Is your EMI on home loan set to rise?   Aug 23, 2013

Financial News. Simplified
August 23, 2013
In this issue

Weekly Facts
  Close Change %Change
BSE Sensex* 18,519.44 (78.7) -0.42%
Re/US$ 64.63 (3.2) -5.19%
Gold Rs/10g 31,375.00 1,855.0 6.28%
Crude ($/barrel) 111.11 1.1 0.97%
FD Rates (1-Yr) 8.00% - 9.00%
Weekly change as on August 22, 2013
*BSE Sensex as on August 23, 2013

RBI's move to maintain tight liquidity position by hiking short term borrowing rates has started showing its effects on domestic economy. Borrowing cost of banks has gone up over last one month and now it may even start affecting their profitability if scenario doesn't change in the near future. Banking system is already reeling under pressure as they hold poor quality of loan assets.

To cover up costs, private sector banks recently hiked their base rates, a rate that is used to determine pricing of loans. Base rates of private banks are in the range of 9.8% - 10.75%. This is a bad news for new as well as existing borrowers who have opted for variable interest rate option. You may end up paying about Rs 850 more on your home loan EMI assuming you have borrowed Rs 50 lakh for 20 years. Those who don't want to shell out more would have to extend the tenure of loan by around 15 months.

PersonalFN believes measures taken by RBI have started impacting borrowers due to which credit growth in the economy may cool off. Investment programmes of corporate are being affected by high borrowing cost. As a reason, the prevailing industrial lull may continue even in future.

Moreover, PersonalFN believes that aspirant borrowers and those who already have borrowed should take notice of hike in lending rates. If your financial budgeting allows you to pay higher EMI don't opt for extending loan tenure. At the same time, you should revisit your financial plan as change in the cash outflows may bring about simultaneous change in other aspects of financial plan. PersonalFN believes, given the dynamic environment we live in these days, static financial plans don't work. You need to constantly monitor your plan and account for external changes affecting your financial circumstances.


India badly needs inflows of foreign capital; at the same time it has to curb dollar outflows. This seems to be the only way that may significantly boost Indian rupee which is making fresh all-time lows almost every day. In a bid to discourage speculation in rupee, RBI imposed stringent measures by way of sucking out excess liquidity. But instead of taking positive cues from policy actions; rupee has moved further down. Notably, falling rupee is dragging markets and falling markets are pushing the rupee further down. Over last one month, equity markets have fallen nearly 10% while yields on 10 year sovereign benchmark bond have surged about 16% causing a severe loss to investors.

Falling rupee and rising yields
Indian Rupee aginst US Dollar Yeild on 10-Yr G-Sec Bond
Data as on August 19, 2013
(Source: ACE MF, Economic Times)

As seen in the graph above, yield on 10 year G-sec bond has jumped substantially in August and rupee also fell quite sharply. One of the main reasons has been outflow of money from capital markets. Foreign Institutional Investors (FIIs) have been relentlessly selling Indian debt. As per data published by Security and Exchange Board of India (SEBI), they pulled out about 4.2 billion USD in 2013 of which about 0.98 billion USD have been withdrawn in first 19 days of August 2013. On the other hand, equities have seen inflows of 8.46 billion USD from the beginning of 2013. But this month through August 19, inflows in equities too have turned negative, knocking off rupee.

To read more about this news and the view of PersonalFN over it, please click here.

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The government is battling to curtail twin deficits. While rapidly depreciating rupee is a threat to financing current account deficit, fragile fiscal position of the government is making it difficult to manage fiscal deficit. In the April-June quarter of Financial Year (FY) 2013, gross tax revenue has grown at a marginal rate of 4.5%. Revenue from the direct taxes grew at 15.5% falling short of the budget estimates of 20%.

The need to rationalise India's tax structure was recognised and first draft of Direct Tax Code (DTC) Bill was prepared in 2009 which was followed by a draft prepared by the then finance minister in 2010. The Bill aims to overhaul Indian tax laws which are half a century old. It proposes to get more people and companies in the tax ambit with rationalising tax provisions. There were some crucial provisions such as taxing those who earn above Rs 10 crore at 35% by creating a fourth tax slab. It also proposed to tax divided income earned above Rs 1 crore at the rate of 10%.

The Cabinet was supposed to present the bill for approval in the on-going monsoon session of parliament. But now it comes to hand that the Prime Minister asked to put it on hold for the time being. The bill would again go back to the standing committee as there have been some concerns over provisions related to wealth tax and taxing the super-rich.

PersonalFN believes that the DTC bill has been moving back and forth for 3 years now and nothing has materialised as yet. Under difficult market conditions where it is imperative for the government to clear such crucial bills after addressing all the concerns raised against some of its provisions. It is often said that India has structural problems. Here are they. No wonders investors are losing faith in India.


It would be rare to find an investor who is unmoved even after the recent fall in Indian equity indices. Considering the dire state of India's economy, falling equities shouldn't surprise investors but the manner in which they are shunned nowadays, is worrisome even for an experienced investor. Recently S&P BSE Sensex fell about 800 points in a day posting its steepest fall since July 2009. This might have recalled memories of the bear market of 2008-09. Rupee is hitting fresh lows every day sending shivers down the spine of investors. Measures taken by RBI and the government have fallen flat. Well, under such difficult circumstances, it is crucial to know how some of India's largest mutual fund schemes have performed. Their performance should be compared with the performance of broader markets.

HDFC Top 200 and HDFC Equity, which together have a corpus of in excess of Rs 20,000 crore, have miserably underperformed S&P BSE 200 over last 3 months. Moreover, they have underperformed on YTD basis. HDFC Top 200 is a largecap oriented fund while HDFC equity is a flexicap fund. Reliance equity opportunities fund which focuses on investment opportunities across sectors and market capitalisation segments, has also underperformed broader markets. Among others, Reliance Growth, a midcap oriented fund and UTI Dividend Yield which follows the tenets of value investing have made losses in excess of those made on S&P BSE 200.

To read more about this news and the view of PersonalFN over it, please click here.

  • Recently, the government allowed about 13 Public Sector Undertakings (PSUs) to raise Rs 48,000 crore by issuing tax free bonds. The bonds would be available in 10-year, 15-year or 20-year series. Since the bonds would be tax free and be issued by PSUs; they would track the yield on 10 year G-sec bond and coupon rates may be 0.55%-0.80% lower than the yield on 10-year G-sec benchmark bond. PSUs have been allowed to raise 30% of their issuances through private placements. One may consider this as a golden opportunity given higher bond yields but institutional investors think otherwise. Power Finance Corporation (PFC) and Rural Electrification Corporation (REC) had to cancel private placement programmes for a reason of demand for even higher rates by prospective investors who demanded a rate of 10.75%. Believing this cost to be out their budget, companies withheld the issue.

    PersonalFN is of the view that, volatility in bond yields is not only affecting debt mutual funds but also the issuers. Long term papers are more vulnerable to volatility in yields. Spike in the short term rates have pushed even the long term rates up and investors might have expected them to go further up that's why they had demanded for higher rates. Keep your eye on issuance of tax free bonds, they might give you opportunities to lock your money for the long term at a good rate.

Yield Spread: It is the difference between yields on differing debt instruments, calculated by deducting the yield of one instrument from another. The higher the yield spread, the greater the difference between the yields offered by each instrument. The spread can be measured between debt instruments of differing maturities, credit ratings and risk.

(Source: Investopedia)

Quote : "Risk is what's left over when you think you've thought of everything." - Carl Richards


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