  | | February 01, 2013 | | | | | | | Weekly Facts | | | Close | Change | %Change | | BSE Sensex* | 19,781.19 | (322.3)
| -1.60% | | Re/US$ | 53.23 | 0.5 | 0.86% | | Gold Rs/10g | 30,335.00 | (275.0) | -0.90% | | Crude ($/barrel) | 115.94 | 1.8 | 1.60% | | FD Rates (1-Yr) | 7.50% - 9.00% | Weekly change as on January 31, 2013
*BSE Sensex as on February 01, 2013 | |
Impact 
With the Reserve Bank of India (RBI) having reduced rates and infused liquidity in the banking (to the tune of Rs 18,000 crore vide a CRR cut) in its 3rd quarter review of monetary policy 2012-13, many of you be wondering whether it be an opportune time to invest in longer tenure debt funds.
In the December 2012 quarter, with hopes that the country's central bank would reduce policy rates as hinted in its 3rd quarter mid-review, value of assets in the income fund category, more than doubled to Rs 33,563 crore; it being the highest ever increase in the category over the past eight quarters.
Also expecting that going forward interest rates may scale down a little further in order to support growth risks, income funds have increased their average maturity from 5.39 year to about 8.0 years and has taken exposure to G-Securities (G-Secs), while allocation to Certificate of Deposits (CDs) have reduced.
But, is it appropriate to take exposure to income funds now?
Well, we are of the view that we have already seen most of the debt market rally happened in the past few weeks on expectation of 25 basis points (bps) rate cut from the RBI in its stance of addressing to growth risk (as reflected by the slowdown in GDP growth rate) - which it has done! Now for yields to fall any further, aggressive rate cuts are required; which looks dim in the backdrop of macroeconomic assessment done by the central bank and the risk factors such as:
- Twin deficit problem (occurring due to widening current account deficit which has reached 5.4% of GDP for September 2012 quarter as is expected to rise further to 6.0% for December 2012 quarter and with fiscal deficit);
- Intermediate inflationary pressures
- Global economic factors
For the debt markets, Union budget 2013 would now be an important event as that will guide the markets on how fiscal consolidation will happen. It is noteworthy that any spill leading to higher borrowing estimates and deficit may lead to a negative sentiment and bond yields may see an upside movement of 25bps to 30bps. We expect another 25 bps reduction in policy rates by March 2013, followed by another 50 bps till December 2013 if inflation mellows down and signs of moderation therein appear.
Hence in time where uncertainty yet persists over the long-term trend of interest rates, we recommend that one should avoid taking exposure to long-term income funds. Income funds having a short-to-medium maturity profile can be considered at this point in time. In case if you wish to play the interest rate movement prudently, you could consider dynamic bonds, which by their very portfolio trait hold debt papers across maturity profile taking a view of the interest rate cycle.
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Impact
Contrary to the roaring participation of Foreign Institutional Investors (net buying worth Rs 19,808 crore as on January 28, 2013) domestic mutual funds (MFs) continued to be net sellers in the Indian equity markets yet again. Until January 28, 2013 they net sold Indian equities worth Rs 3,881 crore.
Domestic MFs press the sell button yet again!
Data as on January 28, 2013
(Source: ACE MF, PersonalFN Research)
So what is worrying fund managers?
Well, the fund managers seem to be concerned about the following domestic issues amongst others, although the global economic environment has improved in the intermediate, which has helped the markets ascend in the first month of calendar year 2013:
- Widening Current Account deficit (which has reached 5.4% of GDP for September 2012 quarter and is expected to rise further to 6.0% for December 2012 quarter);
- How the fiscal deficit target would be achieved (although the Government is quite ambitious on its path of fiscal consolidation);
- Risk of sovereign rating downgrade (due to the aforementioned twin deficit problem)
- Persistent weakness in the Indian rupee (despite RBI intervention)
- Impact of removal of subsidy on diesel and most fertilizers, on inflation
- Lull in industrial activity
- What the Government would enunciate in Union Budget 2013
- Political turbulence ahead of 2014 general elections
Apart from the aforementioned issues, ascending move of the Indian equity market in the last few months has also built-up redemption pressures for fund managers (as investors have preferred to either book profits, or are wary of the markets), which has caused them to be net sellers, despite the Government brought in reforms in the winter session of the parliament. Hence the increase in the Average Assets Under Management (AUM) of the industry (by 5.3%) for December 2012 quarter, can be construed to have occurred more due to the ascending move of the Indian equity markets since September 2012, rather than fresh investments made. In fact until last year the industry has seen a massive closure of 6,00,000 equity portfolios, never seen in the industry's history.
We are of the view that, at most times participation of domestic mutual funds has been contrary to that of FIIs. This has occurred on variety of macroeconomic reasons along with redemption pressures building in. Going forward too, the same trend may continue. But for you as investors in order to accelerate wealth creation by taking long-term view, mutual funds are a preferred investment option for host of advantages they offer. When markets seem to be volatile, one can opt for the Systematic Investment Plan (SIP) mode of investing as it can provide you with the advantage of rupee-cost averaging and compounding. However while selecting a mutual fund, prefer diversified equity funds with a good and consistent track record and invest with a long-term investment horizon of at least 3 - 5 years. Also consider fund houses which follow strong investment process and systems.
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Impact
All of you, who have opted for home loans at floating rates, have something to rejoice. The Reserve Bank of India (RBI) in its 3rd quarter review of monetary policy 2012-13 reduced policy rates by 25 basis points and infused liquidity into the system via a CRR cut of the same magnitude. Thus now with repo rate placed at 7.75%, bankers could contemplate reducing lending rates and approach this as an opportunity to increase credit growth as liquidity too worth Rs 18,000 crore, is flushed in the banking system (via a 25 bps CRR cut). Also in a press conference RBI Governor, Dr. D. Subbarao had said that banks had assured the central bank that loan rates would be brought down through a cut in the base rate.
So have banks indeed reduced lending rates? To know about that and the impact of the move on the borrowers, industry and economy, please click here.
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Impact
In the Union Budget 2010, our country's erstwhile Finance Minister (FM) - Mr Pranab Mukherjee enunciated that more banking licenses be issued in the Government's agenda of inclusive banking and providing a fillip to the banking sector. Thereafter acting upon the same, the Reserve Bank of India (RBI) in August 2010 also issued a discussion paper on granting new bank licenses; after which draft norms thereto were issued. But in July last year the draft norms witnessed diverse views from important think tanks and policy makers and the existing banks opposed the move. Amid all this, the RBI wanted the Government to amend the banking laws thereby bequeathing them with more power, in order to facilitate the process of issuing new banking licenses. But now although in the winter session of the Parliament the crucial Banking Laws (Amendment) Bill, 2011 was approved, there's yet a delay in issuing new banking licenses (despite the RBI had indicated that it will issue final guidelines onto the same by this month-end).
So what has caused such a delay? To know that and to read our view over it, please click here.
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- The per capita income of our country grew at a slower rate of 13.7% in the fiscal year 2011-12 to Rs 5,130 at current prices compared to Rs 4,513 in 2010-11.
"The per capita income at current prices is estimated at Rs 61,564 (per annum) in 2011-12 as against Rs 54,151 for the previous year depicting a growth of 13.7%, as against an increase of 17.1% during the previous year", said the revised data of national accounts.
Likewise, the Gross Domestic Savings (GDS) data too revealed that that the growth at current prices in 2011-12 slowed to 30.8% of GDP at market prices as against 34.0% in the previous year.
Also the rate of Gross Capital Formation (GCF) stood at 35.0% in 2011-12 as against 36.8% in 2010-11.
We are of the view that the abovementioned data points reflect the slump which the Indian economy has witnessed thus far since the beginning of fiscal year 2011-12. This in turn has had an impact of decline in financial savings of the household sector. Also the high interest rate regime has impeded the rate of GCF.
- The growth of eight core sectors (consisting of crude oil, natural gas, cement, coal, electricity, steel, petroleum refinery products and fertilisers) which has a weightage of 37.9% in overall Index of Industrial Production (IIP) grew marginally to 2.6% in December 2012 (from 1.8% reported in November 2012). However when compared to the same month a year prior, core sector growth dwindled, because in December 2011 the data stood at 4.9%. The decrease when compared to the previous year data has occurred due to drop in production of coal, natural gas and fertiliser.
We are of the view that, the slump in the core sector occurred due to variety of domestic and global economic factors has resulted in descending trend when compared to previous year. But such a data may not negatively impact IIP for December 2012, because of improvement in sentiments seen in the last quarter of calendar year 2012.
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Floating Interest Rate: An interest rate that is allowed to move up and down with the rest of the market or along with an index. This contrasts with a fixed interest rate, in which the interest rate of a debt obligation stays constant for the duration of the agreement. A floating interest rate can also be referred to as a variable interest rate because it can vary over the duration of the debt obligation.
Source: Investopedia
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Quote : "An investor without investment objectives is like a traveller without a destination." - Ralph Seger
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