| 20th July, 2012 |
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| Weekly Facts |
| ||Close ||Change ||%Change |
|BSE Sensex* ||17,158.44 ||(55.3) ||-0.32% |
|Re/US$ ||55.14 ||0.8 ||1.41% |
|Gold Rs/10g ||29,195.00 ||55.0 ||0.19% |
|Crude ($/barrel) ||106.57 ||6.2 ||6.13% |
|FD Rates (1-Yr) ||7.25% - 9.25% |
Weekly change as on July 19, 2012
*BSE Sensex as on July 20, 2012
The headline inflation as measured by the Wholesale Price Index (WPI) for the month of June 2012 fell 30 basis points to 7.25% from 7.50% in the previous month. Citing this gradual mellowing of the inflation, there are expectations built by the industry that the RBI may reduce the interest rates in order to revive the slowing economic growth in the country.
Even though the inflation for the month of June 2012 may have reduced but it is still high, more than the comfort zone of the RBI (6% to 7%). Moreover, the average inflation for the year 2012 (calendar year) is at 7.46%. Some of the factors which hint at stickiness in the inflation numbers in the near future are:
We believe that, due to the above mentioned reasons the Reserve Bank of India (RBI) may not go in for a rate cut at its upcoming first quarter review of monetary policy scheduled on July 31, 2012. However, even if the RBI succumbs to the industry or Government pressure and cuts the policy rates (with less aggression); the banks may not be able to immediately pass on the benefit to the customers. This is due to the fact that the deposit growth of banks as on June 29, 2012 was at 13% (year-on-year) as against the credit growth of 16% for the same period. Thus, money lent by banks has been more than the deposits raised by them. In such a scenario, it would be nearly impossible for the banks to transmit any rate cuts to the customers as this will directly affect the deposit growth which is already low. This will also hold true for the lending rates as they too may be kept unchanged resulting in home loans, auto loans and other retail loans maintaining their present interest rates.
- Fuel prices: Prices of petrol and diesel may see a hike in the near future to reduce the under-recoveries of the Oil Marketing Companies (OMCs).
- Food inflation: Below normal rains in the current monsoon season may drastically shoot up the prices of food grains leading to high food inflation
- Supply-side bottlenecks: Lack of political will and reforms at snail’s pace are hampering capacity generation leading to supply-side inflation
In order to reduce the demand for physical gold which in turn will result in less gold imports, the Reserve Bank of India (RBI) is mulling ways to introduce a financial instrument which will generate returns similar to physical gold. According to the RBI, such measures are to ensure that the country consumes less physical gold as the consumer craze for the yellow metal is putting the nation's external trade at risk.
India imported $45 billion worth of gold in 2011-12, an increase of 3% year-on-year although physical imports fell 17% to 854 tonnes from 1,034 tonnes due to high international prices which was amplified by the weak Indian rupee. Also, the Government had doubled the import duty on gold to 4% to curb import of the precious yellow metal, since India is the world's largest importer and consumer of the precious metal. Rough estimates suggest Indian household possesses some 18,000 tonnes of gold. About 23% of all gold imported was for investment in India while 75% of jewellery is treated as investment, according to World Gold Council data.
Moreover, RBI's Financial Stability Report said that banks' import of gold coins for retail sale to households has risen from just 1% of total imports by banks in 2009-10 to 3.8% in 2011-12. It expressed concerns over the issue as households investing in the metal could reduce the availability of funds for the financial sector and thus shrink economic growth.
We are of the view that reducing gold imports will go long way in reducing the current account deficit (CAD) as gold imports constitute around 10% of the total imports. However, the RBI’s attempt to reduce the consumption of the precious yellow metal in the country may not achieve a thumping success due to gold being a traditional asset having a lot of emotional value attached to it. May it be a marriage of children or their birthday or their marriage anniversary, gold jewellery has always been the preferred choice of consumers in the Indian sub-continent. Nonetheless, even if such an instrument is introduced, it should have some tax incentive for the subscribers in order to make it a lucrative investment proposition.
After four months of deliberations between the mutual fund industry, the Finance Ministry and the capital market regulator - Securities and Exchange Board of India (SEBI), on whether to include mutual funds (MFs) in Rajiv Gandhi Equity Savings Scheme (RGESS); it has now been finally decide by the Finance Ministry that the mutual funds will remain out of the ambit of RGESS, dashing all hopes of the MF industry to find a replacement for their Equity Linked Savings Scheme (ELSS).
It is noteworthy that earlier, Mr U.K. Sinha, Chairman of SEBI too had backed the mutual fund industry’s demand, where on different forums, recommending that small and first-time investors should enter the stock market only through mutual funds, since they did not have adequate resources to make informed decisions. The mutual fund industry body - Association of Mutual Funds in India (AMFI) too was lobbying hard to get its hands on the RGESS, but all in vain. We at PersonalFN do not believe it to be a good move by the finance ministry and to read how it will impact the investors please click here.
Buying a house property involves a lot of money, energy, knowledge of the surroundings (of the property involved) and the most important is the developer of the property with whom you deal. Yes, it is a herculean task to buy a house property in a city like Mumbai, Delhi, Kolkata, Pune, Bengaluru etc with so many procedures and documentation involved right from visiting the site of the building which is under construction or to be constructed, to getting an approval for a home loan from a housing finance company or your bank. And to top it up there are bureaucratic hurdles and rampant corruption which shoots up your total cost of buying your dream home. This state of affairs in buying a property can be attributed to the lack of a regulator (like SEBI for capital markets and IRDA for insurance industry) for the housing sector.
But now citing this predicament for the homebuyers, the Maharashtra State Assembly recently passed the Maharashtra Housing Regulation and Development (MHRD) Bill, which will pave the way for the establishment of the country’s first regulator for the housing sector. To know how the MHRD Bill will benefit you, please click here.
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- Reliance Mutual Fund has filed an offer document with the SEBI for its maiden Infrastructure Debt Fund (IDF) targeted primarily at the long-term funds of super-rich individuals, foreign institutional investors, local institutions and corporate investors, the scheme will not accept investments below Rs 1 crore. Each unit of this mammoth fund will be priced at Rs 10 lakh.
We believe that infrastructure is the key to propel growth in the country. The infrastructure sector has huge potential but requires large funding with a long gestation period. However, the large funding requirement has been impeded by high cost of borrowing, currency depreciation, fuel shortages, etc. Moreover, a number of infra projects hit a road block due to vested interests of political parties.
So, from a holistic point of view it would be wise to invest in IDFs only when there are strong signals from the government to quicken the pace of reforms which in turn would result in sufficient fuel supply, credit supply, and boost confidence amongst the investors.
- In order to penalise companies saddled with adverse auditor remarks, the Government is considering an amendment in the Companies Act, 1956. Earlier the SEBI had initiated a dialogue with the Ministry of Corporate Affairs (MCA) on bringing in changes in the Act with respect to provisions relating to restatement of financial accounts of listed companies that is now considered mandatory if the auditor has a different opinion. While changes in the Listing Agreement can be initiated directly by SEBI, amendments to the Companies Act can only be proposed by the MCA. The changes will have to be ratified by the Parliamentary Standing Committee which is currently studying the proposed Companies Bill of 2011.
In our opinion, such checks and measures will minimise instances like the Satyam Computer Services Ltd. scandal. Moreover, the listed companies will now be more vigilant while maintaining their books of accounts.
Debt Fund: An investment pool, such as a mutual fund or exchange-traded fund, in which core holdings are fixed income investments. A debt fund may invest in short-term or long-term bonds, securitized products, money market instruments or floating rate debt. The fee ratios on debt funds are lower, on average, than equity funds because the overall management costs are lower.
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