The RBI left interest rates unchanged but cut the cash reserve ratio for banks and indicated it may ease monetary policy further in the January-March quarter, although inflation remains a near-term concern. While the decision to leave the policy repo rate unchanged at 8.00 percent was in line with forecasts in a recent Reuters poll, expectations for a rate cut had grown after India's finance minister on Monday outlined a plan to trim the country's hefty fiscal deficit. "As inflation eases further, there will be an opportunity for monetary policy to act in conjunction with fiscal and other measures to mitigate the growth risks and take the economy to a sustained higher growth trajectory," RBI Gov. Duvvuri Subbarao wrote in his quarterly policy review. Read: RBI Faces Rising Pressure To Cut Rates Headline wholesale price index inflation rose to 7.8 per cent in September, and the RBI said it expects inflation to rise before easing in the final quarter of the fiscal year, which ends in March. "While risks to this trajectory remain, the baseline scenario suggests a reasonable likelihood of further policy easing in the fourth quarter of 2012-13," Subbarao wrote. Investors, companies and the government have been clamouring for a cut to interest rates that have been on hold since April and remain some of the highest among major economies. While economic growth in India has been slowing, inflation has not, and the central bank has been calling on the government to follow through quickly on recent steps to cut its deficit and encourage investment, and to take further such measures. "Recent policy announcements by the government, which have positively impacted sentiment, need to be translated into effective action to convert sentiment into concrete investment decisions," Subbarao wrote. The RBI cut its GDP growth forecast for Asia's third-largest economy to 5.8 per cent for the current fiscal year, from 6.5 per cent previously, and increased its projection for headline inflation in March to 7.5 per cent, from 7 per cent earlier. The central bank lowered the cash reserve ratio, the amount of deposits that banks must keep with the central bank, by 25 basis points to 4.25 per cent, a move it said would inject about Rs 17,500 crore into the banking system in order to pre-empt potentially tightening liquidity. In the Reuters poll earlier this month, economists had been nearly evenly split on whether or not the RBI would lower CRR. (Reuters)
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Like everyone in the market, Rahul Goswami, CIO Fixed Income of ICICI Prudential Mutual Fund, is expecting the rates to come down gradually, and by March 2013, he sees the rates lower by 50-75 bps. He also thinks that RBI could go in for a 25 bps cut in repo rate on 30 October. Meanwhile, in the absence of any unforeseen event, even if there is no rate cut, Goswami does not expect 10 year G-Sec yield going beyond 8.35 per cent. But on the medium term, he expect yields to come down to 7.8-per cent in the next 3–6 months with potential trading range of 7.75-8.25 per cent on the bond yield.As a fund manager, Goswami has increased the allocation on government securities given that spreads have narrowed significantly between G-Sec and corporate bonds, but feels it’s unlikely to sustain for a long time and will increase allocation to corporate bonds if spreads widen. He sees 2-5 years' tenure for corporate bonds looking attractive on expectations of a gradual rate cut which will provide the opportunity to lock in the carry.Excerpts from the conversations:Are these testing times for the Indian economy as well as the market and why? When do you think the sword of uncertainty will move away?The Indian economy continues to grapple with challenges coming from the euro zone crisis as well as the unsustainable current account deficit and fiscal deficit. However, on the positive side the government biting the bullet and initiating the reform cycle have boosted sentiment. Reduction in oil subsidy and a cap on the number of subsidised cooking gas cylinders per household should help contain fiscal deficit by 0.2 per cent of GDP over the next 12 months. The firm resolve shown by the government in introducing reforms ensured that there were no roll backs. Going forward, continuity in policy reforms, divestment decisions and other such steps to aid further fiscal consolidation will act as key positives for the economy and markets. Now is the time for execution to follow action. This will be the key to ensuring that the Indian economy while clearly being a structurally strong growth story continues to improve on fundamentals. We expect continued effort from the government on containing fiscal deficit. Though it may potentially be inflationary in nature in the near term, in the long-term it is anti-inflationary and will thereby provide more room for RBI to bring down the rate structure.Everyone is expecting a rate cut and even you expect 50-75 bps cut in interest rates in the next 6 months. First, why do you think he central bank will cut rates? Second when inflation and deficit are at higher levels, don’t you think cutting rates will further impact inflation and deficit or are you of the view that RBI will have to bite the bullet of rising inflation and deficit to boost growth?It will not be an easy decision for the central banks to cut rates in light of the high inflation that continues to be out of the comfort zone of RBI. While inflation and high fiscal continue to be of concern, there are basic requirements of the economy which may warrant support from the central bank in terms of monetary easing. The investment cycle needs to be revived and growth continues to be much below the potential growth of rate + 7 per cent that the country can have. Hence RBI has a tight rope to walk of balancing inflation and growth. We therefore expect that RBI will only be able to take calibrated monetary easing stance in the form of a gradual rate cuts, CRR cut & bond OMOs.As far as inflation and deficit are concerned, the government has already been taking steps to bring down fiscal deficit to more sustainable and moderate level. While inflation continues to stay elevated, the positive is in the fact that there is no more significant upside risk on inflation. We are confident that the government will continue to demonstrate intent and action towards fiscal consolidation and thereby hope and expect a good part of the Kelkar committee recommendations to be accepted and implemented. So the key trigger going forwards will be how the twin deficits pan out. How much will RBI cut rates in the forthcoming monetary policy on 30 October 2012? What is your view on the liquidity in the system? Do you expect further cut in CRR and by how much?As mentioned earlier, there are requirements on both sides i.e. inflation is refusing to come off and at the same time investment cycle is not picking up and growth continues to be much below potential. Hence some monetary easing is definitely in the offing with the view to support growth. Whether it will by way of rate cut or reduction in CRR is yet to be seen. In terms of liquidity, liquidity going forward is only expected to tighten in light of the seasonality witnessed in currency in circulation. Further liquidity will be a function of how government balances behave in times to come, going forward even if liquidity worsens further, we expect RBI to take the necessary steps to bring down the liquidity deficit within their comfort range of +/- 1 per cent of NDTL (net demand and time liability). Hence liquidity is not a concern given the comfort that RBI will continue to address any liquidity concerns that may arise as effectively as they have in the past. What is your outlook on the Indian Bond market?The 30th October policy is going to be the immediate key trigger. Lot of things will depend on the stance and method taken by RBI to provide monetary easing i.e. weather it will be through a CRR cut, a rate cut or a combination of both. But highest probability, RBI would consider a gradual calibrated monetary easing and would be willing to assign a 25-bps cut in the repo rate. In case of a rate cut, the market will be cheerful and will give some headroom for yields to move down further. In such a scenario, we expect bond yields to soften further over a period of time. Even in the absence of a rate cut we do not expect a sell off to happen and bond yields are unlikely to go beyond around 8.35 per cent in the immediately foreseeable future, however, over the medium to long term basis expect bond yields to soften. Apart from rate cuts, market will closely track guidance from RBI on future monetary stance, global events direction, direction of commodities specifically oil and inflation expectation pans out.Going ahead, what would be the fund house strategy to invest?At ICICI Prudential AMC we have a framework that works on the principle of SLR i.e safety, liquidity and then returns. Aligned to this the first priority in portfolio construction is safety. Then comes liquidity followed by returns. On a standalone basis, we are very selective as far as credit opportunity is considered given that we manage money in fiduciary capacity and only look at it if it aligns well within our framework of SLR.Last year, most of the fund managers made good money by keeping the money in short-dated securities. In current market condition where will you advice investors to invest?We will always advice investors the same investment strategy as we follow in our portfolio construction that is to first focus on safety, liquidity and then return. Further their investment decision should be aligned to their risk appetite and investment horizon.We expect short-term rates to ease off in the coming months based on RBI’s liquidity measures. This may benefit the 2-5 year maturity space. We therefore believe that the 2-5 years segment on the yield curve is attractive in terms of risk adjusted returns. In the second half of the financial year, the downward bias for the longer end is expected to accelerate once RBI starts conducting OMOs and hence investors should gradually tilt portfolio allocations towards the next step onto a higher duration fund.Post government’s measures on fiscal consolidation, there is expectation that RBI may support government’s efforts through monetary action. Further RBI is likely to conduct OMOs to ease liquidity. These measures will be positive for long duration funds and offers a reasonable opportunity to enter Gilt and Income funds.What is your take on the 10-year G-Sec yields and why? Where do you see the G-Sec yield in the coming 3 and 6 months? Do you think it is good time to buy G-Sec (what would be the tenure) as further demand for G-Sec and rate cut will help in making some capital gains?The direction of 10 year G Sec yield is also going to be a function of the RBI action on 30th Oct. In absence of any unforeseen events happening, even if there is no rate cut we do not expect 10 year G-Sec’s going beyond 8.35 per cent but on the medium term horizon we expect yields to have a downward bias and come down. In the event of calibrated monetary action, space will be created for yields to go down further and may result in 10 year going down to the 7.8 per cent range in the next 3–6 months time. Direction will also further depend on how RBI caters to the liquidity conditions in the future given that we expect stress on liquidity over the next 6- 8 weeks. We anticipate a potential trading range of 7.75- 8.25 per cent on the bond yield. Any rate cut move or OMO will only help the bond yields to soften. As a fund manager how are you managing the money in your portfolio and where are you investing in this market?We have increased allocation in the portfolios to government securities given that spreads have narrowed significantly and is unlikely to sustain. We may further increase allocation to corporate bonds if we see spreads widening to a more comfortable level. 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 believe that the 2-5 year tenure looks attractive given the expectation of a gradual rate cut which will provide the opportunity to lock in the carry. On a relative basis corporate bond spreads are too tight against sovereign bonds and where we may see central government securities outperforming corporate bonds over the next 3 - 4 months 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 will look at opportunistically investing in PTC, CP’s and CD’s and will depend on the levels and liquidity conditions at that point of time. In the current context CP‘s and CD’s will be preferred. We may not be keen participants in PTC’s given the lack of clarity on the segment and the current taxation of PTCs.
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India will move to cut its fiscal deficit to 3 per cent of GDP by March 2017, the finance minister said, as the government tackles its ballooning expenditure to prevent the country's credit rating being downgraded to junk. After years of policy inertia that hit investments and slowed economic growth to a near three-year low, the Congress party-led ruling coalition is pushing ahead with key reforms to stimulate sluggish growth. "As fiscal consolidation and investors' confidence increases it is expected that the economy will return to the path of high investment, higher growth, lower inflation and long-term sustainability," Finance Minister P. Chidambaram told a news conference in New Delhi on 29 October. Chidambaram's comments came a day ahead of the Reserve Bank of India's (RBI) quarterly policy review. The central bank, which is not expected to cut rates on 30 October, has previously called for fiscal consolidation measures from the government. The central bank's governor, Duvvuri Subbarao, met with Chidambaram on Friday. India's fiscal deficit widened to 5.8 per cent of GDP last year from 3.5 per cent in 2007-08, and could hit 6.1 per cent this fiscal year that ends in March, according to a government panel report last month. The International Monetary Fund sharply cut its economic growth forecast for India for 2012 this month to 4.9 per cent from 6.1 per cent previously. Rating agency Standard & Poors said this month the country faces a one-in-three chance of a credit rating downgrade to junk over the next two years. Chidambaram said the government is targetting a fiscal deficit of 5.3 per cent of GDP for the current fiscal year ending in March. The deficit would be brought down through rationalised and strict control of expenditure, he said, without harming flagship poverty relief programmes. The move comes after a government panel last month warned that the country was teetering on a "fiscal precipice" and must slash large subsidies in order to get its ballooning fiscal deficit under control. Chidambaram Speak:-Government expecting current account deficit of $70.3 billion (approx Rs 3,65,560 lakh crore) or 3.7 per cent of GDP in 2012-13-Government accepts recommendations of Kelkar Committee on fiscal consolidation; fiscal deficit to be 5.3% in 2012-13-Fiscal consolidation will help in moving to a regime of low inflation and high growth-I am reviewing Direct Taxes Code (DTC), it will be introduced in Parliament; meeting on GST on Nov 8-We are confident of raising Rs 30,000 crore from disinvestment in current fiscal (Agencies)
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US stock and options markets will be closed on Monday (29 October), and possibly Tuesday, as regulators, exchanges and brokers worry about the integrity of markets and the safety of employees in the face of Hurricane Sandy. Market participants and regulators decided late on 28 October to shut the market, reversing a plan to keep electronic trading going on Monday. Bond markets will remain open, but will close at noon, a trade group said. The decision to close stock and options markets came after regulators, exchanges, and dealers discussed the unknowns that would have been tested if the markets opened on Monday, three sources familiar with the situation said. For example, NYSE Euronext's New York Stock Exchange had initially planned to shut its physical trading floor, which would have meant operating as an all-electronic exchange for the first time. The decision to shut down the stock markets came after Wall Street had prepared to open for business on Monday with limited staffing after a mass transit shut-down in New York, booking hotel rooms for key employees and leaning on offices in other cities. Wall Street banks, including Goldman Sachs Group Inc and Citigroup Inc, activated their emergency plans, which many firms put in place after the Sept. 11, 2001, attacks. It was not immediately clear if those plans had also changed. Some bank offices in lower Manhattan's Financial District are in evacuation zones and most non-critical staff and employees who don't rely on high-speed systems, including some investment bankers, were asked to work from home. "Super Storm"The storm is expected to slam into the US East Coast on the night of 29 October, bringing torrential rain, high wind, severe flooding and power outages. The rare "super storm" - created by an Arctic jet stream wrapping itself around a tropical storm — could be the biggest to hit the US mainland, forecasters said. The scramble started early as the threat of the storm forced the New York mass transit system to shut down on Sunday evening, leaving tens of thousands of employees stuck at home. About 8.5 million commuters use the Metropolitan Transit Authority's transit lines daily, meaning most Wall Street employees would be unable to get to work. New York City Mayor Michael Bloomberg also closed public schools and ordered an evacuation of 375,000 people in coastal areas, including downtown offices of banks such as Citigroup. The major exchanges and most big trading firms have alternate trading facilities if downtown Manhattan is inaccessible, but the storm's wide path may affect a number of sites in the New York metropolitan area. Authorities have warned of possible widespread power outages that could last for days. Wall Street was spared the worst of Hurricane Irene in August last year. Officials had feared Hurricane Irene would flood lower Manhattan and cripple business in the world's financial capital, but the flooding was minor and there were no major disruptions at the exchanges. All of the US exchanges, as well as major broker-dealers, and regulators were involved in the decision to close the markets, according to several executives at exchanges and financial firms. The US markets have seen three high-profile snafus this year, beginning with the failed IPO of BATS Global Markets, the No. 3 US equities exchange, on its own exchange; Facebook Inc's botched markets debut on Nasdaq's exchange; and a software glitch that cost trading firm Knight Capital well over $400 million, nearly forcing it into bankruptcy. Bond MarketsThe Securities Industry and Financial Markets Association said earlier on Sunday it is recommending an early close of noon EDT on Monday for the trading of U.S. dollar-denominated, fixed-income securities. It said its member firms should decide for themselves whether their fixed-income departments remain open for trading. The foreign exchange market's activity generally follows the fixed income markets. The New York Federal Reserve has calls scheduled for early Monday morning with dealers to see what each dealer is doing to cope with the storm, and will modify its market activities accordingly. In Washington, the Commerce Department said it would post its report on personal income and spending for September on its website at 8:30 a.m. as scheduled, even though the federal government was closed. The Federal Reserve said it would postpone its regularly scheduled releases, including its weekly report on selected interest rates and daily commercial paper data. The Fed said it would release the data when federal offices in the Washington area reopened. CME Group Inc said it will be closing its US equity index futures and equity index options on futures markets on the trading floor and on CME Globex at 8:15 a.m., Central Time, on Monday. All other CME Group futures and options on futures markets will remain open. IntercontinentalExchange Inc said trading in the ICE Futures Russell equity index futures and options will close early, at 9:15 a.m. Eastern Time on Monday. It said ICE Clear Credit will close at noon Eastern Time on Monday, with the U.S. fixed income markets. It said all other ICE markets and clearing houses will remain open and follow regular market hours. Work From HomeGoldman, whose office in lower Manhattan is in one of the areas to be evacuated, told employees earlier on Sunday that it would open for business, with some staff working from offices in Greenwich, Connecticut, and in Princeton, New Jersey. It also plans to use teams in London and other locations around the world for support. Citigroup, which has three buildings in the evacuation zone, said "non-critical personnel should invoke their work-from-home strategies." JPMorgan Chase & Co said its buildings were still open Monday and the bank was planning to be fully operational, using resources in the United States, Europe and Asia. For many investment bankers and private equity executives, working from home will make the most sense. Blackstone Group planned to close its office on Monday. Hurricane Sandy also led to some events being canceled or postponed. Citigroup Prime Brokerage postponed a hedge fund event that had been scheduled for Tuesday. (Reuters)
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In a last desperate push for reforms, the Union Cabinet approved bills for foreign investment in insurance and pensions on October 4 as Prime Minister Manmohan Singh sought to restore confidence in the flagging economy. The Cabinet also approved the Companies Bill 2011 as well as the Forward Contract Regulation Amendment Bill allowing options. As per former ally TMC's earlier request, the Haldia Petrochemical project was also scrapped by the government, a step unlikely to win much brownie point with the estranged ally. Addressing the media after the Cabinet meeting, finance minister P Chidambaram also announced the construction of five new airports. The Cabinet also approved draft of the 12th five year plan and the scheme to extend subsidised pulses and edible oil to BPL card-holders. But the reforms are expected to face a tough fight in Parliament with erstwhile ally Trinamool Congress threatening to push a no-confidence motion in Parliament against the UPA government and most major parties opposing the Cabinet clearances.Under the Bills cleared by the Cabinet, the cap on foreign money in insurance companies would rise to 49 per cent subject to Parliament approval. Addressing the media after the Cabinet meeting, Finance Minister P Chidambaram said that the cap on FDI in pension will follow that of insurance and if 49 per cent FDI is allowed in insurance by Parliament, it will be the same in pension as well. The pension and insurance Bills have been proposed for nearly a decade. Unlike last month's measures, they need to be approved by Parliament, where the coalition government is in a minority after its largest partner pulled out in anger at last month's reforms. The Cabinet also signed off on a shareholder-friendly bill to make corporate management more accountable, which would overturn a half-century old law. Union Cabinet met to discuss raising the FDI cap in insurance sector to 49 per cent and opening the pension sector to foreign investment besides creation of a National Investment Board. The Cabinet also considered a number of other crucial measures like giving more powers to commodity market regulator FMC, Competition Bill to bring all sectors under Companies Act, and model tripartite agreement for operationalising the Infrastructure Development Fund (IDF), sources said.This is the second time within a month that the Cabinet considered such major proposals to push reform initiative. On the eve of the cabinet meet, RBI said on October 3 that the government must tackle growing subsidy burden to contain fiscal deficit, highlighting the tension among the country's policymakers amidst fears of a downgrade.The markets were in an expectant mood throughout the day with the Sensex crossing the 19,000-mark to a 15 -month high and the Nifty jumping to a 17-month high on expectations of further reforms. (Read: Markets On A High) Hard To Push ThroughGood intentions apart, it is going to be next to impossible for the government to get Parliament to approve the pension and insurance FDI moves. With Mamata Banerjee giving a call for ousting UPA government and BJP as well as Left parties opposing the moves, the government seems to be skating on thin ice.BJP had appeared more malleable as BJP spokesperson Prakash Javadekar said "“We have told the government that if you address our concerns then we will back your decisions on pension and insurance.” The BJP had earlier indicated that it may back the reform if the government fixes the limit on FDI in its legislation. This ensures that in future, if there is a move to increase the cap on FDI, Parliament's approval is necessary. However, in the existing political climate, BJP is unlikely to be malleable and more likely to go with the tide and oppose the move.Once the amendments to the current guidelines are brought to Parliament, the government will have to depend on the external support of Samajwadi Party's Mulayam Singh Yadav who has 22 Lok Sabha MPs and could help the government pass the Bill. In the Rajya Sabha, however, the government is in a minority, and it could trip there.Insurance reform is widely seen as crucial because the sector needs a capital infusion of over Rs 62,000 crore or $12 billion over the next five years. Domestic and foreign insurers, who have invested much money in India over the last decade, have been lobbying the government for years to raise the FDI limit to 49 per cent from 26 per cent. Along with raising the FDI limit, the insurance amendment bill aims to strengthen regulation of the sector and allow foreign re-insurers to enter the Indian market. Reinsurance is the insurance that is purchased by an insurance company to insure the assets that it is covering. While pension and insurance decisions were in focus, the Cabinet on October 4 also discussed a range of legislation including the Companies Bill, giving statutory powers to the interim pension regulator and giving the forwards market regulator more power. Parekh Panel For Big-ticket ReformsA high-level committee on financing of infrastructure, headed by HDFC Chairman Deepak Parekh on October 3, meanwhile suggested big-ticket reforms to attract investment in the infrastructure sector and recommended increasing electricity charges and rail fares. The Parekh committee also pitched for 100 per cent foreign direct investment (FDI) in the telecom sector. The limit at present is 74 per cent. The panel also suggested raising prices of natural gas. Fiscal PrecipiceLast week a government panel, led by former finance secretary Vijay Kelkar, warned of a "fiscal precipice" if the government does not urgently slash fuel, food and fertilizer subsidies to curb a deficit that could hit 6.1 percent of gross domestic product this fiscal year. The first set of reforms announced last month have boosted the rupee, which partly recovered from a sharp drop in value this year, but the RBI says more action is needed to save the budget and reduce inflation. "The diesel price hike barely scratched the surface. The more important signal will be to act on the Kelkar committee recommendations and have a fiscal roadmap," A Prasanna, chief economist at ICICI Securities Primary Dealership told a news agency.
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Most state-run banks need an infusion of additional capital and a decision will be taken in the next few weeks, finance minister P. Chidambaram said on 15 November.The minister said government would soon finalise capital infusion for the PSU banks and the beneficiaries would include Indian Overseas Bank, Central Bank of India and Bank of Maharashtra. The government had proposed to inject Rs 15,000 crore of capital in the PSU banks.Referring to the issue of new banking licences, Chidambaram said he had written to the Reserve Bank to initiate the process of issuing guidelines and start accepting the licences pending approval of the Banking Regulation Amendment Act by Parliament."...we have written to the RBI recently urging them to proceed to finalise the guidelines and proceed to receive applications for new banking licences in anticipation of the amendment in the banking regulation act," he told reporters after reviewing the performance of public sector banks.As per the RBI's draft norms released in August 2011, private sector entities or groups owned and controlled by Indian promoters, with diversified ownership, sound credentials and integrity, and having successful track record of at least 10 years, would be eligible to promote banks."We have written to the RBI and hope that the RBI will pick up the thread and finalise the guidelines and start receiving the application," Chidambaram said.The minister said the "power or the authority" which the RBI wants is already available in the other provisions of the law and with the central bank's own regulations and guidelines for new banking licenses."We are only formalising them by amending the banking regulation act. And I have assured the RBI that banking regulation act will indeed be amended, hopefully in the Winter Session (of Parliament), if not in the Winter Session then in the Budget Session," he added.He further said if RBI proceeds to receive application and process them, even then the first banking licence is not likely to be issued in the next six or eight months."So by the time the licence is issued and the banks comes to existence and the banks begin to function, the banks regulation act would have been amended," the Minister said.The draft norms have pegged the minimum required capital for promoting bank at Rs 500 crore and restrict foreign shareholding at 49 percent for the first 5 years. Addressing a press conference after meeting heads of the banks, the finance minister said they had suffered a deterioration of non-performing assets and write-offs. Open to handholding the stressed sectors, the finance minister said government will work out a strategy to assist industry segments reeling under the impact of economic slowdown. "If the economy improves and growth improves, the sectors (which are not doing well) will recover. But in the meanwhile we will have to do some handholding and try to help these sectors recover", he said while addressing a press conference after meeting the heads of public sector banks in New Delhi. Govt To Handhold Stressed Sectors: FMStating that slowdown is a temporary phenomenon, the minister said the "situation is not alarming" and would improve with recovery and bad loans would become standard accounts. "A bit of handholding (is needed) to help the sectors or the industry or the unit to tide through this difficult period...and when the economy recovers, these accounts will indeed become standard accounts", he added. The government will have to look at rising Non-Performing Assets (NPAs) sector wise and find ways and means to help them, he said, adding the "NPA is reflection of the slowdown in the economy". The NPAs of the public sector banking group has increased by 0.98 per cent in the one-year period ending September 2012 mainly on account of the stress being faced in sectors like infrastructure, steel, construction, textile, food process and telecom infrastructure, the minister said. On the positive side, Chidambaram said housing and automobile sectors have been doing well on back of decline in EMIs. India's economic growth rate has slipped to nine-year low of 6.5 per cent in 2011-12 and the Reserve Bank of India (RBI) expects it to decline further to 5.8 per cent in the current fiscal. The first quarter of 2012-13 recorded a growth rate of 5.5 per cent, while the figures for the second quarter will be released later in the month.(Agencies)
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In the absence of a downgrade and implementation of the reform process, the Indian equity market can be expected to touch a new high by March 2013, says Akshay Gupta, managing director & CEO, Peerless MF. He feels the equity market can surge 15 per cent from the current levels on back of FII flows. However, he is fully aware that there are a lot of issues that can spoil the party for the Indian markets. Efforts from the government will dictate the trend in the next year. “This time December and January FII flows will hinge on the government's implementation (of the reform process) and if that fails, FII money will not flow in next year,” says Gupta who feels all eyes will be on the winter session of Parliament which can be the next trigger for our markets. Excerpts from the conversation: What impact do you see on the overall P&L of the mutual fund with the new Sebi norm coming into effect that restricts MFs from having multiple plans in their schemes as well as on the expense ratio?On an overall basis, for the long term, these are changes that benefit the P&L of the MF industry in general. Obviously, since Peerless Mutual Fund is a sub-set of the industry, it will also benefit. In the short term, re-adjustment will need to be made for single plan structure. It is expected that loss of revenue will happen in the fixed income schemes, where multiple plans existed, which gave leeway to the AMCs to charge expense ratios more flexibly. What would be the strategy of Peerless MF to grow its AUM and investor base? How much are you investing in the business? So far how much have you invested in the business and when do you plan to break-even?Strategy of Peerless is very simple – “Customer is king”. From the inception, customer centricity has been our focus. Business numbers like AUM and investor base is a consequence of this broad strategy. Getting more granular, we are focusing on creating new customers in untapped geographies through vernacular delivery. We have more than 40% of our AUM in retail-oriented schemes from non-top 15 towns, which is also the focus of regulator. This has been our strategy since inception. On the institutional side, our strategy is to provide few and appropriate solutions of cash management and investments to customers. We do not believe in launching unnecessary products to confuse customers. Thus far, in the last 3 years, we have launched only seven products and all of them are doing extremely well. We have invested more than Rs 30 crore in the business and we have already reached the break-even in the last quarter. We shall reach a full annual break-even in the next year (2013-14). Peerless General Finance and Investments (PGFI) is also infusing an additional Rs 50 crore to make the capital Rs 100 crore. This makes our operations stronger and solid. PGFI has supported mutual fund operations at every step and will do everything to continue this support. Infusion of capital is one of the support measures. What is your view on the overall financial market? What are your concerns on the global environment and do you think it can be a drag on the Indian market? And why?Overall the financial markets do reflect the global economies eventually. Global economy will go through stress of deleveraging over the next 10 years. While, the pain will be felt more in the western economies, Indian economy has strong linkages to the western world. Hence, on an overall basis there is pain but I see that outsourcing theme can turn out to become an exception and will get a boost due to global pain. Sectors like IT, Pharma and Auto will benefit from the global pain that will result in work getting outsourced to skilled developing economies like India. What is your take on the Indian equity market and why? Do you see the rally sustaining near the 19000 mark? In your view what will be the next trigger for the Indian equity market? And why? When do you see it coming?I do expect the markets to rally from these levels by another 10-15 per cent till they become visibly expensive. We must remember that FIIs have been the reason for this rally. They are smart investors and gravitate towards wherever they find better value. So, 19000 may not be too far but the next trigger for the market will be implementation of all the announced reforms and also absence of any “downgrade” news. What is your view on the overall corporate performance of Indian Inc? Have the September-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 about?Expectations have been clearly met. In fact, I feel that we have been positively surprised in some sectors like Pharma, FMCG, Cement, IT and Auto. Some sectors like PSU Banks, Commodities and Telecom have yet again not been up to the mark. We continue to remain bullish on 2 themes – Consumption and Outsourcing and in particular - FMCG, Pharma, Auto, IT and private banks. In current market condition, where will you advice investors to invest? Currently where are you investing your own money? And why?I am investing 70 per cent of my own money in Hybrid schemes (mixture of Debt, Equity and Gold) along with 30 per cent in diversified equity schemes on a systematic basis. My advice to customers would be to invest in short-term income and flexible income schemes on the fixed income side and diversified equity funds on the equity side or invest in hybrid schemes because they rebalance automatically and have asset allocations, which might benefit retail investors, who do not have much time to spend. 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 have kept maturities in the fixed income side at a conservative end of the range across various products and therefore have not been adversely affected despite the fixed income markets correcting in the last two weeks. Having said that, the fixed income returns since January 2012 have been substantial and the last two weeks may not be the barometer for investors to get worried. On the equity markets front, we have been stocking companies with good governance, sound cash flows and low impact of policies/ previous policy actions. What is your take on the 10-year G-Sec yields and why? Do you see it going past 8.30 per cent? Where do you see yields in the short-term (3M) and medium-term (6M)?Our forecast is that interest rates have to come down and despite temporary blips, the whole yield curve has to come down by 25-50 bps. We should see 10 year touching 8 per cent by April 2013. Fixed income, particularly FDs and bonds have become a flavour among investors, even equity fund managers are keeping a large portion of their money in FD and bonds. In your view is fixed income still a cushion for equity investors?Thankfully, it has and it should have been long time back. Trust deficit in the industry is largely due to the fact that fixed income funds were not sold in the right quantum to retail investors between 1998-2008. Fund managers can keep money in money market instruments only temporarily as a conservative call. Fixed income is the essential cog in the asset allocation wheel and financial advisors must incorporate 25-75% of any portfolio in fixed income funds accompanied by equity and gold. 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 are bullish on 2-5 year bonds – both PSU and corporate since there has been a correction recently. We have been buying opportunistically in the 2-5 year segment. However, on an overall maturity basis, we are still keeping lower maturity and duration in our funds. What is your view on gold? Should it take maximum share of ones portfolio as the world economy is still not showing signs of revival?Gold will have a good run for the next 10 years. Of course like any other asset class or investment, there are bound to be corrections and rallies. Like I have said previously, global pain will keep gold at firm levels. So, there is no indication of major correction in the global gold prices. Gold should ideally occupy 10-30% of one’s portfolio. If rupee depreciates with a higher ferocity, we will see gold prices touching new peaks in India. What is your take on the Indian currency? Do you think its heading towards the 60 mark and why? Where do you see the Rupee in the next three months before the budget?It is difficult to put a number on the rupee-dollar but there are 2 scenarios…First – if all goes well, dollar flows continue, then rupee can get back to Rs 50 and the second- if a downgrade happens or fiscal situation goes beyond control due to policy inaction then even 60 may be less for the rupee to stop. Oil is hovering around $110 per barrel, now with the US election over do you see the upsurge? And why? Will this be the dampener for the Indian market?Till monetary easing continues hedge funds and other funds (run by the ARAB world) will continue to tank-up oil futures. With US President, Obama getting re-elected, it is likely that oil will continue to hover above the $100 level. For India, the tight-rope walk will continue since Oil is the largest import item for India and till the prices come down significantly i.e below $80 per barrel, Indian economy will continue to be on the edge.
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Moving in line with equity market, the Indian rupee recovered 38 paise to 54 a dollar on Friday on fresh selling of the American currency from banks and exporters amid expectations of more foreign capital inflows. Weak dollar in the overseas market also boosted the rupee value, a forex dealer said. The rupee resumed higher at 54.15 per dollar as against last closing level of 54.38 at the Interbank Foreign Exchange (Forex) Market and firmed up further to 54.00 at 1040 hrs. It moved between 54 and 54.20 a dollar in the morning deals. The Bombay Stock Exchange 30-stock index, Sensex, advanced by 247 points in the on fresh buying after the government notified its decision to allow FDI in the multi-brand retail sector. Thursday evening, unfazed by opposition even from its own allies, government went ahead implementing its decisions to allow FDI in multi-brand retail and liberalise foreign investment in aviation and broadcasting sectors. In Sydney market, the dollar declined as investors bought stocks and commodities, with some analysts now expecting more weakness of the American currency. (PTI)
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The BSE Sensex rose around 2.5 per cent to new seven-month highs on 14 September after the government announced a hike in diesel prices and after the Federal Reserve announced a new asset purchase programme.State-owned oil companies such as Bharat Petroleum Corp led the rally intitially after India raised the price of heavily subsidised diesel on 13 September to rein in its fiscal deficit. The shares later pared gains.Lenders such as State Bank of India also rose on expectations the government's fiscal consolidation steps would increase chances of a rate cut from the RBI, which reviews policy next on 17 September.India's wholesale price index (WPI) rose a higher-than-expected 7.55 per cent in August from a year earlier, mainly driven by higher food prices due to deficient monsoon, government data showed on 14 September.Investors are also at the government's weekly cabinet meeting later in the day, which is expected to discuss opening up the aviation sector to foreign direct investment."Fuel price announcements coupled with positive global news flows will provide another boost to markets. This rally should continue in near term," Jagannadham Thunuguntla, Head of research at SMC Investments and Advisors Limited.The Sensex rose 2.5 per cent as of 2:37 p.m. and headed for its eighth consecutive winning session. The Nifty rose 2.5 per cent as well.Lenders gained on expectations the fuel price hike would increase the prospect of rate cuts, given Reserve Bank of India officials were seen as wanting the government to shore up its finances before considering easing monetary policy.State Bank of India rose 5.4 per cent, while ICICI Bank rose 5.3 per cent.Shares in software services exporters and metals rose after the Fed launched an aggressive stimulus program, saying it would pump $40 billion into the US economy each month until it saw a sustained upturn in the weak jobs market.Tata Steel rose 4.5 per cent, while Hindalco Industries rose 7.7 per cent, while Infosys rose 2.6 per cent.Airlines rose on hopes that the sector would benefit from a potential opening up of the sector. SpiceJet extended gains for a third day, up 5.8 per cent.(Reuters)
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Finance Minister P. Chidambaram exudes the self-confidence of a man who, in the eyes of India's cheerleading financial markets, can do little wrong. In the 11 weeks since he took office, the benchmark BSE index has surged around 8 per cent, due in large part to his hard-charging drive to boost investor sentiment that had soured under his predecessor, Pranab Mukherjee. But the reality is the steps taken so far will not fix the sluggish economy in the near term, and the window of opportunity for implementing game-changing reforms such as slashing government spending on fuel, food and fertiliser subsidies will narrow as campaigning for a 2014 election gets under way. "When you are fixated on equity markets and you are doing whatever you can to push them higher that is exactly what you will see," said economist Rajeev Malik of CLSA, Singapore."Pushing up equity markets is a lot easier than taking up some of these more difficult moves." Together with Prime Minister Manmohan Singh, Chidambaram has unveiled a series of big-ticket and small-bore initiatives over the past month that were long demanded by investors and business leaders frustrated by years of policy inaction in New Delhi. According to government officials, the slew of policy announcements on lifting the bar on foreign investment in the airline, insurance, pensions and retail sectors are part of a two-step government strategy -- first, pump up the financial markets, then unveil a road-map for cutting the fiscal deficit. The first step has worked. Net inflows from foreign investors have surged since Chidambaram's appointment, with $7.7 billion flooding into stocks and bonds since then, according to regulatory data. The next step will be more difficult. Turf Wars, FrictionReports published by the World Bank, International Monetary Fund (IMF), Standard & Poor's and a government panel over the past 10 days have provided sobering reminders of the huge challenges facing an economy still beset by high inflation and dragged down by ballooning current account and fiscal deficits. The IMF sharply cut its economic growth forecast for India for 2012 to 4.9 per cent from an earlier projection of 6.1 per cent growth. The Kelkar budget panel, meanwhile, warned that India was teetering on the edge of a "fiscal precipice" and called for swift action to reduce the deficit, which it said could hit 6.1 per cent of GDP this year if no action was taken. Chidambaram has signalled that he is acutely aware of the dangers, telling a news conference last week that without reforms to curb the deficits, India "risked a sharp and continuing slowdown of the economy". He is expected to unveil a deficit reduction plan soon, possibly before the Reserve Bank of India's next policy review on 30 October. But turf wars within the cabinet, friction among coalition partners, continued weak government at a federal and state level and fears of alienating voters ahead of the 2014 election could still choke off Chidambaram's reform drive. The Finance Ministry knows it has a "very small window" in which to act, a senior ministry official told Reuters. There is already disagreement among ministers over a land acquisition bill long sought by Indian business leaders that would make it much easier for companies to buy land for industrial and infrastructure projects. The bill is stalled in cabinet and it is not clear when it will be approved. The environment minister, meanwhile, has raised objections to another Chidambaram initiative -- a national investment board aimed at cutting through red tape that can hold up infrastructure projects for years. The proposal is seen as the government's boldest attempt yet to clear infrastructure bottlenecks that have strangled economic growth. Weakened Coalition Singh's coalition government has also been seriously weakened by the walkout of a key ally and now governs without a parliamentary majority. It is dependent on support from two fickle allies that have campaigned against some of its flagship reforms, such as allowing foreign supermarkets into India. That will make it difficult for the government to get pension and insurance reforms, recently approved by the cabinet, through parliament. In fact, there is now a higher risk of the government falling and an early election being called. Critics question whether, in the face of such challenges, the ruling Congress party will have the political will to follow through with what Singh and Chidambaram have started. The party's powerful chief Sonia Gandhi favours costly welfare measures and had to be persuaded to back the recent reforms. "If the government were to enter into a populist mode come FY14 budget and roll back any of the reform initiatives, risks of a (credit rating) downgrade will rise come next year," said Radhika Rao, an economist at Forecast in Singapore. The government has already baulked at the recommendation of the Kelkar deficit reduction panel to phase out fuel subsidies, saying it had a duty to protect India's poorest citizens. And Oil Minister Jaipal Reddy said last week he was "not so courageous" as to raise diesel prices any time soon after a hike in mid-September sparked a nationwide strike and street protests led by opposition parties. His comment suggested the government is already viewing policy decisions through the prism of a general election due by mid-2014, when it will face a tough fight to win a third term. Those political considerations pose a challenge even for someone as single-minded and determined as Chidambaram, finance minister for the third time in a storied political career. The question now is how much time India's political leaders will give him to get the economy firmly back on track. (Reuters)
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