S&P BSE Sensex*	Re/US $	Gold Rs/10g	Crude ($/barrel)	FD Rates (1-Yr)
20893.57 | 861.23 4.30%	44.35 | 0.2 0.38%	19,645.00 | 335.0 1.73%	85.49 |2.7 3.24%	6.50% - 7.25% /td>

 

 

 

In India gold is considered as a harbinger of prosperity and so people never mind buying gold at any price; and that's especially true on festive occasions like Dusshera and Diwali.

According to a senior official of the World Gold Council, India's gold sales during the biggest festival week (of Diwali) may rise by 40% from a year ago as consumers may pick up the precious yellow metal in anticipation of further gains from the current levels.

According to Mr. Ajay Mitra, Managing Director of the World Gold Council India and the Middle East, so far demand has been consistently strong, and even the period of Shradh (inauspicious period) did not take away sheen of gold. He expects gold imports to breach 2007's record of 770 tonne and rise to as much as 800 tonne in 2010.

At present India is world's largest gold consumer and the gold market too is well regulated in India and the federal Government has allowed 23 state-run and private banks to trade in bullion at the wholesale and retail levels. Jewellers also sell coins and bars through their retail outlets.

We believe that the confidence of people in gold as an asset class will never fade away. Also, gold is considered as a sign of prosperity by most of the people. The fact that gold provides a good hedge against inflation and economic turmoil is now becoming common among people. So, in that sense there is a combination of economics and emotions of people involved while buying the precious yellow metal, which is making it look inexpensive to buy even at these elevated levels.

We believe investors should keep allocating 5% - 10%, of their investible amount in the precious yellow metal, and stay invested with a long-term investment horizon of 10 - 20 years.

Multibagger Stock Ideas Claim this Free & Exclusive Guide Today. Act Now! CLICK HERE to know more...

RBI combating inflation, but promotes growth

The Employees Provident Fund Organisation (EPFO) has taken another step towards employee welfare. Now, the EPFO in its review next year is considering raising the cover under its deposit-linked insurance scheme to 100 times the basic salary for an employee in organised sector.

Currently, the scheme offers free life insurance of 20 times an employee's basic pay with a ceiling of 6,500. If the life insurance cover is raised to 100 times then an employee will be covered for an insurance of 650,000.

Central Public Fund Commissioner Mr. Samirendra Chatterjee said, "There is a possibility that we could increase it to 100 times the basic pay instead of 20 times allowed at present."
 

In our opinion the EPFO has taken a step in the right direction. Employees stand to benefit immensely if such a proposal is implemented as a good amount of life insurance will be made available at an economical rate and without the hassles of making periodic premium payment by the employee. This is because premium payment for the employees benefit would be done directly by the employer.

RBI combating inflation, but promotes growth

 

In order to combat inflation which is still in the uncomfortable zone (8.62% in September 2010), the Reserve Bank of India (RBI) raised the repo rate as well as the reverse repo rate by 25 basis points each in its second quarter review on monetary policy 2010-11. Hence now, the repo rate is placed at 6.25%, while the reverse repo at 5.25%.

The major changes announced by the central bank are as under:
 

• Cash Reserve Ratio (CRR) is left unchanged at 6%


• Bank Rate is left unchanged at 6%


• Housing loans capped at 80% of the value of a property (earlier they were capped at 85% of the value of the property)


• Risk weight for home loans above 75 lakh hiked to 125 basis points (earlier risk weight was 100 basis points)


• Provisioning for teaser rates on housing loans rose to 2% (earlier provisioning for the same was 0.5%)

 

After a series of six consecutive rate hikes since March 2010, the RBI has now hinted at a pause in the rate hike cycle by saying "the likelihood of further rate actions in the immediate future is relatively low...

The RBI Governor D Subbarao also said, "We have reached the normal levels on interest rates. Further action will be driven by the growth and inflation situation and implications of external developments."

We believe that RBI will continue adopting the calibrated exit path by increasing policy rates by 25 basis points if inflation still continues to climb, provided growth is intact. But a noteworthy point here is this was the sixth consecutive hike in policy rates, where so far both repo and reverse repo rates have been increased by 125 basis points and 175 basis points respectively. Hence, taking this into account, the intermediate rate hike (in the next mid-quarter review of monetary policy scheduled for December 16, 2010) looks unlikely.

As an impact of the policy rate hike, we don't see lending rates stepping up, at least prior to this festive season.

 

 

In an interview with CNBC-TV18, Mr. Uday Kotak, Vice Chairman and Managing Director of Kotak Mahindra Bank shared his views on the second round of quantitative easing in United States and growth prospects in global as well as Indian markets.

In his opinion on the quantitative easing by United States, the world is divided. He thinks that there's a world which believes that the Fed needs to do a lot more quantitative easing, and there's another which believes that the Fed will do less than what most people think. He believes if the first happens, there will be gush of liquidity around the world, which will put pressure U.S. dollar and will lead to significant flows into the emerging markets and commodities. And if the second happens markets could see some correction.

On the prospects of growth in the global and Indian markets, Mr. Kotak is of the view that the world growth is very sluggish, and therefore he doesn't see growth momentum in most parts of the world except for China and India. He believes that the domestic (Indian) economy is in good shape, but the capital market valuations will be dependent on the size of quantitative easing in U.S. Hence he thinks, smaller size of quantitative easing in U.S., will affect the markets negatively whereas larger size of quantitative easing (in U.S.) will bloat valuations as more money would flow in. Moreover, he thinks that the foreign money is chasing growth and India is producing growth.

 

 

 

 

Quantitative Easing : A government monetary policy occasionally used to increase the money supply by buying government securities or other securities from the market. Quantitative easing increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity

 

QUOTE OF THE WEEK
"Money never starts an idea; it is the idea that starts the money." - W. J. Cameron

 

************

 

 

 

 

• The core sector comprising 26.68% weight in the Index of Industrial Production (IIP) grew by 2.5% in September 2010, its slowest pace of expansion in 18 months. The growth was dragged down by a decline in refining of petroleum products and coal production.
  
  Mr. Shanto Ghosh, Principal Economist with Deloitte India said, "Given a more than 25 per cent weight of these core industries in the overall IIP, I expect a dismal result in the IIP data for September. This data add to the growing concern in the slowdown of industrial activity in India."


• India slipped to the 88th position on the World Prosperity Index, way below China (at 58th position) due to poor healthcare and education systems coupled with weak entrepreneurial infrastructure.
  
  According to the report, "The prosperity Index finds that India has extremely poor healthcare, failing to prevent systemic diseases or malnourishment, it has a weak entrepreneurial infrastructure, a poorly-developed education system, and extremely low levels of social capital."


• According to the Planning Commission, the investments in key sectors like roads, railways and ports will be significantly lower in the 11th Five year Plan (2007-11). The actual investments in these three sectors are likely to be about 21% lower at 5.20 lakh crore than the originally estimated amount of 6.64 lakh crore in the 11th Plan period, ending March 2012.


• India's Purchasing Manager's Index (PMI) for manufacturing, as measured by HSBC rose to 57.2 for October 2010 from 55.1 for September 2010.
  
  Fredric Neumann, Co-Head of Asian Economic Research at HSBC said, "After some bouncy data in the last few months, India's economy has picked up steam again."


• The Industrial Finance Corporation of India (IFCI) is considering applying for banking licence, once Reserve Bank of India (RBI) comes out with its norms.
  
  IFCI CEO and MD - Mr. Atul Kumar Rai said, "Once RBI comes out with norms on banking licence, we will examine them and consider applying for it."