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| August 08, 2014 |
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| Weekly Facts | | | Close | Change | %Change | | BSE Sensex* | 25,329.14 | -151.7 | -0.60% | | Re/US$ | 61.23 | -0.67 | -1.11% | | Gold Rs/10g | 28,600.00 | 450 | 1.60% | | Crude ($/barrel) | 103.79 | -0.91 | -0.87% | | FD Rates (1-Yr) | 8.00% - 9.00% | Weekly change as on August 07, 2014
*BSE Sensex as on August 08, 2014 |
Impact 
Film stars have a big fan following. They popularise many fashion trends. Be it a new hairstyle or a dance step, fans follow their idols. To some extent, this goes true even in case of investing. When a legendary investor invests in some unknown company, many investors follow him without even bothering to know about the business of that company. Similarly, when an expert market commentator predicts market direction, many of us take it for granted that markets would move accordingly. For those who are doing it frequently, there's some news.
What is the news?
Life Insurance Corporation of India (LIC) is going invest around Rs 3 lakh crore in capital markets this financial year. Although majority of investments would be in debt, a significant portion would be allocated to equity. Out of its total investment of Rs 3 lakh crore, about 20% i.e. Rs 60,000 crore may be invested in Indian equities.
Should you follow the insurance giant?
It may not be harmful always to follow your favourite actor or actress but taking similar approach to your investments is most likely to be harmful to you. PersonalFN is of the view that, objectives of two different investors can be different. Moreover, if the investor is institutional, the approach to investments can be totally different.
In the past, LIC participated in disinvestment programme in a big way. It wouldn't be any exaggeration if someone says it bailed out many disinvestment issues of the Government in the past. LIC takes a very long term calls on companies it invests in, it has to service liabilities for a very long term, say 30 years. It bids for significant stakes in companies. PersonalFN believes instead of following LIC, you should follow your asset allocation.
PersonalFN is of the view that, risk appetite, time horizon and most importantly life goals are the important considerations for taking any investment decision. PersonalFN recommends its investors not to follow any star investor or a theme or any other investment fad. Disciplined approach, personalised investment plan and vigilant monitoring is what you need to go closer to achieving your life goals.
Will markets rise?
Considering the size of its investments, moves of LIC can have significant impact on markets. However, one must consider impact of other macro-economic variables and dominance of FIIs in Indian equity markets. Therefore, it can't be said with certitude that market will rise. LIC too would look at valuations before investing. Moreover, global events are beyond the control of any institution. Thus in case FIIs pull out of India in a big way, investments made by LIC may not be good enough to prop up the markets.
Do you think markets will surge if LIC invests aggressively in equities? Share your views
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Impact
Many of us take out loans for various reasons. There are several factors we look at while borrowing. The first and foremost is the rate at which we are being offered a loan. When we are borrowers we want rates to be lower, but if we are lenders we want higher rates on our deposits. When the base of lenders is large they have a lesser bargaining power as there is a lesser chance of monopoly.
Like us, Government of India is also a borrower as well as a lender. This has put it in a slightly awkward position these days. When it issues debt i.e. when it borrows, the investors are largely institutional and Foreign Institutional Investors (FIIs) in particular.
Narrower the base of investors more dependant is the borrower. Considering India's current financial position, clouds of a sovereign rate cut by independent rating agencies are looming over the nation. A cut in rating means borrowing cost for the Government would go up. This leads to multiple problems; higher interest payments, lesser amount available for developmental projects and so on.
If public sector banks invest aggressively in G-sec market, there would be lesser funds available with them for non-government borrowers. This too is not desired.
What is the solution?
Recently, while addressing a press conference, RBI Governor mentioned that, RBI is considering ways to improve retail participation in the G-sec market. The RBI is believed to be working on facilitating mechanism for increasing retail participation in the G-sec market.
PersonalFN is of the view that, this appears to be a cautious effort of RBI to reducing dependence on foreign capital and keeping the borrowing cost for the Government relatively stable.
Having said this, PersonalFN believes, the Government and the RBI have to be on the same page for managing debt effectively. In India, it has been advised that, Indian Government should manage its own debt through Debt Management Office (DMO). Globally, there is a clear demarcation between debt management and the monetary management. This issue has been discussed several times at various platforms. While RBI talks about the need for deepening the sovereign bond market, Government is discouraging retail participation by changing tax rules. PersonalFN will keep writing on this matter as and when there are new developments.
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Impact
Indians are conservative when it comes to spending as they are taught to save money conventionally. But at national level, India finds it difficult to manage its income and expenditure. The Indian Government often struggles to keep its expenses under check. Growth in the income of the Government is limited and there are many claims on the revenue as the Government has to achieve a number of socio-economic objectives. The shortfall in the revenue of the Government over its expenditure is called fiscal deficit. At present it is mounting. At 2.98 lakh crore, the fiscal deficit has touched 56.1% of its full year target for 2014-15 in the first quarter itself.
The outgoing Finance Minister Mr P. Chidambaram had used accounting tactics to contain fiscal deficit number for the fiscal year 2013-14. Oil subsidies nearly worth Rs 35,000 crore were deferred and passed on to the next Government. Moreover, in the interim budget this February, he also proposed to lower the fiscal deficit to 4.1% in the financial year 2014-15. When BJP led NDA took over from UPA II, it was believed that, the new Finance Minister, Mr. Arun Jaitley may revise the fiscal deficit target upwards.
Now, although the NDA Government was not bound by the fiscal consolidation roadmap unveiled by the UPA Government in 2012, Mr. Jaitley has reaffirmed the fiscal deficit target of 4.1% of GDP. You see, independent rating agencies are closely watching the progress on ground as there have been talks of downgrades on sovereign rating of India. So, it remains to be seen whether India can manage to achieve ambitious fiscal deficit target.
Fiscal deficit woes: receipts lag expenditure
Actual figures are for the April-June quarter of 2014-15
Receipts include tax receipts, non-tax revenues and non-debt capital receipts
Expenditure include plan and non-plan expenditures
(Source: Business Standard; PersonalFN Research)
As depicted in the graph, actual expenditure has exceeded the actual receipts by around Rs 2.98 lakh crore, which comes to be around 56.1% of the full year target.
To read more about this story, please click here.
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Impact
Yesterday (on August 5, 2014), the Reserve Bank of India (RBI) kept policy rates unchanged in 3rd bi-monthly monetary policy for 2014-15. Such a move was very much on the expected line, especially when stickiness in inflation yet remains.
You see, after an initial slow progress of monsoon and uneven spatial distribution, while the deficiency has narrowed down to 19% (as per the latest report on the Indian Meteorological Department) from 21% earlier, the fears are not entirely dispelled yet. Prices of vegetable, fruits and protein based items are sailing high and therefore the RBI has decided to continue closely vigil on inflation developments. The central bank remains committed on disinflationary path of taking Consumer Price Index (CPI) inflation to 8.0% by January 2015 and 6.0% January 2016. The RBI has said, while inflation at around 8.0% in early 2015 seems likely, it is critical that the disinflationary process is sustained over the medium-term. Thus in this backdrop, it appears unlikely that RBI would reduce policy rates this calendar year.
But banks may start cutting rates on fixed deposits soon...
Bankers are of the view that deposit rates will start coming down before the lending rates do. Recently in the Business Standard, Mr CVR Rajendran, the CMD of Andhra Bank was quoted saying, "While deposit rates will apply immediately to the deposits that come for re-pricing, there has to be a lead time to adjust the lending rates."
To read more about this news and PersonalFN's views on it, please click here.
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- Insurance companies may soon start getting a good hold of rural market if the recent initiative taken by Insurance Regulatory and Development Authority (IRDA) brings about desired results.
Early this month, IRDA launched insurance services for rural areas through Common Service Centres (CSCs).
What is CSCs?
Many Indian villages miss access to a number of essential services. To improve the delivery of public services, the need was felt to make an effective use of Information and Technology. Computerisation of government departments may be the first step taken in the right direction. Taking it further, National e-Governance Plan (NeGP) has also been launched. The ultimate objective of NeGP is to bring public services closer home to citizens, as articulated in the Vision Statement of NeGP.
As a part NeGP, Common Service Centres (CSCs) have been set up. Common Services Centers (CSCs) are Information and Communication Tools (ICT) enabled front end service delivery points at the village level for delivery of Government, Financial, Social and Private Sector services in the areas of agriculture, health, education, entertainment, FMCG products, banking, insurance, pension and utility payments among others.
For improving the penetration of insurance services in remote areas and villages, IRDA had issued guidelines for utilising CSCs platforms in September 2013. Based on those guidelines IRDA started promoting insurance lately.
PersonalFN is of the view that, while such initiatives work in the national interest, it is important to focus on needs of end customers. It is desirable to increase penetration of insurance in villages but ultimately it is equally important that they are not sold products they may not benefit from. PersonalFN has always believed that, life insurance should be bought only as a hedge against risks to life. Similarly, while buying health insurance, claim settlement record should matter more than just premium.
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Sovereign Debt: Bonds issued by a national government in a foreign currency, in order to finance the issuing country's growth. Sovereign debt is generally a riskier investment when it comes from a developing country, and a safer investment when it comes from a developed country. The stability of the issuing government is an important factor to consider, when assessing the risk of investing in sovereign debt, and sovereign credit ratings help investors weigh this risk.
(Source: Investopedia)
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Quote : "You have to keep your priorities straight if you plan to do well in stocks." - Peter Lynch
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