India's GDP beats forecast Dec 04, 2009

India's GDP beats forecast

Dec 4, 2009

Weekly Facts
	Close	Change	%Change
BSE Sensex	17,185.68	330.8	1.96%
Re/US$	46.09	0.4	0.78%
Gold Rs/10g	18,210.00	320.0	1.79%
Crude ($/barrel)	78.17	1.0	1.26%
FD Rates (1-Yr)	5.00%-6.50%

Weekly change as on Dec 3, 2009

India's GDP beats forecast

Impact

(Source: Bloomberg)

The Gross Domestic Product (GDP) expanded during the second quarter (July – September) of the fiscal year 2010 by 7.9%. The key drivers for this strong figure are:

Pickup in manufacturing sector

Increased government expenditure

Robust investments

Lower interest rates

Higher government salaries & pay commission arrears

Increased incomes especially in the rural areas due to greater social spending and high farm goods prices

Modest growth in farm output despite drought

In the first quarter (April – June) of the present fiscal year, the economy had expanded 6.1%. Interestingly now, the growth is close to the same level (i.e. 7.7%), of the second quarter (July – September 2008) of the fiscal year 2009, thus indicating that the economy is back on the health track. The stock market too has cheered this news during the week.

Given the attractive GDP numbers, we believe there are likely chances of:

Government withdrawing stimulus – certainly beginning the phasing out over next few months

RBI tightening interest rates soon

Banking made easy?

Impact

In a move to make banking transactions more easy and convenient, the Reserve Bank of India (RBI) permitted banks to adopt the ‘Business Correspondents Model’ from Monday – November 30, 2009.

It means banks will now be able to appoint ‘Business Correspondents’ (BCs) enabling them (banks) to deepen the banking system. RBI has allowed entities like individual kirana/medical/fair price shop owners, PCO operators, agents of government-sponsored small savings schemes, insurance agents, petrol pumps owners and retired teachers to act as BCs of banks.

The principle for appointing such BCs are:

Experience of these individuals in cash handling (cash inflow and outflow)
Being residents of the area in which they propose to operate

According to RBI, the charges for services provided by the BCs, will be levied in a transparent manner and BCs will not be allowed to charge customers directly.

The model has evolved after experiencing limitations in the traditional ‘brick and mortar' banking model. As per RBI notification, the new model (Business Correspondents Model) will enable banks to accelerate their goal of financial inclusion.

However, we believe that though the move seems to make banking easier and convenient, there are some serious operational glitches like cash management, security and technology, which need to be considered for safe banking.

Banning insurance commissions

Impact

The panel constituted last year, chaired by D Swarup, the Chairman of the Pension Fund Regulatory and Development Authority (PFRDA) presented its report to the Government. The panel was asked among other things:

How to stop mis-selling of financial products
How to raise financial literacy among citizens

With respect to the insurance industry, the panel has recommended in its report, that the up-front commissions embedded in the premium should be done away in a phased manner as under:

Year	Commissions
2009	15%
2010	7%
2011	0%

The main intention of the panel is to stop mis-selling of products as agents and financial advisors often push financial products where they can earn more, without the investors in mind.

The move has been opposed by the Insurance Regulatory & Development Authority (IRDA) and Life Insurance Council, the industry lobby for the insurance sector.

We believe that if the recommendations to do away with insurance commissions go through government approvals, it will be in the interest of the investors.

Dubai debt trap

Impact

Dubai, which is seen as the global financial hub, got into a debt trap with Dubai World struggling with liabilities to the tune of USD 59 billion. The Dubai Government too hasn’t guaranteed the debt of Dubai World. As per a government statement, the company has received financing based on a project schedule basis and not on government guarantees.

This sent shock waves across the financial markets, significantly impacting stock prices across the globe. S&P too has cut the credit ratings of six Dubai government-linked companies, including ports operator DP World, to junk status. S&P also placed the ratings of four Dubai-based banks on negative outlook, due to their exposure to Dubai World.

The Dubai crisis in our opinion, is irrelevant in long term Indian context and thus we opine that investors should not press the panic button and continue to stay invested.

IPO subscription to be made easy for HNIs & firms

Impact

From January 2010, HNIs and firms will be eligible to use the banking channel called Application Supported by Blocked Amount (ASBA) to buy stocks in the primary (IPO) market.

Under this channel, when an investor applies to an IPO, the funds do not immediately flow out from his account. The bank blocks the value of the shares applied for and the funds are not disbursed till the shares are allotted. Customers cannot use this money, since it is blocked.

Earlier in July 2008, SEBI allowed only retail investors to subscribe to IPOs through this channel, but capped the maximum amount of bid at Rs 1 lakh.

As a second phase, the channel will now be thrown open to a wider group of investors who will be able to make multiple applications at different prices within the price band of an IPO.

SEBI has asked banks to be ready with their software and to make necessary changes in their software.

We believe that the move will reduce the time taken between the public issue and listing. This will be in the interest of investors as it will make IPO subscriptions easy and ensure hassle-free transactions. Investors will no longer have to wait for the receipt of refund cheques.

SMS tariff war

The battle continues - will the customer win the war? The tariff war in the mobile telecom industry has now extended and shifted its focus to the Short Messaging Services (SMSes). Dual technology player Reliance Communications (RCom) has triggered a tariff war in the SMS segment. The company has launched two SMS plans which are available to both pre-paid and post paid users of the GSM and CDMA service.

SMSes under one plan will be charged at 1 paisa per SMS, but in order to avail of the same, users would have to pay a monthly fee of Rs 11. In another plan the users can avail of 15,000 SMSes free, by paying Re 1 per day as a fee. In other words it means 500 SMSes per day for a rupee charged; a great offer.

The above plans will be appealing to customers with high SMS usage – typically youth and professionals across India.

The tariff war is likely to continue till consolidation sets in the mobile telecom industry.

Since the mobile telecom industry is more voice driven, the move may not have too much impact on the industry. However, it will indeed be pro-customer as it will lead to increase in savings.

AND OTHER NEWS...

HDFC Ltd. launched a dual rate home loan product where it offers fixed rate of interest of 8.25% valid for two years (i.e. upto March 31, 2012) and thereafter applicable floating rate for the balance term.
The National Stock Exchange’s (NSE) Mutual Fund Service System (MFSS) started on Monday – November 30, 2009 with UTI schemes making its debut onto the new mutual fund trading system with a turnover of Rs 78 lakh. Birla Sunlife Mutual Fund was the second one to join the NSE’s MFSS platform. The rest of the fund houses are expected to join later since they are in the process of creating their technology infrastructure to list their schemes on the exchange.
The Bombay Stock Exchange (BSE) launched its mutual fund trading platform today (Friday – December 4, 2009) named BSE StAR MF (Bombay Stock Exchange Platform for Allotment and Redemption of Mutual Fund units), with Tata Mutual Fund schemes making its debut onto the mutual fund trading system from Friday. Big fund houses such as HDFC, ICICI Prudential, DSP BlackRock too have signed up for this platform.
The start of the tax saving season has seen some of the mutual fund companies stepping up commissions. Some of the mutual fund companies are offering as high as 5% commissions to distributors, which are mostly on tax saving schemes. This initiative by the mutual fund companies is despite the fact that SEBI banned commissions to be deducted from investors’ money.
The Pension Fund Regulatory & Development Authority (PFRDA) unveiled its Tier II account for its New Pension Scheme. Under this account investors will be allowed to enter and exit at will (just like savings account). However, the account will be available for investors of NPS who already hold Tier I account.
With gold making waves, it is turning out to be an important asset for wealth managers. Religare Mutual Fund has sought the approval from SEBI to launch a gold Monthly Income Plan (MIP). The fund will be a first of its kind in the country.
Gold prices hit a record high breaching the Rs 18,000 mark. In the Mumbai market standard (99.5 purity) gold closed at Rs 18,220 (for 10 gm) on Wednesday, Dec 2, 2009.
Employers may soon be required to make mandatory provident fund contribution to their employees with a salary upto a sum of Rs 15,000 a month, instead of Rs 6,500 at present.