Impact
The spiralling effect on inflation, of excess liquidity prompted Reserve Bank of
India (RBI) to increase the Cash Reserve Ratio (CRR) by 75 basis points from 5%
to 5.75%, in its third quarter monetary policy review 2009-10.
The increase in the CRR will be in a phased manner
in two stages:
First Stage: Increase of 50 basis points will
be effective the fortnight beginning February 13, 2010.
Second Stage: Increase of 25 basis points
effective the fortnight beginning February 27, 2010.
The other highlights of the monetary policy review
are:
- Bank rate left unchanged at 6 percent
- Repo rate left unchanged at 4.75 percent
- Reverse repo rate left unchanged at 3.25 percent
- Statutory Liquidity Ratio (SLR) has been left unchanged at 25
percent
We believe that the policy announcement is a
cautious step to “test the waters” and thus gauge readiness for a withdrawal of
the stimulus packages. It could also lead to mutual funds facing redemption
pressures from banks.
Impact
(Source: CSO)
WPI
inflation at a 13 month high of 7.31% in the month of December 2009 and food
inflation at 16.81% for the week ended January 9, 2010, brought nervousness to
the equity markets. The BSE Sensex has fallen 7%, since the time the inflation
numbers were posted.
The
announcement of a hike in the CRR of 75 basis points in a phased manner, by the
RBI in its third quarter review of monetary policy 2009-10 added to some knee
jerk reaction to today’s trade, but later the markets did recover smartly. At
the time of writing this article the BSE Sensex was up 73.37 points at
16,380.24.
We believe that these are opportune times for
investors to buy fundamentally sound stocks and/or mutual funds and stay
invested for long-term.
Impact
The Securities and Exchange Board of India (SEBI) and Insurance Regulatory and
Development Authority (IRDA) are crossing swords over the regulation of Unit
Linked Insurance Plans (ULIPs). SEBI has also issued a show-cause notice to all
life insurance companies, including the biggest player Life Insurance
Corporation (LIC), who sell such products. The insurance companies have been
asked to explain as to why they have not taken SEBI’s approval before selling
ULIPs.
SEBI’s contention is that, ULIPs raise money from the
public and the money is invested in a fund chosen by public and the valuation is
through the Net Asset Value (NAV) methodology, which is unitised fund value.
Thus having characteristics akin to mutual fund schemes, ULIP’s should come
under SEBI’s jurisdiction.
SEBI’s display of authority has not gone well with IRDA.
Mr. R. Kannan, Member of IRDA, said “ULIPs are internationally sold by insurance
companies and not by any other segment of financial services. This product is
structured as per international practice and is well within section 2(11) of the
Insurance Act”. He also said that he will take up this issue with the
Government.
We feel this turf war between the respective
regulators could affect the plans of life insurance companies aiming to come up
with an Initial Public Offer and may also show a negative impact on the stock
market, as it may dampen the investment spirit of fund managers of ULIPs. The
faster this issue is resolved, one way or the other, the better for all
concerned.