  | | December 03, 2010 |  |
Impact 
The Reserve Bank of India (RBI) is planning to put a ceiling on various charges (many of them exorbitant) levied by banks to customers for basic services. Hence, retail customers can now heave a sigh of relief from the irrational charges levied by banks for not adhering to certain rules and regulations.
Some banks have been charging as high as  750 (taxes extra) for failure to maintain a minimum balance in savings accounts. Similarly, pre-paying home loans can attract a penalty of 2% on the outstanding amount. Some of them (banks) charge a flat fee of 50 for demand drafts, even in rural areas where drafts are generally not in high denominations. Depositing cash at a branch other than the base branch is charged 100, irrespective of the amount deposited. Some banks charge 100 to issue duplicate bank statements.
At present the only service charge that has been capped is cash withdrawal from other banks' ATMs beyond five transactions at 20. And this was done by RBI last year, as banks charged as much as 55 for cash withdrawal from non-base bank ATMs.
Now the National Housing Board (NHB) has scrapped the pre-payment penalty on pre-closure of housing loans, provided the borrowers pre-pay the loan out of their own sources. Thus, one cannot take another loan to pay off a previous loan amount.
In our opinion RBI is planning to take a step in the right direction by rationalising the various penalty charges levied by banks on the customers. This would not only be a boon to customers but may also bring uniformity and efficiency in bank's administration.
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Impact
After showing a robust growth (of 8.8%) in GDP (Gross Domestic Product) for Q1 of FY 2010-11, the Indian economy continued to be on the growth path by now expanding marginally to 8.9% in Q2 (July 2010 to September 2010) of FY 2010-11.
The GDP for Q2 of FY 2010-11 (at the constant prices of 2004-05) is estimated at 11,46,637 crore, as against 10,53,057 crore in Q2 of 2009-10.
 (Source: CSO, PersonalFN Research)
The Q2 GDP's upward movement can be attributed to the growth in the industrial sectors (which account for 20% of the overall GDP) due to the lower inflation numbers under the new series.
During the Q2 of FY 2010-11, the manufacturing activity grew at 9.8% (8.4% in Q2 of FY 2009-10), while mining & quarrying and construction activity grew at lower pace of 8.0% (10.1% in Q2 of FY 2009-10) and 8.8% (8.3% in Q2 of FY 2009-10) respectively.
Even trade, hotels, and communication services rose by a handsome 12.1% (8.2%. in Q2 of FY 2009-10). But financial, insurance and real estate services restrained the growth by expanding only 8.3% (11.3%. in Q2 of FY 2009-10).
Agriculture, forestry and fishing reported its fastest growth in 11 quarters expanding by 4.4% in Q2 of FY 2010-11, as compared to 0.9% growth in the same period a year ago.
Reacting to the economic growth rate Finance Minister, Mr. Pranab Mukherjee said, "We may be confident that at the end of this year, the GDP growth will not be less than 8.70% - 8.75%... It may be more."
In our opinion, despite the lackluster IIP numbers reported in the last two consecutive months (6.9% in August 2010 and 4.4% in September 2010), the Q2 GDP numbers distinctly indicates that the Indian economy is on a growth path, which would stream inflow of capital into our country.
Also, that the industrial & service sector is contributing in a major way to the country's economic growth, reveals the fact that we are now an "industrial and service oriented" economy and not only an "agrarian" dependent economy. Hence given that, we may consequentially see growth in such sectors participating in the economic development. But to take the advantage of such robust economic situation, in our opinion it would be ideal to go in for diversified equity funds rather than thematic funds, because they (diversified equity funds) can provide your portfolio with the required margin of safety, as the fund manager has the privilege in such funds to take appropriate sector and stock bets therein, as per the opportunities prevailing from time to time. | Impact 
The Reserve Bank of India (RBI) decreased the Statutory Liquidity Ratio (SLR) to 23% (from actual 25%) for banks on a temporary basis till January 28, 2011. The announcement was made by the central bank as a measure to combat the liquidity crunch faced by banks since the past few months, and also not ruling out the possibility of a deeper crunch liquidity crunch, (especially in the money market next month), due to the advance tax payments scheduled in next month.
Thus now banks can reduce their holdings in Government securities by 2% without being penalised for not maintaining the actual SLR of 25%. In other words it also means that banks can now hold only 23% of their Net Demand & Time Liabilities (NDTL) in the form of Government securities; and any level (of SLR) above 23% will entitle them to pledge their securities to raise short-term money.
Reacting to this move Mr. Ashish Vaidya, Head of Fixed Income Currencies and Commodities at UBS India said, "It is a welcome measure which was on the cards and it will reduce systemic risks arising out of liquidity shortfall. But since the measure is temporary and does not really change the liquidity position, I don't expect rates to move by more than two to five basis points."
In our opinion the move taken by the RBI, is prudent as it will reduce the systemic risk caused due to the liquidity crunch. But a noteworthy limitation is that, banks can borrow from RBI as long as they have surplus government securities to offer as collateral.
As an immediate and temporary impact of this we may also see 10 - Yr G-Sec yields softening, which may thus push the price of 10 - Yr G-Secs upwards. As far as policy rates (repo rate and reverse repo rate) are concerned, we don't expect the central bank raising them in the second quarter review of monetary policy (scheduled on December 16, 2010), as IIP numbers have slowed down (4.4% in September 2010), along with inflation too mellowing down to 8.58% in October 2010 (from earlier 8.62% in September 2010).
| | | Weekly Facts |
| Close | Change | %Change | | BSE Sensex* | 19,966.93 | 830.3  | 4.34% | | Re/US$ | 45.29 | 0.2 | 0.51% | | Gold /10g | 20,525.00 | 155.0 | 0.76% | | Crude ($/barrel) | 88.56 | 2.8 | 3.25% | | FD Rates (1-Yr) | 6.50% - 7.50% | Weekly change as on December 02, 2010
*BSE Sensex as on December 03,2010 |
In this issue
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In an interview with DNA Money, Mr. A. Balasubramanian, Chief Executive Officer (CEO) of Birla Sun Life Asset Management Company shared his view on the effects of scams on the capital markets, Foreign Institutional Investor (FII) flows in India and RBI monetary policy.
Mr. Balasubramanian believes that unearthing scams like these help in making the system more transparent and increasing accountability. Thus in a way, according to him it helps in cleaning up the system. He's also of the opinion that the current correction in the market is healthy, and there has been no change in fundamentals as they continue to remain strong. However he does not rule out the fact that the current volatility may prevail for some time more.
Talking about the FII flows Mr. Balasubramanian explains that historically November and December period are lean periods for markets with FII flows slowing down towards the end of the calendar year. He also mentioned that there were expectations of yields going down and deflationary scenario emerging post QE2, but over last few weeks opposite has happened, where the yields have gone up leading to a pause in inflows. But he's of the view that long term outlook of India remains good.
Mr. Balasubramanian thinks, the probability of further rate hike by RBI is nearly zero. However, he says RBI will keep doing suitable monetary adjustments to reduce risks.
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Sundaram Mutual Fund launched "Sundaram Capital Protection Oriented Fund", a three year closed-end debt scheme, with a capital protection orientation.
According to the offer document, the scheme's investment objective is "to seek income and minimise risk of capital loss by investing in a portfolio of fixed income securities. The scheme may invest a part of the assets in equity to seek capital appreciation."
Hence the Asset Allocation pattern to be followed by the fund is as under:
 *Exposure to derivatives will be limited to 50% of the net asset
A noteworthy point here is that scheme is "oriented towards protection of capital" and does not guaranteed returns.
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Statutory Liquidity Ratio (SLR) : SLR is that amount which a bank has to maintain in the form of cash, gold or approved securities. The quantum is specified in terms of percentage of the total demand and time liabilities of a bank.
(Source:PersonalFN Research) |
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- The India Infrastructure Finance Company Limited (IIFCL) may soon get an NBFC (Non-Banking Finance Corporation) status as the Government intends to bring the dedicated infrastructure lender under the regulatory oversight of RBI. The move is aimed at providing greater clarity to the company's business, subjecting IIFCL (earlier unregulated) to some checks and balances.
- Provident Fund withdrawal for overseas workers employed in the country has become stricter, prohibiting them from taking back the PF money until they are 58 years of age or are incapacitated.
According to an amendment carried out by the Labour Ministry, An international worker may withdraw the full amount standing to his credit in the Fund:
- On retirement of services in the establishment at any time after the attainment of 58 years
- On retirement on account of permanent and total in capacity for work due to bodily or mental infirmity
- Government of India will soon decide on the successor for the post of SEBI Chairman, with a selection panel scheduled to hold final interviews on December 3, 2010.
Mr. U. K. Sinha, AMFI (Association of Mutual Funds in India) Chairman and R. Bandyopadhyay, Corporate Affairs Secretary are said to be the top contenders for the post amongst those short-listed.
- Mr. Montek Singh Ahluwalia, Deputy Chairman of the Planning Commission of India is likely to succeed Dominique Strauss-Kahn as the next chief of International Monetary Fund (IMF). Other likely candidates are Mohamed A El-Erian, the American-born son of an Egyptian diplomat and an economist who leads the giant bond investor Pimco; Arminio Fraga and Guillermo Ortiz, former heads of the central banks of Brazil and Mexico respectively.
Also a noteworthy point is, as the Emerging market economies share in the IMF is likely to rise more than 45.5% post the reforms, the IMF Chief's position is speculated to be from the Emerging countries.
- Housing Development Finance Corporation Ltd. (HDFC Ltd.), India's largest housing finance company is planning to foray into the education sector. HDFC will look at small towns to either set up schools or take over defunct boarding schools.
HDFC Chairman, Mr. Deepak Parekh said, "The opportunity is huge, as the need for quality education will only increase. Parents in even rural areas want to give their children a good education. Higher education is also on our radar."
- The Income Tax (I-T) department has introduced a new number for taxpayers called the Document Identification Number (DIN) on the lines of numbers like PAN and TAN. The DIN will have to be quoted on every income-tax related communication, including returns to be filed next year for the financial year 2010-11. The 'Aykar Sampark Kendras' will hand out the DIN from this month
According to section 28(2)(B) of the I-T Act that deals with DIN, if the document sent to the tax authority does not bear this unique computer-generated number then such document, letter or any correspondence shall be treated as invalid and shall be deemed never to have been received.
- Bharat Heavy Electricals Ltd. (BHEL), India's largest power equipment maker has appointed CRISIL as a consultant for setting up a Non-Banking Finance Company (NBFC). BHEL has cash reserves of over 10,000 crore and wants to utilise a part of it for lending to the infrastructure and power sectors.
- Lion Fund Management Co. Ltd. (a China based Asset Management Company) won approval from China Securities Regulatory Commission (CSRC) to launch a first of its kind Gold Fund in China. Lion Global Gold Fund will invest in gold-backed Exchange Traded Funds (ETFs) overseas.
Such a fund was approved citing, inflation fears might fuel demand for the yellow metal (Gold).
- The six core industries - crude oil, petroleum refining , coal, electricity, cement and finished steel (combined weight of 26% in the Index of Industrial Production) grew 7% in October 2010 hitting a 7-month high after touching a low of 2.7% in September 2010. This indicates that the industry could revert to high growth rates soon after two disappointing months.
- Finance Minister, Mr. Pranab Mukherjee cautioned emerging economies from huge capital inflows which could ultimately lead to financial instability.
Mr. Mukherjee added, "The emerging economies, though faced with brighter growth prospects, are confronting financial instability caused by international capital flows. We need to design policies in a manner that the redistribution process does not feed off public finances and the growth process itself is not hampered"
- India's fiscal deficit narrowed down by 33.76% year-on-year to 1.62 lakh crore in April - October 2010 from 2.45 lakh crore for the same period a year ago.
The decrease in the fiscal deficit can be attributed to better-than-expected revenue from the sale of spectrum and robust tax collections.
- India's manufacturing sector grew at it fastest pace in six months in November 2010 at 58.4 (57.2 in October 2010) as recorded by the HSBC Purchasing Manager's Index (PMI). The manufacturing activity picked up on the back of increased orders in October and November 2010.
New orders grew at the strongest rate in four months and companies also reported a significant rise in new export business during the month. Growth in export orders rose sharply from October's eleven-month low to grow at the fastest rate since January.
- Infrastructure major Larsen & Toubro (L&T) is planning for an Initial Public Offering (IPO) for its subsidiary L&T Finance, by January 2011.
Mr. A M Naik, Chairman of L&T said, "We have a date in mind of January at this point, but we will also wait for the right market conditions. The way the market went down in the last two weeks, we thought whether it would be the right time, but the market seems to be coming back. Therefore, we may maintain our original date of January sometime." | | | | Disclaimer: This newsletter is for Private Circulation only and not for sale, is only for information purposes and Quantum Information Services Limited (PersonalFN) is not providing any professional/investment advice through it and, does not constitute or is not intended to constitute an offer to buy or sell, or a solicitation to an offer to buy or sell financial products, units or securities. PersonalFN disclaims warranty of any kind, whether express or implied, as to any matter/content contained in this newsletter, including without limitation the implied warranties of merchantability and fitness for a particular purpose. PersonalFN and its subsidiaries / affiliates / sponsors / trustee or their officers, employees, personnel, directors will not be responsible for any direct/indirect loss or liability incurred by the user as a consequence of his or any other person on his behalf taking any investment decisions based on the contents of this newsletter. Use of this newsletter is at the user's own risk. The user must make his own investment decisions based on his specific investment objective and financial position and using such independent advisors as he believes necessary. PersonalFN does not warrant completeness or accuracy of any information published in this newsletter. All intellectual property rights emerging from this newsletter are and shall remain with PersonalFN. This newsletter is for your personal use and you shall not resell, copy, or redistribute this newsletter, or use it for any commercial purpose. | | |