The new RBI guideline — not allowing banks to invest more than 10 per cent of its networth in liquid and liquid plus funds — has been worrying Rajan Krishnan, managing director of Baroda Pioneer Mutual Fund, who feels the bread and butter business (liquid and liquid plus) will put further pressure on the mutual funds that continue to reel under pressure of stringent regulatory norms and the overall weak market condition. In a freewheeling chat with Businessworld he discussed a gamut of subjects from business strategy to lack of decision making by the government to European crisis and its impact on the equity market.Though he doesn't see the Reserve Bank of India (RBI) cutting rates next week, he feels it could be a welcome move if the governor cuts cash reserve ratio (CRR). Holding on to its equity investments through mutual funds he is bullish on sectors like auto, IT and pharmaceutical, while bearish on FMCG. Overall he feels this could be an appropriate time for investors to build a good equity portfolio for a long-run and would advice investors to come through systematic investment plan (SIP) to avoid volatility.Excerpts from the conversation: What impact do you see on the overall P&L of the mutual fund with the RBI norm of restricting banks to investing not more than 10 per cent of its networth in liquid funds coming into effect?The new ruling of a 10 per cent cap by the investments of bank in liquid will see the Assets Under Management (AUM) in liquid funds come down substantially for the industry from the peak levels seen a year or so back. Maybe by 50 per cent or more. While Liquid Funds are low margin products, the big reduction in AUM could see a very significant drop in revenues for a number of fund houses, without any commensurate drop in expense levels.What would be the strategy of Baroda Pioneer to grow its AUM and investor base? How much are you investing in the business?We are very committed to both – increasing AUMs as well as our investor base. However, we have taken a call that we will pursue growth at a meaningful cost rather than growth at any rate. We have been investing in strengthening staff, improving systems, widening distribution, internal communication &training etc. For the moment, we have not been spending much on creating visibility through external communication.The AUM growth is likely to come from growth in corpus of our fixed income product range. Here the key approach from Baroda Pioneer is to pursue and convert as many large clients as possible. And from the converted one pursue higher allocation. While doing that, we have kept our focus on the smaller companies who can benefit from the opportunities provided by our various schemes. Over the last couple of quarters, our average AUM has gone up from around Rs 3,395.58 crore to Rs 4,581.67 crore currently.On the retail side of the business where growing the investor base is key, Baroda Pioneer's focus to a large extent has been in working closely with Bank to Baroda to extend our coverage to as many branches and locations as possible. We believe that the branch network of Bank of Baroda is a very effective platform to reach out to investors in even the smaller towns. We hope to be active in all 3,500 plus Bank of Baroda branches, including rural ones, by mid-2013. These efforts have yielded some success and we have increased our investor base from 57,000 at the end of 2011 to more than 116,000 currently.What is your view on the overall financial market? Do you think the downgrades in Europe will have a major impact on the Indian markets?Currently there are huge challenges facing the financial markets. At a global level as well as at country specific level. Even as one set of issues seem to find a solution others are cropping up. Even though I am optimistic that we will see improved conditions in the coming quarters, I expect that financial markets will keep us on our toes for the next 12 to 18 months.Overall, financial markets are driven by news flow from Europe, global economic data and domestic macros. While conditions in the US are improving slowly and Asia presents a mixed bag, Europe continues to be under pressure. Undeniably, major problems in Europe have and will move global financial markets. Global financial markets are beginning to price in the possibility of a break-up of the Euro, which would have catastrophic consequences not only for Euro but for the global financial system because of the interconnectedness. The European crisis or downgrades in Europe may not affect our economy that much but it will have an impact on the Indian markets. However, spill-over effects from European defaults (or sovereign departures from the Euro) to the banking system and economy to other countries would be manageable. Ever since long-term refinancing operations (LTROs) were issued on 21 December 2011, the tail-risk situation seems to have been averted and liquidity has improved for EU banks. Last week, Spain and Italy could sell more bonds than its planned target. The IMF now says they have $500 billion to lend to Europe's bailout fund. The funding crisis there is over for time being which is a big a positive for European market and equity markets elsewhere.Till when do you see such a drag market condition and why? What is your take on the Indian equity market and why?I am more worried about domestic issues. The growth rate has been retreating. Investment climate has worsened. On the political front, worsening political gridlock and revelation of a slew of scams left the government unable to deliver on any structural reforms. We do not see that quick a recovery in growth. Improvement in fiscal situation too will take some time. The European crisis will continue to weigh heavily on global markets. Things are not looking great but then most negatives have been factored in. We see 2012 to continue to be a challenging year. We expect to see some relief on the inflation and interest rate fronts. Downside from the current level is probably capped at 8-10 per cent. The market is trading below long term averages and this is a good time for long- term investors.In your view what will be the next trigger for the Indian equity market? And why? And when do you see it coming?Decline in inflation and interest rates: The sharp slowdown in economic growth and a decline in food inflation have led us to advance our policy easing call. We believe the RBI will begin easing monetary policy in 1Q12, probably starting with a CRR cut and following it up with a series of cuts in benchmark interest rates.Industrial growth, particularly led by an upturn in manufacturing and infrastructure construction, should revive in 2H12.Potential downgrades in earnings estimates, particularly for FY13. However, we believe the January- March quarter should mark the end of the earnings downgrade cycle, particularly for the rate-sensitive sectors.On the political front, observers hope for a second lease of life to reforms after the conclusion of the key state elections in February-March 2012. We expect the policy environment to remain unsupportive in 1H12 due to the election season.What is your take on next week's RBI policy? Will it set the tone for a rally in the market?In Tuesday's RBI policy, we expect the central bank to be dovish showing concern on slowing growth. With inflationary expectations changing for the better and growth decelerating, RBI will initiate easing monetary policy. But inflation is still not in the comfort zone for RBI which may force RBI to refrain from cutting policy rates just yet. RBI may indicate easing measures from next policy in March if inflation slips below 7 per cent. We feel market is factoring in the above as 10-year government yields has rallied recently. Whether as a signal of policy or not, a CRR cut would be very welcome given the very tight liquidity conditions in the country currently.What is your view on the overall corporate performance of Indian Inc? Have the December-ended quarterly results that have been declared so far been in line with your expectation? Which are the sectors that you are bullish and bearish?December quarter results are likely to reflect the challenging environment being faced by India Inc. There could be several one-time hits due to forex losses. Till date major results from IT, banks, financials and metals are in line with expectations. However, the commentary about future from the IT sector has disappointed the market. We are positive on pharma and IT companies which will benefit from rupee devaluation. We are positive on auto manufacture, which are trading at reasonable valuations. We are bearish on the FMCG sectors due to its stretched valuation.In current market condition where will you advice investors to invest? Currently where are you investing your own money? And why?Given India's long-term growth story, equity investments would continue to offer good returns. I would advise retail investors to invest in equities through the SIP route, as it is a time-tested strategy to even out the effects of volatile markets like what we are going through. I continue to hold my equity investments, mainly through mutual funds. As a fund manager what call will you take on the overall portfolio of the mutual fund? What will be your short-term strategy in the current market condition?We are not trying to ride on momentum. At present, it is better to spread out and balance our portfolio across sectors rather than sticking to defensives or going too aggressive.What is your take on the 10-year G-Sec yields and why?We maintain our stance that 10-year-yield could soften to 8 per cent level in next 3 to 6 months due to weak global economy, slowdown in growth, decrease in inflation and open market operation (OMO) purchase by RBI. But the key risks are deterioration in the government fiscal position, supply of government securities and higher crude and commodity prices.Fixed income, particularly FDs and bonds have become a flavour among investors, even equity fund managers. In your view is fixed income still a cushion for equity investors?We believe fixed income is a cushion during a bear phase in equity markets. Currently the equity market is volatile and may continue to remain so for some more time. Therefore, we have seen asset allocation shift towards fixed income/cash by investors as well as equity fund managers.What is your take on the 1 year, 2 years, 3 years, 5 years and 10-years yields in corporate bonds? Will you be a buyer in corporate bonds and what would be the tenure?We expect the 1-year CD rate could come down by 75 to 100 bps in next 6 months. Similarly 2- and 3-year bond yield can potentially come down by 40 to 60 bps. The 5- and 10-year ones can come down by 20-30 bps to 8.75 per cent in next 6 months but the risk is higher in the long end of curve due to deterioration in the government fiscal position and supply of government securities. In this scenario, the short to medium term bonds offer better risk adjusted return.What is your view on gold? Should it take maximum share of one's portfolio as the world economy is still not showing signs of revival?Gold is another important asset class. An asset class that Indians have been extremely familiar with, has not been taken that seriously as a pure investment option. Its only more recently that Gold ETFs have become popular as an investment opportunity. Gold has run up quite a bit in the last few quarters with uncertainty levels high. As the global economic conditions stablise there is every possibility that we will see a correction in gold prices. Hence, it may not be prudent to have a disproportionate part of your portfolio in gold.
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The Reserve Bank of India (RBI) said the growth outlook and business climate have weakened but warned of upward risks to inflation, a day before it is widely expected to keep policy interest rates on hold.Indicating that it may not tweak interest rates in Tuesday's policy review, the Reserve Bank said on Monday it will try to strike a balance between the need for promoting growth and containing inflationary expectations.The RBI said that GDP growth during the current fiscal is likely to fall below its earlier projection of 7.6 per cent, while inflation, which is still a cause for concern, may moderate to 7 per cent by March-end."Even as the growth slowdown emerges as the major challenge, inflation risks persist, posing a challenge for monetary policy in achieving low and stable inflation with minimal sacrifice of growth," said the Macro-Economic and Monetary Developments Review released by the RBI on the eve of the third quarter policy announcement.Consequently, "Monetary actions will need to strike a balance between risks to growth and inflation," it said."Growth is likely to turn weaker than earlier anticipated," the RBI said.The government also said growth could be around 7 per cent in 2011-12, down from 8.5 per cent a year ago.The RBI left interest rates unchanged in December after raising them 13 times between March 2010 and October 2011.Economists say it may choose to cut the cash reserve ratio (CRR), the share of deposits banks must maintain with the central bank, from 6 percent, to ease tight liquidity, at its review on Tuesday."The critical factors in rate actions ahead will be core inflation and exchange rate pass through," the RBI said on Monday in its quarterly review of macroeconomic and monetary developments.The rupee depreciated by 16 per cent against the dollar in 2011, putting upward pressure on prices of imported goods, especially energy.Commenting on the recent improvement in the price situation, the RBI said, "While in the short run, moderating inflation will provide some space for monetary policy to address growth concerns, in the absence of structural measures to address a range of supply bottlenecks, this will be temporary respite."Overall inflation, which has remained near double digits for 11 months, declined to 7.5 per cent in December, 2011.Investment in industrial capacity that would ease supply bottlenecks in Asia's third-largest economy has been slowed by sluggish decision-making in New Delhi, while programs that increase the spending power of rural Indians has driven up demand for items such as protein-rich foods.The central bank said that while open market operations -- buybacks of bonds from the market by the central bank -- have been its weapon of choice for addressing tight market liquidity, other measures could be considered."Enabling smooth functioning of other markets by ensuring that the liquidity deficit remains within acceptable limits is also a policy priority," the report said.Expressing concern over the deterioration in the fiscal position of the government, the RBI suggested that the government should move ahead with reforms, especially in direct and indirect taxes."The central government's deficit indicators are under duress due to higher subsidies and lower tax collections.Fiscal reforms, including the Direct Taxes Code and Goods and Services Tax, are, therefore, needed to contain deficits in 2012-13," the RBI said.It also called for budgetary solutions to contain the growing subsidy commitment in order to enhance the potential growth rate of the economy.Last month, Finance Minister Pranab Mukherjee had said the subsidy burden in FY'12 could exceed Budget estimates by Rs 1 lakh crore. This is likely to put pressure on the fiscal deficit, which is projected at around 4.6 per cent of the GDP.It said that a widening current account deficit (CAD) and a mounting revenue deficit is putting the fiscal position under strain and impacting the government's wherewithal for capital spending.The report admitted that the liquidity deficit is higher than what suits the RBI, but did not say anything specific on measures to be adopted, like a cut in the cash reserve ratio (CRR), as banks have been asking.Banks have borrowed nearly Rs 1.5 lakh crore from the overnight borrowing window in the past few weeks, leading to demands for a cut in the CRR, or the amount of deposits banks park with the RBI.The RBI has hiked interest rates 13 times since March, 2010, to control inflation. Industry is of the view that repeated rate hikes have made borrowings costlier and has impacted investments. With inflation undergoing a moderation, the RBI took a pause on its rate hike strategy at its policy review last month.CRR Cut Likely?Economists polled by Reuters last week were unanimous in their view that the Reserve Bank of India will keep rates on hold this week, despite weakening economic growth.A minority - 7 out of 20 - forecast that the RBI would cut the CRR, the proportion of deposits that banks must hold with the central bank, by 25 or 50 basis points from 6 per cent, where it has stood since April 2010."Liquidity tightness is persisting and it is getting far too uncomfortable. More importantly, it has not eased after the open market operations," said Shubhada Rao, chief economist at Yes Bank, referring to bond buybacks by the central bank.A cut in the CRR would ease banking system liquidity tha has been far tighter than the RBI's target of 1 per cent surplus or deficit in terms of aggregate deposits.Goldman Sachs, however, rates the probability of a 25-basis-point CRR cut on Tuesday at 60 per cent, noting that tight liquidity effectively pushes up rates and pointing out the slow pace of monetary policy transmission in India."With the long lags in the system, there is a need to start the easing process early to help investor and corporate confidence to kick-start the recovery in 2012," Goldman Sachs economist Tushar Poddar wrote in a note on Monday.Goldman Sachs expects the RBI to cut its 7.5 per cent economic growth forecast for the fiscal year that ends in March, as well as its headline inflation forecast for March."With a potential set of forecasts which call for lower growth and inflation compared to its earlier projections, the RBI would need to signal a change in stance," Goldman said.The market will scour the bank's quarterly macroeconomic report at 5 pm on Monday for clues on what to expect on Tuesday. While the review is mostly backward-looking, the tone of the comments will be critical.A Reuters poll last week forecast annual Indian GDP growth of 7 per cent in the current fiscal year, far below the 8.5 per cent of a year earlier.The RBI, which held to its hawkish stance long after other major central banks shifted their focus towards lifting growth, left rates on hold at its last review in mid-December but sent a strong signal that its next move would be to ease policy.(With Agencies)
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Not sure how credit information reports and scores effect your chances of getting that home loan? Vikram Narayan, Country Manager & Managing Director, Experian India talks to Businessworld's Tanushree Pillai about the importance of credit reports and scores and how individuals and lenders can benefit from these. Excerpts: What is the job of a credit bureau and who all can avail of its services?A Credit Bureau or Credit Information Company (CIC) as it is known in India, is an independent organisation that compiles public data, statutory information, identity information, credit transactions and payment histories of individual consumers and organisations. A CIC such as the Experian Credit Information Company of India, stores information provided by various sources in the same way as it is provided to them - the CIC does not alter or represent the data in any other way. Similarly a CIC does not offer opinions on the data they hold or make any decisions on behalf of lenders who use their services and reports in the credit decision making process.A CIC simply provides the data that is held about an individual borrower to the lender who will make their own assessment based on a range of factors, including the data we manage. The role of a Credit Information Company is to facilitate a culture of information sharing amongst lenders; to provide accurate information to lenders; to make it possible for lenders to quickly make fair, consistent, responsible and profitable lending decisions; to facilitate mass market access to credit, without security; to protect consumers against over indebtedness by providing a full picture of credit exposure and therefore capability to repay; to help lenders guard against fraud, which is a growing and serious problem; to provide consumers with copies of their Experian Credit Information Reports upon request; to educate consumers on the importance of Credit Information Companies; to promote responsible lending and responsible borrowing.Only organisations as described by the Reserve Bank of India under the Credit Information Companies (Regulation) Act 2005 (CICRA 2005) as users and those who are members of our information-sharing scheme can avail our services. Our information-sharing scheme is strictly regulated by the Reserve Bank of India as per the CICRA 2005. There are strict rules governing the ways in which lenders can access and use the data we hold about consumers.How much does a credit report help an individual while applying for a loan?As your credit history plays a key role in your ability to obtain credit and on what terms, it is important to understand the information that is shared by lenders with a credit information company, such as Experian. By understanding your credit history it enables you to take control of your financial situation, make informed financial decisions and also helps to protect yourself from identity theft.What does Experian Services do?Experian's products and services help businesses in customer acquisition, customer management, fraud management, risk management and debt recovery. These are grouped under four principle business lines: Credit Services, Decision Analytics, Marketing Services and Interactive Services. Experian Credit information Company of India Private Ltd is the 16th Credit Bureau operated by Experian. It will provide credit information services to lenders and consumers. We are in the process of acquiring 3 more credit bureaus in Latin America and setting up one more credit bureau in Australia.Experian Credit Information Company of India is a joint venture with 7 banks and NBFCs such as Axis Bank, Punjab National Bank, Union Bank of India, Indian Bank, Federal Bank, Sundaram Finance and Magma Fincorp for providing credit information services. Experian Plc is the single largest shareholder in the company. In addition to providing credit information reports to lending institutions which are members of the Experian Credit Information Company and to individual consumers, we have also launched various value-added services which allows Indian lending institutions to unlock greater customer insight. Experian's customer management products such as Triggers, Account Review, Premier Attributes, CIR+, etc. are used by many leading banks and NBFCs around the world to deploy customer level strategies across the organisation; increasing customer value and account revenue whilst reducing operational costs, credit losses and customer attrition.What does a product like Triggers do?Experian Triggers™ is India's first daily notification service which provides Indian banks and NFBCs with information about consumer credit activity. By providing automated notifications about changes to a customers' financial situation, Experian Triggers helps banks and NBFCs take immediate steps to minimise bad debt.Triggers was launched in June 2011 with Axis Bank and Fullerton as our early adopters. Since then we have added more banks to the list. When did Experian come to India?Experian Services India has been providing decision analytics services and products in India since 2007. Our renowned global experts provide consultancy on all aspects of risk management and work with customers to determine the most optimal strategies to deliver tangible improvements in credit and operational risk practice. Connect+ is an industry standard gateway that helps connect bank's internal systems with multiple credit bureaus and other information sources providing actionable intelligence. Recently HSBC signed an enterprise wide deal to use Connect+ to further standardize its third party data access around the world. Hunter is the application fraud detection and prevention solution which helps users go beyond conventional scoring and underwriting techniques to identify fraudulent applications early in the origination process. Currently, Axis Bank and ICICI Bank are using Hunter in the local mode. We have also launched Strategy Manager which will help banks and NBFCs to treat every customer as an individual and make the right business decisions which will enable them to protect their customer base. Tallyman is a product which helps our customers manage their collections process end to end.In 2010, Experian launched its Indian marketing services business. It products and services provide actionable competitive intelligence to its customers and enables them to identify, target and acquire customers. Experian CheetahMail is the trusted service provider of email marketing for top enterprises worldwide. In India, CheetahMail is being used by Kingfisher Airlines, Lemon Tree Hotels, MakeMyTrip among others.You recently launched Hunter. What does Hunter do?The best strategy to prevent fraud is to detect it at the application stage before a customer is accepted. Experian National Hunter brings in global best practices in fraud based on Decision Analytics experiences, in terms of fraud techniques and trends, and mechanisms to identify/manage them. Globally, Hunter has been able to provide billions of dollars of fraud savings to more than 100 major institutions.Combining a rules-driven business engine with intuitive investigative tools, National Hunter creates a continuous cycle of fraud prevention and detection. The system can be used for all types of loan applications and fraud identification across multiple loan types and channels. Hunter operates on two levels - Local and National. Local Hunter is when the service checks for inconsistencies and past records within the bank across branches. National Hunter is when the service checks for inconsistencies and past records not just within the bank but across banks which have signed up to be members of the Closed User Group. India's Top Three private sector banks - Axis Bank, HDFC Bank and ICICI Bank are already using the service.How can an individual access his credit report from Experian?As per CIRCA 2005, every individual has the right to seek his or her credit information report from the credit information companies. At Experian, we have made it easy for the consumers to access their credit information.An individual simply needs to apply to us and request for the application form to be sent to him. A duly signed form along with identity proof, address proof and a fee of rupees 138 is all one needs to send to us. After validating the information provided by you with the latest records provided by our members and as maintained by us and after authenticating your identity and confirming your address we will dispatch your Experian Credit Information Report within 20 business days.Does Experian provide an individual credit score? Can a retail customer have access to his score? How?Currently, we provide only a credit information report to the individual consumers. We do provide a bureau score to the member banks and NBFCs but not to the consumers.Not many individuals are aware of credit reports and score. How do you think this issue can be tackled?Retail loan is still in its early days of growth in India and hence it is natural that not many will be aware of credit information reports or credit scores. At Experian we believe that an informed and aware consumer is always good for the overall health of the banking industry. This leads to responsible borrowing by the consumers resulting in lesser defaults and delinquencies. Thus we have invested in creating consumer education programs which educates individual consumers about credit, credit histories and credit management. We conduct seminar to educate the consumers at various places and through various forums. We have created literature to help consumers understand the importance of credit management at various life events such as moving homes, bereavement, illness, getting married, etc to enable them to take control of their financial situation.What does one need to do to maintain a healthy credit history and why is it important to do so?When you apply for a loan, banks have to make sure that you are who you say you are and that you are likely to repay the loan. They will look at the information in your application and will check your credit report from a Credit information Companies (CIC). Banks and NBFC's provide a record of your loan and credit card repayments to a CIC such as Experian. A CIC is an independent organisation that compiles public data, identity information, credit transactions and payment histories of consumers. Our Credit Report contains identity information, past and present credit obligations, previous addresses and enquiries made by banks for all your loan applications. If your report shows that you repay credit on time, this will usually help you get credit at favorable terms. Thus it is important to maintain a good credit history.There are a number of things that you can do to improve your credit profile and thereby your chances of getting credit: always make your payments on time. If you cannot do this, contact the lender as soon as possible to discuss what options are available to you, it is always better to speak to your lender immediately if you are experiencing any difficulties in maintaining your payments; If you have paid off a debt but your report doesn't show this, contact the organisation concerned and ask them to make the necessary changes or contact us and we will contact the relevant organisation for you. Close any accounts you no longer use; Check your credit information report regularly. It always makes sense to get a copy of your credit information report before you apply for credit or if you are refused credit as a result of information held by a credit information company.tanushree(dot)pillai(at)abp(dot)in
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The government needs a regular stream of revenue over the financial year; personal income tax is one of the sources of revenue. Accordingly taxpayers are required to discharge their tax obligations over the period in which income is earned. Generally, income in the nature of salary, interest etc. is subject to tax deduction at source (TDS). The tax payer is required to pay taxes in advance during the financial year on the estimated amount of income expected to be earned during the financial year as well. However, where the tax liability of the individual (after considering the taxes withheld) is less than Rs 10,000 the taxes could be remitted as self assessment tax, before filing the tax return. The obligation to pay taxes in advance is triggered only where the estimated amount of tax is expected to exceed Rs 10,000 after the adjustment of TDS. The tax payer, therefore, has an obligation to remit the taxes payable — to the extent it has not been met through TDS — by way of advance tax by the 15th of March. A shortfall in payment of taxes attracts interest. Interest liability will arise, both on account of deferment in payment of taxes, as well as on the delay in payment of taxes beyond the financial year. On the flip side, where the tax paid exceeds the actual taxes due, a refund will arise in the tax return. Since the processing of refunds by the tax departments could take its own time, tax payers need to plan their tax payments in an optimal manner. Taxpayers could experience a short fall in payment of taxes due to various reasons. There could be a shortfall in TDS on salary income. This will typically arise where the employee has changed his employment during the year, and both the employers provide the benefit of lower rates of tax in the initial income slabs in computing the taxes. On aggregating the income and computing the taxes, there will be a balance tax due. A short deduction could also arise where the benefit of deduction for specified investments is provided by both the employers, or the employer provides the relief based on declaration from the employee, and ultimately the investment is not made within the financial year. The rates at which taxes are withheld on interest income, house property rentals etc. is generally lower than the personal marginal rate at which the individual is subject to tax. For instance, the rate at which taxes are deducted on interest is at 10 per cent, whereas a tax payer could be subject to tax at the rate of 30.90 per cent depending on his income level. Tax payers could consider meeting the above tax obligations in different ways:The Income Tax Act enables employers to include income declared by employees relating to an earlier employment, or income under other sources, and compute the tax withholdings accordingly. Salaried employees could provide information relating to the remuneration from previous employment to their employer for computing TDS. This will address the concern on short deduction of taxes. The employee could declare house property income, interest income, capital gains etc to the employer as well. With respect to losses, if any incurred by the employee, the employer is authorised to consider losses arising from house property alone. For instance, the employer is not authorised to consider capital losses. However, if the employee has a net capital gain (after setting off the losses), the employer could consider the net number in computing TDS. The above process will help the tax payer in reducing interest liability. Once the income is declared to the employer, and appropriate taxes are withheld, the employee will not have an interest liability even if the declaration to the employer is made during the later part of the financial year. On the other hand, under the advance tax mode, there will be an interest liability for deferment in payment of earlier installment of taxes. Since taxes are withheld from the salary on a monthly basis, employees could plan their cash flows as well. Tax payers could have concerns in sharing their personal income details with their employer and may prefer to pay the differential taxes in the form of advance tax. Tax payers having business income / capitals gains will also need to plan for advance tax payments. Arriving at a reasonable estimate of the revenues from business and the possible deductions for the entire year could be a challenge. Furthermore, in arriving at the taxable capital gain, the tax payer needs to consider possible set offs on account of capital losses which could arise during the later part of the financial year as well. An estimation of possible taxes that will be deducted at source on such incomes will need to be made as well. Meeting timelines is crucial, as interest is levied for deferment beyond the due date. For instance, even where the tax payer misses the timeline of 15 September, and remits the taxes within the same month, interest liability could be as high as 1 per cent per month till the subsequent due date of 15 December. Effectively the tax payer pays a 3 per cent interest on the shortfall, even for a minimal delay. With respect to capital gains, interest liability does not arise where taxes are paid up through the remaining installments of advance tax. For instance, when a tax payer has a capital gain income arising in the month of November, 60 per cent of the taxes due on such income needs to be paid by 15 December, and the balance by 15 of March. There will be no interest liability for non-payment of taxes in September. Interest liability is also triggered from the 1 of April of the subsequent financial year to the month of payment of taxes, when at least 90 per cent of the total taxes due are not paid by way of TDS or advance taxes. The estimation of taxes therefore needs to meet an accuracy level of 90 per cent. Needless to state, a certain amount of care and planning in the payment of taxes will go a long way in reducing the interest costs to the tax payer.Saraswathi Kasturirangan is senior manager at Deloitte Haskins & Sells
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Surging capital inflows, booming stock markets and a fast-appreciating currency suggest the India story is again shining after a dismal 2011.Dig a little deeper, and problems afflicting Asia's third-largest economy remain largely unabated and unaddressed. Inflationary risks remain and a political logjam continues to hem in reforms, clouding the economic outlook."Nothing has happened on the policy front to justify this mood," said Andrew Kenningham, an economist at Capital Economics in London. "Growth prospects are not looking good by historical standards."New Delhi on Tuesday cut the growth estimate for the current fiscal year that ends in March to 6.9 per cent from a revised forecast of around 7.5 per cent issued in December, sharply below the 8.4 per cent growth of the last fiscal year.Still, the benchmark stock index is up nearly 15 per cent this year while the rupee has risen about 8 per cent from its 2011 close, with both clocking the sharpest gains in more than a decade.An improved global funding environment, relatively attractive valuations of Indian equities and hopes for rate cuts by the central bank have lured foreign institutions. They are net buyers of $3.2 billion Indian equities this year after having sold $357 million last year."The rally at this stage may be more a reflection of foreign portfolio flows and an appreciation of the rupee," said Sanjay Sinha, a veteran fund manager who founded Citrus Advisors, an investment advisory firm."This in itself may be in an anticipation that the twin factors of a rate cut from April and bold economic policies may actually herald the resurgence of the economy. Therefore, data may follow but the markets may have rallied ahead of them."Slowing GrowthThe Indian economic growth is likely to fall to a three-year low of 6.9 per cent in 2011-12, mainly due to sharp slowdown in manufacturing, agriculture and mining sectors, against 8.4 per cent expansion in the last fiscal.Agriculture and allied activities are likely to grow at 2.5 per cent in 2011-12, compared to a robust growth of 7 per cent in 2010-11, according to the Advanced Estimates released on Tuesday by the Central Statistical Organisation (CSO) of India.Manufacturing growth is also expected to drop down to 3.9 per cent in this fiscal from 7.6 per cent last year.The CSO's Gross Domestic Product growth projection is a tad lower than the 7 per cent forecast made by the Reserve Bank of India in its quarterly monetary policy review last month.The latest GDP growth estimate of 6.9 per cent for the entire fiscal means that the pace of economic expansion slowed in the second half of 2011-12, given that GDP growth in the April-September, 2011, period stood at 7.3 per cent.According to the advance estimates, mining and quarrying is likely to witness a decline of 2.2 per cent, compared to a growth of 5 per cent a year ago.Growth in construction is also likely to slip to 4.8 per cent in 2011-12, against an 8 per cent in 2010-11.Furthermore, the finance, insurance, real estate and business services sectors are likely to grow by 9.1 per cent this fiscal, against 10.4 per cent last fiscal.Commenting on the GDP growth estimates, Planning Commission Deputy Chairman Montek Singh Ahluwalia said: "The 6.9 per cent is consistent with what we have been saying."We said 7 per cent for year (2011-12) as whole. (With) 7.3 per cent in the first half and 6.9 in the third quarter, 7 per cent is possible."According to the data, growth in electricity, gas and water production is, however, likely to be better this year.The segments are expected to grow up by 8.3 per cent in 2011-12, against 3 per cent in 2010-11.Valuations at the end of 2011 were 12-13 times estimated earnings for the fiscal year that ends in March 2013, compared with a 10-year average of 15, said Rakesh Arora, managing director at Macquarie Equities Research in Mumbai.The Reserve Bank of India (RBI) has signalled that it is finished raising interest rates after 13 increases between March 2010 and October 2011, to the relief of companies and banks. A rate cut is widely expected by the end of June, if not sooner.The rupee's recovery has been fuelled in part by measures the central bank took to stabilize the exchange rate."It is a feel-good rally," said Jagannadham Thunuguntla, head of research at SMC Investments and Advisors Ltd.Macroeconomic indicators are recently looking better.Industrial output has recovered from a record slump and the manufacturing and services sectors continue to pick up pace. Inflation slipped below 8 percent for the first time in two years in December and is on track to fall to the central bank's 7 percent target by the end of the fiscal year.PrematureMany India-watchers warn the euphoria is premature.Inflation is indeed down smartly, falling to a two-year low of 7.47 per cent, but that is due almost entirely to a drop in food inflation that is widely seen as unsustainable.Non-food manufactured inflation eased by just 0.2 percentage points from 7.9 percent in November to 7.7 percent in December.All of this means that the RBI may not be in a hurry to slash interest rates."We don't expect the RBI to be aggressive in easing rates as inflation worries are still not completely mitigated. We expect it to be cautious in easing interest rates," said Siddhartha Sanyal, an economist at Barclays Capital in Mumbai.Meanwhile, the policy environment in New Delhi remains muddled, with the Congress party government of Prime Minister Manmohan Singh weakened by corruption scandals and facing a tough election in Uttar Pradesh, India's most populous state.A negative outcome for Congress next month in the election could further weaken it and exacerbate political gridlock that has already stalled reforms including a goods and services tax (GST) and foreign direct investment in multi-brand retail.Before the global financial crisis of 2008, India's growth capacity was estimated at around 8.5 per cent. Sluggish capital investment since then means India can now sustain just 7 or 7.5 per cent growth without overheating, economists say."From the last quarter, there has been no push in terms of policies to help get investments moving on the ground," said M.S. Unnikrishnan, managing director at Thermax Ltd, which makes and installs heating and pollution control gear."Share market prices and the movement in the rupee are no indication of what is happening on the ground," he added.Fiscal FissuresPublic finances remain strained. RBI Governor Duvvuri Subbarao last month urged New Delhi to adopt greater fiscal discipline, saying a lack of credible fiscal consolidation would constrain it from lowering rates.The global picture remains mixed. While improving prospects in the United States have driven optimism, most recently in a better-than-expected jobs report, the ongoing euro zone debt crisis weighs on sentiment and puts pressure on India's exports, and in turn its current account deficit.Morgan Stanley wrote in a Monday note that ongoing fiscal and current account deficits will continue to pressure the rupee against the dollar over the long term."As the economy undergoes an extensive deleveraging process, we expect Indian equities and credits to underperform against their regional and emerging market peers during 2012," it said.Year To ForgetCalendar 2011 was a year policymakers would rather forget.Inflation stayed stubbornly high, prompting rate hikes that mainly served to dampen growth. As the economy lost steam, public finances weakened. New Delhi is on track to fall short of its aim to trim the fiscal deficit to 4.6 percent of GDP.Political gridlock after a wave of scandals means investment bottlenecks persist, dampening investor sentiment and eroding asset quality in the infrastructure sector as projects stall.Shares plunged, ending the year with their first annual fall in three years. A record sell-off in equity markets hammered the Indian rupee, which lost nearly 16 percent against the U.S. dollar, rendering it the worst performer in Asia."Foreign inflows are coming in on the fact that the interest rate cycle has peaked in India and economic situation has reached a trough," said Sinha of Citrus Advisors."To sustain them from here on requires action on policy reforms. If hopes of economic reforms don't materialize, there are good chances of these inflows drying up," he said.(Reuters)
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Attractive valuation has seen Maneesh Dangi, co-CIO at Birla SunLife Mutual Fund, going overweight on equity for the past 2-3 months, having invested around 65-70 per cent of his personal investable surplus in equity and the rest in short-term bond funds. Talking to Businessworld he feels the long-term refinancing operation (LTRO) in the Euro-zone has been the game changer eliminating credit risk and in turn will see equity market rallying for some more time. For the star fixed income fund manager, equity buzz is not getting any louder, however. He understands that growth (particularly EPS growth) is getting difficult for companies, but the valuation parameters still look good. In his debt funds, in the last one month, he has been moving out of government securities (G-Sec) and corporate bonds and is buying certificate of deposits (CDs) and 1 to 3 years of corporate bonds, as he sees them rallying in the coming days. Excerpts from the conversation: Was the CRR cut by RBI, a surprise and why? Were you ready for this surprise? Were you completely invested? If not, how much of a hit have you incurred since the cut and if yes, how much have you gained?It wasn't a surprise to us. We have been articulating for the past four months that RBI would be cutting cash reserve ratio (CRR) in January as inflation starts to appear lower and liquidity deficit begins to hurt growth. Interestingly, since we had a view on the CRR cut, we weren't under-invested in G-Secs in most of our flagship duration funds. CRR cut affects the G-Sec and corporate bond markets differently. Paradoxically, CRR cut is bad for G-Secs as it reduces the propensity of RBI to do open market operation (OMOs). It may be puzzling to some observers, but the ones in know of market dynamics would get it that most of the bullishness in G-Sec markets has been on account of OMOs (in which RBI buys back bonds from the markets). So as a fund house we had light positions in G-Sec and this paid off handsomely as yields moved up sharply after CRR cut. We had swapped out G-Sec positions in short term corporate bonds and that category of investment has done well for us.We think RBI would cut CRR in March again by 50 bps (There's small chance of higher cut as well). What is your outlook for the bond market?We expect RBI to cut interest rates by more than 100 bps over the next 9 -12 months which will cause a bull steepening of the curve, meaning short end rates will move down more than longer end rates. The rate cuts will benefit both corporate and government bonds. But we are more constructive on corporate bonds for two reasons. First, the uncertainty around the total pending borrowing of the government and second, because incremental CRR cuts are bad (marginally) for government bonds, as it reduces the propensity for OMOs. So we think, the current markets offer better opportunities for the corporate bonds, as easing liquidity creates better environment to own corporate bonds. Going ahead what would be the fund house strategy to invest?At the broader asset allocation level, our big view is that worst is priced in the risk assets and the time has come to add equities in the portfolios. As for fixed income, we favour medium-term corporate bonds over G-Secs and long-term corporate bonds, as liquidity is likely to ease and RBI is likely to cut rates over the next few quarters. We are investing in one-year CDs and in corporate bonds with 1 to 3 years' maturity. One year CD rates — currently trading at near 9.9 per cent — should get priced 100-125 bps lower over the second and the third quarter of 2012. While 2-3 year should get priced lower by 50-75 bps. What has been the impact on the fund house due to the new RBI guidelines on the liquid fund and liquid plus fund? How are you tackling the outflow?RBI guidelines have resulted in bank money drying from out liquid funds. MF industry has lost more than Rs 50,000 crore due to the RBI's guidelines on banks' investments in ultra short-term funds. Since the transition has happened over a long period of time, as RBI had intimated the industry about it long ago, mutual fund industry could tackle the outflow in a non disruptive manner. I remember last year you made good money for investors by keeping the money in short-dated securities. In current market condition where will you advice investors to invest? Currently where are you personally investing your own money and why?Investors will make money by investing in medium term corporate bonds as rates are likely to ease substantially over there. All my investments are split between some short term fund and equity funds. I am overweight on equity now. Today 65-70 per cent of my money is in equities, while the rest is in short-term bonds. I am not investing in gold. I see gold as insurance, investing during uncertainty and today will not like to pay heavy price to buy insurance. What is your take on the 10-year G-Sec yields and why?We are keeping away from G-Sec as the 10 year G-Sec will average at 8 per cent through the year, but it's likely to see some very low levels during the year. (This one is the most difficult to predict, but may be closer to 7.5 per cent during second and third quarter of the year, unfortunately it will not be a permanent adobe for it given the state of our profligate government). There are two levers working on G-Sec yields, one the easing rate bias that should induce lower yields and the other is very high fiscal deficit which should keep the pressure on yields. Next year will be the battle of both these forces and that should keep markets excessively volatile. I don't think G-Sec markets are going to trend in any particular direction.Will you be an investor in PTC, CD and CP in these markets and why? What are the yields you are looking at in these instruments?We are investors in all the instruments. Currently, CDs are favorable instruments as they offer very good yields and sufficient liquidity. One year CD is offering near 10 per cent yields. What is your view on the liquidity in the system? Why are bankers craving for more returns on their money — at least this comes to be seen from the auctions. What is your view and why?In my view, liquidity situation is likely to change quite dramatically in next couple of months. By April and May, RBI would have cut CRR as much to make sure that systemic liquidity is near neutral. Mostly, liquidity will remain neutral for many months after that. Financiers always crave to earn more on their money, but unless they collude, mere craving is futile. Its Mr Market, a collective force of all the participants' greed and fear, that drive the return or yields. Auctioned yields or Base rates are high because liquidity is deficient, and government seems to be crowding out private borrowing.Is the fund house seeing a flow of money in to the fund house? In the last six months how much of it is coming into fixed income and in which schemes? Over last 6 months, we have seen our duration funds garnering a lot of money. Dynamic bond fund, which has a mandate to run flexible duration of 1 to 3 years, has tripled in size.
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Killol Pandya, head of fixed income at Daiwa Asset Management and Lakshmi Iyer, Head of Product & Fixed Income – Kotak Mutual Fund, talk to Businessworld's Tanushree Pillai about the nuances of debt mutual funds – where your money is invested, what kind of returns should one expect and how long should one remain invested.What are the different kinds of debt mutual funds that are available for retail investors?Pandya: Mutual fund schemes which invest in debt instruments fulfill several investor needs. There are Liquid and ultra short term funds which are oriented at the Institutional and semi- Institutional segment and provide good returns and overnight liquidity to the investors. For investors having a slightly longer investment horizon, there are short term debt funds. For investors who have a medium to long term investment view, there are Medium term and income funds. Some investors have a pre-determined investment horizon; these investors can use the Fixed Maturity Plan (FMP) route to make meaningful investments. We also have debt oriented hybrid funds by way of MIPs etc which provide a good asset mix for investors who have a larger risk-return appetite.Iyer: The Indian mutual funds industry offers a range of investment avenues through debt funds, servicing a spectrum of investors; be it for investors with short-term horizon of as little as a day, or for long-term holdings.Consequently we have liquid funds, short-term debt funds, and long-term bond/gilt funds. Over and above that, close ended debt funds (also termed as FMPs/QIPs) are also a key retail offering.Mutual funds also offer hybrid debt funds, which are recognized as monthly income plans and balance funds. These funds primarily are mix of various asset classes which are devised to cater to specific investment needs of investors.Please elaborate each one and how different it is from the other?Pandya: Different Mutual Fund (MF) schemes provide different risk-return profiles. They also represent a different profiles in terms of investment horizons of investors. In that sense, each of the debt MF products provide value to the investors at discrete points on the Risk-Return-Investment horizon matrix.What kind of allocation (percentage wise) should retail investors go for (keeping in mind a certain age bracket) Pandya: Allocation of money in different MF products does not only depend on the age of the investor. More importantly, it is a function of where we are placed on the interest rate cycle. As things stand now, we appear to be at the end of the interest tightening cycle. We are likely to experience a period of interest rate stability before the rates begin to soften. So, we advise retail investors to stay invested in debt funds while keeping about half their money at the shorter end of the curve (liquid and ultra short term funds) and venture out towards products which are longer on the yield curve with the balance money put in a calibrated manner.Iyer: That is dependent on the investor's investment profile and objectives. It is a function of interest rate cycle. If signs of peaking are visible debt should increase towards long duration funds and vice-versa. Over and above that, the investors can also generate competitive returns by investing their excess cash balances in liquid funds.What are the benefits of debt mutual funds?Pandya: The very nature of the underlying instruments such as money market instruments, sovereign bonds and debentures indicate a pre-determined fund flow. While debt markets are exposed to interest risks, reinvestment risks and market risks, the impact of these risks can be managed in a relatively better manner. Empirical evidence suggests that debt markets are relatively less volatile than equity or forex markets. The inherent stability, relative probability of protecting capital and making some returns thereon, is the key advantage of debt funds.Iyer: A relative regularity of return and performance vis-à-vis the other asset classes is one of the key advantages of the debt mutual funds. Other than that, the risk on capital invested is far reduced (provided the fund is invested in creditworthy instruments) vis-à-vis the other asset classes. Thus the possibility of a capital loss in fixed income investment is very low. Also, if the debt investments are timed with the peaking of the interest rate cycle, the investors have the potential to make modest capital gains. Given today's high interest rate scenario, what kind of returns are debt MFs giving?Pandya: Currently, debt funds are giving one month returns ranging from 8 per cent to 20 per cent, depending on the underlying asset class and the investment period involved. These returns may be a product of investments at high yields as well as profits booked on account of the significant softening seen in Gilt market yields. When should a retail investor think of investing in debt MFs?Pandya: I do not subscribe to the policy of trying to 'time' the debt markets. I hold that debt fund investments ought to be a perennial feature of every retail portfolio. As I have already shared with you, debt funds provide a range of investment solutions and retail investors may find value in a combination of the offerings at all points in time.Iyer: An investor can invest into the debt funds in almost any kind of market or circumstance. However, the investor is advised to calibrate across the short and the long duration funds according to the interest rate environment prevalent. When the interest rates have peaked, the long duration funds, in a 1-year timeframe, tend to be relatively better performers. On the other hand, in a rising interest rate environment, money market funds are more advisable. Whereas, in a range bound market, short duration debt funds find more traction. The unique thing about debt funds is that there are products available for every business and interest rate cycle. In the past year, how have the returns of debt MFs varied and why?Pandya: Debt MF returns are always subject to market risks and more importantly to interest rate risks. As a rule of thumb, interest rates hardening leads to a drop in debt MF returns. In the past 6 to 8 quarters, we have seen about 13 hikes from the Reserve Bank of India (RBI) amounting to a total of about 375 bps. This was a natural fallout of the interest tightening regime seen by our economy during the period. In such a scenario, it is difficult for debt funds to outperform. However, funds which were oriented at the shortest end of the curve (viz. Liquid and ultra short term funds) have managed to give relatively better returns throughout the period.What type of debt instruments do debt MFs invest in?Pandya: Debt funds may invest in near cash assets such as CBLO & reverse repo, Money Market instruments such as Treasury Bills, Commercial Papers and Certificates of Deposits as well as instruments such as sovereign bonds, Debentures, Pass through certificates, Fixed Deposits and other allied structured debt obligations. In addition, debt funds may use debt derivatives such as Overnight Index Swap (OIS) to hedge their portfolios subject to SEBI guidelines. Debt oriented hybrid funds may also invest in additional asset classes such as Equities and gold subject to the profile of the offering.As a percentage of the total MF pie, how much are debt MFs?Pandya: As per the AMFI's monthly data of category-wise assets under management as on December 31, 2011, debt mutual funds which include Liquid/Money Market Funds, Income and Gilt Funds form approximate 70% the total industry AUM. What kind of returns is expected from debt MFs in the next six months?Returns given by Mutual Funds are always subject to market risks and dependent on a number of factors. The returns given by debt MFs in the coming months shall primarily depend on the interest cycle. The speed and strength of movement by the RBI in terms of reference rates shall be the primary driver behind debt fund returns. In addition, WPI inflation, rupee movements and the upcoming budget shall be watched in order to determine the expected returns. Nonetheless, it may be fair to state that 2012 (calendar) may be better for debt funds than 2011 was and debt MF returns may approach double digit returns in the current calendar.Where would you invest your money in, given the current scenario?Pandya: As I have stated earlier, we appear to be at the end of the interest tightening cycle. We are likely to experience a period of interest rate stability before the rates begin to soften. As a function of this, we advise retail investors to stay invested in debt funds while keeping about half of their monies at the shorter end of the curve (Liquid and ultra short term funds) and venture out towards products which are longer on the yield curve with the balance monies albeit in a calibrated manner. However, I hold that it may not be possible for the retail investor to keep track of the markets on his own. In such cases, I would recommend a dynamic fund. Such funds permit the Fund Manager to seamlessly move across the yield curve and alter the portfolio's duration in order to optimise returns for the investor while also keeping a check on the risks involved.Iyer: The nature and scale of investment must almost always be a function of individual's investment objective and risk-return profile. Having said that, in the current economic environment, the steep slack in the gdp growth and a rapidly declining inflation; presents the possibility of a gradual downward rate-revision over the course of next 12 months. Moreover, the renewed FII interest in India, as demonstrated by the approximstely $5 billion net inflow into the domestic capital markets, also indicates of a possible change in the equity market circumstance in the year ahead. Consequently, we would prefer the equity allocations to be in the 20-35 per cent range, with predominant allocation for large-cap funds. The allotment of these investments through the means of SIP may prove to be an additional risk mitigating factor. Moreover, the investor can look to have a skew towards short term funds & FMPs on the debt portion with some position in the long duration space, so as to position oneself for possible capital gain opportunities in the year ahead. The investor can also look to obtain around 5-15% exposure in safe-haven (traditionally) asset like gold by means of Gold ETF and/or Gold Fund of Funds.
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Of late, Gopal Agrawal, CIO at Mirae Asset Mutual Fund has been busy readjusting his portfolio — selling defensive and export-oriented stocks — and getting into high beta stocks in sector like metal, energy, capital good and engineering and construction. The reason: Risk appetite is back into equities.The year has started on a bumper note for the Indian equity market with the Bombay Stock Exchange (BSE) 30-share Sensitive Index (Sensex) gaining nearly 12 per cent to close above 17,000 in January 2012. This was on back of the $2.2-billion record inflow of money from foreign institutional investors (FIIs) into Indian equities. In the last 10 years, this is the highest ever FII inflow for the month of January. "It's a global rally and we (India) are a part of it. Risk appetite towards equities is returning and therefore markets across the globe have rallied," says Agrawal who manages equities worth Rs 400 crore.Agrawal says, the recent long-term refinancing operation (LTRO) success in the Europe has brought back the confidence among investors and that is the reason why risk premium towards equity has gone up. Concerns over China going for a land landing fading away also helped improve sentiment in the global market. Though he says the reason why Indian markets have rallied more compared to its Asian peers is, "Signs of growth are coming back. The factors that pulled the equity market in 2011 have reversed with inflation coming down, easing in interest rates and importantly improvement in liquidity." The 50 basis points (bps) cut in cash reserve ratio (CRR) by the Reserve Bank of India (RBI) and its statement on peaking out of interest rates which in turn further appreciated the Indian rupee has helped propel the market.FII flows have evidently pulled up the market, but the money has predominantly come into large-cap stocks. The BW Expert Index and the BW Dartboard Index which are more of a multi-cap index gained 9 per cent and 8 per cent, respectively, but underperformed the board-based National stock Exchange's CNX Nifty Fifty Index that gained 12 per cent. In our special ‘The Where To Invest Issue' dated 23 January 2012 we had constructed the BW Index for our readers and in this context this is the first update where we are analyzing the index that has been prepared and is maintained by Gurgaon-based Indxx Capital Management Services.The low-hanging fruits have been plucked and Indian equities have normalized from an oversold market valuation position. So the question is what next? Where are we heading and will the rally continue? Despite fears regarding Europe continuing to persist, experts feel this market has legs to sustain the rally. Says Agrawal, "Though market rally may continue, for it to be sustainable, improvement in government balance sheets and reform are keys." He feels reduction in fiscal deficit and reforms in the power and mining sector will be crucial for the Indian equity market.On the other hand, Nandan Chakraborty, managing director-institutional equity research at Enam Securities feels, "February is going to be a mine-field." He feels the market will be put to test starting from the second batch of results which may have nasty surprises. Secondly, the Iran gold-for-oil may test the Indian rupee. Indian market has been the biggest gainer among BRIC nations and among the top four gainers in the overall MSCI Index, gaining 21 per cent in the last month. Going ahead, Indian market will be put on litmus test. One thing is clear which goes up sharply, must come down and therefore some correction could be healthy for our market. Traders may tread cautiously.
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Simply put, there were no surprises in the Reserve Bank of India's (RBI) mid-quarter review of monetary policy on December 16. No rate hikes, no CRR (cash reserve ratio) cuts, no policy measures of any kind. There were no expectations of anything dramatic, of course: most analysts were sure there'd be no rate hike.Readers will recall that is the second quarter review in late October this year, RBI Governor Duvvuri Subbarao had said that if things remained the same, there would be a pause in the policy interest rate hiking cycle. He was as good as his word. In its statement on this mid-quarter review, the RBi says that if the current downward trend in inflation continues, "monetary policy actions are likely to reverse the cycle, responding to the risks to growth". Music to the sensitive (though occasionally tone deaf) ears of Indian industry.But some did hope for a cut in reserve requirements, specifically the CRR, to add liquidity in a relatively tight market. "Why should there be one, when the banks aren't using the marginal standing facility (MSF)?" asks Indranil Pan, chief economist at Kotak Mahindra Bank. "The liquidity is just where it should be under current conditions."Liquidity is tight, most market analysts will tell you; but as Devendra Kumat Pant, director at Fitch Ratings points out, liquidity conditions are always tight at this time of year (it used be called the ‘busy season', when credit growth was usually higher than in the first half of the financial year).This time round, the tone of the announcement, which has been rather ‘hawkish' until recently, is cautious. In its outlook for the rest of the financial year and beyond, the central bank has underscored the risks to growth; it also points out that sudden events could arrest the downward momentum of inflation. Of course, it could be that the RBI is covering all bases.Does this mean the RBI will review what it can do to push growth? Not really. First, the RBI is unable to do anything about global events, other than try and prepare the best possible defence. As the announcement said clearly, the risks to growth are on the ‘downside', meaning lower pace of growth is highly probable.Second, events in the domestic arena have been dominated by the failure of the government to contain spending with budgeted limits, which adds to inflationary pressures and inflation itself. The RBI cannot do anything about public finances either. As it is, the central bank is left fighting inflation with one hand tied behind its back. It's hard to focus on growth with limited maneuverability.Under the circumstances, perhaps doing nothing was the best thing to do; sometimes, that is the hardest thing to do.
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The Reserve Bank on Thursday swung into action to check slide in rupee value against dollar and speculations by imposing restrictions with immediate effect on forward trading in the local currency by FIIs and traders and capped banks exposure to the forex market.The Reserve Bank of India (RBI) has decided to withdraw the facility of re-booking forex contracts by companies and Foreign Institutional Investors (FIIs) and reduced across-the- board exposure limits of banks which are authorised to deal in the foreign currency.The central bank said these steps have been taken in view of the "developments in the foreign exchange market". The rupee today slipped to sub-54 level for the first time in its history and touched a low of 54.30 against the dollar. In the last nearly four and half months, the rupee has declined by about 20 per cent against the dollar.The forward contracts booked by resident, irrespective of the type and tenor of the underlying exposure, "once canceled cannot be re-booked", RBI said in a notification.It has also reduced the limit for hedging of foreign currency risks for importers/exporters from 75 per cent to 25 of the average actual import\export turnover in the past three years.It further said all the forward contracts booked by exporters and importers would be on "fully deliverable basis.In case of cancellations, exchange gain, if any, should be passed on to the customer". (PTI)
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