Impact 
Ever since the global financial crisis of 2008, the banks across India have become more vigilant and increasingly cautious to protect themselves from potential delinquencies. As a result of this, banks have blocked or withdrawn around 1 crore credit cards. Interestingly at the same time, the total number of transactions through debit cards has outpaced the number of credit card swipes, though in value terms credit cards account for larger spend.
According to data released by the Reserve Bank of India, the number of credit cards in the system has fallen nearly 36% to 1.76 crore as on September 2011, from 2.75 crore as on March 2008.
We believe that banks have increasingly become cautious and are adopting rigorous credit checks (by obtaining credit information reports from credit bureaus), given the global economic crisis panning out. But the consumption story in India still appears robust. Hence, we think that the approach followed is appropriate as it would help banks to reduce delinquency cost, thus "being safe rather than sorry’.
We recommend consumers to thoughtfully spend given the global economic worries swirling around, and spend within your means by not engaging in any over-leveraging, otherwise may lead to a nightmare while managing your personal finances.
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Impact
During the Budget for the fiscal year 2011-12 the Finance Ministry allowed foreign retail investors to invest in Indian MF schemes in an effort to improve inflows into an otherwise stagnant industry. Subsequently in August 2011, the capital market regulator - the Securities and Exchange Board of India (SEBI) laid down norms for such investments. But the move once thought to be a game changer for the mutual fund industry has not taken off due to stringent entry rules set by the SEBI.
One of the main hindrances in the entry of foreign investors is the requirement of Permanent Account Number (PAN) for such investors. Citing this, the Reserve Bank of India (RBI), SEBI and the Finance Ministry are currently reviewing the norms to facilitate entry of foreign investors in the Indian mutual fund industry.
We believe that the entry of foreign retail investors in the domestic mutual funds will help overhaul the mutual fund industry. However, in order to smoothen the process of investing for foreign nationals in Indian mutual funds the present norms need to be modified. Completely doing away with the norms may not be the best idea as it may give impetus to black money which has become a menace.
There should be a mechanism amongst different countries to accept the investments from foreign nationals based on the identification proofs in their respective countries in order to make cross country investments hassle-free.
| | Impact 
Foreign Institutional Investors (FIIs) have displayed their nervous streak whenever economic and political worries have swirled around in the global economy such as the one’s mentioned below:
- Political unrest in the Middle East and North African (MENA) region
- Downgrade of sovereign rating of the United States (due to ballooning debt-to-GDP ratio)
- Debt-overhang situation in the Euro zone (led by Greece’s failure to put its public finances in place)
- Sticky inflation in India along with expectation that fiscal deficit target (of 4.6%) for the present fiscal year may not be met.
(Source :Office of Economic Advisor, PersonalFN Research)
The graph above depicts that powered by huge inflows and outflows, the Indian equity markets have been susceptible to enormous volatility, where so far on a year-to-date (YTD) basis the BSE Sensex is down by 22.45%.
We believe that the movement for the Indian equity markets will always be vulnerable to FII flows, as there investments are huge. A noteworthy point is that FIIs flow are sometimes short-term in nature, unlike Foreign Direct Investment (FDIs) which are commitment of long-term funds to participate in economic growth as well as fuel it. Hence, while forecasting economic growth one should be watchful on the FDI activity, rather than mimic FIIs who are like migratory birds that just flock around from one place to another in search for better investment environment (for better returns).
In order to even out the volatility of the Indian equity markets well, it is recommended that one enrols for the Systematic Investment Plan (SIP) route provided by mutual funds as this will enable better rupee-cost averaging and power your portfolio with the benefit of compounding. However, remember to invest in equity markets with a long term view of at least 3 to 5 years in order to reap the benefits of this asset class, and invest in equity mutual funds which are consistently good performers and follow strong investment processes and systems.
| | | | Weekly Facts |
| Close | Change | %Change | | BSE Sensex* | 15,695.43 | (676.1) | -4.13% | | Re/US$ | 52.02 | (1.0) | -2.00% | Gold /10g | 28,640.00 | (325.0) | -1.12% | | Crude ($/barrel) | 107.23 | (3.8) | -3.47% | | FD Rates (1-Yr) | 7.25% - 9.40% | Weekly change as on November 24, 2011
*BSE Sensex as on November 25, 2011 | | | | This Week's Poll !!!
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In an interview with the Economic Times Mr. Vijai Mantri - Managing Director (MD) and Chief Executive Officer (CEO) of Pramerica Mutual Fund shared his views on linking of interest rates in small savings scheme to Government securities, tax efficiency of small savings scheme and interest rate cycle.
Mr. Mantri believes that making interest rates on small savings schemes market-linked, will not be a big benefit to the investors. He thinks that the Government may fix the rate for the next 12 months, but if interest rates go down a year down the line, the PPF rate will also follow suit. In his opinion, the government is very clear that if you want to invest in small saving schemes, you will have to manage the market risk. This is also evident from the way the pension regime has moved from "defined benefit" to "defined contributions", he added. "If you invest in any option that offers you an assured coupon rate, then there is a price to be paid for that assurance. This price is a lower coupon rate. As they say, there are no free lunches," he explained.
Explaining the attractiveness of the small saving schemes post the rate hike, he said that the small savings interest rates have been increased but the hike is not very significant and if you look at them from a short-term perspective of about 1-2 years, the open-ended debt fund will outperform the term deposits. "Today, you will get 8.6% on your PPF because the interest rates are high. At the same time, short-term debt funds are giving returns of 9-10%. However, one year down the line, when interest rates go down to, say, 7%, your PPF interest rate will also go down. In the case of a short-term fund, you will not only get the accrued interest but also the capital gain," he explained.
As far as tax efficiency of small saving schemes is concerned, Mr. Mantri thinks that the Section 80C is a very crowded avenue which includes provident fund, life insurance, Equity Linked Saving Schemes (ELSS), pension, fixed deposits, school fees, housing loan repayment, etc, under its ambit. But on the aspect of increasing the maximum investment amount to  1,00,000 he commented saying - "There is virtually nobody who will claim the entire 1 lakh tax benefit under Section 80C from his investments in PPF. If you work in the organised sector, your PF will take care of a chunk of the deduction. If you have school-going children or have a life insurance policy, much of your tax saving limit will be easily exhausted. One must also note that the PPF was set up primarily to cater to the people who are not covered by the EPF. It was meant to serve the workers in the unorganised sector. However, over the years, we have seen that it has been hijacked by the rich investors. It is like diesel. The subsidised price was meant for truckers and bus owners, but now even owners of expensive SUVs and luxury cars are claiming the benefit."
On whether interest rates have peaked out, Mr Mantri said, "Nobody can be absolutely sure about how the interest rates will move in the future, but we do try to improve our odds. From these levels, it appears that the market interest rates have, perhaps, peaked out. The corporate deposit rates today are lower than those in March 2011. This is despite the RBI raising rates 2-3 times after March. However, the market discounted the hikes six months ago."
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Joint Venture: The cooperation of two or more individuals or businesses in which each agrees to share profit, loss and control in a specific enterprise
(Source: Investopedia) | | | QUOTE OF THE WEEK
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- Henry Ford | | |