it will pull down the prices of a wider range of products. In other words, China will continue to help hold down global prices—although possibly by less than in the past.

The biggest risk from rising inflation lies in emerging economies, not in the developed world. Because food has a much bigger weight in household spending, not only are those economies more prone to a surge in inflation now, but the social and political consequences would also be more severe. This week Jean-Claude Trichet, the ECB's president, warned central banks around the globe not to repeat the mistakes of the 1970s. Back then, emerging economies played a far smaller role in the world than they do now. To maintain their new-found strength, their policymakers need to keep a firm grip on inflation. The longer it is allowed to climb, the greater the danger to future economic growth.

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INTEREST RATE AND THE OIL CONNECTION

SOMETHING’S GOTTA GIVE
Oil prices in April-May are already 50% above last year’s average and the rupee is down by over 5% this month. If neither the dollar nor oil sees a correction, interest rates will rise, says Cuckoo Paul


IN HIS State of the Union speech in 2006 US President George Bush said America was “addicted to oil’’ that is largely imported from unstable parts of the world. The US has since taken several policy initiatives including higher production of biofuels and moving to lower fuel consuming vehicles, that are beginning to show results. For the world’s largest consumer, imported oil dependency is set to fall from 60% to 50% in the next seven years. In stark contrast, India’s dependency is growing as domestic oil consumption spurts to a 10-year high and ONGC’s oil production remains stagnant. With oil headed for $200 per barrel-levels and without any concerted effort to reduce the ‘addiction’, all we can do is pray for miracles.
Since over 60% of our crude oil is met through imports, the numbers arising from high oil prices are piling up to look positively threatening for the economy. For Indian oil marketing companies like Indian Oil, Hindustan Petroleum and Bharat Petroleum, the wolf that has been at the door for two years is now breaking in. Analysts now fear that the damage will be much deeper as the government pushes the problem to the future by issuing oil bonds. Heading into an election year, retail price revisions are unlikely to be significant. High inflation numbers make the decision even more difficult. As the government vacillates on the issue, the loss on every litre of diesel sold has risen to Rs 24 this fortnight.
Take a look at the under-recoveries by the oil companies to understand the scale of the problem. “During 2007-08, the figure was Rs 77,000 crore; the projection for 2008-09 is Rs 2 lakh crore,’’ says Indian Oil director finance SV Narasimhan. The projection for this fiscal is based on the average prices in the past two months. Prices in April-May are already 50% above last year’s average. While the average price of the Indian crude basket was about $75 per barrel last year, it has risen to $110 per barrel now. “There is absolutely no clarity about what is in store for us,” says Mr Narasimhan. Analysts say that at current prices, the system of subsidy-sharing between the government, ONGC and the oil marketing companies will break down. “There is no way ONGC will be able to pay its one-third share of the burden, which works out to Rs 63,000 crore,” says an oil company director.
Crisil principal economist DK Joshi is very clear that “it’s time to reform the oil sector.” Ideally, the government needs to pass on some price rise to consumers, he says, but acknowledges that this is politically difficult as inflation is high and elections are only a year away. “The recommendations of the Rangarajan Committee report made in 2006 need to be seriously considered. The tax-subsidy regime need to undergo a surgery, if not a complete overhaul,” he feels. Citing a textbook solution, he says the problem has also to be tackled on the demand side and oil conservation needs to be given a push. Initiatives like car pooling should be pushed further.
For oil companies, however, textbook solutions are clearly not the need of the hour. Faced with a liquidity crunch, Indian Oil has sold oil bonds worth Rs 4,300 crore in April at a discount of 7% to 8%. However, this is not enough to keep the ship afloat. Borrowings are rising every day in tandem with the under-recoveries that have now touched Rs 300 crore daily. The debt too cannot be increased beyond a level, as the lenders may soon reach their sectoral caps on oil company lending.
Oil companies hope the finance ministry will increase the spread to offset the discount on the sale price of the bonds. They would ideally like a spread of about 100 basis points above the GSec. The spread available now is only 5 to 20 basis points. Among the other solutions being discussed is a uniform 3% oil stabilisation cess on the lines of the education cess. “This could yield up to Rs 20,000 crore per annum, which can be used to fund the under-recovery,” says Mr Narasimhan. However, at this stage no single solution would do and the cess would have to be combined with a duty cut on crude oil and petroleum products.
Internationally, several governments have been forced to bite the bullet of high oil prices and pass on part of the burden to the public. The Indonesian government has announced a 30% increase in pump prices from this weekend, despite a public outcry. A decision may be called for also because the prognosis from oil pundits is not very encouraging. In its latest monthly report, the London-based Centre for Global Energy Studies, founded by the enigmatic Zaki Yamani, said: “Oil prices would continue to rise unless there was a worldwide recession.” Goldman Sachs, the most active investment bank in energy markets, last week predicted that oil prices would jump to $141 per barrel during the second half of 2008. The main reasons cited are supply disruptions in oilproducing nations like Nigeria, high demand for energy by China ahead of the Beijing Olympics and a weak dollar, that makes dollar-priced oil cheaper for buyers using other currencies. On a broader level, much of the blame can be laid at the doors of the oil producers. Today, oil sells for around 56 times the cost of production in the Persian Gulf. Many feel that this unnatural state of affairs exists because the market is dominated by low-cost producers who constrain production, refrain from investing adequately in new capacity and ho have erected insurmountable entry barriers.
All these have the potential to slow down the country’s economy. Insulating the economy from oil price shocks would require a substantially higher issuance of oil bonds. Even if the government absorbs part of the increase, there will have to be some pass-through to consumers, considering that a weakening rupee has worsened the price impact for India. The rupee has weakened over 5% in May. A pass-through would result in higher fuel prices and higher inflation. This could translate into a hike in interest rates.

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Nifty Volatility index

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KGN scrip moves from Rs 100 to Rs 55,000

KGN scrip moves from Rs 100 to Rs 55,000
An Ahmedabad-based company had an unbelievable run on the Bombay Stock Exchange upon re-listing on Wednesday, shooting from Rs 100 to Rs 55,000 during early trade, breaking the record of MMTC which is the most expensive scrip on the bourses at Rs 27,050.

The stock of KGN Industries, which is headquartered off C G Road, closed at Rs 15,001 on rather thin volumes of 827 shares, but not before creating history of sorts and also trading being suspended on the bourse after nearly two-and-half hours of trading.

Since it was the day of re-listing, as per current rules no circuit-breakers were in place, allowing the stock a free run to find its level on the day of its re-admission for trading. However, since the bourse officials found that orders were being placed at unrealistic prices, the trading in the scrip was suspended at 12.20 pm, as a proactive surveillance measure, BSE said in a release. KGN Industries used to be known as Royal Finance till it was de-listed in February 2001 when the last traded price was just Rs 11.

In the release, BSE, acknowledging the unusual trading in the KGN stock, said it had already started an investigation to examine the orders which were placed at unrealistic prices and added that "appropriate action, if any, will be initiated against the concerned entities."

KGN Inds scrip is under the trade to trade category of BSE. This means every trade, buying and seeling, has to result into payment of cash (for buying) and delivery of shares (for selling). No netting of trades is permitted for stocks in the trade to trade category.

The closing price of Rs 5,216.30 has been arrived as per the existing methodology but taking into consideration the entire trading duration, the BSE release said. A few years ago, the company surrendered its licence as a non-banking finance company (NBFC) to the Reserve Bank of India and the promoter, Aris Menon, got into castor-oil trading business.

The company's name was changed to KGN Industries in 2007 and it did a rather fiery relisting on Wednesday which analysts found completely baffling. "We will advise investors to stay away till the fundamentals of the company are properly scrutinised," said an analyst. While his staff said that Menon, the company's managing director, was travelling abroad, one company official said KGN Industries had only about 15 employees and a net profit of Rs 1.25 crore from a turnover of Rs 250 crore.