Inflation at 13 month high Jan 22, 2010

Inflation at 13 month high

Jan 22, 2010

Weekly Facts
	Close	Change	%Change
BSE Sensex	17,051.14	533.7	3.04%
Re/US$	46.05	0.4	0.92%
Gold Rs/10g	16,555.00	300.0	1.78%
Crude ($/barrel)	75.42	2.4	3.11%
FD Rates (1-Yr)	5.00%-6.50%

Weekly change as onJan 21, 2010

Inflation at 13 month high

Impact

The broader price index as measured by the Wholesale Price Index (WPI) touched a 13 month high of 7.31% in the month of December 2009, up from 4.78% in the previous month.

(Source: CSO)

The present inflation level is much higher than the expectation of the Reserve Bank of India (RBI). In its second quarter review of the monetary policy in October 2009, RBI had indicated that it expected WPI inflation to touch 6.5% by March 31, 2010. However, now looking at the latest inflation figure, many economists are estimating inflation to touch double-digits by March 2010.

The current inflation is mainly attributed to supply side constraints of food items.

We believe that in order to control the inflationary situation, RBI might drain liquidity through a hike in the Cash Reserve Ratio (CRR) by 150 bps in 2010 and also a hike in the reverse repo by around 125 bps. This also seems to be a measure of RBI to withdraw from the current accommodative policy. In such a scenario hardening of interest rates can be expected in the year 2010.

Reducing the time gap

Impact

The Securities and Exchange Board of India (SEBI) plans to reduce the time for listing shares after public issue to 7 days by the end of 2010.

Mr. C.B. Bhave, Chairman - SEBI, said that a shorter period would unlock money in Initial Public Offers (IPOs) faster, thus enabling it to be productively used. Presently it takes upto 20 days for an Initial Public Offer (IPO) to get listed after closure. This delay in listing, risks both investors and issuers, since there may be a change in investor sentiments between the IPO date and the listing date. Further it also reduces liquidity.

We believe that the move is pro-investor and is also an attempt to limit the speculation that precedes every new listing in the grey market.

Trading through mobile phones - coming soon

Impact

Trading through mobile phones could soon become a reality as the final guidelines on this are expected in the next few months.

Earlier, in May 2009, the Securities and Exchange Board of India (SEBI) had proposed a draft framework for wireless trading and had invited responses and feedback.

As per SEBI's proposed framework, brokers who provide internet based trading services would be eligible to use wireless technology only after the stock exchange approves the same.

The net worth requirement for such brokers was to be fixed at a minimum of Rs 50 lakh, if the broker provides facility on his own. In case a service provider provides the internet trading facility on behalf of a group of brokers, then net worth criteria as stipulated by the stock exchange would apply. Brokers would not charge clients for trading through mobile phones; it is only the service provider who will charge the customers.

Security is a major concern; however software vendors are confident that there are technologies which will address this issue. SEBI too has provided detailed consumer protection measures in its draft report addressing this concern.

We believe that the move is good and will enable the investors to transact while they are on the move. However with the 3G auction delayed, there may be issues with the speed and seamlessness of the transactions.

INTERVIEW

In an interview with the DNA Money, Mr. Kenneth Andrade, Head of Investments at IDFC Asset Management Company expressed his view on the global liquidity situation, valuations, consumption stocks and overall investment outlook.

On the global liquidity situation, he believes that earlier money has been flowing from government to corporate and individuals, but there is likely to be some reversal in this trend. He said "the money could be reclaimed through increased taxation or by withdrawing money from the financial system. The latter will be a balancing act as government decides whether they can afford to slow down growth or if it is better to keep liquidity in abundant".

On the valuation front, he believes that we are in the top end of the valuation. He also mentioned that investor sentiments have certainly improved, but a lot now will depend on government policy. Macro events too will play their part and the budget would be keenly watched.

On the consumption stocks he believes that they are growing faster than the broader market and this extends to the entire food chain, from the farm to the fork. The consumption play would extend beyond the FMCG (Fast Moving Consumer Goods) segment. One can look at opportunities in the form of capital spending and revenue spending. Opportunities will still abound in consumption.

Mr. Andrade is reasonably optimistic for the year 2010. "If one invests in government securities, then the returns would be 8% or so. The objective of investing in equities would be to beat these returns and we are reasonably optimistic in doing so" he said.

AND OTHER NEWS...

Future Generali India Life Insurance Co. Ltd launched a unit-linked whole life plan named 'Future Generali Sanjeevani Plus'. The policy covers the policyholder till the age of 99 years. The minimum premium for the regular premium payment option is Rs 18,000, whereas for the single premium option is Rs 75,000. The policy can be availed by those aged between 30 days and 65 years.

Foreign exchange reserves rose by $ 741 million during the week ended January 8, 2010 to $ 284.3 billion. This was mainly on account of revaluation of non-dollar assets in reserves.

The RBI along with SEBI announced that stock exchanges that currently offer futures trading in dollar-rupee can now launch futures trading in euro-rupee, pound sterling-rupee and yen-rupee. The introduction of these new currency futures will help market participants, especially international traders to hedge their risk against the cross currency volatility.

Geojit BNP Paribas Financial Services launched Financial Investment Platform (FLIP) an enhanced online investment platform. The platform offers trading in a range of services such as equities, derivatives (stock and currency), mutual funds and Initial Public Offers (IPOs). The platform also includes additional features such as multi-market watch in a single screen, simultaneous tracking of upto nine scrips in a single window and online payment facility with nine banks.

The Bombay Stock Exchange Ltd. launched a website- www.bsepsu.com, to provide relevant information relating to disinvestments of Public Sector Undertakings (PSUs). The website also carries comprehensive database on all past disinvestments.

RBI increased the daily transaction limit for purchases made over the mobile phone platform to Rs 50,000 from the earlier cap of Rs 5,000, thus giving a major fillip to m-commerce.

With effect from April 1, 2010 all financial transactions without a Permanent Account Number (PAN), will attract more tax. The government announced that higher of the prescribed rate or 20%, will be deducted on all transactions liable to tax deduction at source (TDS), where the PAN of the assessee is not available.

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