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| October 01, 2014 |
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| Weekly Facts |
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Close |
Change |
%Change |
| BSE Sensex* |
26,567.99 |
-58.33 |
-0.22% |
| Re/US$ |
61.35 |
-0.41 |
-0.67% |
| Gold Rs/10g |
27,100.00 |
150 |
0.56% |
| Crude ($/barrel) |
95.42 |
0.36 |
0.38% |
| FD Rates (1-Yr) |
8.00% - 9.00% |
Weekly change as on September 30, 2014
*BSE Sensex as on October 01, 2014
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Impact 
If you have availed a home loan from a bank or Housing Finance Company (HFC) for buying your dream home, you would always expect that interest rates come down. Usually, the quantum of home loan is so large that even a cut of 0.50% may translate into hefty savings. So, often all eyes are on what actions the Reserve Bank of India (RBI) takes in its monetary policies; which influence major the decision of banks such as fixing interest rates on loans and deposits. You see, growth in an economy gets fuelled when interest rates descend or stay for long. But again, that is function of inflation among other macroeconomic variables.
Monetary policy stance...
In the 4th bi-monthly monetary policy statement for 2014-15 (held on September 30, 2014), RBI continuing with its vigil on inflation, keft policy rates unchanged, where the repo stood at 8.0%, while the reverse repo rate at 7.0% thereby maintaining the Liquidity Adjustment Facility (LAF) corridor between the two at 100 basis points (bps). Moreover, the Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) were left untouched at 4% and 22% respectively. But, the central bank lowered the liquidity facility provided under the export credit refinance (ECR) facility from 32% of eligible export credit outstanding to 15%, effective from October 10, 2014.
The rationale behind the status quo...
You see, the macroeconomic situation hasn't changed much since RBI announced its 3rd bi-monthly monetary policy in August 2014. Although there have been some positive developments, growth momentum of Indian economy is yet to show sustainability and promising signs.
In the April-June quarter of the fiscal year 2014-15, India's Gross Domestic Product (GDP) grew at 5.7% - the fastest rate recorded over last 9 quarters. But with the industrial activity slumping to 0.5% in July 2014 after expanding at an average of 4.2% in the April-June quarter of the financial year 2014-15; the buoyancy of economic growth remains under question.
Upside risk to inflation remains…
Data as on September 30, 2014
(Source: RBI, PersonalFN Research)
Similarly, although, retail inflation measured by the movement of Consumer Price Index (CPI) for the month of August has come a tad lower at 7.80% in August 2014 vs. 7.96% recorded in July 2014, stickiness in food price inflation is yet evident and remained a cause of concern. Likewise, the non-food credit growth fell to a multi-year low of 9.7% in the fortnight ended on September 05, 2014.
Current Account Deficit (CAD) however reduced to just 1.7% in the first quarter. Liquidity conditions too remained comfortable throughout 2nd quarter of the current fiscal year...and rather improved toward the end of the quarter. Borrowing under LAF and Marginal Standing Facility (MSF) reduced to Rs 45,000 crore for September till the 28th day, from Rs 87,000 crore in July. This was due to lower credit growth and higher liquidity injection by RBI through more frequent 14-day and overnight variable rate repo operations.
So, what is RBI's outlook on growth and inflation?
RBI has retained its GDP growth estimate of 5.5% for the current fiscal. It expects economic growth to slow a bit in the 2nd and 3rd quarter of the current fiscal year, while growth may pick up in the last quarter. Revival of investment cycle, strong export growth, fiscal consolidation and lower inflation remain the key areas where performance must improve before GDP growth picks up. However, on back of high food price inflation, RBI expects inflation to have a significant upside risk. RBI is doubtful about achieving the 6% inflation target in 2016.
How did markets react?
As far as equity markets are concerned, knee-jerk reaction was positive but as investors settled and got time to analyse the announcement, markets lost gains made earlier and closed almost flat. As far as the Indian debt market is concerned, the 8.40% (2024)10-Year benchmark rose a tad higher ending the day at 8.51% from the previous day's close of 8.49%. It is noteworthy that the yields which were on declines since the beginning of the week had hit a rock bottom of 8.44% on Monday, as there were expectations by a few that RBI could lower repo rates or indicate a softening trend.
What should home loan borrower expect now?
PersonalFN is of the view that, unless retail inflation comes down to a level desired by RBI, it is unlikely that it will precipitate to lower policy rates and lower interest rate on your outstanding home loan amount. The RBI may maintain status quo longer than anticipated earlier. In worst case it may even hike rates, if situation demands. Until policy rates stay higher, interest on your home loan won't come down.
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Impact
The current market rally has sustained for more than a year now. During the initial phase, large caps rallied but soon after the Modi-led-NDA came to power, the mid and small caps have zoomed in the race. Strong rallies often tempt investors to invest aggressively in equity and equity oriented mutual funds. Typically, fund houses launch a number of New Fund Offers (NFOs) in their race to garner more Assets under Management (AUM), trying to capitalise on the upbeat sentiments in the market. PersonalFN has written vehemently against such approach of mutual fund houses. However, now a few mutual fund houses are cautiously restricting inflows in some of their schemes as the markets have got overheated.
Recently, DSP BlackRock Mutual Fund announced that it won't accept investments in excess of Rs 2 lakh through SIP route or in lump-sum in DSP BlackRock Micro Cap Fund. This move will come in effect from October 01, 2014.
Why restrict inflows?
Well, anticipating large investments in micro-cap segment due to vibrant mood in the market, the fund house has decided to go slow on inflows. This is surprising that while other fund houses are launching funds targeting mid and small cap segment, DSP is taking a contra step. According to the fund house the decision has been taken to protect the interest of existing investors.
PersonalFN is of the view that, considering expensive valuations in the mid and smallcap domain, the move made by DSP BlackRock Mutual Fund appears rational. If markets start falling micro cap stocks would tend to fall violently, which defies the purpose of investing fresh money with an objective of wealth creation. If investors keep pouring money in a micro cap fund, the fund manager has limitation as to how much cash he can hold. This in a way affects old investors in case markets enter a correction mode.
Speaking about the timing of the move, PersonalFN believes, the fund house has adopted a nimble approach which might help it win investors' confidence. Such move also denotes that the fund house has doubts pertaining to the durability of the current stock market rally, especially in smaller stocks.
Do you think this is a right move made by the fund house and others should follow it? Share your views
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Impact
The worries of Indian banks seem to be far from over. Public sector banks have reported some high-profile cases of frauds. Asset quality of banks, especially of public sector banks is largely affected due to slack in the economic progress, high interest rates and more importantly due to lapses in the credit assessment processes of banks. Private sector banks are affected too, albeit to a lesser extent.
If this wasn't enough, the recent verdict of the Supreme Court of India (SC) on coal mine allocation is going to impact asset quality of banks negatively. The Judgement of SC has been a watershed as it cancelled allocations of 218 coal blocks. With this, the apex court not only slammed the Government involved, but also showed no mercy to corporate that have made huge investments in these blocks. The court was convinced that the mines were allocated through a defective and non-transparent process.
You see, coalgate is a sensitive issue for power and steel sector companies. So with the banks, as the Indian banking sectors lending exposure to such sectors. While banks are taking efforts to avoid their assets turning into bad or non-performing, the fact remains that the asset quality of some Indian banks is in danger. But to reduce this strain, they are now in talks at the ministerial level.
PersonalFN is of the view that, banks should be given some consideration on case to case basis. PersonalFN also believes, sound banking system is the backbone of any large economy and thus it is important to fix the problem of bad asset quality as quickly as possible, before it infuses a grave systemic risk. Having said this, while the judgement delivered by the SC may have some short term negatives, in the long run this is positive and gives a clear message that political nexus to do business would not stand for too long .if incorrect practices are adopted.
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Impact
Investors are foolish! That's what mutual fund houses perceive investors to be. You see, they take advantage of ferocious market rallies and try to woo investors with New Fund Offers (NFOs) that make little sense, especially considering their current product portfolio. On one hand mutual fund houses talk about investor education programmes and making them financially literate and wise, and on the other, they expect investors to be irrational and give good response to NFOs.
What's the new reason this time for launching NFOs?
If you happened to invest in equity mutual funds 6-8 years back; you would still recollect how aggressively "natural resources" theme was promoted. After all it was a commodity boom across the globe. NFOs garnered huge corpus, but what happened thereafter, everybody knows. Mutual funds had launched around 48 NFOs in 2007; however that number dropped to just 17 in 2009 when markets traded at their multi-year lows. Similar phenomenon can be witnessed now.
Now that NDA Government is enchanting "Make in India" mantra, manufacturing theme is being promoted. Also, mutual fund houses are launching focused funds that target to keep portfolio brief and concentrated besides launching opportunities and mid and small cap funds. As reported by Business Standard on September 04, 2014, in this calendar year so far, fund houses have launched about 40 equity oriented schemes which exceed the number of NFOs launched between 2011 and 2013.
To read more about this and PersonalFN's views on it, please click here.
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Bad Debt: A debt that is not collectible and therefore worthless to the creditor. This occurs after all attempts are made to collect on the debt. Bad debt is usually a product of the debtor going into bankruptcy or where the additional cost of pursuing the debt is more than the amount the creditor could collect. This debt, once considered to be bad, will be written off by the company as an expense.
(Source: Investopedia)
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Quote : "The key to making money in stocks is not to get scared out of them" - Peter Lynch
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