  | | September 27, 2013 | | | | | | | Weekly Facts | | | Close | Change | %Change | | BSE Sensex* | 19,727.27 | (536.4) | -2.65% | | Re/US$ | 62.08 | (0.3) | -0.49% | | Gold Rs/10g | 30,080.00 | (200.0) | -0.66% | | Crude ($/barrel) | 108.80 | (2.8) | -2.50% | | FD Rates (1-Yr) | 8.25% - 9.00% | Weekly change as on September 26, 2013
*BSE Sensex as on September 27, 2013 | |
Impact 
Although rupee has recovered from its record-lows; it still appears depreciated. As most of you know, India needs to attract nearly USD 70 billion to resolve the on-going problem and bring down current account deficit. Various measures have already been taken including offering special swap facility to dollar deposits raised by foreign banks abroad. Moreover, overseas borrowing limit of banks has also been raised to 100% of their tier-1 capital. These two measures may help India raise about USD 15 billion from overseas investors. To attract more foreign capital, various possibilities are being discussed.
One that is of greater significance is inclusion of India in global bond indices. Recently RBI hinted at possibility of discussions being held with international index agencies and investment banks for the aforesaid purpose. However, it is believed that before India is included in any of the leading global bond indices; it has to do away with restrictions on flow of foreign capital. Lately, even the SEBI panel recommended to have removed all restrictions on foreign capital in the G-sec and corporate debt market. There have been a number of recommendations such as allowing unlisted corporate and alternative investment funds to access credit default swaps.
PersonalFN is of the view that if India is included in global bond indices and recommendations of the SEBI panel are accepted, debt markets would be impacted positively. Moreover, it would also serve the principal objective of supporting rupee. India's inclusion in global bond Indices may result in inflow of about USD 10 billion.
It is often said that, Indian debt markets, especially the government securities market and corporate bond markets have a narrow base and are relatively illiquid. PersonalFN believes such reforms will make markets deeper and improved liquidity would be beneficial to domestic investors as well.
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Impact
From 1st of October 2013, life insurance business wouldn't be normal for insurance agents as well as insurance companies. New Guidelines introduced by Insurance Regulatory and Development Authority (IRDA) would come in effect from 1st of October. After Unit Linked Insurance Plans (ULIPs) went out of favour with agents for a reason of less lucrative incentives; traditional insurance plans have been promoted aggressively. With an aim to clamp down malpractices in selling and to make traditional insurance policies customer centric; IRDA brought in many changes. These include higher risk cover and better surrender value to name a few. Besides, now the service tax would be recovered separately from policyholders.
Insurance agents are not letting go any opportunity to hard sell and earn high commissions. They are using levy of service tax as their sales-pitch. However, in reality, traditional insurance plans attract service tax even now. The only difference is that, it is absorbed by insurance companies and is eventually covered from policyholders through premiums. Insurance agents are making gullible investors believe that service tax is going to be levied for the first time and this would make traditional insurance policies costlier. Fact is, with new guidelines coming in force, how much your agent earns as commission would depend on number of years of premium paying term.
PersonalFN is of the view that the new rules may discourage agents to pitch short premium paying term products or sell longer tenure products with shorter premium paying term. But it may not curb mis-selling to a great extent. First-year commission paid on a traditional plan with premium paying term of 12 years or more can still be as high as 40%. PersonalFN believes that, investors would be better off not paying much attention to sales-pitch made by your insurance agent irrespective of how urgent it may sound. It is always better to keep investments and risk management needs separate. Opting for pure term insurance is advisable.
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Impact
Most The amount you pay to buy 250 grams of vegetables was buying you one full kilogram of veggies just few years ago. That is the rate at which cost of living is going up for the common man. Still, India's Wholesale Price Index (WPI) suggests that inflation has come down significantly in calendar year 2013, despite some upward movement witnessed in past few months.
Implications...
Being wary of the potential threat of diminishing purchasing power, Indian investors have been chasing gold to hedge themselves against such high rate inflation. This resulted in India importing huge quantity of gold. Higher gold imports affected India's current account position extremely negatively. As a result of which Indian currency lost its value sharply over last few months. To correct this, Indian government and RBI took a number of steps to discourage demand for gold. This included hiking duty on gold imports and barring banks from selling gold among others. There were few more suggestions to divert people from buying gold and real estate for the purpose of safeguarding themselves from ill-effects of high inflation. Need for launching inflation-linked bonds was being repeatedly discussed. Finally, in June this year, RBI launched Inflation Indexed Bonds (IIBs) tracking the movement of Wholesale Price Inflation. However, IIBs tracking movement of WPI don’t offer adequate hedge against inflation. Let’s understand why.
Wholesale Price Index (WPI) primarily captures the movement of industrial inflation which has about a two third of weight in the index and only about 20% the index represents price inflation in primary articles. On the other hand, about 50% of the weight has been assigned to food price inflation in Consumer Price Index (CPI). Thus, CPI is a better indicator of retail inflation than WPI. A common Indian spends sizable portion of his earnings on buying primary articles such as food. This is why investors would be less enthused to buy products protecting them against wholesale price inflation.
CPI vs. WPI Inflation
(Source: Central Statistical Office, RBI, PersonalFN Research)
To divert investors from gold; it needs to be ensured that investors are adequately protected from consumer price inflation. Acknowledging this need, the new RBI governor had assured about considering launch of IIBs tracking CPI.
To read more about this news and the view of PersonalFN over it, please click here.
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Impact
The Only few weeks ago RBI had come down heavily on home loan products popularly sold as 20:80 and 25:75 schemes. Now, it's a turn of consumer loans. Recently, in a confidential note sent to banks, RBI has asked them to stop offering zero interest loans.
Why has RBI done so?
It has been a growing trend to purchase consumer durable goods using credit. Many of you must have come across attractive ads inviting you to buy smartphones, SUVs and newly launched LED models among others. Usually, manufacturers of white goods, big retail chains and some prominent retailers tie up with banks and offer you an option to pay for your purchases through EMIs attracting zero percent interest. These loans are a variation in personal loans. The only difference is, instead of disbursing loans to you, vendors are paid directly. Between July 2012 and July 2013, loans disbursed by banks for the purchase of consumer durables have gone up nearly 34%.
RBI is of the view that, although such consumer loans might come at zero percent interest, banks often charge processing fees (which are charged upfront) on such products. This effectively covers for the interest forgone. Hence, these loans trick the borrower and the only purpose they serve is to lure buyers to make purchases. Moreover, in most cases, buyers can't avail any discount otherwise available on cash purchases and loans are issued at the maximum retail price. RBI has also asked banks to stop making such discrimination while issuing loans and has insisted that any benefit that is available should be passed onto customers.
To read more about this news and the view of PersonalFN over it, please click here.
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- With escalating costs of medical treatments, buying healthcare insurance has become a necessity these days. Although, you may have opted for healthcare insurance, your worries don't end there. Policyholders are always on tenterhooks till the insurance company settles their claim. But this may change soon.
We may soon have a credit-card alike medicash card which can be swiped for paying medical bills. This is expected to bring down cases of insurance company rejecting claims. Insurance companies may provide cashless authorization slip to policyholders. Moreover, insurers may get in contact with policyholders at the time of their taking discharge from the hospital and would share the approved amount through SMS or email.
PersonalFN is of the view that, although introduction of medicash smoothen the process of claim settlement; there would still be an element of uncertainty as far amount of claim settlement is concerned. Since it is only at the time of discharge, the policyholder will know whether his claim will be settled in full. PersonalFN believes unless there is more clarity on how would the medicash function, its benefits would be limited.
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Credit Default Swap: It is a swap, "designed to transfer the credit exposure of fixed income products between parties. A credit default swap is also referred to as a credit derivative contract, where the purchaser of the swap makes payments up until the maturity date of a contract. Payments are made to the seller of the swap. In return, the seller agrees to pay off a third party debt if this party defaults on the loan. A CDS is considered insurance against non-payment. A buyer of a CDS might be speculating on the possibility that the third party will indeed default."
(Source: Investopedia)
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Quote : "It's never too early to encourage long term savings" - Ron Lewis
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