IIP signalling robust economic recovery Mar 26, 2010

IIP signalling robust economic recovery

March 26, 2010

Weekly Facts
	Close	Change	%Change
BSE Sensex	17,558.85	39.6	0.23%
Re/US$	45.51	0.0	0.11%
Gold Rs/10g	16,310.00	405.0	2.42%
Crude ($/barrel)	78.44	2.6	3.26%
FD Rates (1-Yr)	5.00%-6.50%

Weekly change as on March 25, 2010

IIP signalling robust economic recovery

Impact

(Source: ACE MF)

The Index of Industrial Production (IIP) for January 2010 grew by 16.7% over last year. According to the quick estimates released by the Central Statistical Organisation (CSO), the rise in IIP is broad based and is on account of:

Strong manufacturing growth - The manufacturing index, which is the principal component of the IIP, grew by 17.9% over the last year

Robust expansion in output – Output of capital goods grew over the last year by 56.2%, followed by growth in output of intermediate goods and consumer goods of 21.3% and 31.6% respectively

On the plus side, these IIP numbers signal a robust economic recovery. However, these same numbers are likely to be critical inputs in the RBI’s monetary policy review, to be held on April 20, 2010. These numbers will support the RBI’s decision to tighten the monetary policy i.e. implement a rate hike, which could dampen sentiments in the equity markets.

Tax-free core bonds from private banks

Impact

As the Government seeks to broaden its avenues to raise long-term funds to build more roads, ports and power plants, it will require over a trillion dollars over the twelfth 5 yr plan period (2012-17) to improve infrastructure.

Finance minister, Mr. Pranab Mukherjee has said that given the constraints in financing key projects, the Government has decided to open the window for issuing tax-free infrastructure bonds to private firms as well. So far, only state-owned companies were allowed to issue such bonds. This will thus lead to India’s private banks and Non-Banking Financial Companies (NBFCs) joining the list of select state-owned firms to offer tax-free bonds to investors.

In this year’s Budget, the Government has also provided for a tax deduction of Rs 20,000 p.a. under Section 80CCF for investment in long-term infrastructure bonds. This is over and above the existing limit of Rs 1,00,000 p.a. under Section 80C of the Income Tax Act.

Such bonds offer a lower rate of interest than fixed deposits, but the effective return to the investors is higher because of the tax benefits.

We believe that such a move will provide a fillip to infrastructure finance and provide an opportunity to individual tax payers to reduce their tax liability. It will also facilitate the development of a long-term bond market.

Expect less dividends now

Impact

Securities and Exchange Board of India (SEBI) has tweaked the accounting norms which will result in mutual fund companies finding it difficult to pay the magnanimous dividends paid in the past. SEBI has barred fund houses from using the “unit premium reserve account” to pay dividends. Instead, it has directed mutual funds to pay dividends only from realised gains.

Hence, when a mutual fund house sells units of an open-ended fund, at a price higher than the face value of the unit, part of the sale proceeds that represents the unrealised gains will be transferred (credited) to a separate account known as the “unit premium reserve account”, which will be treated at par with unit capital and will not be utilised for determination of distributable surplus. Similarly, when units of an open-ended mutual fund are sold at a price less than the face value of the unit, the difference between the sale price and the face value will transferred (debited) to distributable reserves, and the dividend can be declared only when distributable reserves become positive after adjusting the amount debited to reserves.

The revised norm for accounting are going to affect the quantum of dividend payouts by mutual funds and will thereby hurt most mutual funds and their distributors, since they have churned fees in the past by luring investors into equity funds using dividends. Also, it will infuse pressures on fund managers to deliver dividends, thus running the risk of turning them into traders, rather than money managers.

INTERVIEW

In an interview with the Financial Express, Mr Milind Barve, Managing Director of HDFC Asset Management Company Limited expressed his views on equity markets, recent SEBI regulations and the competition in the mutual fund industry.

On the equity markets, Mr. Barve said “in the last few months, we have witnessed a turnaround in the equity markets. Interestingly, in the last few months, our funds have faced relatively lesser redemption as investors in Systematic Investment Plans (SIP) are looking at a minimum of 3-year investment horizon and are not worried about where the markets are headed (over the short-term). We have been selling SIPs in the last four years and all of them are retail investors, who have a long-term view”. He believes that the year 2010, will be a good year for Asset Management Companies (AMCs).

On the recent SEBI regulations on reducing the period for New Fund Offers (NFO), Mr. Barve is of the opinion that the regulator has put things in order by doing so and also believes that this will not be a problem for the mutual fund industry. He also thinks that the regulator’s move to invest after the NFO closes will also bring justice to all the investors.

On competition building up in the mutual fund industry, he said, “if we look at parameters like economy growth and the saving rate, I believe India is a terrific market to start a mutual fund business. However, the entry of more players will impact the competitive landscape. Today, the top 10 players dominate the industry - being profitable and owning majority of market share”.

AND OTHER NEWS...

The Reserve Bank of India (RBI) increased the short-term lending and borrowing rates by 25 basis points each with immediate effect. The repo rate has been increased from 4.75% to 5.00% and the reverse repo rate has also been increased from 3.25% to 3.50%. The RBI Governor, Dr. D. Subbarao said that the hike of 25 basis points is aimed at maintaining the country’s growth rate. He also mentioned that RBI was keen to move away from its expansionary monetary policy.

Prime Minister Dr. Manmohan Singh has said India could return to 9% GDP (Gross Domestic Product) growth trajectory by 2011-12, but cautioned that an uncertain global environment could still play spoilsport. “The restoration of high growth should not be taken for granted”, he said. He also mentioned that the country must target a 10% growth for the twelfth plan period to eliminate poverty and create jobs.

Food inflation declined from 16.30% (week ended March 6, 2010) to 16.22% for the week ended March 13, 2010 on account of easing prices of pulses and onions.

Dhanlaxmi Bank made its foray into the retail asset business with launch of Dhanlaxmi Bank Platinum and Gold Credit cards. Also, the bank for the first time in India is introducing a ‘pay by transaction’ billing mode for credit cards. Under this billing mode, instead of having a monthly billing cycle, the interest-free credit period is considered for each transaction from the day of purchase. A customer thus enjoys a 45-day interest-free credit period on each purchase and does not need to time the purchase based on the billing cycle.

Global investment banker, Goldman Sachs has applied to the RBI for a banking license in India. “We have applied for a commercial banking license. Our file is in now”, Goldman Sachs CEO and MD (India) Brooks Entwistle said.

Petrol and diesel prices may go up by Rs 0.41 a litre and Rs 0.26 a litre respectively, in 13 major cities including Delhi, Mumbai, Kolkata and Chennai from April 1, 2010, when these cities move for cleaner auto fuel named “Euro IV”. The oil ministry is considering a proposal to raise pump prices of Euro-IV petrol and diesel to recover about Rs 15,000 crore spent by state-owned oil companies in upgrading their refineries, a senior oil ministry official said.

The Insurance Regulatory and Development Authority (IRDA) has warned the public against buying insurance policies being offered by Darwin Platform Life Insurance and Aetna Healthcare Networks (India), since the companies are not registered with the regulator.

IN THIS ISSUE