IIP numbers for May, cool down despite the heat!   Jul 16, 2010

Weekly Facts
	Close	Change	%Change
BSE Sensex	17,909.46	257.7	1.46%
Re/US$	46.61	0.3	0.55%
Gold Rs/10g	18,440.00	75.0	0.41%
Crude ($/barrel)	75.53	1.9	2.64%
FD Rates (1-Yr)	5.00%-6.50%

Impact

After showing a good run-up from October 2009 onwards, the Index of Industrial Production (IIP) slowed down to 11.5% in May 2010 (data released in July 2010). The numbers for April 2010, were also revised downwards to 16.5% from the original 17.6%.

Nevertheless, this the eighth consecutive month that the IIP numbers are in double-digits helped by:

• Robust domestic consumer demand
• Expanding exports
• Higher infrastructure spending

According to the quick estimates released by the Central Statistical Organisation (CSO), the main reason for the slow down in the IIP growth was on account of:

• Decelerating manufacturing growth - The manufacturing index, which is the principal component of the IIP, decelerated to 12.3% in May, when compared to 17.9% in the previous month (April 2010).
  
   
• Loss of growth in sectoral output - Output of capital goods grew only at 34.3% in May 2010, as compared to 69.9% in the previous month. Similarly, the output of consumer durables and consumer non-durables also slowed down to 23.7% (37.0% in the previous month) and 2.4% (6.6% in the previous month) respectively, with the overall growth in consumer goods also going down to 8.2% (14.5% in the previous month).

We believe that despite the deceleration in growth, the IIP numbers are yet signalling robustness of the Indian economy and also support the Government's expectations of an 8.5% growth in Gross Domestic Product (GDP) for the current fiscal year. Moreover, in our opinion, the deceleration in IIP numbers may not preclude Reserve Bank of India (RBI) from increasing policy rates by 25 basis points in the next policy review meeting (scheduled for July 27, 2010).

Impact

The Insurance Regulatory and Development Authority (IRDA) plans to review the returns that an insurance company guarantees on its pension plans.

The insurance regulator intends to do so, on the basis of:

• Economic situation in the country
• Interest rate movements

"Whenever there is a macroeconomic change and the Reserve Bank of India revises key policy rates, we may look at revising the prescribed return", an IRDA official said. He also added, "Depending on interest rate movements, the returns would be changed more than once a year".

However as of now, the insurance regulator plans to stick to its order asking life insurers to guarantee a minimum 4.5% return on Unit-Linked Pension Plans (ULPPs). This minimum guarantee of 4.5% return is pegged on three broad parameters:

• Savings bank rate
• Reverse repo rate
• Yield of 10-Yr Government Bonds

In our opinion, while the idea of making the "minimum guarantee return rate" dynamic, is good from a pure economic sense, this may actually make it costlier (in terms of the premium paid) for the buyers of such products. Moreover, actuaries at life insurance companies may find it difficult to manage long-term guarantees because there are not many long-term investment options available. Presently, the longest maturity government bond has tenure of 30 years.

Impact

The Securities Exchange and Exchange Board of India (SEBI) has asked the two depositories in the country - NSDL and CDSL, to offer "no-frills" demat accounts to retail investors who do not trade regularly. SEBI’s aim in doing so, is that it felt that not having a demat account is an entry barrier in cases where:

• A fixed deposit holder in a PSU (Public Sector Undertaking) bank may want to invest in the retail bond issue of a state-owned bank or financial institution
• Semi-literate or illiterate workers in state-owned companies may receive shares of their employers in divestment programmes, and
• A person who never trades in shares inherits shares through transmission

SEBI’s main intention behind asking depositories to offer such demat accounts was to widen the retail investor base. Presently, there are 1.7 crore demat accounts, but a number of them are inactive.

On this move, a senior official of one of the depository said, "Both the depositories will sit together and decide on the issue. There is also a need to take depository participants into confidence".

We endorse SEBI’s intention of widening the retail investor base. But, in our opinion just offering "no frill" demat accounts may not ensure complete retail participation in the capital markets. For investors to participate in the capital markets, more awareness should be spread through investor education programs.

While implementing this move, we also feel that depositories may also put restriction on "no frill" accounts in terms of value and/or volumes, which in turn will defeat the purpose of this whole exercise.

INTERVIEW

In an interview with the Business Standard, Mr. Raj Bhatt, Vice-Chairman and CEO of Elara Capital (a full-service investment bank based in London) shared his view on the risk-aversion levels in the global market place and the impact on the Indian stock markets and on the interest rate scenario in India.

On the risk-aversion level in the global market place and its impact on the Indian stock market, he mentioned that immense liquidity was pumped in during the sub-prime crisis, which when cleared, led to concerns about sovereign debt. But he believes, that these have not impacted the Asian economies thus resulting in an element of decoupling. He is of the opinion that the earlier growth in the U.S., was due to high consumption but now it is giving way to better savings. And these savings, according to him, will pave the way for better allocation towards India. According to him, India is an attractive market as presently the valuations are fair and therefore expects a 10% -15% growths in the equity markets in the days to come. But having said that, he is quite wary about India’s double-digit inflation and fiscal deficit.

On the interest rate scenario, he believes that the steps taken by the Reserve Bank of India are in the positive direction. "The Reserve Bank of India has built a high level of credibility in the global scenario and this is very positive as well. Yes, inflation has been a surprise and we do see some amount of hardening in interest rates, but not very high", he said.

AND OTHER NEWS...

• The International Monetary Fund (IMF) revised the growth projections for India in 2010 to 9.5%, as it believes that the growth position story during the year would be driven by favourable financial conditions and robust corporate profits. In April, the IMF had projected a growth rate of 8.8%, thus making India the second fastest growing economy in the world after China.

POLL
 

""Will India grow at 9.5% in 2010, as projected by IMF?"  

Click here to give your views...

• IRDA finalised IPO guidelines for insurance companies and has referred the same to the capital market regulator - SEBI, for final approval.

• SEBI directed mutual fund houses to have a uniform exit load for investment through lump sum as well as the SIP (Systematic Investment Plan) route. Presently, mutual fund houses levy an exit load of 1%, in case of investments redeemed before a year.

• The Employees Provident Fund Organisation (EPFO) may retain its interest rate at 8.5% in 2010-11. "I hope that the recommendation of 8.5% by the Finance and Investment Committee of the EPFO will be retained," Central Provident Fund commissioner S. Chatterjee said.

• Concerned over the dilution of its role in dealing with inter-regulatory disputes, RBI Governor, Dr. D. Subbarao has asked the Government to re-look at the ordinance it had issued last month to end the turf war between SEBI and IRDA, over regulation of ULIPs.

• Financial service firm, Networth collaborated with Indian Health Organisation (IHO) and launched a co-branded health plan card named "Networth-IHO Health plan card" which aims to provide easy access to high quality healthcare at a reasonable cost. The membership fee for the card is Rs 2 per day for a person. The card offer savings to its members on all preventive and pre-hospitisation medical costs.

• With the aim of improving the quality of technical education in India, the Central Government signed a credit agreement of USD 300 million, with the World Bank, for the Technical/engineering Education Quality Improvement Project (TEQIP).

• The Bombay Stock Exchange (BSE) announced plans to launch "Sensex Future & Options", on Eurex from October 4, 2010. The new contracts denominated in U.S dollar, will have an expiry of three months, at the end of next March, June, September and December.

• Financial services firm Religare Enterprises Limited (REL), has agreed to buy a part of Citi Group’s home loan business in India for nearly Rs 500 crore. This deal will thus enable REL to amplify its presence in the consumer lending business.

• Wholesale Price Index (WPI) inflation for June 2010 stayed in double digits at 10.55%, on account of increase in fuel, food and metal prices. The WPI inflation figure for April 2010 was also revised to 11.23% from the earlier 9.59%.

New Issues

• ICICI Prudential Mutual Fund launched an open ended Gold Exchange Traded Fund (Gold ETF) named "ICICI Prudential Gold Exchange Traded Fund".
  
  As per the offer document, the investment objective of the scheme is "to provide investment returns that, before expenses, closely track the performance of domestic prices of Gold derived from the LBMA AM fixing prices. However, the performance of the scheme may differ from that of the underlying gold due to tracking error".
  
  The fund will benchmark its performance against the price of gold from the LBMA (London Bullion Market Association) AM fixing price
  
  The New Fund Offer (NFO) is open for subscription from June 30, 2010 to July 29, 2010.