Your investment strategy to beat the inflation bug   Jun 15, 2012

  
15th June, 2012

In this issue


Weekly Facts
  Close Change %Change
BSE Sensex* 16,949.83 231.0 1.38%
Re/US$ 55.82 (0.9) -1.58%
Gold Rs/10g 30,000.00 320.0 1.08%
Crude ($/barrel) 96.16 (4.6) (4.6)
FD Rates (1-Yr) 7.25% - 9.25%
Weekly change as on June 14, 2012
BSE Sensex as on June 15, 2012
Impact

The WPI inflation for the month of May 2012 inched further upwards to 7.55% from 7.23% in the previous month. Moreover, the inflation for the month of March 2012 has been revised upwards to 7.69% from 6.89% estimated earlier. Clearly the inflation bug has raised its ugly head once again pushing economic growth into doldrums.

The Inflation bug rising again!

The rise in the headline inflation can be attributed to the following components which constitute the WPI.

Food inflation: With a weightage of 14.34%, the food inflation for the month of May 2012 stood at 10.74% as against 10.49% in the previous month. Going forward if the monsoon season results in subnormal rains, it may further spur the food inflation.

Fuel & Power inflation: The fuel & power inflation for the month of May 2012 stood at 11.53% as against 11.03% in the previous month. Petrol prices in Mumbai saw its steepest ever rise by Rs 7.54 per litre on May 23, 2012 pulling up the price of petrol to Rs 78.57 per litre. But after nine days, owing to the nationwide protest, the Government quickly slashed the petrol prices by Rs 2 per litre. Also, going forward if the diesel prices are decontrolled in order to reduce the under-recoveries of the Oil Marketing Companies (OMCs) we may further see a steep rise in the fuel inflation.

However, the country's import bill may get some respite as the Brent crude oil prices have mellowed down below $100 per barrel. But if the rupee continues to depreciate vis-a-vis the dollar, the gains would be off-set to some extent.

In our opinion the chances of the WPI inflation heading northwards are higher owing to the present facts reflecting the monsoon this year to be below normal. If this happens it could further push up the food inflation. Fuel prices too need to be watched for as any spike in the fuel price can have a direct bearing on the fuel & power inflation.

To know what should be your investment strategy to beat the inflation bug please click here.



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Impact

With the economy slowing down due to debt-overhang in the Euro zone which may eventually break the European Union of 17 nations and policy inaction of the Government, realty funds are finding it difficult to raise funds from investors. Moreover, the past experience of lacklustre returns from real estate investments has driven away investors from this investment avenue.

Thus, in order to attract investors to invest in real estate funds, the realty advisory firms are adopting new fund-raising structures offering flexible terms to investors and a choice of projects to invest in. The unconventional model of raising funds from investors is more transparent about the projects in which the funds so raised will be deployed. Unlike the conventional model commonly known as the blind-pool wherein they subscribe to an agreement and have little to say in the deployment of funds raised.

We believe that to diversify an investor’s portfolio over and above the equity, debt and gold asset classes, investing in real estate sector may turn out to be a good option. However, due to lack of a dedicated regulator, the sector has been quite opaque, thus depriving investors from taking exposure to the same.

Any step taken towards making this sector transparent in its functioning and properly defining investment structure would help gain investors’ confidence. Also, it would be interesting to see the implementation of Real Estate Regulator Bill by the Government as this could be the answer to smooth and transparent functioning of the real estate sector.



Impact

You must be aware of the widening difference between petrol and diesel prices in the city these days. And with a difference of more than Rs 30, you may have been induced to exchange your old petrol car for a diesel one or simply buy a new diesel variant car. Some of the other reasons why you would opt for diesel variants are; diesel cars are more fuel efficient than petrol and offer 30% more mileage. Besides, diesel price has been frozen in the country for almost a year due to political compulsions that has made it a lot cheaper than petrol.

Helped by this increasing price differentiation, sales of diesel cars have zoomed to over 55% of the total 1.63 lakh units sold in May this year, up from mere 38% last year. However, before you buy that dream car (diesel variant); you need to be aware of the repercussions of your decision.

To know our views please click here.

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Impact

The global economy has been grappling with the slowdown in world’s major drivers of growth - the Europe and the United States of America. With the former being almost on the verge of a breakdown and the latter unable to sustain growth; the Emerging Nations like India too, are going through a rough patch.

Taking privy of the above situation, the Chief Economic Advisor - Mr Kaushik Basu warned that if the Eurozone breaks up finally, it will be more disastrous than the 2008 global financial crisis triggered by the fall of the Wall Street banks, from which the global economy is yet to recover. He even reiterated that if the Europe slips into a crisis, it is going to be a very difficult time and there is no escaping from that.

To read more about what Mr Basu says please click here.


In an interview with the Economic Times, Mr Chandresh Nigam – Head of Investments at Axis Mutual Fund shared his views on the effects on the investor sentiment if S&P downgrades India to junk status, crude oil, RBI’s action on interest rates and outlook for the markets.

Mr Nigam believes that if the S&P downgrades India to junk status and at that point of time general global sentiments are weak, investors would have another reason to sell emerging markets. "Markets, in the short-term, run on sentiments. The impact of a ratings downgrade will be heavy if the overall sentiment is weak. However, if things are going reasonably well and some of our problems have got resolved, the market may even take a ratings downgrade in its stride," he said. However, Mr Nigam thinks that it is a good time to invest in the Indian equity market as there has been some response from the Government post the lower GDP growth announcement. Secondly, he says that the reduction in the oil prices have been a significant relief for the Indian markets.

As far as RBI’s action on interest rates is concerned, Mr Nigam is of the view that RBI has clearly showed it has moved on from inflation-control mode to promoting growth. "With this kind of GDP number, there's a 50-50 chance, RBI may cut rates when it meets next week. The market is expecting a 25-bps cut. I think that's quite possible. If we are targeting an 8% GDP growth, we must tap down interest rates," he explained.

Mr Nigam expects the market to be range bound this year as he does not see a huge growth this year. "Our call is that it may stay between 4600 and 5600 levels on the Nifty. But markets may look up once rates start moving down and with some policy action and global stability. The market will move in line with corporate profit growth rate. Valuations are cheap now. We have forecast an EPS of Rs 1,250 for Sensex this year," he said.

In our opinion S&P’s warning should give a kick-start to the policy reforms which are being delayed by the Government in power. Some of them (policy reforms) like FDI in multi-brand retail and insurance, clarity over the tax laws, etc. need to be implemented immediately to put India on a high growth trajectory.

We believe that the RBI’s stance on the rate cut decision will be based on the current slowdown in growth as well as the headline inflation hovering above its comfort zone of 6% to 7%. Nevertheless we are of the view that the RBI may cut the repo and reverse repo rates by 25 basis points at its upcoming first quarter mid-review of monetary policy scheduled on June 18, 2012.

The Indian equity markets are at present going through a rough patch with domestic pressures on one side and weak global growth on the other. The key to India’s economic health going forward will depend a lot on the normalcy of rains in this year’s monsoon season. A good monsoon may revive the Indian economy as also lower food inflation aiding the headline WPI inflation to cool down.




  • In order to attract more foreign funds the Reserve Bank of India (RBI) raised the limit on the number of foreign remittances an individual can receive to 30 per calendar year from the earlier limit of 12 remittances. However, the cap on the amount of each transaction has been kept unchanged at $2,500 per person. This had been a long-standing demand from money transfer agents who had received such requests from customers. A report released by the World Bank suggested remittances to India would be $64 billion in 2011, marginally higher than those to China. The World Bank had revised the estimates from $58 billion on the basis of the view that a weak rupee and robust economic activities in the Gulf countries would lead to a surge in remittances.

  • The United Nations (UN) has sharply lowered its growth forecast for India for the year 2012 to 6.7% from an earlier estimate of 7.7% citing weakening domestic demand particularly private investment due to aggressive monetary tightening and standstill in policy decisions as the major reasons. UN's downward revision is in line with similar revision by many of the global banks such as Morgan Stanley, Goldman Sachs and Merrill Lynch and comes after government estimates showed that India's GDP grew at the slowest rate of 6.5% in 9 years during the previous fiscal 2011-12. The UN also lowered its forecast for 2013 to 7.2% from an earlier estimate of 7.9%.

  • According to the realty consultant, Knight Frank, India witnessed the third highest rise of 12% globally in housing prices in January-March quarter of 2012 over the year-ago period. However, housing prices declined by 0.9% when compared with the previous quarter. The Knight Frank Global House Price Index monitors and compares the performance of 53 mainstream residential markets across the world. Brazil recorded the strongest annual growth (23.5%) and Ireland the weakest (minus 16.3%).

  • From July 1, 2012 there will be no service tax on derivative transactions as notified by the Finance Ministry. All kinds of derivatives including interest rate swaps, currency futures will not attract any service tax. From July 1, 2012 services taxation will be under a negative list approach whereby all services except a specified list of 17 services would attract service tax. However, for brokerage house, any brokerage/commission earned by them on stock market trades would continue to attract service tax even after July 1, 2012.

  • Indirect tax collections for the month of May 2012 increased 16.1% to Rs 37,166 crore as against Rs 32,019 crore in the same month last year. The increase in the tax collection was led by a jump in service tax collections of 45.4% to Rs 8,607 crore in May 2012 as against Rs 5,918 crore in the same month last year. Total tax collections during April-May 2012 stood at Rs 70,211 crore, compared with Rs 61,955 crore in the corresponding two months of the last financial year, a cumulative growth of 13.3%.

    Net direct tax collections for the period April-May 2012 increased to Rs 35,323 crore from Rs 12,956 crore in the year-ago period. For the current fiscal, the government has set a direct tax collection target of Rs 5.7 lakh crore, which is about 15.2 per cent more than the actual collection of Rs 4.95 lakh crore in the previous fiscal.

  • Reflecting India’s dismal growth scenario corporate tax collection declined by 2.82% to Rs 24,329 crore for the period April-May 2012, against Rs 25,035 crore in the year-ago period. However, the personal tax segment bucked the trend by rising 10.02%.


Real Estate Investment Trust (REIT): A security that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages. REITs receive special tax considerations and typically offer investors high yields, as well as a highly liquid method of investing in real estate.
(Source: Investopedia)

QUOTE OF THE WEEK

"You need a plan to build a house. To build a life, it is even more important to have a plan or goal."       - Zig Ziglar

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