Inflation at a 16 month high Mar 19, 2010

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March 19, 2010

Weekly Facts
	Close	Change	%Change
BSE Sensex	17,519.26	351.3	2.05%
Re/US$	45.46	0.1	0.33%
Gold Rs/10g	16,715.00	210.0	1.27%
Crude ($/barrel)	81.08	1.2	1.48%
FD Rates (1-Yr)	5.00%-6.50%

Weekly change as on March 18, 2010

Inflation at a 16 month high

Impact

The broader price index as measured by the Wholesale Price Index (WPI) touched a 16 month high of 9.89% in the month of February 2010, up from 8.56% in the previous month. Interestingly, during the corresponding month last year, inflation rate was 3.50%.

(Source: ACE MF)

The rise in inflation was broad-based with non-food items such as cement, metals and machinery becoming costlier over the month, after manufacturers raised prices to absorb rising input costs. Inflation in manufactured items too has surged from 6.55% (in January 2010) to 7.40% in February 2010.

The Finance Minister, Mr. Pranab Mukherjee has warned that inflation could be in double digits by March 2010, though the Government is taking steps to protect vulnerable sections from the price rise. “I will not be surprised if it (inflation) reaches double digits in March”, he said.

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 (of which a 75 bps hike has already been announced by the RBI, in its third quarter review for the year 2009-10), and also a hike in the reverse repo by around 125 bps. This also seems to be a step by RBI to withdraw from the current accommodative policy. In such a scenario, hardening of interest rates can be expected in the year 2010 – probably sooner than later.

ASBA for investors in NFOs

Impact

Investors in New Fund Offers (NFOs) will soon be able to avail the ASBA (Application Supported by Blocked Amount) facility while subscribing for New Fund Offers (NFOs). The Securities and Exchange Board of India (SEBI) released a circular, which stated “the mutual funds / Asset Management Companies (AMCs) have to compulsory provide ASBA facility to investors for all NFOs launched on or after July 1, 2010”. Investors can, however continue to apply through the existing process using cheques or demand drafts as the mode of payment.

Further, in order to make the process more efficient, the market regulator has called for a reduction in the NFO period for all schemes, barring Equity Linked Savings Schemes (ELSS), to a maximum of 15 days from the current provision of 30 days in case of open ended schemes and 45 days in case of closed-ended schemes.

SEBI has also shortened the duration of allocation of new fund units, while making sure that the AMCs do not utilise the NFO proceeds before closure of the NFO period. “Mutual funds / AMCs shall use the NFO proceeds only on or after the closure of the NFO period. The mutual fund should allot units/ refund of money and dispatch statements of accounts within five business days from the closure of the NFO and all the schemes (except ELSS) shall be available for ongoing repurchase/ sale/ trading within five business days of allotment,” said SEBI.

The regulator has also asked AMCs to disclose the details of payment of brokerages and commission to associates, employees or related parties of sponsor / AMC in their half-yearly annual accounts.

We believe that these measures taken by SEBI are in the long-term interest of the investors, since they appear to bring in ease for NFO subscriptions and also instill efficiency and transparency in the system.

Portable’ health insurance policies on the cards

Impact

In just a few months from now, a majority of the people will be permitted to change their health insurers (non-life insurance company), without having to lose any benefits that have accrued to them.

The proposed portable health insurance policy, which was earlier, sold to those in the age of 18 years and 40 years, will now cover individuals from the age of 3 months to 65 years

At present, not many people change their health insurer even if they are not satisfied with the service. This is on account of fear of losing the no-claim bonus and / or the coverage being lowered. Also, currently insurance companies cover an illness only after the policy has been in operation for four years. They often deny claims in the first few years on the grounds that the ailment was “pre-existing”. But now, if you have a portable health cover, the new insurance company cannot exclude, say, heart-related problems, citing previous history. The proposed policy will be portable across non-life insurance companies and a shift from one company to another will be allowed at the time of the annual renewal.

The product, which was in the works for over a year, has now been cleared by the General Insurance Council (the industry lobby), who will now approach the Insurance Regulatory and Development Authority (IRDA) for product approval. The IRDA is expected to take a maximum of 90 days to clear the policy.

We think that such a move is pro-consumer, since it will ensure that proper service and legitimate rights are given to consumers and also provide un-satisfied consumers a gateway to look for better non-life insurance companies without fear of loss of benefits.

INTERVIEW

In an interview with the Economic Times, Mr. Prasun Gajri, the Chief Investment Officer (CIO) of HDFC Standard Life Insurance, expressed his views on the Indian equity markets and Inflation.

On the Indian equity markets, he is of the opinion that it is unlikely that markets will repeat the performance of 2009-10 anytime time soon. However he mentioned that, the key factors contributing to the economic growth are in good shape and while there could be hiccups on the way, the broad direction is positive. “We are structurally bullish on both domestic consumption as well as investment themes and our portfolio is aligned accordingly. We are not yet comfortable with global economy. We believe more negative surprise can emerge globally”, he said. According to him, the near-term triggers for the markets are inflation levels, expected monetary tightening by Reserve Bank of India (RBI) and movement in interest rates. He also mentioned that global market cues will be crucial and is of the opinion that negative cues will surface from various parts of the world, periodically. On the earnings, he expects them to be in line with the market expectation, but feels that there could be some impact on rising input prices on margins and also of inflation on consumption patterns.

On inflation he said “it has been moving up and is likely to be around double-digit level soon”. Apart from the argument that inflation has been driven up by supply-side constraints, he feels that the demand elements have been picking up as well. “The fact that IIP (Index of Industrial Production) growth is still strong and inflation is still rising makes us believe that RBI will be forced to take action. We expect a 50 basis points hike in April policy review”, he said.

AND OTHER NEWS...

State Bank of India will soon announce an extension of its special home loan scheme till April 30, 2010. It will roll out a new scheme under which the interest rate will be fixed at 8% p.a. for the first year, 9% p.a. for the next two years and thereafter at floating rate for the remaining tenure of the loan.

Food inflation declined to 16.30% for the week ended March 6, 2010 on account of easing prices of pulses and vegetables. However, fuel inflation has climbed from 11.38% (week ended February 27, 2010) to 12.68% for the week ended March 6, 2010, on account of increase in prices of petrol and diesel.

Lakshmi Vilas Bank (LVB) tied up with Visa to launch its debit card called the 'Lakshmi Vilas Bank International Visa Debit Card'. The launch of LVB visa debit card will enable new and existing customers of the bank an opportunity to shop, dine, pay bills, book tickets, in addition to helping them withdraw cash both in India & globally.

Indian investors can now trade in an international index, as the Hang Seng Benchmark Exchange Traded Fund (Hang Seng BeES) is now available on the National Stock Exchange.

Mutual funds are trying out ways to lure investors to gold funds. They are now launching gold Fund-of-Funds (FOF) that invest back into their own exchange traded funds. Quantum Mutual Fund is among the recent ones to file an offer document with SEBI to launch a Gold FOF, while previously Reliance Mutual Fund and UTI Mutual Fund had done so.