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| September 04, 2015 |
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| Weekly Facts | | | Close | Change | %Change | | S&P BSE Sensex* | 25201.9 | -1190.48
| -4.51% | | Re/US $ | 66.24 | -0.19
| -0.29% | | Gold Rs/10g | 26,600.00 | 200.00 | 0.76% | | Crude ($/barrel) | 49.7 | 8.01 | 19.21% | | F.D. Rates (1-Yr) | 6.25% - 8.20% | Weekly changes as on September 03, 2015
*BSE Sensex as on September 04, 2015 |
Impact 
If you are a borrower, there is some good news for you. Banks will have to be more transparent in pricing loan products in coming months, if the draft guidelines on base rate become a reality.
What may change?
Under present system, banks have been given liberty to follow any permissible method to arrive at cost of their funds in the base rate calculation. Base rate is used as a reference point to pricing loans. It has been observed that, different banks use diverse methods for calculating cost of deposits. Suppose, RBI cuts policy rates by 25bps (0.25%); the cost of fresh borrowing may come down for banks, if banks are able to raise deposits at lower rates. However, when it comes to lowering the interest rates on loans; banks are reluctant many a time as they take into consideration, average cost of funds and not the latest cost of funds.
RBI has time and again raised its concern on poor transmission of monetary policy. If draft guidelines become new norms; banks may have to follow universal method for calculating cost of funds.
Impact on Borrowers and depositors
As soon as RBI changes the monetary policy stance, borrowing and lending rates may change without much of time lag. Loan pricing may become little more transparent as banks will have little discretion in arriving at the cost of funds.
Impact on banks
Profitability of banks may take a hit if there is a huge difference in the average cost of the funds and the marginal cost of the funds. It appears, in the falling interest rate scenario, at least in initial stages; profitability of banks may take a hit and opposite is true under rising interest rate scenario.
PersonalFN is of the view that, if accepted, draft guidelines, may facilitate better transmission of monetary policy. This may give RBI more flexibility in reacting to the changing economic situations. Borrowers and depositors too may benefit from the new rules as banks will have to pass on the rate hikes and rate cuts.
Message to borrowers
PersonalFN believes, borrowers should keep some margin in their household budgets to be able to absorb higher EMIs on account of rising borrowing costs. Similarly, one shouldn't overstretch when borrowing rates are soft.
If you find it difficult to manage your finances due to extended work hours or complexities involved; you may simply depend on unbiased and personalised financial planning services provided by PersonalFN.
Do you think, the proposed move has a potential to make India's monetary policy more effective? Share your views here.
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Impact
While there are growing concerns over growth prospects of China, India has been able to retain its position of the fastest growing economy, among major economies. India has grown at 7.0% in the first quarter of the Financial Year (FY) 2015-16. Although Quarter-on-Quarter growth has been lower for the quarter ended in June 2015; it has been higher on Year-on-Year Comparison. India's GDP grew at 7.5% in Q4 of FY 2014-15 and 6.7% a year ago. However, deeper analysis suggests that growth momentum has been flagging and prospects also remain questionable, going by available numbers.
Why 7% growth looks unimpressive?
Despite of higher indirect tax collections and lower subsidy payment, GDP growth came a tad lower than the Gross Value Added (GVA) of 7.1%. Let's understand the relationship between GVA and GDP.
GVA + taxes on products - subsidies on products = GDP
In simple words, GDP is GVA increased by net of taxes on products collected and subsidies paid. GVA helps you arrive at contribution of each sector in GDP. The reason why GDP came lower than GVA in Q1, FY 2014-15 is growth in indirect taxes at constant prices has been dull. On the other hand, spending on account of fertiliser subsidies and food subsidies has gone up substantially. The Government has also settled the subsidy arrears.
| | Financial Year 2015-16 (Q1) | | | Y-o-Y Growth | Share in GDP | | Agriculture, Forestry & Fishing | 1.9% | 14.2% | | Mining & Quarrying | 4.0% | 2.8% | | Manufacturing | 7.2% | 18.9% | | Electricity, Gas, Water Supply & Other Utility Services | 3.2% | 2.3% | | Construction | 6.9% | 8.0% | | Services Related to Broadcasting | 12.8% | 19.9% | | Financial, Insurance, Real Estate & Professional Services | 8.9% | 22.2% | | Public Administration, Defence & Other Services | 2.7% | 11.6% | Data as on August 31, 2015
(Source MOSPI, PersonalFN Research)
As given in the table above, growth rate in agriculture, mining and utility services has been poor. Manufacturing has remained firm but growth hasn't been high enough to compensate for the shortfall in other sectors. Financial sectors and services related to broadcasting have done fairly well, providing some support.
Growth in Private Final Consumption Expenditure (PFCE) has been 7.4% while that in Government Final Consumption Expenditure (GFCE) has been just 1.1%. Gross Fixed Capital Formation (GFCF) has witnessed lacklustre growth of 4.8%. Exports have come about 6.4% lower on Y-o-Y basis. Deposit growth and credit growth aggregated at 11.4% and 9.3% for the quarter ended on June 30, 2015. This suggests that, demand for credit at prevailing interest rates is low. During the first quarter of last fiscal credit growth had aggregated at 13.3%.
PersonalFN is of the view that, all aforesaid indicators point at slowing momentum of economy. Although manufacturing growth still remains higher than the GDP growth, factors that are required to achieve even higher manufacturing growth are sagging. Lower growth in GFCF and single digit credit growth suggest that capex cycle still remains weak.
PersonalFN also believes that, performance of agriculture remains important for two reasons. Farming sector not only directly adds to the output but also decides the strength of rural demand. Fiscal deficit has already reached 70% of the full year limit for FY 2015-16 in first four months leaving little room for the Government to spend aggressively in the second half of FY 2015-16. Devaluation of Chinese currency and slowing economic growth across the globe may continue to exert pressure on India's exports.
How markets reacted?
Equity markets reacted negatively to GDP data. Besides weaker growth back home, turbulence in the global markets caused S&P BSE Sensex to touch 12-month low recently.
What to expect?
PersonalFN is of the view that, economic growth may come under more pressure if capex cycle fails to revive substantially and household demand doesn't pick up drastically. Considering these possibilities, PersonalFN believes that there may be some more downside left in the markets. You shouldn't speculate on the direction of markets and stay invested for long term. In case markets fall on bad data, you may take advantage of rupee cost averaging. Under current scenario, Systematic Investment Plans (SIPs) offered by mutual funds remain one of the best options to take exposure to equity markets.
Do commodity funds look attractive at this juncture?
As you may be aware, China is stuttering with lower economic growth. As a result commodity prices, especially those of base metals have come off sharply. Since most of commodities are in a tight grip of bears, commodity funds have nosedived.
PersonalFN recently wrote an article telling investors how commodity funds are placed at this juncture. Will they go further down or the sharp bounce back is on the cards. Click here to know that. |
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Impact 
"Rats abandon a sinking ship." If emerging markets are considered a sinking ship; they are the Foreign Institutional Investors (FIIs) who have been stampeding to exit Indian equity markets. International investors are not just bearish on India but also on major markets across the globe. Please look around and this is how world equity markets may look like;
Chinese equity markets are smashed, European and U.S. markets are distressed, and those in the Japan and elsewhere in Asia are rocked. It is very obvious, equity markets in India can't run up in isolation. That decoupling hasn't happened yet. In such a scenario U.S. Dollar is being considered very safe and has been attracting investors. This is why investors are encashing profits in equities and preferring to stay in USD for a moment; at least unless picture becomes clears.
Speaking about India, last week of August was a devastating one. Overvalued Indian market fell like a house of cards as contagion of Chinese gloom spread everywhere; after Asia's largest economy pegged its currency down. While FIIs exited India; mutual funds came to the rescue. Only time will prove, who's dumb and who's smart. Having said this it is important for you to stay calm and not allow any mutual fund advisor to fool you. It has been observed that, mutual fund advisors often make investors churn unnecessarily when markets are volatile only with an aim of earning higher commissions.
Investment Trends in August 2015
Data as on August 31, 2015
Data considers daily net investments of mutual funds and FIIs in Indian stock markets for the month of August 2015
(Source: SEBI, PersonalFN Research) FIIs might be exiting India for reasons given below
- China has been facing serious structural problems. As slowdown fears in China appear to be more serious and well-accepted now, FIIs are believed to have become risk-averse all of a sudden and thus have been withdrawing from all major emerging markets
- What looked certain till now, as far as action of Federal Reserve (Fed) on policy rates in the U.S. is concerned, has started looking uncertain after China devalued its currency
- With 7 odd percent of GDP growth, India still remains one of the most rapidly growing economies. However, despite of showing noticeable improvements, Indian economy is well-short of meeting expectations of global investors.
- It seems lacklustre performance of corporate Inc., quarter after quarter, has finally made FIIs believe that India may take a long to recover in true sense. Valuations appear extremely expensive.
- Logjams in Parliament are obstructing the passage of some key bills which gives a feeling that there is no consensus within India on the reform agenda
In simple words, FIIs had invested heavily in India on expectations that it will be a rewarding investment destination. However, they appear to be worried about prospects of Indian markets now under fast changing environment.
To know more about this and PersonalFN's views over it, please click here.
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Impact
Recently, JPMorgan India Short Term Income Fund and JPMorgan India Treasury Fund bore the brunt of its corporate debt holding in Amtek Auto Ltd.
Amtek Auto Ltd, is sailing through turbulent times. The company reported a net loss of Rs 157.60 crore in June quarter, while net sales were at Rs 854.22 crore. As of March this year, the total debt on the balance sheet of the company was Rs 7,844.12 crore and creditors have been largely been affected. When the company issued this debt paper, it was carrying an 'AA-' by rating agency CARE. But now for failure to share crucial information for facilitating a rating opinion, CARE has suspended the coverage of this company. Brickwork Ratings too has downgraded its rating to 'C', from 'A+' earlier.
Such a scenario has gone on to impact the performance of the aforesaid two schemes, as JPMorgan Mutual Fund was forced to Mark-to-Market the value of the fund in line with the new credit rating.
To read more about this news and our views, please click here.
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- Everyone wants to receive regular income even after retirement. Keeping this in mind, many people invest in retirement plans offered by insurance companies which need them to use proceeds to buy annuity once the plan reaches maturity. At present, you may choose an annuity option even after the retirement plan gets matured. However, there is a possibility that, annuity payments get delayed due to time lag between the date of maturity of a retirement plan and the date of buying annuity resulting in the delay of subsequent annuity payments.
Insurance Regulatory and Development Authority (IRDA) has directed insurance companies to ask for annuity preferences of customers when the retirement plans are sold. Therefore, you may expect a call from the insurance company asking you to provide your choice of annuity option, if payment on your plan is due after April 2016.
PersonalFN is of the view that, although the aforesaid move by the IRDA may help cut down time lapses, it may not change anything drastically for investors. PersonalFN has always believed that investors should avoid investing in retirement plans and annuity plans offered by insurance companies as they are tax inefficient. Instead, PersonalFN suggests you to plan for your retirement well in advance and ensure that, your post retirement expenses are taken care of through meticulous planning. |
Marginal Cost of Funds: "The incremental cost of borrowing more money to fund additional asset purchases or investments. In its simplest calculation, the marginal cost of funds is simply the interest rate on the new loan balance. Marginal cost of funds is often confused with the average cost of funds, which would be calculated by computing a weighted-average of all the combined loans' interest rates."
(Source: Investopedia)
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Quote : "Games are won by players who focus on the playing field – not by those whose eyes are glued to the scoreboard." - Warren Buffett
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