(Nipun Mehta is Executive Director & Head - India, SG Private Banking. The views expressed here are his own)

At a Sensex level of around 17,000, are the Indian equity markets looking at the face of a possible bubble in the offing? Terrifying words, probably unjustified for a market which is still 20 percent lower than its all time peak touched in Jan 2008. Let’s look at it from different perspectives.

In the Indian equity markets, unlike in other global markets, it is commonly believed that the day the roadside vendor starts giving ‘tips’ or the day cheerleaders with pom-poms start appearing on business channels, the top is near.

This time however, we have not yet seen any of this fanfare amongst investors or business commentators. There is hence little reason to believe that a retail investor driven bubble is on the horizon. Nowhere close to it actually, since there has been very little retail or high net worth individual (HNWI) participation in the rally of the last 9 months.

What has clearly driven the markets are the Foreign Institutional Investors (FIIs) who have pumped in close to $7.4 bln in India in the last quarter raising their ownership to close to 19.2 percent up from 18.3 percent in the previous quarter. As per statistics available, FII ownership is also up by 2.5 percent from the March 2009 figure of 16.7 percent.

A large part of this is contributed by the dollar carry trade whereby FIIs raise funds at ridiculously low interest rates in dollars and invest it into a stronger currency viz INR. In the process they gain not just by the rising equity markets but also by the strengthening INR against $.

This is clearly similar to the Yen carry trade that happened earlier (whereby borrowings were in Yen at negligible interest rates) and which burst when the Yen — a strongly controlled currency — suddenly started strengthening. Can dollar carry trade stop? Can a similar bubble be building up in the $ carry trade as well?

Clearly the dollar carry trade can stop if interest rates in the U.S. rise. Can it happen in the short or medium term? Appears quite unlikely given the state of the U.S. economy and the statements the Fed has made in the recent past.

On the other hand, can the $ start appreciating enough for the stock market gains to be eaten away by a strengthening dollar? At least in the immediate term, this too appears unlikely. Considering the huge trade deficit, the Fed needs to ensure a weak dollar in order to encourage exports.

Effectively, there does not appear to be any bubble building in the Indian equity markets. What can however puncture the rally are the FII allocations to the emerging markets/India being realigned in January 2010 or the FIIs withdrawing big time under instructions by concerned central banks to use the borrowed funds for lending/investing within their own countries as opposed to help India or the emerging markets to benefit. Does that look possible?

(You can e-mail Nipun Mehta at: nipun.mehta@sgprivasia.com)

The Indian government has reiterated its refusal to reduce carbon emissions under any new global deal to fight climate change.

The Times of India reported this week that Environment Minister Jairam Ramesh wrote to Prime Minister Manmohan Singh urging him to accept curbs on India’s rising carbon emissions without insisting they should hinge on new finance and technology from rich nations.

While such a possibility was seen by Western negotiators as potentially helping in getting agreement on a global deal in Copenhagen in December, Ramesh was accused in the Indian media and by opposition political parties of hurting the interests of India.

But Ramesh said on Tuesday India was not going to accept internationally legally binding emission reduction targets, though it was prepared to discuss and make public periodically the status of its domestic climate action.

Should India agree to reduce carbon emissions under a global deal to fight climate change? Or should it ask rich nations to fulfil their commitment to give developing countries finance and technology to fight climate change?

Bollywood star Shah Rukh Khan was en route to Chicago for a parade to mark Independence Day when he was detained and questioned at Newark airport.

After a couple of hours’ interrogation, the 43-year-old actor was allowed to make a call, getting in touch with the Indian consulate who vouched for him and secured his release.

The incident sparked uproar among Khan’s fans in India, who vented their anger over the Internet and in protest marches.

This is not the first time an Indian celebrity has had trouble with U.S. immigration officials and security checks.

Last month, U.S-based carrier Continental Airlines apologised to former Indian president A.P.J. Abdul Kalam for frisking him at New Delhi airport.

On Saturday, Information Minister Ambika Soni said while she could not say if Khan had been detained “on religious grounds, there have been too many instances like these in the U.S. concerning Indians”.

A Times of India report on Sunday said U.S. officials feel some Indian visitors are “needlessly huffy about routine security procedures and there is a broad cultural mismatch”.

Are Indians overreacting? Or is the U.S. taking things a bit too far?

Khan is a celebrity but what about ordinary Indians who travel to the U.S. — do they face racial profiling?

(C. Uday Bhaskar is a New Delhi-based strategic analyst. The views expressed in this column are his own)

Yet another Hiroshima Day will be observed on August 6 with grave solemnity in Japan but few other parts of the world will mark the mushroom day of August 6, 1945 with the deep concern it ought to receive.

Sixty-four years after the apocalyptic destructive potential of the atomic bomb was recognized, it may be posited that the global community is less secure apropos the nuclear domain with every passing day.

While Myanmar is now perceived to be the latest potential member of the nuclear  weapon ‘club’, the overlap between state and non-state entities who are contributing to covert nuclear  proliferation remains as opaque as it has been for well over three decades.

The highly publicized but little investigated A.Q. Khan episode that irrefutably pointed to a clandestine nuclear Wal-Mart has been swept under the carpet since it did not serve the realpolitik compulsions of the major powers – and this includes some of the non-weapon states who are prominent members of the Nuclear Suppliers Group.

While U.S. President Obama is publicly committed to global nuclear disarmament – but recognizes that it will not occur not in his lifetime – and former American Cold War stalwarts led by Henry Kissinger advocate the ‘cause’, the reality in the strategic grid of the world is stark.

The most comprehensive estimate of the global nuclear arsenal places the current stockpile (as of June 25, 2009) at 23, 335 warheads. Of these, more than 8,000 are deemed to be operational.

India, which was always in the vanguard of the disarmament debate became a reluctant nuclear weapon power in May 1998 and is now reviewing its options as a state with nuclear weapons.

With the launch of the ARIHANT on July 26, it is now committed to acquiring a nuclear deterrent at sea – the invulnerable ‘second-strike’ capability. Welcome to the global nuclear reality on Hiroshima Day.

While nuclear deterrence strategy and practice is averred to be cast in stone – a tenet inherited from the menacing Cold War decades – the global nuclear environment is brittle, sullen and uncertain.

Adversarial dyads are bristling and the US-Russia divergence over missile defences is case in point.

States with nuclear weapons including those with nascent arsenals, non-state entities that have extreme revisionist agendas and the inevitability of the permeation of knowledge through the ever growing global technological advances have only added to the complexity of the nuclear challenges that now abound.

Many commendable non governmental initiatives have been mooted over the last decade in different parts of the world and a sturdy set of detailed reports and recommendations are now available.

Yet no significant state level policy-shift has been made – except for the rhetorical commitment that is made – the most well-known being that of U.S. President Barack Obama.

No state that has the nuclear weapon capability – or the ostensible protection this WMD provides – is willing to forsake it unilaterally. This reliance on the ‘nuke’ is an indicator of the insecurity index of the security planners worldwide and it is instructive that even Japan is unable to move out of the US nuclear umbrella – let alone an Australia or UK.

The case for a blue ribbon Global Nuclear Convention that distils all the available reports and assessments and objectively suggests the way ahead is imperative. The nuclear doctrine, strategy and related operational posture of  nuclear weapon states needs to be reviewed and the non-state entity with its  tangled  tentacles candidly identified  - along with the many red herrings that have been deliberately strewn.

It is prudent to recall that even as some constituencies reflect over the enormity of   Hiroshima Day – as many as 2,200 American and Russian warheads are on high alert and ready for ‘launch on warning’ use.

Such irrefutable empirical reality can lead to cynicism – but this should not be devoid of hope - that the Holy Grail of total disarmament is elusive but we must persevere.

The Reserve Bank of India (RBI) announces 2009/10 fiscal’s first quarter monetary policy on July 28 and most analysts and traders expect it to leave key rates unchanged.

India’s economic outlook is mixed as a weak monsoon could dampen signs of nascent economic recovery, food prices are soaring even though headline inflation is benign and the borrowing programme is huge despite ample cash conditions.

The RBI has already cut the repo rate, or its key short-term lending rate, by 425 basis points to 4.75 percent in six steps since October 2008 as it tried to guard a slowing economy against the global financial crisis.

Should the RBI cut its key lending rates further?

By C. Uday Bhaskar

(C. Uday Bhaskar is a New Delhi-based strategic analyst. The views expressed in the column are his own)

The joint statement issued by Prime Minister Manmohan Singh and his Pakistani counterpart Yusuf Raza Gilani at Sharm El-Sheikh in Egypt on the sidelines of the NAM Summit has generated considerable comment in both countries and is being interpreted across a wide bandwidth that ranges from outright condemnation to cautious cheer.

India and Pakistan are now back to formal engagement — albeit in a brittle manner with many caveats after the composite dialogue, that goes back to January 2004, had been put on freeze by India after the Mumbai terrorist attack of November 2008.

It is instructive that this modest breakthrough came on the eve of U.S. Secretary of State Hillary Clinton’s visit, which marks the first high-level political contact between the Obama administration and the UPA government after it was voted back to power.

The operative part of the statement is contained in a mere 18 words that read as: “Action on terrorism should not be linked to the composite dialogue process and these should not be bracketed.”

Critics in India have flayed Singh for his seeming ‘capitulation’ and invoked the criticism that he is ‘weak’ — a charge leveled against him during the early 2009 campaign phase.

In Pakistan, the joint statement is being perceived as a victory for Islamabad which had long sought this decoupling of action against terrorism (a euphemism for the investigation in the Mumbai attack) and the composite dialogue.

Some sections have compared PM Gilani’s performance to that of an astute captain who has won a crucial cricket match — allusion to Pakistan’s dramatic T20 victory at Lord’s in June.

A more objective assessment of the joint statement would suggest that yes, India was perhaps more conciliatory in what it conceded — but on balance this statement is a tightly drafted diplomatic win-win textual compromise for both leaders in a prickly domestic political environment.

India and Pakistan need to engage at the official level on many issues — none more urgent than terrorism — and the circle has been squared in a reasonably satisfactory manner.

Pakistan’s insistence that Mumbai is linked to the abiding and unresolved issue of Kashmir has been set aside (though India has accepted a neutral reference to Balochistan) and is now committed — once again — to deal effectively with the Mumbai investigations.

Singh made a detailed statement in parliament asserting that Islamabad is expected to deliver on Mumbai first — and that some progress has been made by way of a dossier having been received that admits to the role of the Lashkar-e-Taiba and the ‘mastermind’ Zaki-ur-Rehman Lakhvi.

With this renewed commitment the Zardari-Gilani combine has infused some slender traction into the Mumbai investigations and justified Singh having gone the extra mile.

But will this be sustained? Past history and the unresolved politico-military contradictions within Pakistan do not augur very well. In 1972 when the Shimla pact was signed, PM Indira Gandhi was generous beyond compare with PM Zulfiqar Ali Bhutto and in retrospect, India could be charged with having squandered an emphatic military victory by way of the politico-diplomatic gains that accrued to it.

To that extent PM Singh has also been more conciliatory and accommodating with PM Gilani than what his domestic critics would have grudgingly endorsed. Will the tangled and zero-sum history of Indo-Pak dialogues repeat itself — or will this prudent gamble-cum-investment by Singh pay off?

The answer to this conundrum lies to an extent in the visit of Hillary Clinton and the posture that the Obama administration proposes to adopt vis-à-vis terrorism and Pakistan.

In Delhi’s perception, the anti-India establishment in Pakistan has made a distinction between the good and bad terrorists. The latter include those who target the vital interest of Pakistan. But the former who target India are either tacitly encouraged or allowed to exploit the loopholes in Pakistani law and remain free.

The manner in which the Hafiz Saeed case is being prosecuted is illustrative. It is astonishing that Pakistani law ostensibly does not prohibit linkages with the al-Qaeda and yet the U.S. sees Pakistan as a principal ally in the war on terror.

Like the Pakistani policy, the U.S. is equally culpable of having followed an ambiguous approach towards terrorism and nuclear proliferation. Some transgressions get the Nelson’s eye – whether it is Hafiz Saeed or A.Q. Khan — or the ‘truth’ as revealed by President Zardari about the Pakistan establishment having supported and nurtured terrorism and religious radicalism.

It is time to ‘reset’ many South Asian policy buttons and the Clinton visit is an opportunity to clear the clutter. Distorted narratives about state support to terrorism, religious radicalism and nuclear proliferation must be jettisoned and the moderate civilian constituency in Pakistan enabled.

The Indo-Pak joint statement in Egypt has laid the foundation in a tentative manner and this must be strengthened in the Clinton visit.

By iTrust Financial Advisors (www.iTrust.in)
When it comes to our personal finances, the annual budget is not really worth that much attention. Every year expectations build up that major tectonic shifts will happen that will impact our personal finances.

This year is no different. In fact, the expectations are even higher given the outcome in the general elections. The usual items populate the wish list of changes that are being talked about by pundits.

Here’s a quick compilation of items, by personal finance category, that could have an impact on our personal finances. But do keep in mind that not all of these could happen, or happen in the magnitude that they are expected to.

Stocks and Trading
Phase out of securities transaction tax and commodities transaction tax. The impact of this could be that trading could become marginally cheaper than what it is today.

Mutual Funds
Nothing major expected here. The big change, not a part of the Budget, was SEBI’s new policy on zero entry loads for mutual funds, i.e., no more fees paid out of our money to sellers of mutual funds.

Insurance
The Life Insurance Council of India has asked for a separate limit for deduction under Section 80C for long term instruments like insurance. If this were to happen, the impact of this could be that one will get a higher annual amount for your tax deduction.

There is also talk of limiting the service tax on ULIPs to only the fund management charges. If this goes through, the impact will be to reduce the overall charges levied on one’s ULIP.

Home Loans
The annual limit under Section 24 for tax deduction on interest paid on an outstanding home loan is expected go up fro Rs 1.50 lakhs to Rs 2.50 lakhs. This will result in saving of up to approximately Rs 30,000 depending upon one’s marginal income tax rate.

Additionally, there have been strong demands for the deduction to begin as soon as loan repayment begins. Currently, the tax deduction is possible only when the home has been fully constructed.

Small Savings Schemes
The interest rate regime on schemes such as NSC, KVP etc. is expected to be brought in line with the prevailing market rates of interest. A reduction of 0.50% - 0.75% in the rate of return is expected. The impact of this will be that the returns from these small savings schemes will not be that appealing compared to other fixed return instruments such as debt funds, or even bank accounts.

Household Expenses
Petrol and Diesel prices have already gone up by up to 10% as of the announcement on July 1, so the impact on our transport costs will clearly be felt.

Additionally, if LPG subsidies are also changed, they will likely impact our costs of operating our kitchen.
The Budget is clearly a guessing game for policy watchers, so lets see what happens on July 6 and how many items end up impacting our personal finances in a really meaningful way.

If Pakistan’s battle against the Taliban seems difficult, a much tougher challenge lies ahead: deciding what to do about the Lashkar-e-Taiba militant group it once nurtured to fight India in Kashmir.

For security analysts, the two questions are whether the army and ISI can close down the LeT, and if they want to do so — the assumption being that this would have to be done by the country’s powerful military rather than the civilian government.

Analysts say the army may be rethinking its attitude to militants after it lost control of the Pakistani Taliban, which overran the Swat valley and began encroaching on Punjab.

But giving up the LeT, seen as a “force multiplier” in the event of an invasion by India — rather like citizens trained in civil defence — would be another step altogether.

Would Pakistan army turn against the LeT?