The Big Mac Index is an informal way of measuring the purchasing power parity (PPP) between two currencies As stated in the Economist, it "seeks to make exchange-rate theory a bit more digestible".

· The Big Mac Index was introduced by The Economist in September 1986

· The index also gave rise to the word burgernomics.

It is based on the principle that the rate between two currencies should naturally adjust so that a sample basket of goods and services should cost the same in both currencies.

In the Big Mac Index, the "basket" in question is considered to be a single Big Mac sandwich as sold by the McDonald's fast food restaurant chain. The Big Mac was chosen because of the high degree of standardization of the BIG MAC burger across many countries around the world, with local McDonald's franchisees having significant responsibility for negotiating input prices.

Hence the index enables a comparison between many countries' currencies. Some menu items are market specific, which would hinder a comparison, if used. Still other menu items are specially priced, such as the dollar menu in many U.S. restaurants consisting of sandwiches and other items that cost $1.

The Big Mac PPP exchange rate between two countries is obtained by dividing the price of a Big Mac in one country (Home currency) by the price of a Big Mac in another country (foreign currency). This value is then compared with the actual exchange rate; if it is lower, then the first currency is under-valued (according to PPP theory) compared with the second, and conversely, if it is higher, then the first currency is over-valued.

For example, suppose the price of a Big Mac is $2.50 in the United States and Rs.100 in India; thus, the PPP rate is 2.50/100= 40. If, the actual USD rate is 1$ = Rs. 45 then USD is under-valued (40<45)>

The burger methodology has limitations in its estimates of the PPP. In many countries, eating at international fast-food chain restaurants such as McDonald's is relatively expensive in comparison to eating at a local restaurant, and the demand for Big Macs is not as large in countries like India as in the United States.

Social status of eating at fast food restaurants like McDonald's, local taxes, levels of competition, and import duties on selected items may not be representative of the country's economy as a whole. In addition, there is no theoretical reason why non-tradable goods and services such as property costs should be equal in different countries: this is the theoretical reason for PPPs being different from market exchange rates over time. Nevertheless, the Big Mac Index has become widely cited by economists.

MORE WHEN WE DO THE TOPIC IN THE CLASS!!!!!!

So the much awaited credit policy is out and our Reddy "garu" has pulled out some surprises (although not nasty ones).Let us look at some of the fall outs of the policy announced yesterday:

• RBI has told the corporates, banks etc to be "vigilant and well prepared" to deal with higher volatility on the rupee dollar front - which means--- guys I am not going to put too much effort into restricting rupee appreciation - so you guys take care of yourself
  
• This is a good sign ... I have long been of the opinion that too much protection is being given to the exporters - while this was necessary in the early stages of the development - it should have been stopped once our FX reserves touched 200 bnUSD. Moreover the exporters of our country have been pampered to the hilt and should now realise that they should grow up.
• CRR hiked by 0.50 bps to 7%
• This move will suck out close to Rs.13500 crores out of the system - not a major cause of concern for treasuries - because the liquidity floating around in the system is estimated to be around Rs. 1 lac crores. The bond yields reacted yesterday - but this was only a reaction to the announcement and is likely to settle down today. We have seen that the excess liquidity in the system was arising primarily due to the fact that deposits were growing rapidly while advances was showing a declining trend. This coupled with the RBI pumping rupee to support the dollar led to huge liquidity float in the system. Of course the banks will now have to make the effort of pushing advances and reduce costs on borrowings i.e. deposits.
  
• Ceiling of Rs.3000 crores on reverse repo discontinued:
• With the removal of this ceiling the call rates will now gravitate towards this rate which is presently at 6%
• Long term repos to be introduced:
• I have mentioned in my lectures that the short term yield curve is characterised by a zig zag pattern owing to volatility and unpredicability in the short run. With the introduction of 14 day and 28 day repos we might see some smoothening of this segment of the yield curve.
• GDP growth at 8.5%
• This growth has primarily been driven by the services and industrial sector - the farm sector outlook is still uncertain. Like discussed in the class - the RBI is faced with a dilemna of managing a high GDP growth on one hand and reigning inflation on the other.A High GDP together with a monetary system sloshing in liquidity is sure indicator of high inflation in the days to come - this will also result in higher interest rates (this is already indicated by a upward move of the CRR

The coming few months should be interesting as RBI unfolds its plans to tackle the strange situation that India is in now My call - we should see some tightening of the interest rates in the medium term and the RBI is likely to adopt a push pull strategy to control inflation and dollar.

RUPEE APPRECIATION AND AS 11

The rupee has appreciated 10-11 per cent against the dollar in recent times. Accounting Standard (AS-11) of the Institute of Chartered Accountants of India (ICAI) governs accounting of foreign currency transactions and translations. Those who have long-term loans in dollar such as external commercial borrowings (ECBs) have to book huge gains on account of this fluctuation, when re-stating the balance-sheet. Is this correct?

The rupee appreciation in the past few weeks was very fast and it is difficult to assume that the appreciation will sustain in the long run. How do we proceed to simultaneously comply with the standard and recognise the currency volatility? We have to be prudent while recognising income and booking losses. The gain on account of the appreciation may not be sustainable, and hence is it prudent to recognise the same in the profit and loss (P&L) account? Can it be a good practice, not to recognise the income and pass it on to an exchange risk administration reserve to meet future liabilities? Is AS-11 equipped to meet this scenario?

Prudence is no longer an objective of most accounting framework. Fair presentation is. Therefore, it is important that assets and liabilities are represented at fair values. In the case of forex loan, fair presentation would be to account for the loan at the exchange rate prevailing on the balance-sheet date. As a corollary, the corresponding gain/loss is recognised in the `profit and loss' account (where else can it go?).

It would be incorrect not to recognise the gain, since it would tantamount to creating a secret reserve. It is also not appropriate to suggest that the gain is not being recognised, since exchange rates can cause the reverse moment in the future. What if they do not? Accounting cannot be based on prediction.

Just another point, if the loan was used for financing a fixed asset, then the exchange difference may very well be termed as a borrowing cost under AS-16 and to that extent the same may be capitalised or de-capitalised.

RELATIONSHIP BETWEEN INTEREST RATES AND INFLATION

It is typically a positive relation. In other words, both tend to move either up or down together. However, the caveat is that interest rates will always follow inflation rates or, put simply, when inflation goes up, interest rates go up and when inflation comes down, interest rates tend to fall.

The reason behind this relationship is fairly simple as also complex. Inflation tends to happen when an economy is `overheating' much like what is happening in India now. Of course, inflation also happens when central banks print a lot of money or when macroeconomic policies go bad. However, in this case, let's assume that the central bank and government are largely following `correct' policies. This assumption is necessary because the relation between inflation and interest rates becomes clearer.

Money is the engine of any economy. Let's start from the time when money is cheap or in other words, there is a low interest rate. This is also called `loose money policy'. Because of this cheap money, people borrow to start businesses, invest and so on; the price they pay for the money is interest. Over time, a virtuous cycle gets created where this money generates more money and people tend to become richer.

India is the best case where this has happened in the last few years. Interest rates were low in India and people and companies have borrowed liberally for a variety of things. People bought houses, cars, TV sets and so on and companies built factories, etc. When this happens, economies will typically go through what is known as a boom phase with GDP, incomes, and profits rising rapidly. All this increases the demand for goods and we all know that prices of goods depend on demand and supply. Over time, demand builds and slowly outstrips supply as is happening in India now. When that happens, prices of goods tend to go up and that results in inflation because most of these goods are usually part of a basket that constitutes the Wholesale Price Index or the Consumer Price Index.

To `cool' the economy, central banks will raise interest rates. The intention here is to slow demand and, in effect, decelerate the economy. However, this is a tightrope act because interest rates must be raised just enough to cool the economy but not send it into a recession. When interest rates are increased, money becomes costlier and that is known as `tight money policy'. What the central bank hopes is that when it increases rates, people and companies will borrow less and therefore there will be less purchases and investments. This usually cools the economy. During this cooling period, GDP growth usually slows, companies' profits are reduced and people are less likely to spend. Over time, inflation drops and as it does, the central bank will usually lower interest rates to again kick-start the economy and the cycle continues.

However, it is important to understand that the above explanation is very broad and that there are many factors that go into this sometimes complex relationship.

- The article has been written by Sunil Rongola who is Economist, Murugappa Group. The views expressed are personal and has appeared in Hindu todya

PLEASE DO MAKE SURE TO GO THROUGH THE SECTION ON THE RIGHT TITLED " Articles I would recommend - these are enormously useful for CA Students"


srini

hey guys,
please visit my blog linked : http://www.srininewsblog.blogspot.com

It has a section Hindu business line - mentor - this section often contains interesting news for CA students. e.g. on 16th of July it had the solution of a problem in costing which came in May 2007 solved by Mr. PV Ratnam. It also contained an article as to constitution of audit paper in the finals - keep an eye on this blog

Well so much for the so called ethics, professionalism, laptop toting personnel, cutting edge technology by the so called big 4 ......

Deloitte to Pay $130 Million to Parmalat Shortly

Deloitte had settled with Parmalat to pay US $149 million for its role in the bankruptcy of the Italian dairy company.

Now it is time to pay....Parmalat SpA says that Deloitte have a few days to come up with the money, and apparently Deloitte will pay $130 million as a first installment.

The first signs of the economy cooling down is showing: the runaway growth in bank loans is finally losing some steam. For the first time in 6 years, banks have recorded an absolute dip in loans given to individuals and Corporates.

Latest RBI figures reveal that aggregate non-food credit extended by banks declined Rs 30,532 crore between April and June 22 to Rs 18,17,955 crore. Though a slow credit demand is normal in the first quarter which is lean season, for the first time in 24 quarters, banks are seeing their loan portfolio shrink. Significantly, it’s happening at a point when deposits parked in banks are recording the highest quarterly growth of over Rs 1,00,000 crore.

The point to note here is that while the deposits are at a record volume - the loan portfolio is reducing - while this is good as far as the FM is concerned because he is achieving the objective of cooling down an overheated economy - the question is what happens to the banks - they will pay interest on the deposit on one hand while on the other hand the loan portfolio
shrinking.
The central bank has given enought indication that it is not comfortable with the fierce loan growth. Since last year, it has implemented series of rate hikes to cool down the economy and diffuse bubbles in various markets. The monetary actions may be finally showing results.

From the corporates side, the corporates are more inclined to borrow from alternative sources which are available at a relatively cheaper rates. But with global PE funds tripping over their feet to fund indian ventures - mid cap segment is gravitating more towards equity.

And anyway equity markets seem to be in a tizzy and spiralling northwards .....

Interesting ruling for section 54 and 54F of the Income tax act

Special bench of Income Tax Appellate Tribunal vide a significant ruling AIT-2007-205-ITAT affecting investment decision of sellers and buyers of real estate has ruled that exemption under sections 54 and 54F of the Act would be allowable in respect of one residential house only. If the assessee has purchased more than one residential house, then the choice would be with assessee to avail the exemption in respect of either of the houses provided the other conditions are fulfilled. However, where more than one unit are purchased which are adjacent to each other and are converted into one house for the purpose of residence by having common passage, common kitchen, etc., then, it would be a case of investment in one residential house and consequently, the assessee would be entitled to exemption.

• The Special Bench was constituted to decide the following question of law:

“Whether, the phrase “a residential house” used in sub-section (1) of section 54 and 54F means one residential house or more than one residential house independently located in the same building / compound / city?”

• The Revenue contended that exemption under sections 54/54F of the Income Tax Act, 1961 would be available only in respect of investment made in one residential house. On the other hand, the assessee contended that the exemption under the aforesaid sections would be available even if investment is made in the two house properties though distantly located from each other.
• The assessee and her husband were co-owners of a residential flat at “Gulistan” situated at Bhulabhai Desai Road, Mumbai, having 50% share each. In the year under consideration, the said flat was sold for a total consideration of Rs.3.03 crores on 12.8.1984. The share of the assessee in the sale consideration of Rs.3.03 crores on 12.8.1984. The share of the assessee in the sale consideration amounted to Rs.1.515 crores. The assessee re-invested the sale proceeds in purchase of ½ share in these two flats were purchased by the husband of the assessee. The assessee claimed exemption u/s 54 of Rs.76.44 lacs against long term capital gain arising from the sale of her share in the residential flat at Bhulabhai Desai Road, Mumbai. However, the assessing officer was of the view that exemption was available only in respect of investment in one residential house. Accordingly, he restricted the exemption to Rs.47.79 lacs being the investment in the flat at Erlyn Apartment, Bandra. On appeal, the CIT(A) held that exemption was available in respect to investment made in both the flats.

Observations of Special Bench:

· The real controversy is about the true meaning of the expression “a residential house” used by the legislature in sections 54 and 54F of the Act. According to the Revenue, it means, one residential house while, according to the assessee, the word “a” means “any” which in turn means “one or more than one”.

· The word “a” is ambiguous as it has no definite meaning. Various meanings are given to the word “a”. It not only means “one” or “any” but it has various other meanings depending upon the context in which it is to be used. Therefore, the cardinal principle of interpretation cannot be applied and consequently, the intention of legislature has to be discovered by resorting to the aids to the interpretation. One of the rules of interpretation is to find out the context in which such word is used by the legislature.

· The legislature has used the words “a” and “any” with reference to investment of capital gain / sale consideration in certain asset or assets. The legislature was not oblivious regarding the meaning of these two words. The word “any” has been used by the legislature in sections 54B, 54D, 54E, 54EA, and 54EB while the word “a” has been used in sections 54 and 54F of the Act. This clearly shows that the legislature intended different meanings to be given to these two words. A close reading of these sections shows that legislature intended to allow exemption in respect of investment in more than one asset by using the word “any”. Section 54E allows exemption in respect of investment in any specified asset. Explanation 1 to sections 54E defines the “specified asset”. It includes various assets in which investment can be made by the assessee who are eligible for exemption u/s 54E. There is nothing to indicate that investment is restricted to any of the specified assets. Had the legislature intended to restrict investment in any one of the specified assets, it would have used the words “in any one of the specified assets” instead of “in any specified asset”. This clearly shows that the word “any” has been used where the legislature intended investment in more than one asset. Similarly, in section 54EB, the legislature has used the words “in any of the assets specified by the Board”. Similar is the position in section 54EA. Section 54B and section 54D also used the word “any other land” and “any other land and building” respectively. The expression “any other land” is an expression of widest amplitude and, therefore, its meaning cannot be restricted to any one piece of land. On the other hand, the legislature has used the word “a” in sections 54 and 54F. Had the legislature intended for investment in more than one asset, it could have easily used the words “in any residential house”. Superfluous words are not used by the legislature. Different words “a” and “any” have been deliberately used by the legislature to convey different meanings. Therefore, in our humble view, the legislature used the word “a” where it intended investment in one residential house only and used the word “any” where it intended investment in one or more assets.

· However, we are in agreement with certain decisions of the Tribunal relied on by the learned counsel for the assessee wherein exemption was allowed in respect of investments in two adjacent or contiguous units converted into one residential house by having common passage / stair case, common kitchen, etc. intended to be used as singly house for the residence of the family. As already observed, the intention of the legislature is that investment should be made in one residential house. So long as the house purchased is one even after conversion, the exemption would be available. On the other hand, if the investment is made in two independent residential houses, even located in the same complex, then, in our opinion, exemption cannot be allowed for investment in both the houses. However, the choice would be with assessee to avail exemption in respect of any one house.