Thumb’s Up to Q1 GDP   Sep 03, 2010

Weekly Facts
	Close	Change	%Change
BSE Sensex	18,238.31	12.0	0.07%
Re/US$	46.72	0.1	0.28%
Gold Rs/10g	19,140.00	170.0	0.90%
Crude ($/barrel)	75.85	2.8	3.78%
FD Rates (1-Yr)	6.00% - 7.10%

Impact

The Indian economy expanded at 8.8% in Q1 (April 2010 to June 2010) of FY 2010-11, thereby inching-up from 8.6% growth posted in the previous quarter (January 2010 to March 2010). The Gross Domestic Product (GDP) (for Q1 of FY 2010-11) at the constant prices of 2004-05 is estimated at Rs 11, 32,778 crore, as against Rs. 10, 40,949 crore in Q1 of 2009-10.

This upward move was despite the concerns of inflation in the domestic economy and double-dip recession in the global economy; and was fuelled by robust manufacturing growth.

The manufacturing activity grew at 12.4% (in Q1 of FY 2009-10 it was 3.8%) during the Q1 of 2010-11, while agriculture and construction activity grew at 2.8% (in Q1 of FY 2009-10 it was 1.9%) and 7.5% (in Q1 of FY 2009-10 it was 4.6%) respectively.

Even trade, hotels, and communication services also rose by a handsome 12.2% (in Q1 of FY 2009-10 it was 5.5%). However financial, insurance and real estate services restrained the growth in the economy by expanding by just 8%, against a growth of 11.8% in the same period a year ago.

Commenting on the Q1 GDP number, Finance Minister - Mr. Pranab Mukherjee said, "The numbers are quite encouraging, more encouraging point is 12.4% growth which has been registered in the manufacturing sector. I think the highest growth rate in the last 11 quarters. I do hope it will be possible to maintain this level of growth". He also exuded confidence and expressed that the economy will grow by not less than 8.50% - 8.75% this fiscal year, but mentioned that the economy will have to reach a 4.00% growth in the agriculture sector, to have sustainable growth.

We think that the GDP growth rate posted for in Q1 of FY 2010-11, is impressive, and is on account of the prudent stimulus measures adopted by the Government during the global economic meltdown. However, in our opinion the Reserve Bank of India (RBI) may take cue from the GDP growth rate number, and thus may continue to adopt its calibrated exit path by raising policy rates by 25 basis points in its mid-policy review meeting (scheduled for September 16, 2010). The rationale behind the rate hikes would be making policy rates more relevant to the economic growth rate and containing inflation.

To know more about the GDP impact, Click here.

Impact

If the Direct tax Code (DTC) goes through, insurance policyholders would be in for bonanza, as the DTC tabled in the parliament has proposed to exempt policyholders’ funds from the 12.5% tax charged on the income earned from the investment corpus generated through premium collections.

But the DTC has proposed to levy a 30% tax on shareholders’ funds. Hence now, the income of the insurance companies will be taxed at the corporate rate, while the earnings of the policyholders’ funds (accumulated on behalf of investors) will not be taxed.

We believe that if the DTC tabled in the parliament goes through, it will certainly act as sweetener for policyholders’ as they would gain through the increased bonus rates. Also in our opinion country’s largest life insurer - Life Insurance Corporation of India (LIC) would stand to benefit, since it does not have any shareholders. In their (LIC) case the surplus (net of taxes), is distributed between policyholders and government in the ratio of 95:5; so while the government will lose tax, it will gain in dividends

Impact

Keeping up the good work through its "clean-up drive", Insurance Regulatory and Development Authority (IRDA) has brought the "distribution" of insurance products under its scanner. The regulator would now look at the manner in which the corporate agents, banks and telemarketers are selling insurance products.

IRDA Chairman - Mr. J. Harinarayan said, "Product efficiency alone will not contribute to a healthier market". He also added that the IRDA would soon come with norms regulating bancassurance (deals that insurers have with banks for selling insurance).

At present, IRDA has published draft guidelines on agent behaviour which prescribes minimum productivity levels, and has also proposed norms which require agents to generate a report analysing the prospects needs before selling them a policy. "The draft norms pertaining to agents’ behaviour are still being examined, but the response from insurers has been positive so far", the IRDA Chairman said.

We think that while such a move will preclude mis-selling in distribution of insurance products; keeping a constant vigil over this may become difficult.

To read more about IRDA’s clean-up drive  Click here

INTERVIEW

In an interview with the Economic Times, Mr. A Balasubramaniam - CEO of Birla Sun Life Asset Management Company shared his views over SEBI’s plan to list all mutual fund schemes.

According to Mr. Balasubramaniam, the decision to list the mutual funds is a win-win situation - both for investors as well as the fund houses. He believes that this will provide investors with the ease and convenience while transacting in mutual funds, along with providing mutual funds with a better reach.

He is also of the opinion that the current NSE/BSE platform is quite good, but feels that to leverage its (platform) fullest potential by investors, distributors and manufacturers; a complete replication of Over The Counter (OTC) transaction done in mutual funds (including the subscription in SIP/STP) would be required.

He also believes that such a platform would reduce the transaction cost and overhead cost; however asset management companies will need to pay a minimum fee for listing their mutual fund schemes.

But having said that, he is of the strong belief that despite the transactions being done online, the role of intermediaries in indispensable as they capable to pull investor to the industry.

When asked about the distributor’s fees problem, he states that financial advisory is a service that is provided by these intermediaries and they demand fees for that service. Just like a fee is paid to the physician, commission needs to be paid to these distributors.

AND OTHER NEWS...

• Reliance Life Insurance Company Ltd., is gearing up to foray into the health insurance business and has applied to the Insurance Regulatory and Development Authority (IRDA) for its approval to tap the growing demand for health cover.
  
  Healthcare expenditure being $35 billion annually and only 2-3% of population having medical cover; in our opinion the company sees this potential scope for growth in the health insurance market.


• Larsen & Toubro (L&T) is likely to enter the insurance business by first quarter of the next fiscal, and has received preliminary approval (called R1) from IRDA.


• Birla Sun Life Insurance Company Limited launched two new plans - "Bachat Moneyback plan" and "Bachat Child plan". The "Bachat Moneyback plan", will enable customers to build a corpus through regular and systematic savings approach for various life needs; whereas the "Bachat Child plan" will enable parents to provide for and protect child’s future through regular savings.
  
  According to Fabien Jeudy, the Chief Actuarial Officer of the company, these plans will offer a regular money back of 20% of the monthly base premia at every 5th, 10th and 15th policy year.
  
  These have been launched following the success of Bachat Endowment Plan.


• In order to help parents plan for their child’s future goal, ING Life India has launched ING Aashirwad, a non-linked (not linked to capital markets) and non-participative child insurance plan.
  
  Under the plan, in case of any eventuality to the parent, an additional, equal to 50% of the guaranteed maturity as, death benefit and future premiums will be waived off, and the policy will continue to be in force. On maturity the child will get the full maturity value of the policy. Moreover, in order to enhance the protection against accidents, parents will also be having the option of adding an Accidental Death Benefit (ADB) or Accidental Death, Disability and Dismemberment Benefit (ADDDB).


• SMC, a domestic broking firm, has got provisional approval from SEBI to enter the mutual fund business, said group Chairman and Managing Director, Mr. Subhash Chand Aggarwal.


• In a recent ruling, the National Consumer Commission (NCC) said that the buyer is entitled to opt out of a housing project if there is a delay in delivery of possession of the house by the real-estate developer. The buyer is also entitled to a full refund with reasonable interest and any deduction on the amount is unjustified, the NCC added.


• In order to make overseas student travel insurance more beneficial to the students, ICICI Lombard General Insurance launched Student Medical Insurance Plus Plan as an add-on cover to supplement the Overseas Student Travel Insurance Plans.
  
  The additional coverage under this plan includes treatment for mental and nervous disorders, including alcoholism and drug dependency, in-patient medical expenses related to pregnancy, medical expenses for inter-collegiate sports injuries, cancer screening and mammography examinations, childcare benefits and even hospitalization in case of the much talked about Swine Flu / H1N1 influenza. Also no health check up is required.


• The Housing Development Finance Corporation (HDFC) raised its Retail Prime Lending Rate (RPLR) by 50 basis points to 14.25% in the wake of rising borrowing costs.
  
  In our opinion the increase in RPLR will impact all existing customers over the next three months, as the adjustable home loan rates are benchmarked to the RPLR.


• Workers employed under the National Rural Employment Guarantee Scheme (NREGS) may soon be brought under the ambit of New Pension Scheme (NPS), according to a senior official of the Pension Regulatory and Development Authority (PFRDA).
  
  In our opinion such a proposal would benefit the rural workers who have shorter work life span and no means to save for their retirement. However, these talks are at an early stage of development.


• HDFC Standard Life launched its new Unit Linked Insurance Plan (ULIP) called HDFC Standard Life Crest which is in line with the new IRDA regulations for ULIPs. In order to be familiar with the new ULIP, the product HDFC Standard Life Crest has a 30-day free look-in period as against the usual 15 days.
  
  The company also said that henceforth, all of its product will carry a 30-day free look-in period. Also if the investor feels that he/she has bought a wrong product, a choice will be given to switch over to an alternative product offering from the company within a year at a nominal additional cost.


• In a first of its kind move, IDBI Bank Ltd. (IDBI) has done away with the concept of minimum balance on Current and Savings Account (CASA) deposits and has waived off most of the service charges except those pertaining to bounced cheques.
  
  RM Malla, Chairman & Managing Director of IDBI said, "I do not want to withdraw this offer in my tenure as CMD. If this new model fails to attract customers and increase CASA, I would assume that either our communication has failed or it is not backed by service." Mr. Malla has three years term at IDBI Bank.


• The Development Credit Bank (DCB) increased the Benchmark Prime Lending Rate (BPLR) to 15.5% (a hike of 50 bps) with effect from September 1, 2010.
  
  "The hike reflects the increased cost of funds. Our internal assessment is that the upward bias in the interest rates may continue for the next two quarters," DCB Managing Director M Natrajan said.

NEWS ISSUES...

• Reliance Mutual Fund launched an open ended diversified equity small cap fund named "Reliance Small Cap Fund".
  
  As per the offer document, the investment objective of the scheme is "to generate long term capital appreciation by investing predominantly in equity and equity related instruments of small cap companies and the secondary objective is to generate consistent returns by investing in debt and money market securities".
  
  The fund will benchmark its performance against the BSE Small Cap Index.
  
  The New Fund Offer (NFO) is open for subscription from August 26, 2010 to September 9, 2010.
  
  To know more about the fund  Click here.