Impact 
It seems that realisation has dawned upon the Finance Ministry that insurance is meant for protection and not for investment, while laying the new rules for tax benefits on life insurance policies. The Finance Bill has sought to increase the protection element in insurance policies by proposing that the sum assured or death cover be at least 10 times the annual premium for the policy to enjoy tax benefits, instead of the current limit which is 5 times (of the annual premium). The idea behind increasing the minimum sum assured is to ensure that insurance policies carry a reasonable amount of insurance and do not work as investment plans alone.
However, as usual the insurance industry is not in favour of the above mentioned changes as according to them the changes will not benefit all the classes of policyholders especially the older people and those with poor health record.
We believe that it is absolutely right in bringing above the mentioned changes in the insurance policies. If the proposals of the Finance Ministry are implemented it will make endowment policies unfavourable as the premium will be higher. However, the most important thing is that the premiums for the term insurance, the purest form insurance will not change.
Investors should always keep in mind to separate their investment needs from protection needs. If you adopt this approach it will not only result in better protection for your family but will also help in achieving your goals as your hard earned money will be channelized through efficient sources of investment like mutual funds, fixed deposits, etc.
| Impact
The Reserve Bank of India (RBI) in its Annual Monetary Policy 2012 slashed the repo and reverse repo rates by 50 basis points (bps) higher than the markets expectations. The RBI's move comes on the back of a slump in India's Gross Domestic Product (GDP) growth rate and also disappointing Index of Industrial Production (IIP) growth of 4.1% for the month of February 2012.
Inflation showing signs of moderation
(Source: Office of the Economic Advisor, PersonalFN Research)
Furthermore, with headline inflation being 6.89% for the month of March 2012 and there being more upside risks to it in the coming months, did not preclude the RBI from a mild dose of rate cuts. Instead the RBI turned its tide over reviving the economic growth of the country.
In our opinion, the RBI's decision to slash the policy rates by 50 bps despite the upside risks to inflation, is merely intended to provide an impetus to economic growth rate. Going forward since upside inflation still persist, the chances of immediate rate cuts (at least in the 1st quarter mid-review of Monetary Policy 2012-13) are reduced.
To view our detailed note on the RBI's Annual Monetary Policy Statement 2012 please click here.
| Impact
In India a person buys gold mainly in the form of jewellery, gold bars or even coins. This attraction towards gold has been since time immemorial. It brings in a sense of pride and happiness to buy gold in the physical form. If one's daughter is to get married, the first thing that comes to her parent's mind is buying gold jewellery. Some people also consider it as a status symbol. But this emotional way of purchasing seems to be taking a back seat, as investors seem to be looking at it as an investment avenue or an asset class to protect one's portfolio in times of economic and political uncertainties.
To read more about the ideal way to invest in gold, please click here.
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| Impact 
To start any new venture or business, you always seek clarity in many forms. First you need clarity in your thoughts as to what you want to achieve by undertaking such an activity. Then follows the calculation part which helps in assessing the capital required to start the venture or the business. But when you learn that the rules and regulations framed by the Government for that particular venture or business are not very clear and there is a lot ambiguity surrounding the same, your hopes actually crash. Eventually you lose all your interests' in doing that business even though there are some rules in place for the same.
Similarly, the mutual fund industry is also in a dilemma of launching Real Estate Mutual Funds (REMF) despite regulations being in place for the same since 2008 by the Securities and Exchange Board of India.
Let's find out what deters the mutual fund industry from launching such funds.
This Week's Poll !!!
Have you bought your insurance policy as an investment?
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In an interview with the Economic Times, the RBI Governor Dr. Duvvuri Subbarao explained his stance of reducing policy rates by 50 basis points and also shared his views on how banks would transmit these rate cuts under a low deposit growth rate regime and inflation.
On the stance of reducing policy rates, Dr. Subbarao thinks that a person should not read RBI actions by what people are expecting from the RBI. "The inflation numbers that came out on Tuesday has showed that core inflation had come down below 5% for the first time in two years. You must remember that we had last raised policy rates in October 2011 when headline inflation was about 10% and core inflation was above 8%. There has been a significant decline in both of them. On the other hand, we had numbers about growth, 6.1% in the third quarter of last year. We have taken into account growth and inflation dynamics, the numbers as they came out and calibrated this. Another motivation for a strong increase was to motivate banks to transmit this to deposit and lending rates," he explained.
According to the RBI Governor, despite the low deposit growth rates, the reduction in the policy rates was carried out as the liquidity position was now more comfortable and the Government's cash balances were down giving scope for more active management of liquidity.
As far as inflation is concerned, Mr Subbarao believes that the inflation has come down in the post crisis period but fiscal deficit has gone up. "We have had supply shock on the food side and there was demand pressure, so there was some unfavourable mix of demand pressure and supply shock that drove inflation. Growth had come down due to post-crisis concerns. Now we are hoping that inflation and growth have bottomed out and that 5% medium-term inflation target of RBI is very much within the realm of possibility," he said.
We believe that the 50 basis points (bps) cut in the repo and reverse repo rates by the RBI was undertaken to give an impetus to economic growth, rather than nudging it (economic growth) by a cut of 25 bps in policy rates. While inflation has certainly mellowed at 6.89% for the month of March 2012 (from 6.95% in February 2012), the upside risk to WPI inflation still persists. The retail inflation as measured by the Consumer Price Index (CPI) has already jumped to 9.47% for the month of March 2012 (from 8.83% in the previous month), as prices of food, fuel and clothing have become dearer. Moreover, if oil marketing companies increase fuel prices (in consent with the Government), to correct their under-recoveries (due to ascending trend in Brent crude oil prices), then we may again see the inflation bug moving northwards.
With the Government pressure on the PSU banks to consider rate revisions, PSU banks may reduce their lending as well as deposit rates in order to abide with the Government. This will take pressure off the RBI as the transmission of rate cuts by the banks will take place sooner than expected. However, this may adversely affect deposit mobilisation of the banks and on the other hand demand for loans may increase due to lower rates. This may further trigger asset-liability mismatch for the banks.
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- The Reserve Bank of India (RBI) has directed the banks not to levy any penalty on pre-payment of loans taken on floating rate. The removal of foreclosure charges or prepayment penalty on home loans will lead to reduction in the discrimination between existing and new borrowers and the competition among banks will result in finer pricing of home loans with the floating rate.
- In its World Economic Outlook the International Monetary Fund (IMF) has forecasted a 3.5% growth in the year 2012 for the world economy. This was an upward revision against its January 2012 projection of 3.3%.
For 2013, the IMF expects the world economy to grow at 4.1%. The report reflects IMF's view that the euro area, while still facing an economic downturn and the "hard to quantify" potential risk of a country's default, has stabilised since last year.
And as far as India is concerned, the IMF has pegged growth in India's Gross Domestic Product (GDP) for FY 2012 at 6.9 per cent, scaling down the forecast by 0.1 percentage points, compared to its projection in January. It attributed the moderating growth outlook to policy uncertainty, supply bottlenecks, high interest rates and low external demand.
- India received Foreign Direct Investment (FDI) worth $2.21 billion for the month of February 2012 taking the annual growth to 74%. Moreover, the cumulative FDI flow from April 2011 to February 2012 was at $28.4 billion. Recently, the government has streamlined the procedure to boost foreign investment into the country and also allowed FIIs to invest up to 23% in commodity exchanges without seeking its prior approval.
In our opinion there is more scope to attract FDI flows into the country by way of prudent policy reforms like 100% FDI in multi-brand retail.
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Foreign Direct Investment (FDI): An investment abroad, usually where the company being invested in is controlled by the foreign corporation.
(Source: Investopedia)
| | QUOTE OF THE WEEK
"The highest use of capital is not to make more money, but to make money do more for the betterment of life."
- Arthur Godfrey
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