Inflation continues to move upward   Jul 23, 2010

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Impact

After showing a minor cool-off in May 2010, the Wholesale Price Inflation (WPI) for June 2010 (data released in July 2010) continued to inch-up in the double-digit space at 10.55% on account of increase in fuel, food and metal prices. Moreover, WPI inflation numbers for April were also revised upwards sharply, from 9.59% to 11.23%.

A noteworthy point is that this is the fifth consecutive month that the WPI inflation has been in double-digits. Moreover, given the deregulation of auto fuel prices in the last week of June 2010, the WPI inflation for July 2010 is also expected to maintain the trend.

But, our Finance Minister, Mr. Pranab Mukherjee is playing down concerns of rising inflation by saying he expects moderation in the inflation rate by year-end. "I do feel that the annual rate of inflation will be 5.0% - 6.0% (by 2010-end)," he said.

We believe policymakers may be taking encouragement from the signs of a good monsoon, which improves the chance of a good harvest. But, in our opinion, WPI inflation may moderate to around 6.5% - 7.0% by year-end. Moreover, we also believe that in order to control spiralling inflation, RBI will continue to adopt the calibrated exit path by raising policy rates by 25 basis points, at its first quarter review of the monetary policy 2010-11 (scheduled for July 27, 2010).

Impact

The Insurance Regulatory and Development Authority (IRDA) has proposed some key requirements for insurance agents, including a clause for the renewal of their licences.

The insurance regulator has said:

• Licenses will not be renewed if the agent’s persistency ratio is less than 50%


• Licenses will not be renewed if an agent is unable to sell minimum 20 policies every year, and if the first year premium income is less than Rs 1.5 lakh

According to Mr. S.B. Mathur, the Secretary General of the Life Insurance Council, a minimum 50% persistency ratio is good for the industry, as he believes that it will encourage agents to sell more long-term products. At present, the average persistency ratio of agencies is around 70%, but small agencies fail to cross the 50% mark.

Justifying the move for a minimum persistency ratio, IRDA explained that, failure of agents has often resulted in high lapsation rates in some of the new and emerging companies. There are several causes of decline in persistency that are linked to agents, such as mis-selling of products and improper service. Further to make it more stringent, it has also refrained spouses and close relatives of employees of insurers to act as agents.

We believe that the introduction of a minimum persistency ratio is in the long-term interest of the insurers (as it reduces their acquisition cost), agents (as regular flow of income continues through renewal commission) and policy holders (as a long-term investment habit will be promoted). However, a requirement of selling 20 policies every year may induce agents to mis-sell an insurance policy and as the client base increases, may also infuse problems in servicing clients.

Impact

In order to enforce discipline and check front running activity in mutual funds houses, the Securities and Exchange Board of India (SEBI) has asked fund houses to install conversation recording facilities in dealing rooms and also disallow dealers from using personal mobile phones in the dealing rooms. Moreover, SEBI has also asked mutual fund houses to maintain records of the phone conversations in the dealing room for at least eight years, which will be open for SEBI inspection and will also be periodically checked by the designated executives of the fund house and reports will be submitted to the trustees of the fund house.

The capital market regulator's direction follows a June 17, 2010 order banning HDFC Asset Management Company’s (AMC) former equities dealer, Nilesh Kapadia, from stock market transactions. Kapadia was barred after allegations that he had tipped off his friend before placing orders for the fund house.

Presently, some fund houses have already taken a cue from this and made their dealing rooms sound proof, installed Closed-Circuit Television (CCTV) cameras and are recording calls of even fund managers and not just dealers. Moreover, some fund houses are disallowing dealers from even interacting with the other staff members of the fund house.

In our opinion, this move by SEBI is a positive step to preclude price rigging and is in the larger interest of investors and mutual fund houses, as front-running increases the cost of acquisition of shares or reduces the realisation from the sale of shares.

INTERVIEW

In an interview with the Economic Times, Mr. Mahesh Patil, Head of Equities at Birla Sun Life Mutual Fund shared his views on why investors are not putting money in mutual funds and also on the near term outlook for the equity markets.

On why investors are not putting in money in mutual funds, he expressed the view that the recent rally is driven by more pessimism than optimism, as the investors feel that the Indian equity markets are more overvalued. He believes that, investors are waiting for a correction before investing any fresh money into equity markets. He said, "Investors who had just invested before the equity markets peaked in 2008, are cashing out at break-even or even if the profits are small, as they have been waiting for more than two years now".

On the near term outlook for the equity markets, he expects markets to be range bound. According to him, presently, inflation and valuations are the key risks for the equity markets. Moreover, India is also trading at a premium to most other emerging markets. But having said that, Mr. Patil is an optimist and believes that the long-term structural story is intact. He is bullish on the domestic consumption story and the banking and financial services sector as he believes that they are proxy on the growing economy.

AND OTHER NEWS...

• The Chicago Mercantile Exchange (CME) started trade in the Nifty futures on Monday. CME introduced two new contracts - E mini and E micro S&P CNX Nifty futures, designed to access Indian market opportunities.

• Buoyed by the prospects of a robust economic recovery, the Planning Commission has projected an optimistic average economic growth rate of 8.1% plus during the 11th Five Year Plan (2007-12), as against 7.7% recorded during the previous plan. "We will end the 11th Plan period with an 8.1% growth, perhaps a little more", said Mr. Montek Singh Ahluwalia - Deputy Chairman of the Planning Commission.

• In order to attract more retail investors to the stock markets, the capital market regulator - SEBI, is now considering making application forms simpler and shorter for Intial Public Offerings (IPO) and Follow-on Public Offers (FPOs). Presently, the IPO and FPO forms are unnecessarily too long and ask investors’ to fill in some details that can be done away with.

• L&T General Insurance Co. Ltd. an arm of an engineering and construction firm Larsen and Toubro Ltd. (L&T) received a license from IRDA to commence its general insurance business.

• Reacting to International Monetary Fund’s revised GDP growth projection of 9.5%, for India in 2010, Finance Minister - Mr. Pranab Mukherjee at a CII conference said, "Though IMF has recently upgraded its forecast of GDP for the year 2010-11 to 9.5%, I am a bit conservative, and am confident that the growth in the current year should be around 8.5% and our target will be to cross the double digit barrier by 2011-2012". Now meanwhile, the Prime Minister’s Economic Advisory Council (PMEAC) is also considering an upgradation in their forecast for India’s growth in the year 2010-11, from 8.2% earlier to 8.5%, being in tandem with the Finance Ministry forecast.

• In a move to go paperless, State Bank of India (SBI) launched "Green Channel" counters at select branches across the country, in order to facilitate its account holders to make paperless deposits, withdrawals and remittances. Account holders would simply be required to swipe their debit cards at the point-of-sale terminals installed at designated counters to execute the transaction. The maximum transaction limit has been fixed at Rs 40,000.

• Standard Chartered Bank launched its online remittance service called "Transfer2Home", as a part of its NRI service offering. According to a bank statement, customers can transfer money to India from U.S.A, U.K., U.A.E., Singapore, Hong Kong and Bahrain.

• In order to capitalise on the growing demand for online travel insurance service, Cholamandalam MS General Insurance Company (a joint venture between Murugappa group and Mitsui Sumitomo Insurance group of Japan) launched "Click Easy" travel insurance on their website, for customer to complete paperless transactions while purchasing leisure, business and student travel insurance policies online.

• Kolkata based Peerless Securities, a part of Peerless General Finance & Investment that entered the mutual fund segment recently, is planning to foray into merchant banking. The company has already applied to SEBI for a license and is expecting final approval soon.