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Impact 
 The Insurance Regulatory and Development Authority (IRDA) has agreed to amend norms, thereby now allowing insurance companies to invest their policy holders' money in the proposed $11 billion infrastructure fund facilitating flow of money to long-gestation infrastructure projects.
Thus now, this will enable insurance companies to invest in infrastructure sector to the maximum. Insurance companies can allocate up to 15% of their investment portfolio to infrastructure and social sector. But the current rules allow them to invest only in AAA or AA credit-rated debt paper.
Earlier in a recent Parliamentary Consultative Committee, Finance Minister - Mr. Pranab Mukherjee had said that there could be 30% gap in funds needed for infrastructure and called for intermediating greater amounts of insurance and pension funds to the sector. Moreover, the Planning Commission has given an estimated requirement of $1 trillion for infrastructure sector for the twelfth 5 year plan.
While we believe that the IRDA's decision to amend norms would give a boost to infrastructure spending; we think that this is quite a politically motivated move, which would put money of several policy holders at risk, as most infra funds provide finance to infra companies (in the form of debt) who are already bearing the burden of high interest cost, thus making them financially unhealthy.
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Impact
Onion price have rocketed to as much as  85 per kg in some parts of India, which forced the Government to ban export of onions and remove customs duty on their import (which was earlier pegged at 5%). But despite these measures, onion prices aren't expected to cool-off as this year's derailed / unseasonal monsoon has damaged the crop.
The RBI (Reserve Bank of India) too isn't expecting the pace of food prices to mellow, due to this, and is thus signalling likelihood of a policy rate hike in the next monetary policy review meeting (scheduled on January 25, 2011). "Food inflation is not easing as we would like it to be. Upside risks to inflation are still high," said Dr. Subir Gokarn, Deputy Governor of RBI. He also mentioned that global commodity prices are on the upside, which is a concern.
(Source: Office of Economic Advisor, PersonalFN Research)
Brent crude oil price too is on an upswing. Crude oil prices have risen by about 21.0% in the last four months, which also pose a risk of WPI inflation maintaining an upward bias.
Interestingly, the data released by the central bank displays that cash and currency with the public grew to almost 1,00,000 crore this year (between April 1 and December 3) as against about 65,000 crore in the year ago period, thus indicating that expectation of high inflation is compelling people to stay with cash.
We believe, that even though the RBI is signalling a policy rate hike in its next policy review meeting, the present liquidity crunch (caused by credit growth being higher than the deposit growth) may hinder RBI's policy rate hike stance. Moreover, the liquidity is expected to remain tight till around March 2011 due to tax obligations. As regard rising commodity prices are concerned they have fuelled by flow of QEII (Quantitative Easing phase II, done by Federal Reserve of the U.S. to get their economy on the growth path) money into "commodity" asset class. |
Impact 
 The Insurance Regulatory and Development Authority (IRDA) had recently penned down sweeping changes in the norms governing Unit Linked Insurance Plans (ULIPs). And interestingly after these norms were rewritten insurers have changed their business models by reducing their dependence on the ULIPs in the product line and started promoting traditional products (which includes term plans, money-back, endowment and pension plans).
An interesting statistic revealed that at present, out of the total premium income of the insurers, premium from traditional products accounted for almost 85% - 90% and the rest was contributed by the ULIPs.
For instance, Reliance Life Insurance has reduced its dependence on ULIPs to 50% at the end of November 2010. However, during the same period last year, 85% of the premium came from ULIPs while traditional products accounted for the rest.
Similarly in case of Birla Sun Life Insurance which generated revenues over 92% from selling ULIPs before new norms were introduced; has now generated only 70% revenues from selling ULIPs post new norms.
HDFC on the other hand still exudes confidence on ULIPs. Mr. Amitabh Chaudhary, Managing Director and Chief Executive Officer at HDFC Life said, "We still believe ULIPs are transparent and better than the traditional plans. The charges have been capped and will bring down profitability. But increase in volumes will bring it back to the operation levels by the first quarter of the next financial year."
In our opinion, the ULIP products were bound to lose sheen in the life insurers product line, as the new norms put in place a stricter control over their (ULIP product) functioning, and also started shrinking insurance company's margins. Also in our opinion they still lack transparency, and even their disclosures in their fact sheets are inconsistent. |
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| Weekly Facts |
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Close |
Change |
%Change |
| BSE Sensex* |
20,073.66 |
208.8  |
1.05% |
| Re/US$ |
45.09 |
0.3 |
0.60% |
| Gold /10g |
20,390.00 |
(65.0) |
-0.32% |
| Crude ($/barrel) |
93.47 |
2.1 |
2.29% |
| FD Rates (1-Yr) |
6.50% - 7.25% |
Weekly change as on December 23, 2010
*BSE Sensex as on December 24,2010
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In this issue
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In an interview with The Financial Express, Mr. Mahesh Patil, Head-Equity Domestic Assets at Birla Sun Life Mutual Fund shared his views on the equity markets, oil prices and its impact on the equity markets and the RBI monetary policy.
Mr. Mahesh Patil believes that the Indian equity markets are fundamentally fairly priced after the recent correction, but is also of the view that there are specific challenges being faced in some sectors. He cited this saying, "While on the one hand demand has picked up in the consumption sector, there have also been some slowdown in the infrastructure space following policy issues, which in turn, has led to delay in projects." He's also of the view that unearthing of scams and bribery will affect the investor sentiments in the short-term, but on an overall basis India's growth story is intact. However, speaking of the impact of these scams on FII (Foreign Institutional Investor) flows he thinks that the Government needs to act swiftly on scams, as no investor likes uncertainty.
On rising oil prices, Mr. Patil believes that it could worsen India's current account deficit (as India is an oil dependent country) which would also tend to put pressure on the rupee, in turn affecting the portfolio returns in dollar terms for FIIs. "Currently, oil prices are also higher because of higher demand following the winter season in the northern hemisphere. So, in the near term it might touch that levels. But from the medium-term outlook, we don't think oil will sustain at that levels, unless global demand picks up sharply. In the medium term, we expect oil prices to come down to $80 per barrel", he said
The RBI monetary policy stance, in his opinion was in line with the market expectations. But he believes that it does not give the signal that interests rates are likely to go down, with inflation running high. |
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Bond Fund : A fund invested primarily in bonds and other debt instruments. The exact type of debt the fund invests in will depend on its focus, but investments may include government, corporate, municipal and convertible bonds, along with other debt securities like mortgage-backed securities.
(Source: Investopedia)
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QUOTE OF THE WEEK
"Waste your money and you're only out of money, but waste your time and you've lost a part of your life."
- Michael Leboeuf
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- Food inflation for the week ended December 11, 2010 bounced back to double digits to 12.13% from 9.46% in the previous week. The increase in the food inflation was on account of rise in primary articles.
- The Reserve Bank of India (RBI) will focus on developing a strong corporate bond market in order to fund the infrastructure development that will require an estimated $1 trillion during the 12th Plan period and propel India on a double digit growth trajectory.
RBI Deputy Governor, Mr. Subir Gokarn said, "We need a strong corporate bond market as we have to take away the burden on banks from financing long-term funding needs of the infrastructure sector which is targeted at $1 trillion over the five year period beginning 2012."
- According to the Planning Commission Member - Arun Maira, the Government of India will unveil a national manufacturing policy in the coming weeks in order to raise manufacturing sector's share in the country's GDP to 25% by 2022.
Since 1991, the share of manufacturing sector in India's GDP has remained close to 17%, whereas all the other economies (i.e. emerging and developed) manufacturing contributes not less than 25% - 26% of their GDP.
- The International Monetary Fund (IMF) is planning to set up a trust fund to provide technical assistance to member nations in the areas of tax policy and administration.
The topical trust fund, to be launched in May, 2011, would provide about $ 30 million as technical assistance to strengthen the tax systems in 15-20 low and lower-middle income countries.
- SBI Life Insurance launched "Saral Life" - a traditional, participating endowment plan, and "Smart Elite" - a new Unit Linked Insurance Plan (ULIP). Some of the key features of the schemes are as follows:
Saral Life :
- Savings cum insurance cover with easy acceptance
- Enrolment based on Simplified Questionnaire and Good Health Declaration
- Flexibility in Coverage
- Tax benefits as per prevailing norms under the Income Tax Act, 1961.
Smart Elite :
- Limited premium paying term
- No Premium Allocation Charges from 6th policy year onwards
- Two protection options available - Gold & Platinum
- Inherent Accidental Death and Accidental Total and Permanent Disability benefit
- Option to increase/decrease the Sum Assured (SA) from 6th policy year onwards
- Tax benefits as per prevailing norms under the Income Tax Act, 1961.
- Tata AIG General Insurance launched new health insurance named "Wellsurance", which is a combination of health insurance and wellness benefits to cater to different customer segments.
Wellsurance caters to different customer segments such as 'Wellsurance Executive' targeted at the young working men, 'Wellasurance Family' targeting the individuals and their families and 'Wellnesurance Women' targeting the women.
Other health benefits associated with Wellsurance are critical illness cover, surgeries, child education benefit and beyond health insurance the scheme offers free access to health helpline, a dedicated health portal and health perks.
- Central Provident Fund Commissioner & Chief Executive of Employees Provident Organisation (EPFO) - Mr. Samirendra Chatterjee termed 'Infrastructure Bonds' as risky and unsafe in the long term, thereby ruling out investments in infrastructure bonds by the EPFO.
Infrastructure bonds are less attractive in the short term than conventional debt instruments as they offer a lower rate of interest. These bonds, however, come with tax benefits that make their effective returns higher. But the tax advantage does not make them attractive as all Provident Fund (PF) income is tax free in India.
- Advance tax payments by India's top 100 corporate taxpayers rose 18.7% in December 2010 as compared to a year ago, indicating better corporate performance in the third quarter.
The Top 100 companies paid 27,531 crore in advance tax for December 2010 as compared to 23,190 crore. Also the total direct tax collections neared 3,00,000 crore mark as personal income tax rose by 16.2% in April-December 2010 and corporate tax collections grew 21.3%.
- Goldman Sachs, the world's most profitable investment bank, is set to launch its Indian mutual fund business in 2011, its second attempt to foray into the Indian market after 2009.
Goldman Sachs had received SEBI's approval to start MF business in India in September 2008. However, the U.S. firm had postponed its India's MF plan following the global financial crisis.
- ING Life Insurance Company launched a new ULIP named "Market Shield" - a guaranteed NAV product. The guarantee comes into play even if the policyholder chooses to exit the policy before the scheduled maturity date. It assures higher of the guaranteed NAV or current NAV for partial withdrawals, death, surrender and maturity benefits. The allocation that can be made into equities is capped at 60% under this product.
- Global consultancy firm Fitch has revised upwards its growth forecast for India to 8.7% this fiscal, from its earlier estimate of 8.5%. However, for 2011-2012 and 2012-13, it (Fitch) expects the economic growth to fall further to 8.5% and 8% respectively.
- The Union Finance Ministry has recognised the "Aadhaar" number issued by the Unique Identification Authority of India (UIDAI) as an officially valid document to satisfy the Know Your Customer (KYC) norms for opening bank accounts.
This in our opinion will provide convenience to investors as they would be required to submit only one document while complying with KYC norms, and would also dramatically reduce the paper work, of the banks and other financial institutions while maintaining records of their customers / investors.
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This newsletter is for Private Circulation only and not for sale, is only for information purposes and Quantum Information Services Limited (PersonalFN) is not providing any professional/investment advice through it and, does not constitute or is not intended to constitute an offer to buy or sell, or a solicitation to an offer to buy or sell financial products, units or securities. PersonalFN disclaims warranty of any kind, whether express or implied, as to any matter/content contained in this newsletter, including without limitation the implied warranties of merchantability and fitness for a particular purpose. PersonalFN and its subsidiaries / affiliates / sponsors / trustee or their officers, employees, personnel, directors will not be responsible for any direct/indirect loss or liability incurred by the user as a consequence of his or any other person on his behalf taking any investment decisions based on the contents of this newsletter. Use of this newsletter is at the user's own risk. The user must make his own investment decisions based on his specific investment objective and financial position and using such independent advisors as he believes necessary. PersonalFN does not warrant completeness or accuracy of any information published in this newsletter. All intellectual property rights emerging from this newsletter are and shall remain with PersonalFN. This newsletter is for your personal use and you shall not resell, copy, or redistribute this newsletter, or use it for any commercial purpose.
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