RBI buys 200 metric tonnes of gold Nov 06, 2009

RBI buys 200 metric tonnes of gold

Nov 6, 2009

Weekly Facts
	Close	Change	%Change
BSE Sensex	16,063.90	11.2	0.07%
Re/US$	47.02	-0.2	-0.40%
Gold Rs/10g	16,610.00	470.0	2.91%
Crude ($/barrel)	77.82	2.4	3.21%
FD Rates (1-Yr)	4.75%-6.50%

Weekly change as on Nov 5, 2009

RBI buys 200 metric tonnes of gold

Impact

The Reserve Bank of India (RBI) bought 200 metric tonnes of gold from the International Monetary Fund (IMF). The purchase was an off-market transaction and was executed over a two week period during October 19-30, 2009 at market based prices. RBI would make the payment of nearly $ 6.7 bn from its dollar reserves to purchase gold from IMF.

This transaction was part of RBI’s foreign exchange reserve management operations. In other words, RBI wanted to diversify its portfolio of Foreign Exchange reserves which includes foreign currency assets, mainly US treasuries, Gold, Special Drawing Rights (SDRs) and RBI funds with IMF.

Gold as a proportion of the total reserves of $279,910 mn was merely 3.5% at the end of September 2009. The recent purchase will increase the gold reserves to about 6% of the total reserves.

There was no and is unlikely to be any direct impact on gold prices as it was an off-market transaction. However, it has improved the sentiments in the gold market – more relevant with the demand for gold likely to pick up given the wedding season.

You should follow the footsteps of RBI and diversify your investments. We have often suggested an allocation of 15% to 20% of your assets in gold. If you have bought enough gold, let it continue to glitter in your asset allocation.

Fewer trading holidays for markets

Impact

After allowing bourses to extend trading by two-and-a-half hours, SEBI is now looking into the proposal to allow fewer trading holidays on stock exchanges, in line with global practices.

The table below lists the number of trading holidays available in the calendar year 2009 for some of the major exchanges.

Exchange(s)	No. of Holidays*
Bombay Stock Exchange	19
National Stock Exchange	19
New York Stock Exchange	9
London Stock Exchange	6
Singapore Securities Trading	9

* excluding Saturday & Sunday
(Source: www.bank-holidays.com)

The reduction in the number of trading holidays on the Indian bourses could potentially:

Increase trading volumes

Increase foreign investor participation

Preclude domestic investors from losing out on several big events which occur in the global markets during Indian holidays

Monetary policy tremors seen in Banking Funds

Impact

After the Reserve Bank of India (RBI) directed the banks to set a provision of 70% of their respective Non Performing Assets (NPAs) by September 2010 in its monetary policy, the banking sector mutual funds' performance has witnessed a drag.

Banking Funds and BSE Bankex

(Base: 100)
(Source: Crisil Fund Analyser)

	Value of funds (Rs)
Funds & Indices	Before Monetary Policy*	After Monetary Policy**	% Increase/ Decrease
Reliance Banking	119	110	-7.64
UTI Banking	116	107	-8.31
Sundaram Fin Serv Opp	115	105	-8.28
BSE Bankex	117	107	-9.02

(Note: August 3, 2009 taken as the investment date for an investment amount of Rs 100)
(*As on October 26, 2009 ** As on November 3, 2009)

The above table explains the tremors felt in the banking sector funds and BSE Bankex on account of an increase in RBI’s NPA provisioning norms. The above banking sector mutual funds have fallen by an average of 8.07% and the BSE Bankex by 9.02% since the announcement of RBI’s Monetary Policy in October 2009.

The downturn in the banking sector funds will continue since the profitability of these banking companies is expected to be squeezed in fiscal year 2011. Currently several banks including SBI and ICICI have a provisioning lower than 70% for NPAs.

Since sectoral funds are exposed to higher levels of industry specific risks, we advise investors to stay away from such funds.

Spared from commissions

Impact

Your investments in Unit Linked Insurance Plans (ULIPs) are to be spared from the burden of paying commissions after April 2011. This move is intended to:

Improve the returns to investors who have invested in ULIPs

Curb mis-selling

Help raise insurance penetration

A proposal featuring in the final draft of a panel set up by the High-Level Committee on Financial Matters (HLCFM), an apex forum for financial sector regulators, will also pave the way for a load free regime on almost all the financial products after April 1, 2011.

On the other hand, the Insurance Regulatory and Development Authority (IRDA) has demanded a retention of the existing structure of commissions. As per the insurance rules, agents are entitled to get commission as under:

Year(s)	Commission*
1	Upto 40.0%
2	7.5%
3 and thereafter	5.0%

(Note: * Paid as a percentage of premium)

We opine that this move to spare the investors from commissions is healthy and in the investors’ interest and in keeping with the general direction that the distribution industry seems to be moving in.

RBI proposes to ban less than 90 days NCD

In order to regulate short term Non Convertible Debentures (NCDs), the Reserve Bank of India (RBI) has proposed to ban NCDs with maturity period less than 90 days. Such a move will have the following impact:

Returns of liquid funds and ultra short term funds may fall further to 3.0% - 3.5% from the current 3.5% - 4.0%

The short term Corporate Deposits (CDs) and Commercial Papers (CPs) may receive active participation on account of the change in focus of most fund managers as the NCDs were used as a liquidity management tool

IPO financing may stop - HNIs turn to broking firms for IPO financing, who in turn raise money by floating NCDs of 7 - 12 days maturity at an interest rate of 8% - 9%. These broking firms thereafter lend to their clients at an interest rate of 13% - 18% to finance them (clients) for the IPOs

Currently liquid fund returns have already been affected after SEBI’s guidelines mandating liquid funds not to invest in papers of more than 91 days tenure.

If this proposal goes through, your investment in liquid fund will stand in parity with your money in a savings bank account.

AND OTHER NEWS...

Food inflation has inched up at 13.39% for the week ended October 24, 2009. This is mainly on account of the rise in prices of potatoes and onions.
India’s largest realty firm, DLF, is planning to build 100,000 affordable houses that would cost less than Rs 20 lakh each in major cities across the country. The company plans to launch the same under a new brand.
RBI’s exit from its year long accommodative policy has not affected home loan rates as yet. Punjab National Bank (PNB) announced an extension of its 'Festival Bonanza Offer-2009' for home loans, upto December 31, 2009. Meanwhile SBI & Axis Bank will offer home loan at an interest rate of 8% p.a.
Getting an education loan may become easier. The government plans to protect education loans under a new credit guarantee scheme and has asked the Indian Banking Association to formulate a draft proposal for the same.
Your right to vote in the corporate affairs of a company will soon be just a click away. A leading depository in the country will launch an online voting system in place of postal ballots. This will enhance corporate governance and increase shareholder participation.
Portfolio Management Services (PMS) have increased their minimum investment criteria to Rs 1 crore, from the current Rs 10 lakh, thereby indicating a shift to wealthier investors.
The Pension Fund Regulatory and Development Authority (PFRDA) has increased the maximum entry age for the New Pension Scheme (NPS) from 55 years to 60 years.
The updated National Housing Bank (NHB) Residex released on Wednesday showed that the prices of residential properties have increased in major cities across India in the first half of the fiscal.