Inflation cools as temperatures rise!!    May 21, 2010

We believe that even though inflation (WPI and manufacturing inflation) has cooled-off in April 2010, RBI will continue to adopt its calibrated exit path by raising policy rates by 25 basis points at each step, to normalise policy rates and make it more relevant to the current high economic growth and spiralling inflation. Also, in order to curb the excess liquidity, RBI may hike the Cash Reserve Ratio (CRR) by 25 basis points as and when credit off-take and growth picks up. But, in our opinion, the chances of such a rise in the policy rate and CRR, look bleak before the first quarter review of monetary policy 2010-11 (scheduled for July 27, 2010).

The spat between IRDA and SEBI caused distress and left several ULIP policy holders bemused, and now it seems that the worst is yet to come - this time, not from SEBI or IRDA but thanks to the revised Direct Tax Code (DTC), which is expected to be introduced in the coming monsoon session of parliament.

The draft DTC, which was first unveiled in August 2009, had proposed a tax on returns from insurance policies where the sum assured was less than 20 times the premium paid.

It is noteworthy that currently, almost all ULIPs have a premium to sum assured ratio of 1:5, and hence, under the DTC, all such policies are expected to be taxed at the time of maturity or withdrawal. For traditional insurance policy holders there’s nothing much to worry about, as most of them adhere to 1:20 criteria.

We believe that if this proposal is passed in the revised DTC, it will really signal taxing times for ULIP policy holders from April 2011 onwards. Moreover, increasing the sum assured (making it more than 20 times the premium paid) to make the returns from ULIPs exempt on maturity or withdrawal, will also mean increasing portion of the premium which will go into payment of mortality charges, and thus leaving less money to be invested in units.

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• The Planning Commission wants the Government to set up a debt assessment unit, to specifically focus on the task of reducing public debt, which is hovering at around 80% of GDP. Planning Commission member, Mr. Abhijit Sen said, "fiscal deficit is not a very good measure by which you target debt, it's a very approximate measure…the Finance Ministry and the Reserve Bank should have a debt assessment unit and target debt".

•  In the midst of the turf war between SEBI and IRDA, global consulting firm "Celent", in its recently published research report has underlined the need for a super-regulator, to ensure smooth co-ordination between various watchdogs without hurting the markets. A critical move in this direction could be setting up of the Financial Stability and Developments Council (FSDC), which the Government had proposed in the Budget for 2010-11. The CAG has also thrown the hat in the ring by suggesting that it could play the role of the super regulator.

• India's foreign exchange reserves fell by US $3.39 billion to US $276.24 billion in the week ended May 7, 2010. The weakening of the Euro, resulted in a fall in the value of non-dollar denominated reserves, which are estimated at about 25% of the total foreign exchange kitty.

• According to the data released by the RBI, India’s credit card population fell to 18.3 million as of end-March, from a peak base of 28.3 million in April 2008. Either, Banks have become wary or individuals have become smart to the idea that credit cards are the most expensive form of credit one could ever take. And this in a country, where the percentage of card holders who pay off their card dues on time and never roll their credit, is probably the highest in the world.

• Inter-Connected Stock Exchange (ISE), a national level stock exchange promoted by 13 regional stock exchanges, plans to launch its own equity trading platform from October 2010.

• Nouriel Roubini, Professor at New York University said in a interview with BBC Radio Broadcast, that the crisis engulfing in Euro area is not over yet, as Greece remains the tip of the iceberg. He also mentioned that, what we are facing right now in the Euro zone is a second stage of typical financial crisis.

• According to an Asian Development Bank report, India is world's second-fastest growing economy and also providing second highest returns from equities, just behind Indonesia. The report, however, warned of challenges arising from large capital inflows in terms of macroeconomic issues like exchange rates and asset bubbles in emerging market economies.

• The Comptroller and Auditor General of India (CAG) has sought greater powers to look into the functioning of over a dozen regulators, whose decisions do not fall under the direct control of any other body. The CAG proposal to expand its oversight, forms a part of its suggestion made in the draft Bill governing the role and function of CAG.
  
  CAG feels that even though the regulators are supposed to be independent, they (regulators) have to be responsible to someone. Mr. Vinod Rai, the Comptroller & Auditor General of India said  "regulators are the creation of the Government. They are bodies distanced from the Government, but the basic functions derive from the Government". He also mentioned that his office should be allowed to look into the functioning of regulators that do not have appellate or quasi-judicial where their decision can be challenged.

New Issues

• SBI Mutual Fund launched an open ended equity fund named "SBI PSU Fund". As per the offer document, the fund is mandated to invest 65% - 100% of the collected corpus, in equity and equity related instruments covered under the universe of Public Sector Undertakings (PSU) companies including derivatives and upto 35% in debt securities and money market instruments.
  
  As per the offer document, the investment objective of the scheme is "to provide investors with opportunities for long-term growth in capital along with the liquidity of an open-ended scheme through an active management of investments in a diversified basket of equity stocks of domestic PSUs and in debt and money market instruments issued by PSUs and others".
  
  The fund will broadly follow a top-down approach and invest in stocks of Public Sector Undertaking (PSU) companies, which will thus expose its investors to a sector specific risk on account of the funds portfolio concentration. Similarly, any change in Government policy and political decisions, can change the investment environment.

• Canara Robeco Mutual Fund launched an open ended debt fund named "Canara Robeco InDiGo (INcome from Debt Instruments & GOld) Fund". As per the offer document, the fund is mandated to invest 65% - 90% of the collected corpus, in Indian debt and money market instruments and 10% - 35% in Gold ETFs.
  
  As per the offer document, the investment objective of the scheme is "to generate income from a portfolio constituted of debt & money market securities along with investments in Gold ETFs. However, there can be no assurance that the investment objective of the scheme will be achieved".
  
  As an investment strategy, the fund will take cues from seasonal pattern in gold, global & domestic macroeconomic events, Government policies and central bank’s actions, to decide on the asset allocation between gold & fixed income.