Transparent loan pricing soon Feb 13, 2010

SEBI and IRDA cross swords once again

Feb 13, 2010

Weekly Facts
	Close	Change	%Change
BSE Sensex	16,152.59	92.4	0.57%
Re/US$	46.50	0.2	0.52%
Gold Rs/10g	16,290.00	280.0	1.69%
Crude ($/barrel)	72.39	3.0	3.95%
FD Rates (1-Yr)	5.00%-6.50%

Weekly change as on Feb 11, 2010

Transparent loan pricing soon

Impact

Borrowers can now look forward to a more transparent pricing of their loans, as the Reserve Bank of India (RBI) has proposed the introduction of a new benchmark from April 1, 2010, which will reflect a more accurate movement in the interest rates.

The central bank plans to introduce a ‘base rate’, which will be computed on a cost-plus basis by each bank, and will be the floor price for all lending by the bank. The base rate system will replace the Prime Lending Rate (PLR) – the present benchmark rate used by the banks. Each bank will fix its base rate depending on its cost of funds. In order to arrive at the base rate, banks will have to factor in costs such as deposits cost, cost of maintaining Cash Reserve Ratio (CRR), cost of maintaining Statutory Liquid Ratio (SLR) and operating costs.

We feel that the base rate system will help the borrowers to compare interest rates which they are paying with the base rate. Floating rates will also come down when cost of funds for a bank declines. However we also fee that, such a pricing mechanism will require legislative changes to be made which might lead to the delay in implementation.

Gold losing steam

Impact

(Source: CSO)

After showing an impulsive run-up from February 2009 and maintaining an upward trend till its last high of Rs 18,272 on December 3, 2009, the rally in gold now seems to have lost some of its steam. Gold price has corrected by 10.7% since it last high, keeping it below the Rs 16,500 mark

The reasons cited for such a correction are:

Strengthening of USD

Technical correction

Profit booking

We believe that gold is a hedge against rising inflation, currency devaluation and financial crisis. Hence in such a scenario, investors should gradually keep allocating to gold and make the most of any price decline and increase allocations to this asset class. At Personal FN, we continue to recommend that every investor should have 5%-10% allocation to gold with a long-term investment horizon of 10 to 20 years.

A word of caution from SEBI

Impact

After observing a proliferation of websites offering investment tips to gullible investors, the Securities and Exchange Board of India (SEBI), has cautioned investors not to get swayed by their (websites) claims, since they appear to misguide investors and their advice is not backed by any reasonable basis. In a release, the regulator said, “the public in general are advised not to fall prey to or lured by sources of information such as websites, television channels, etc. – promising quick gains and unrealistic high returns”.

The regulator has also cautioned investors against making investments based on market rumours or unconfirmed or unauthentic news. SEBI has also mentioned that investors should not be guided by astro forecasts on share prices and market movements and get unduly influenced by indicative returns.

We believe that such cautioning by SEBI, is certainly pro-investor, which enables them to take informed investment decisions based on the credentials of professionals like Personal FN.

SEBI’s vigilance gets stronger

Impact

In order to review the ownership and governance structure of market infrastructure institutions like stock exchanges and depositories, SEBI has constituted a seven member committee under the Chairmanship of Dr. Bimal Jalan, former Governor of RBI.

The committee will study the functioning of these institutions, with regards to responsibility of undertaking regulation and supervision of markets while simultaneously pursuing commercial objectives.

The decision to form a committee has come on account of the intense competition developing between the existing stock exchanges, which SEBI fears would compromise on their (SEBI’s) regulatory role. Also, with exchanges being viewed as public utilities, SEBI felt that profit maximisation could not be allowed to become an overriding priority.

Some of the other important issues under consideration of the committee would be:

Self listing by an exchange and possible conflict of interest

Separation of the clearing function of a stock exchange and entrusting the same to an independent clearing corporation

Need for strategic investors in stock exchanges

Eligibility criteria for opening an exchange

We believe that such a measure by SEBI, would infuse better governance to the working of the stock exchanges, which in turn protects the long-term interest of the investors.

INTERVIEW

In an interview with the Economic Times, Mr. Nandakumar Surti, CIO of JP Morgan Asset Management expressed his views on near-term outlook of the markets and interest rates.

On the near-term outlook of the equity markets, he is of the view that huge pipeline of initial public offerings and follow-on public offers and the growing aversion to the risk worldwide are the two factors that could affect the market momentum in the near-term. Further tightening in China’s economy too could also trigger sharper-than-expected correction. However, Mr. Surti is not unduly worried as the earnings growth over the past four quarters has been on an uptrend, and the outlook on GDP growth remains positive. “There is no cause for worry on fundamental grounds” he said.

Mr. Surti is bullish on themes such as infrastructure, capital goods, IT services and cautiously optimistic on sectors such as banking and Fast Moving Consumer Goods (FMCG). He’s bearish on the pharmaceutical sector.

On the interest rate front he expects a 100-125 basis points increase by the end of 2010, but expect it to happen gradually in phases.

AND OTHER NEWS...

Indian Railway Finance Corporation (IRFC) and National Bank for Agriculture and Rural Development (NABARD) will offer bonds by the end of this fiscal year. The IRFC bonds will be non-convertible and will carry a coupon rate of 6.5% to 7.25%. The interest income earned from these would be exempt from tax. On the other hand NABARD’s Bhavishya Nirman Bonds will be 10-year zero-coupon bond and the investor will get Rs 20,000 on maturity, which will be taxable only on maturity as capital gains.

Foreign exchange reserves fell by $ 1.98 billion to $ 280.95 billion during the week ended January 29, 2010.This was mainly on account of Foreign Institutional Investors (FIIs) turning net sellers and currency revaluation

Insurance products will be soon sold through your TV sets, as TV-shopping channel, Homeshop18 has tied up with Tata AIG to offer insurance products. The CEO of TV18 Home Shopping Network Ltd., Mr. Sundeep Malhotra said “we are very soon going to sell insurance products through our channel. Tata AIG will be the first to come on board and their products will be sold by our channel within next two months”.

Food inflation rose to 17.56% for the week ended January 23, 2010, on account of the increase in wheat, pulses and vegetables.

Dr. K.C. Chakrabarty, Deputy Governor of RBI expressed concerns over inflation. Mr. Chakrabarty said "India can’t afford to be lax about fighting inflation as the nation seeks to slow price gains to 5% or less". He also said RBI hopes to cool inflation to 4% or 5% by 2011 - 2012.

Life Insurance Corporation of India (LIC) launched a Unit Linked Insurance Plan (ULIP) named ‘Wealth Plus’. The plan is a guaranteed NAV plan, which guarantees highest NAV recorded on a daily basis, in the first 7 years of the policy. The minimum age to avail of this policy is 10 years, whereas the maximum is 65 years. For the regular (yearly) premium option the minimum premium amount is Rs 20,000, while for the single premium policy it is Rs 40,000.