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| January 16, 2015 |
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| Weekly Facts |
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Close |
Change |
%Change |
| S&P BSE Sensex* |
28,121.19 |
662.81 |
2.41% |
| Re/US $ |
62.07 |
0.6 |
0.96% |
| Gold Rs/10g |
27,500.0 |
450 |
1.66% |
| Crude ($/barrel) |
47.63 |
-2.53 |
-5.04% |
| F.D. Rates (1-Yr) |
7.75% - 8.75% |
Weekly change as on on January 15, 2015
*BSE Sensex as on January 16, 2015
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Impact 
On the auspicious day of Makar Sankranti, the Reserve Bank of India (RBI) gave a pleasant surprise by cutting policy rates by 25 basis points (bps). While there was a clamour for reducing policy rates and RBI too in its 5th bi-monthly monetary policy statement hinted of reducing policy rate out of the policy cycle, nobody might have thought it to happen about 3 weeks before the 6th bi-monthly monetary policy statement, 2014-15 (scheduled on February 3, 2015).
So, where do policy rates stand now?
As an effect of 25 bps reduction, policy rates stand as under with immediate effect...
- Repo rate at 7.75%;
- Reverse repo at 6.75%; and
- The Marginal Standing Facility (MSF) and Bank rate consequently stands adjusted to 8.75%
However taking count of the liquidity conditions in the system, the Cash Reserve Ratio (CRR) was left unchanged at 4.00%. Likewise a decision was taken to continue with the overnight repos at 0.25% bank wise Net Demand and Time Liabilities (NDTL) at the Liquidity Adjustment Facility (LAF) repo rate and liquidity under 7-day and 14-day term repos of upto 0.75% of NDTL of the banking system through actions. Moreover, it was decided to continue with daily variable rate repos and reverse repos to smooth liquidity.
What was the rationale behind the rate cut?
The RBI made an assessment of the following macroeconomic facets:
- Inflation: - The central bank noted that since July 2014, inflationary pressures (measured by changes in the consumer price index) have been easing. The path of inflation, while below the expected trajectory, has been consistent with the assessment of the balance of risks in the Reserve Bank’s bi-monthly monetary policy statements; although the Wholesale Price Index (WPI) inflation and Consumer Price Index (CPI) inflation has bounced up a bit to 0.11% and 5.00% respectively for December 2014.
Moreover according to RBI Governor, to an extent, lower than expected inflation has been enabled by the sharper than expected decline in prices of vegetables and fruits since September, ebbing price pressures in respect of cereals and the large fall in international commodity prices, particularly crude oil.
- Inflation expectations: - The factors cited above have reduced the momentum of inflation, compensating for the widely anticipated ending of favourable base effects. Households’ inflation expectations have adapted, and both near-term and longer-term inflation expectations have eased to single digits for the first time since September 2009. The central bank also noted that inflation outcomes have fallen significantly below the 8.0% targeted by January 2015. And on the current policy settings, inflation is likely to be below 6.0% by January 2016.
- Fiscal Deficit: - RBI Governor Dr Raghuram Rajan, has also acknowledged Government’s commitment to adhering to its fiscal deficit target (of 4.1% of GDP) in the current fiscal year.
What would be the overall impact of this rate cut?
Well, borrowers would have reason to smile as banks and finance companies may reduce the interest rate on loan. Also, large business houses that have been feeling the pinch of higher interest rates would now breathe a sigh of relief as burden of interest payment may reduce going forward. Lower interest rates would benefit India’s new initiative of "Make in India", which is intended to provide a fillip to India’s manufacturing sector and other capital intensive sectors. Likewise, other interest rate sectors are likely to do well. This may thus aid the country clocking better economic growth, which has been languishing for long.
PersonalFN believes RBI has honoured the expectations of rate cut and now to fuel economic growth, the onus is on the Government. We are nearing the first full-budget of the NDA Government which, according to the Finance Minister, would pave way to second generation reforms. Recently, even the Prime Minister talked of introducing two new bills in the budget sessions. Major labour reforms coupled with Land Ordinance is expected to help the Government fast track projects in defence, power and rural electrification and rural housing sectors.
Path to interest rates...
PersonalFN is of the view that, RBI has provided some relief to the borrowers by lowering policy rates now. Since RBI has already stated that it won’t mix up with its monetary policy stance, it is unlikely that, policy rates would be hiked in the foreseeable future. However, further rate cuts depend on many factors mainly:
- Future trend in inflation;
- Government action in the areas where supply side constraints are posing threat of higher inflation; and
- How the Government will walk the path of fiscal consolidation
PersonalFN is of the view that, it would be over optimism to expect a few more rate cuts in near future. RBI may not cut policy rates unless it sees significant improvements in the macro-economic conditions. Investors would be better-off if they avoid speculating on further rate cuts.
What should be your investment strategy...
Having said the above, at present we believe that there are reasons for one to take exposure to longer end of the maturity curve. But while you do so, ensure that your exposure to long term debt funds does not exceed 20%-25% of the entire debt portfolio. While G-sec funds may start delivering returns as fundamentals improve and policy rates start to relax, going overboard now may not be very prudent.
If you are risk averse you can also invest in Fixed Deposits (FDs) now at high interest rates, before banks start pulling down interest rates further. Recently some banks some of India's prominent banks such as SBI, Axis Bank and HDFC Bank reduced interest rates on deposits in the range of 0.25% to 0.75% for various maturities. So, at present FD rates for tenure of 1 year is in the range of 7.75% - 8.75% (depending on the bank you opt for), while for 3 years are in the range of 7.50-8.75%.
You see, while investing in debt market instruments it is imperative to know your time horizon in order to park your hard earned money in appropriate instruments.
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Impact
About 3 years ago mutual funds were finding it difficult to secure fresh inflows for their existing equity oriented funds. However, now that, markets are buoyant and macro-economic indicators are improving, fund houses are flooding markets with New Fund Offers (NFOs) to capitalise on revived sentiments. It appears that their quest for garnering Asset under Management (AUM) is insatiable. After having launched open-ended funds, close-ended funds, plain vanilla funds, thematic funds; now a few fund houses are ready to introduce a new category of equity oriented funds, meant for only very high risk takers.
ICICI Prudential Mutual Fund and Reliance Mutual Fund have recently launched close-ended equity oriented funds that are likely to invest in equity options in addition to investing a dominant portion of their corpus in equities. ICICI Prudential Growth Fund - Series 7 and Reliance Capital Builder Fund II - Series B are the new offerings from India’s two prominent fund houses. Although Scheme Information Documents (SIDs) are not very overt about their intent of using active derivative strategy, the marketing literature suggests that both the funds intend to invest actively in derivatives. While Reliance Capital Builder Fund II - Series B may prefer 3 year-long call options; ICICI Prudential Growth Fund - Series 7 may actively churn its derivative exposure.
So, should you invest in such funds?
Market euphoria and mood of mutual funds looks slightly complacent at the moment. The current scenario resembles the time just before U.S. financial crisis hit the world in 2008. PersonalFN is of the view that, use of derivatives for profit maximisation is a risky strategy. Although Options are safer than Futures, they too involve a cost and are risky too! Moreover, if the fund goes wrong in predicting the market direction, the fund may not only lose onto opportunity, but would also incur higher costs.
PersonalFN is of the view that, investors should avoid investing in such new offerings. Complex products may not necessarily generate high returns for you. On the contrary, PersonalFN suggests you to consider diversified equity funds that have a good track record of performance for creating long term wealth. However, before investing in equity oriented funds you should consider your financial circumstances, goals and give due consideration to your risk appetite as well.
Would you invest in funds that aim to maximise profits by making a use of derivatives? Share your views
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Impact 
The Modi-led-NDA Government launched a national programme called "Make in India", last year (in 2014). This programme has an aim of making India a global player in manufacturing. Although it remains to be seen how far this initiative goes in achieving success, industrial activity seems to be kicking off.
The Index of Industrial Production (IIP) for November 2014 expanded to 3.8% after having contracted in the month before. A recovery in manufacturing, an impressive performance of power &electricity generation sector and a decent performance of mining industries, aided the IIP to bounce back, recording its highest levels in last 5 months. Moreover, it is noteworthy that the IIP readings for the month of August 2014 and October 2014 have been revised upwards.
IIP: on a see saw mode
Data as on January 12, 2015
(Source: MOSPI, PersonalFN Research)
Out of 22 manufacturing industries, 16 industries reported positive growth in November. However, the robust performance of manufacturing industries didn’t come as a surprise, since the HSBC Manufacturing PMI for the month of November had hinted at major improvement in manufacturing activity. Strong flow of new domestic orders and sustained flow of export orders helped manufacturers perform better in November. Basic goods and capital goods sectors did well in particular.
To read more about this news and PersonalFN’s views on it, please click here..
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Impact
The capital market sentiment has improved dramatically over last 1 ½ years in India. Current stock market rally and relentless fall in bond yields is not only attracting retail investors to markets but is also enticing mutual fund houses to buy out businesses of other mutual funds. As Asset under Management (AUM) of a mutual fund house grows, it directly results in improved earnings for the asset management company. But you might be wondering what would change for investors. PersonalFN tries to address your queries pertaining to Mergers and Acquisition (M&A) in the mutual fund industry.
On paper, nothing changes for mutual fund investor when the ownership of an asset management company changes hands unless schemes are merged too. However, the way your money would be managed in future, changes significantly. Therefore it becomes important for you to track news of M&A closely.
To know more about this story and to read our views, please click here
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- Inflows of foreign capital were robust in 2014. Given the possibility of continuation of this trend even in future, the Securities and Exchange Board of India (SEBI) has proposed to provide some relief to domestic fund managers from stringent regulation. At present, managing offshore pooled investments is a tough task for Indian fund managers due to some regulatory requirements which are tough to comply with.
Under current framework, the fund manager who manages domestic funds can manage Category I and Category II Foreign Portfolio Investments (FPIs) only if, domestic as well as offshore funds have the same investment objectives, asset allocation pattern, portfolio strategies, benchmark and at least 70% of portfolio is replicated. If not, a dedicated fund manager has to be appointed for managing offshore money. Moreover, if the fund is managed by the local fund manager there have to minimum 20 investors in a scheme with not more than 25% of the total assets should be held by a single investor. SEBI has proposed to do away with aforesaid regulatory requirements. FPIs prefer domestic teams and fund managers to manage their money too, as indicated by SEBI.
PersonalFN is of the view that, proposed changes may help Indian mutual fund industry tap higher FPI investments. Robust capital inflows are important for maintaining rupee stability. Indian market may also benefit if more and more FPI investors come to Indian and stay invested for long term.
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Foreign Portfolio Investment: Securities and other financial assets passively held by foreign investors. Foreign portfolio investment (FPI) does not provide the investor with direct ownership of financial assets, and thus no direct management of a company. This type of investment is relatively liquid, depending on the volatility of the market invested in. It is most commonly used by investors who do not want to manage a firm abroad.
(Source: Investopedia)
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Quote : "Monetary policy cannot do much about long-run growth; all we can try to do is to try to smooth out periods where the economy is depressed because of lack of demand." - Ben Bernanke
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