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September 24, 2010
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Impact 
On September 21, 2010 the Indian equity markets (BSE Sensex) breached the psychological mark of 20,000 points; but to surprise us all, even gold has reached its all time high in the last two months (see chart below). - a total contradiction to the negative correlation between equity and gold.
 Note: Gold Prices taken of MCX Spot Mkt.
Data as on September 22, 2010
Base:  10,000
(Source: ACE MF)
This sudden positive correlation between the precious yellow metal and equity is on account of the following reasons:
- Global economic turmoil
- Weak U.S. Dollar
- Inflationary situation in India
- Low real interest rates
- Domestic festive demand
We believe that in this global economic recovery phase it would be wise to invest further more in this precious yellow metal. One may continue to invest 5% - 10% of the total investible amount in gold, by keeping a time horizon of 10 to 20 years. Remember whether a negative or a positive correlation, this asset class will do well to your portfolio - it will act as wealth protector, wealth creator and insurance during economic uncertainties.
While investing in equity mutual funds, taking into account that the markets have scaled-up substantially from their lows, one should invest through the SIP (Systematic Investment Plan) / STP (Systematic Transfer Plan) route as it provides the advantage of rupee-cost averaging along with compounding.
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Impact
With the spectacular response from the auction of wireless spectrum (fetching around 1,06,000 crores) and higher revenue receipts from taxes, the Government has decided to share the fruits by increasing Foreign Institutional Investors (FIIs) participation limit in debt instruments.
Now FIIs will be permitted to invest additional U.S. $10 billion in corporate and Government securities. They (FII) would be able to collectively buy Government bonds worth U.S. $10 billion and corporate bonds worth U.S. $20 billion (earlier it was U.S. $5 billion and U.S. $15 billion respectively).
However, the additional U.S. $5 billion limit in each category comes with a condition that, it can be invested only in papers (bond) with a residual (remaining) maturity of over 5 years. Moreover, the additional limit of U.S. $5 billion for the corporate bonds category has been reserved exclusively for the infrastructure companies.
Citing the main reason for such a move, a Finance ministry official said, "The policy has been reviewed in the context of India's evolving macroeconomic situation, its increasing attractiveness as an investment destination and need for additional financial resources for the infrastructure sector while balancing its monetary policy."
We believe that increasing the FII limits in debt instruments will have the following impact:
- Help the country to finance infrastructure growth
- Deepen the debt market by managing volatility as the debt market would attract long-term FII inflows (additional investment will be deployed only in bonds of residual maturity of over 5 years)
- Help domestic private sector companies to raise capital at competitive rates
- Lead to softening of yields of longer maturity papers
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In order to be in compliance with Know-Your-Client (KYC) by November 15, 2010, the Association of Mutual Funds in India (AMFI) has asked the mutual fund houses to release commission to distributors on a case-by-case basis depending on whether the investor-related documents have been submitted by distributors.
AMFI will also undertake a one-time special audit through independent auditors at Registrars and Share Transfer Agents (RTAs) - CAMS and Karvy, in order to ascertain the status of receipt of investor documents and completion of work. The audit report thus produced will be shared among all the mutual fund houses in order to for them to release commissions to distributors.
Moreover, in order to adopt a uniform process on the payment of commission to distributors, AMFI has recommended that where distributors have submitted 80% of documents to RTAs; the commission withheld till December 2009 may be released, and where 100% of documents are submitted to RTAs, 75% of commission withheld between January to March 2010 may be released again on a case-to-case basis.
Reacting to this a senior official at leading mutual fund distribution house said, "Even If we are 100% compliant, we have been told only 75% of our commission will be released. And this is for our January-March 2010 commission. They have dallied for so long over the issue and now say the remaining will be released only after AMFI audits the R&T agents."
In our opinion, this step of linking distributor's commission to the submission of investor's documents to RTAs is in a way to bring in more transparency and maintaining compliance norms.
| | | Weekly Facts |
| Close | Change | %Change | | BSE Sensex | 19,861.01 | 443.5 | 2.28% | | Re/US$ | 45.66 | 0.5 | 1.06% | | Gold Rs/10g | 19,210.00 | 25.0 | 0.13% | | Crude ($/barrel) | 77.52 | (1.3) | -1.64% | | FD Rates (1-Yr) | 6.00% - 7.10% | Weekly change as on Sep 23, 2010 |
In this issue
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In an interview with the Mint, Mr. K.V. Kamath - Non-Executive Chairman of ICICI Bank Ltd. expressed his views on the viability new banking licences.
According to Mr. Kamath prior to allowing banking licences to anyone, the history of the entity, along with the group of people in the organisation, set of businesses which have access to capital - either their own or the ability to marshal capital and proven credibility should be taken into consideration. In his opinion, the regulator would be comfortable with an established industrial house on account of its ability to raise the initial capital. However, he also admits to the fact that preventing an industrial house from lending to its own companies is almost impossible, because there are many indirect ways in which this can be done. He's also of the view that performance during downturn of 2008 should be considered.
According to Mr. Kamath, the banking system is broad enough today to provide reach and thus a new player will take time to get to that level of reach.
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Real Interest Rate: An interest rate that has been adjusted to remove the effects of inflation to reflect the real cost of funds to the borrower, and the real yield to the lender. The real interest rate of an investment is calculated as the amount by which the nominal interest rate is higher than the inflation rate.
(Source: Investopedia) |
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- Indiabulls Financial Services indicated that it will completely exit the commodities exchange business by offloading its entire 40% stake in Indian Commodity Exchange (ICEX).
ICEX was co-promoted by Indiabulls and Minerals & Metals Trading Corporation of India Ltd. (MMTC Ltd), but the two were forced to bring in other shareholders, as the rules did not permit anyone holding more than 40% in a commodity futures exchange.
- Expressing his views over
Reserve Bank of India's (RBI) rate hike on September 16, 2010, Chief Economic Advisor Kaushik Basu said, "This is a hard balancing act; and just because we do not get regular data on unemployment, we cannot be cavalier about it and let unemployment rise".
He further added saying, "The reason why there is no clear formula for the level of monetary policy and fiscal tightening and the level of inflation is because aggregate demand in the economy depends not just on what the government does but also on what ordinary citizens do."
- The Saraswat Cooperative Bank - the largest among Urban Cooperative Banks (UCBs) has once again revived its merger and acquisitions (M&A) activity and is looking at five UCBs in Maharashtra for a possible merger. Saraswat Bank has short-listed 21 banks out of the 66 applications (from banks) for merger proposals.
Talks with five, including one from Ichalkaranji Urban Cooperative Bank, are in an advanced stage, according to Saraswat Coop Bank's Chairman Eknath Thakur.
- Yes Bank - the private sector bank has taken the lead in the process of rate hikes after RBI's recent policy rate hikes in its September 16, 2010 mid policy review. Yes Bank has raised its benchmark prime lending rate (BPLR) by 50 basis points to 17.5% and the base rate is pegged at 7%.
- The Life Insurance Corporation (LIC) of India - the life insurance behemoth, launched Endowment Plus Plan.
The Endowment Plus Plan is a Unit Linked Life Insurance Plan (ULIP) and offers the following benefits:
- Risk cover upto 30 times of annualised premium
- Entry age - 7 years to 60 years
- 4 fund options
- Loan / partial withdrawal facility
- Accident benefit and critical illness rider
- The RBI has granted an Infrastructure Finance Company (IFC) status to State-run Rural Electrification Corporation (REC). Hence, now with an IFC status, REC will be able to take an additional lending exposure of upto 5% of its owned funds in case of a single borrower and upto 10% of its owned funds in case of a group of borrowers.
This move will also make REC eligible to issue Infrastructure bonds and raise funds up to USD 500 million ( 2,500 crore approximately) through External Commercial Borrowing (ECB) in a year.
- On the back of a strong factory and foodgrain output, Mr. Pranab Mukherjee - the Finance Minister of India expects Indian economy to grow more than 8.5%.
"My projection in the Budget was that for year 2010-11 8.5% to 8.75% (GDP growth) and I am sticking to that position," said Mr. Mukherjee.
- ICICI Prudential Life launched its third ULIP - ICICI Pru LifeLink Wealth SP under the new Insurance Regulation and Development Authority (IRDA) regime. The ICICI Pru LifeLink Wealth SP has the following benefits:
- Single premium ULIP
- Protecting market gains through trigger portfolio strategy
- Loyalty addition of upto 2.5% of fund value, at the end of every fifth policy year, starting from the tenth policy year
- Sum Assured to be either 125% or 500% of single premium, as per one's needs
- Top up facility available
- Policy term of 10 / 20 / 30 years
- Food inflation accelerated to 15.46% (new data series used) for the week-ended September 11, 2010, signalling a possibility of another rate hike by RBI in its monetary policy review of November 2, 2010.
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