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IIP grows at 11.8% in Oct on festive demand

15 Dec, 2007, 0058 hrs IST,Pallavi Mulay, TNN

The index of industrial production (IIP) grew at 11.8% in October 2007. Driven by a 13.3% manufacturing growth, this is the fastest in the past six months. A robust festive demand has been the key factor. This is evident from a 12.5% increase in consumer goods on account of strong growth in durables as well as non-durables.

Capital goods and intermediate goods are other sectors that recorded an accelerated growth at 20.5% and 14.2%, respectively. However, production of basic goods slipped to 6.2% this month. Overall industrial performance is satisfactory in October 2007.

Such a spectacular growth was obvious for two reasons: pre-Diwali buying buoyed demand while a low growth of 4.5% in October 2006 improved the present number. Whether this can be sustained is another point.

ABN Amro’s purchase manufacturing index, which is an indicator of manufacturing activity, has slowed down to 60.9 in November 2007 from the highest level of 61.7 attained in October 2007. Nevertheless, the survey has signaled an improvement in operating conditions in the Indian manufacturing sector this month. The order book is estimated to be healthy. However, mounting input cost is a concern. So far, manufactures have managed to hold on to their margins as they were able to hike output prices, says the survey.

Going forward, the Reserve Bank’s policy stance will be a deciding factor. Inflation numbers may go up in the coming weeks, thanks to base effect and a possible hike in fuel price. In addition, demand factors are expected to be benign. Capital flows following rate cuts may build inflationary expectations and leave RBI with little room to cut rates.

India Inc, on the other hand, is expecting a rate cut. Rate hikes and liquidity tightening in recent times may have affected the overall industrial growth, which has marginally dipped to 9.7% during April-October 2007 as against 10.7% in the year-ago period. Under the circumstances, if RBI holds interest rates and goes for a further hike in the cash reserve ratio, industrial growth may be adversely affected.

Anjali R,Pune,says:The numbers are encouraging!! But are they sustainable? Looking at the tight monetary policy, high interest rates and thereby suffering manufacturing sector, appreciating rupee which is discouraging exports especially from employment-intensive sectors and high base effect in index of industrial production may play a spoil sport in coming months. India's blistering economic growth slowed to 8.9% in the second quarter to September 2007, from a year earlier, hit by a downturn in manufacturing as higher interest rates and a strong rupee dragged on manufacturing and exports.

Though exports battled a rising rupee and an impending US slowdown to grow a healthy 35.65% in October 2007 to a seven-month high of $13.3 billion against the $9.8 billion recorded a year ago, the low base effect cannot be ignored. The exports registered a sequential slowdown from $10.7 million in September 2006 (growth of 47.06%) to $9.8 million in October 2006, clocking an annual growth of 21%. However, the October figures failed to cheer the economy fully, as exports from employment-intensive sectors like textiles, handicrafts and marine products had dipped significantly and exports would still fall way short of the target of $160 billion for the current financial year.

The rupee which has appreciated to 39.36 a dollar on 12 December 2007 from 39.56 a dollar on 3 December 2007 on back of capital inflows, will affect the exports growth. A close watch on inflation is necessary. The country's inflation is driven largely by spurt in agri commodity prices. With the global commodity prices on up heal and poor expected wheat crop in rabi season domestically, coupled with recent rise in global crude oil prices could un bottle the inflation genie. 15 Dec 2007, 1243 hrs IST

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Oct industrial growth jumps to 11.8%
BS Reporter / New Delhi December 13, 2007

Experts cite festive buying, robust exports and low-base effect.

Festive buying, robust exports and low-base effect pushed up industrial output growth during October to a seven-month high of 11.8 per cent as against 4.5 per cent in the same month of the previous year.

This comes after industrial production dipped to a six-month low of 6.77 per cent during the previous month, mainly on account of high interest rates and a strong rupee.

“This was expected. Festive buying, coupled with a 35 per cent growth in exports in dollar terms and a lower industrial output in the same month of the previous year are responsible for the October numbers,” said Shubhada Rao, chief economist, Yes Bank.

According to Rao, the impact of the tightening monetary policy has not worn off and it will be difficult to sustain the October growth. “During 2007-08, industrial growth should be around 9.5 per cent.”

However, signs of moderation in industrial output were visible in the April-October period of this year as cumulative industrial production growth stood at 9.7 per cent, which was lower than the 10.1 per cent rise in the corresponding period of the previous year.

Finance Minister P Chidambaram said it was early to comment if the growth rates in October could be sustained in the coming months.

“The April-October figures are slightly lower than previous year’s (figures). We will have to wait and see the November figures,” he told news agencies.

Analysts assured one should not be alarmed by the moderation in the industrial output in the April-October period. “Such moderation is normal under current circumstances. I expect the cumulative growth in industrial output to be around 9 per cent by the end of 2007-08,” said Samiran Chakrabarty, chief economist, ICICI Bank.

Industrial output during the month was fueled by a seven-month-high growth in the manufacturing sector (comprising 80 per cent of India’s industrial production), which stood at 13.3 per cent during the month as against 3.8 per cent in the year-ago period.

But in the April-October period, the cumulative growth was 10.4 per cent, marginally lower than the 11.1 per cent a year ago.

Festive buying pushed up sales of consumer durables to a seven-month high of 9.3 per cent as against 0.2 per cent a year ago. But in the April-October period, the sector recorded a dip of 1.3 per cent as against a 12.7 per cent growth in the corresponding period of the previous year.

The mining sector’s output in October slowed to 3.7 per cent as against 5.9 per cent a year ago. Electricity production also went down in October with a growth of 4.2 per cent as against 9.7 per cent in the same month of the previous year.

A slowdown was also seen in the basic goods sector, where output increased by 6.2 per cent as against 10.5 per cent during the month under consideration.

The sectors that have performed well during the month include capital goods, whose production increased by 20.5 per cent as against 6.5 per cent in the same month of the previous year.

Intermediate goods also saw a healthy growth rate of 14.2 per cent during the month as against 5.9 per cent in the same month of the previous year.

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Posted By : anjalir on 13 December,2007
The numbers are encouraging!! But are they sustainable? Looking at the tight monetary policy, high interest rates and thereby suffering manufacturing sector, appreciating rupee which is discouraging exports and high base effect in IIP may play a spoil sport in coming months. India's blistering economic growth slowed to 8.9% in the second quarter to September 2007 hit by a downturn in manufacturing as higher interest rates and a strong rupee dragged on manufacturing and exports.


Posted By : anjalir on 13 December,2007
Though exports battled a rising rupee and an impending US slowdown to grow a healthy 35.65% in October 2007, the low base effect cannot be ignored. However, the October figures failed to cheer the economy fully, as exports from employment-intensive sectors like textiles, handicrafts and marine products had dipped significantly and exports would still fall way short of the target of $160 billion for the current financial year.


Posted By : anjalir on 13 December,2007
The rupee which has appreciated to 39.36 a dollar on 12 December 2007 over 39.56 a dollar on 3 December 2007 on back of capital inflows, will affect the exports growth.With the global commodity prices on up heal and poor expected wheat crop in rabi season domestically, coupled with recent rise in global crude oil prices could un bottle the inflation genie.

Infra structure, real estate, global funds-Are the sector specific funds true mutual funds?

The biggest advantage of mutual funds is getting decent return on one's investment without having to go through the complexity of investment management oneself. You write a cheque and that's that. After that, which sector or industry is doing well or badly and what to move in or out of is no longer your headache. All that is the fund manager's problem. In fact, this offloading of decisions to a professional fund manager is the whole point of investing in a mutual fund.

However the recent NFOs provide a completely different picture. The theme-based funds (maximum of NFOs are theme based) defeat the three very basic ideas of investing in MFs – diversification, professional expertise and regular monitoring.

Firstly, you are concentrating your portfolio and thereby increasing the risk. MF was supposed to be a route to diversify investment, not concentrate it.

Secondly, you are taking a call on the market as to which sectors will do well. You have entrusted your money to a professional fund manager. Don’t you think you should invest in a diversified fund vis-à-vis a sector fund and leave it to his expertise and experience to decide on the potential sectors (in fact, that’s precisely his job)?

Thirdly, since you don’t know when the tide will turn, you need to constantly monitor a theme-based portfolio. Again, you have opted for MF, as you didn’t have much time to regularly monitor our investments.

During November and December so far, 11 new equity mutual funds have been offered to the public. An interesting aspect of the NFOs this time is that they are predominantly sector or theme specific. The current fancy is infrastructure, real-estate and global funds.

Out of all the NFOs one-exactly one-is of the type where the fund manager will be taking the entire gamut of investing decisions. In all others, the investor will have to lend him a helping hand.

Almost all funds that are launched nowadays are specialised in some way. There are real estate funds, energy funds, small companies funds, emerging marketing funds, and so on and so forth. Per se, there's nothing wrong with the idea of specialised funds.

However, when almost the entire market for mutual funds gets converted to specialised funds, then there's a problem, because deciding between these funds is a job by itself. When you invest in a well-run generic equity fund that can invest in any kind of company, then it's the fund manager who decides what type of sector, industry or size of company to invest in. It's his job to analyse trends and figure out how much of your money needs to be in technology or oil companies or infrastructure or real estate or whatever. But when you invest in specialised funds, then that analysis and that decision has to be made by you. You must take a call on what percentage of your investments to put in what industry and when to put it in and when to pull it out and switch to some other industry or type of company. Does this sound like a good deal to you? It doesn't sound like one to me.

Theme-based funds-what’s wrong?

Interestingly, one of the guidelines on NFOs was that an AMC cannot launch new funds which are similar to any of their existing schemes. Most AMCs already have the conventional diversified and mid-cap funds. Hence, this rush for sector/theme-based schemes! (By the way, some of the so-called theme-based funds are so broad-based that they mimic a diversified fund; the fancy-named NFO being just a marketing maneuver).

But the problem is you don’t know when the fancy starts or when it ends. It could be months or it could be years. So you could either exit too early and miss the best part of the rally or exit too late when all the cream is gone.

Time and again, something or the other will catch the fancy of the market. And then everyone will rush headlong into it. Once upon a time it was Technology, Pharma or Auto. Today no one even talks about them. Now it’s infrastructure and real estate. Tomorrow, they too would be forgotten.

Given all this, theme-based funds carry a higher risk than diversified funds. However, if you are keen in investing, it would be prudent to invest only a small percentage of your corpus in such sector/theme-based funds.

My comment on Business Standard article

RBI raises MSS limit
BS Reporter / Mumbai November 08, 2007

In a measure to combat excess liquidity, the government today revised the ceiling on the Market Stabilisation Scheme (MSS) to Rs 2,50,000 crore as against Rs 2,00,000 crore.

With the MSS auction of Treasury bills held on Wednesday, the MSS outstanding (face value) will be Rs 1,80,155 crore, as on November 8, 2007.

The threshold at which the limit will be further reviewed is now at Rs 2,35,000 crore. The limit was earlier reviewed from Rs 1,50,000 crore to Rs 2,00,000 crore on October 4. This is the fifth time the MSS ceiling has been revised by the government in the same financial year.

The MSS is a scheme of issuing bonds and treasury bills for sucking out excess liquidity from the system.

Anticipating greater requirement of cash with banks in the festive season during the weekend, RBI today accepted bids worth Rs 500 crore in the 91-day T-bill auction out of the total notified amount of Rs 3,500 crore (Rs 3,000 crore towards the MSS).


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Posted By : anjalir on 08 November,2007
Yet another step to curb excess liquidity!!! RBI in its monetary policy review, with increasing CRR by 50 bps, also indicated that it will continue to respond swiftly with all possible measures as appropriate to the evolving global and domestic situation impinging on inflation expectations, financial stability and the growth momentum. Continue...

Posted By : anjalir on 08 November,2007
RBI's moves suggest that monetary tightening is far from over given that the capital inflows are unlikely to abate despite restrictions on participatory notes, derivatives used by foreign investors that are not registered in India to trade on the Indian stock markets and CRR hike. RBI is facing record foreign investments that have pushed the rupee to a 9 1/2 year high and increased money supply. Continue....

Posted By : anjalir on 08 November,2007
Concld....Though the hike in MSS ceiling will raise the fiscal cost (sterilization puts an extra cost on the fiscal and cannot be done indefinitely. Moreover, with FRBM act in place, government has to control its expenditure and would not want to bear the cost of sterilization), the immediate concern of RBI is to curtail excess liquidity in market, which along with soaring oil prices may raise the inflation figures, which are currently well under the RBI's tolerance limit.

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Get ready for lower bank deposit rates
Shriya Bubna & Rajendra Palande / Mumbai October 26, 2007

After nearly three quarters of generosity , banks are now facing pressure to reduce deposit rates. Most face a margin squeeze with the rise in interest expenditure outpacing the increase in interest income at the start of the third quarter of the financial year.

Union Bank, a Mumbai-based public sector bank, has taken the lead. Irrespective of competitive pressures, the bank has cut rates on one-year deposits to 8.5 per cent from 9 per cent, the rate most banks are offering on one- and two-year deposits.

“The revision in deposit rates will help the bank contain the cost of resources and improve margins,” said M V Nair, chairman, Union Bank.

Union Bank of India’s interest income grew 27 per cent during the quarter from a year earlier but its interest expenditure rose faster at 38 per cent. As a result, the bank’s net interest margin (NIM) in the second quarter fell to 2.56 per cent, from 2.76 per cent a year ago.

Other banks are expected to follow suit. Banks like IDBI, ICICI Bank, HDFC Bank and Vijaya Bank have reported a sharper rise in interest expenditure than interest income in July-September 2007 from a year earlier.

ICICI Bank’s interest income, for instance, grew 37 per cent while its interest expenditure rose by 47 per cent.

Most banks are waiting for the mid-term review of the Reserve Bank of India’s monetary policy, due on October 30, before they take action.

“There is scope to reduce deposit rates 50 to 100 basis points but we are awaiting policy signals,” said a senior IDBI Bank official. Analysts suggest that cutting deposit rates is a fait accompli.

“Irrespective of the policy signals, based on the observation of growth in interest earned and interest expended, it would be rational for banks to reduce deposit rates by 25 to 50 basis points across maturities,” said Roopa Rege-Nitsure, chief economist, Bank of Baroda.

The sharp slowdown of credit growth will also require banks to cut deposit costs to sustain profit growth.

Since April 2007, bank credit grew only 5 per cent with just Rs 96,486 crore added to advances against Rs 1,54,000 crore a year earlier.

Poor credit off-take in the first half of 2007-08 has led to slower growth in banks’ net interest earnings.


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Posted By : anjalir on 26 October,2007
This is an expected move. Earlier also with the CRR hike by 50 bps in the first quarter review of the Annual Monetary Policy, many banks had to roll back high deposit rates being offered on tenures 1 year and above. In addition high interest rates domestically encouraged companies to borrow funds through ECBs from outside India. This also lowered credit offtake from domestic banks.

Posted By : anjalir on 26 October,2007
The ample liquidity in the market coupled with poor credit offtake and accelerating deposits are increasing the cost of banks, which will force them to reduce the deposit rates. However the condition will be clear after 30 October 2007.

My comment on Economic Times article

Industrial output rose 10.7% in August
13 Oct, 2007, 0031 hrs IST, TNN

NEW DELHI: The bulls may have left the Street for an early weekend but those buying the India Story were proved right on Friday. Industrial output rose 10.7% in August compared to 10.3% in August 2006. The output had slipped to 7.1%(now revised to 7.5%) in July fuelling concerns that economic growth was moderating.

What makes it sweeter is that the higher growth is on a high base of 10.3% in August 2006, which was mainly boosted by lower growth of 7.4% in August 2005.

“Last month’s drop in the index of industrial production (IIP) was an aberration. I expect the industry to average a growth of 9% this year,” economist Omkar Goswamy said.

The April-August industrial growth, however, slipped to 9.8% from 11% logged in the first five months of the previous fiscal year. Industrial output had been consistently at sub-10% levels in the past three months with higher interest rates slowing down manufacturing and consumer spending.

Optimism about the Indian growth story is all-pervasive. ADB, on Friday, upped India’s FY08 economic growth forecast to 8.5% against the earlier projection of 8%.

“The numbers are above our expectations and show that concerns about an impending slowdown are greatly exaggerated,” said ICICI Securities analyst A Prasanna.

All the three industrial sectors — mining, manufacturing and electricity — showed double-digit growth in August. The manufacturing sector notched 10.4% growth, marginally down from 11.9% in the same month previous fiscal year. It has, however, bounced back from last month’s 7.2%. Manufacturing contributes about 15% to GDP and nearly 80% to industrial output.

The industrial data released on Friday showed demand for consumer goods fell, hurt by monetary tightening, but was more than offset by demand for capital goods and a pick-up in mining activity and electricity generation. The mining sector showed stupendous recovery, recording a growth rate of 17.1% against a decline of 1.7 % in the corresponding month of 2006. Mining had grown by just 4.9% in July 2007.

Electricity generation during August grew by 9.2% compared to 4.1% a year ago.

In the manufacturing sector, the capital goods sector kept the flag flying with a robust 30% growth in August, compared to 16.6% in the corresponding month of 2006.

Consumer durables continue to remain a concern area declining 6.2% compared to 19% growth in August 2006.

Analysts hope the festival season will help consumer demand rebound. Some banks have cuts rates for consumer loans to push demand for homes, cars and TVs.

Basic goods and intermediate goods recorded growth rates of 13.3% and 12.3%, respectively, during August, compared to 4.8% and 8.7%, respectively, in the corresponding period last year.

With industrial growth showing signs of recovery, some analysts feel inflation may resurface. They said in this backdrop, the central bank may not go for cut in rates.

Anjali R,Pune,says:A good sign!! After registering a single digit growth in July 2007, the market expected a slow down in economy. But the impressive, above-expected growth in IIP in August 2007 has rebuilt more confidence in Indian growth story. India's industrial production growth exceeded expectations in August, accelerating for the first time in four months, as record investment in factories, roads and power plants boosted demand for cement and steel. The continuous slowdown in inflation, more efforts towards infrastructure development, rising income leading to rise in demand has all led to rise in IIP. However, the high interest rates have hit the consumer durable segment, which has registered a decline in August. Also the continuous appreciation in rupee and excess liquidity in the market is a cause of concern. RBI may increase the CRR to curtail the liquidity in the system after having low inflation and impressive IIP figures. But the central bank has to look at the decelerating credit off take from banks which may further get affected because of CRR hike.

13 Oct 2007, 1042 hrs IST

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IIP back to double-digit growth

BS Reporter / New Delhi October 13, 2007

Reversing a four-month trend, industrial growth rose sharply this August, pushing the Index of Industrial Production (IIP) back to double digits for the first time since June.

The rebound came on the back of robust manufacturing production, especially in capital goods. Even mining, which had lagged significantly, recorded a massive and unexpected growth during the month.

Mining accounts for 10.47 per cent of the index of which coal and crude oil account for the bulk.

The IIP rose 10.7 per cent this August against 10.28 per cent a year ago. Overall, for the first five months of the current fiscal, industrial growth stood at 9.8 per cent.

Manufacturing, which accounts for nearly 80 per cent of the index, grew 10.4 per cent in August, against 11.94 per cent in 2006. Although this is much better than the growth in the previous two months, it is lower than last year.

The good showing by manufacturing was dented only by consumer goods that continue to reel under the impact of high interest rates.

The sector grew 0.5 per cent in August against 5.69 per cent in July and much lower than a year ago. This is the lowest growth rate the segment has seen so far.

Experts said the decline in consumer goods was a cause for concern. “This indicates a slowdown in consumption,” said Siddhartha Roy, economic advisor, Tata group.

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Posted By : anjalir on 13 October,2007
A good sign!! After registering a single digit growth in July 2007,growth exceeded expectations in August, accelerating for the first time in five months, as record investment in factories, roads and power plants boosted demand for cement and steel. The continuous slowdown in inflation, more efforts towards infrastructure development, rising income leading to rise in demand has all led to rise in IIP. The growth in IIP in August 2007 has rebuild more confidence in Indian growth story.

Posted By : anjalir on 13 October,2007
However, the high interest rates have hit the consumer durable segment, which has registered a decline in August. Also the continuous appreciation in rupee and excess liquidity in the market is a cause of concern. RBI may increase the CRR to curtail the liquidity in the system after having low inflation and impressive IIP figures. But the central bank has to look at the decelerating credit offtake from banks which may further get affected because of CRR hike.

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Banks bow to big cos, cut short-term rates
Abhijit Lele / Mumbai October 8, 2007

Surplus liquidity, flat credit off-take make banks generous.

Faced with abundant liquidity and flat credit off-take, banks are reversing interest rate hikes charged to large companies a few months ago and providing them short-term loans at rates that just about cover their costs.

Most public sector banks’ prime lending rate (PLR) or benchmark rates range from 12.75 to 13.25 per cent. The PLR of ICICI Bank, the country’s largest private lender, is 15.75 per cent.

In the first three months of this fiscal, most blue chips could access loans at a maximum of one to two percentage points below the PLR. Today, short-term loans (that is, for less than one year) for such companies are available between 7.5 and 9 per cent.In the new supply-demand dynamics, many large companies that are in a position to negotiate are accessing short-term loans at rates that are even lower than working capital loans, which are priced closer to the PLRs.A senior banker with a large public sector bank said oil companies like Bharat Petroleum Corporation Ltd (BPCL) and Hindustan Petroleum Corporation Ltd (HPCL) are accessing short-term loans at 7.5 to 8 per cent.

“The gap between the rate at which short-term loans are provided to companies and the benchmark rates has widened over the past three months ago. The gap had narrowed substantially in the early part of the current year when rates for AAA-rated borrowers had touched double digits following a series of PLR hikes,” said Bank of India (BoI) Executive Director K Kamath.

Added A C Mahajan, chairman of Allahabad Bank: “Three months ago, we were lending to companies with rising interest rates in mind, and now we are lending with a belief that there is no likelihood of rates hardening.”

PLRs of banks have increased 300-400 basis points in the past year as the Reserve Bank of India (RBI) increased the cash reserve ratio, the proportion of cash deposits banks must keep with the central bank, by 200 basis points to 7 per cent, raising banks’ cost of funds.

Short-term rates as low as 8 per cent barely cover the costs for those banks that have at least half their deposits in the form of current and savings account balances, which cost 2.8 to 3 per cent.

Bankers do not see anything wrong in lending to large companies at such low rates.

They argue that it is better to recover at least the costs—cost of funds plus cost of capital—rather than not lending at all and bearing the burden of the cost of funds.

Banks’ deposits are swelling with almost all of them offering peak interest rates of 9-9.5 per cent on deposits of one to three years.

Additional reporting by Shriya Bubna & Rajendra Palande.

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Posted By : anjalir on 08 October,2007
This will help companies to raise money in domestic markets. With the ECB norms tightened it became a bit difficult for the companies to raise loans outside India and also high interest rates domestically hindered their expansion and development plans. But now with credit growth decelerating and deposits accelerating the banks are ready to reduce lending rates to lower their cost. However the banks have to see that the loans is provided for some productive purposes only.

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Friday,Oct 05,2007

MSS limit increased; CRR hike concerns ease
BS Reporter / Mumbai October 05, 2007

The government today raised the limit on the Market Stabilisation Scheme (MSS) to Rs 2,00,000 crore, easing pressure on the Reserve Bank of India (RBI) to increase the cash reserve ratio (CRR).

The market has been abuzz with speculation over the last couple of days about the RBI considering the CRR hike.

The MSS limit has been raised from Rs 1,50,000 crore in the current financial year. This is the fourth time the government has raised the limit.

The move gives the RBI additional room to absorb excess liquidity in the system by issuing government bonds.

Under MSS, dated securities and treasury bills are auctioned by the RBI at the market rate and the cost of the coupon payments is borne by the government.

CRR is the proportion of deposits mobilised by banks and parked with RBI for statutory requirement. It currently rules at 7 per cent.

In the pre-credit policy meeting held earlier in the day, bankers had urged RBI not to raise the CRR and pay interest on the liquidity impounded through the earlier hikes.

Prior CRR increases have hurt banks since interest income through advances has been sluggish due to low credit offtake. Bank credit has grown only 21 per cent so far this year, against 31 per cent in 2006.

Surging foreign capital inflows have forced the RBI to mop up dollars to stem the appreciation in the value of the rupee.

In the process of buying dollars, the RBI released rupees that created excess liquidity in the system.


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Posted By : anjalir on 05 October,2007

It was an expected step from government for curbing liquidity in near term. RBI is not expected to raise CRR as it will further slowdown the credit offtake and increse the cost of banks. As deposits with banks are rising and growth in credit is decerelating, a further rise in CRR may increase this gap.Also the coming IIP data for August may clear the picture about credit demand RBI's stand towards CRR in the coming mid term credit policy review due on 30th October 2007.

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Oil price above $83 on storm fears
Press Trust of India / Singapore September 28, 2007

Oil traded above $83 a barrel in Asia today as dealers watched a new storm developing in the Gulf of Mexico, which could impact oil production, dealers said.

New York's main futures contract, light sweet crude, was 46 cents higher at $83.34 a barrel for November delivery in late morning trade.

The contract had surged $2.58 to $82.88 in late US trades yesterday, when it edged closer to the all-time intra-day high of $84.10.

Brent North Sea crude for November delivery was at $80.45, up 42 cents after breaching the $80-level for the first time in London, where the contract soared $2.60 yesterday.

Tensions in the market were heightened on news that a storm developing in the Gulf of Mexico could affect oil production facilities, analysts said.

According to the US National Hurricane Centre, a tropical depression was heading toward the coast of Mexico and could become a tropical storm.

The Gulf of Mexico is a leading oil-producing region for the US and Mexico and investors are worried that, during the long Atlantic hurricane season that ends in November, a storm will damage oil rigs and other infrastructure.

"I think the storm sort of got people on edge," said Jason Feer, Asia Pacific vice-president and general manager of energy market analysts Argus Media, in Singapore.

He said that while US crude stocks have been building, refinery run rates have dropped.

"That sort of indicates there's a potential bottleneck" heading into the North American winter when demand for heating oil picks up.

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Posted By : anjalir on 28 September,2007
This is a bad news. Though domestically the inflation is persistently moving down (WPI at 3.32% for the week ending 15 September 2007) the rising crude oil prices have become a cause of worry and may lead to rise in inflation. Along with it the appreciating rupee and strong inflows may also lead to rise in inflation with rising consumer demand.

My comment in Mint

Posted: Wed, Sep 26 2007. 12:16 AM IST
Columnist



Credit jitters are not over

As corporate borrowers leave the global credit market and seek bank funds here, interest rates could go up


Cafe Economics Niranjan Rajadhyaksha

The stock market has been giddy with elation ever since the US dropped interest rates on 18 September. Its dramatic recovery from the scare of August has been the cynosure of all eyes. Few seem to bother about what is happening in the credit market, where the trouble started in the first place. Is that market, too, back on track? A lot depends on the answer, especially for Indian companies.

The signals are expectedly mixed. There are some signs that the pipeline carrying bond deals is no longer choked with fear. Last week, Suzlon Energy raised $200 million through convertible bonds—only the third such Asian issue since the markets started recovering, according to Finance Asia. The pricing seems tougher than before, but that is only to be expected. The fact that investors lined up to lend to an Indian company is noteworthy. There are also stray news items of companies announcing their intention of testing the global bond markets again.
Meanwhile, the prices of emerging market bonds, too, have started inching up again. This seems to be an improvement over early September, when credit rating firm Moody’s said that the cross-border bond market “has shut down”.

Whereas, the International Monetary Fund (IMF) has warned in its new Global Financial Report, which was released on Monday: “Credit conditions may not normalize soon.” And: “Corporations have, for the most part, been able to secure the financing they need to maintain their operations. However, the adjustment period is continuing and if the intermediation process stalls and financial conditions deteriorate further, the global financial sector and real economy could experience more serious negative repercussions.”

Tata Steel may be one company that will be put to the test soon, according to Moody’s. Around $3.1 billion of its debt matures in the coming months, and will have to be refinanced. This debt was part of the bridge finance (or short-term loans) taken by Tata Steel when it bought Corus earlier this year. But Moody’s has also recognized the “banking support” that Tata Steel enjoys. In other words, if the bond markets are not willing, then the company’s bankers are likely to step into the breach and provide Tata Steel with the money it needs.

Indian companies have been soaking up money in large quantities from the global bond and credit markets over the past two years. This is part of a far larger trend—of companies bypassing banks and funding their growth with the help of alternative sources of money.
Here are the numbers. In 2006-07, bank credit to industry was Rs1,41,543 crore. External commercial borrowings were Rs88,472 crore. Corporate profits after tax (which is the internal pool of money) were Rs1,11,107 crore. That’s a far cry from the hoary old days when domestic banks financed most of the working capital and capital expenditure of Indian companies. The bigger and better companies have cut their dependence on banks over this decade, as it became easier for them to borrow abroad.

What this means is that even though banks are still the single largest source of funds for Indian companies, there are still at least two other founts of money that are close to bank funds in terms of their importance to Indian CFOs—global borrowing and internal resources.

One of these founts was frozen in August and is thawing very slowly. It could present a huge challenge to the corporate sector.

If the global bond and borrowings markets do not ease significantly in the months ahead, companies will have to figure out how to make up for the money they will be unable to borrow. Let me restate this in a more blunt fashion. Indian companies borrowed close to Rs90,000 crore last year from the global markets. It is likely that they may have to depend on domestic banks and their own balance sheets to fund their growth this year. Don’t be surprised if the rush back to banks pushes up interest rates, as demand for bank loans increases.

Bankers have an ugly word to describe the trend of companies bypassing them and raising money directly from investors—disintermediation. Will the global credit crunch push them back into the banking fold? And if it does, will this put increasing pressure on the domestic market for loanable funds, thus pushing up interest rates?

The return of large Indian companies to the domestic banking system could unsettle the local credit market. The “homecoming” of these 820-pound gorillas could squeeze out the smaller fellows. Small businessmen often complain that they anyway pay interest rates that are far in excess of the headline prime lending rates that banks charge their best customers. Things may just be getting worse for them.

Recent Comments

The rising deposits with banks and slowing credit offtake is increasing the cost of banks. As a result banks are looking out for giving more credits. Also the market is flooded with liquidity. The banks can use this money for giving credit. So in the near future there seems to be less chances of hike in bank loan rates. Also a hike (if) in bank cerdit rates will only come with a further hike (if) in CRR by RBI, to curtail excess liquidity in the market. But slowing economic growth and inflation almost near 3% may not support this act of RBI.

Anjali

My comment on BS news

Wednesday,Sep 26,2007

RBI relaxes capital outflows further
BS Reporter / Mumbai September 26, 2007
Takes great leap forward towards capital account convertibility.

The Reserve Bank of India (RBI) today eased overseas investment and loan repayment norms for companies, mutual funds and individuals, seeking to stem the rupee’s gains by encouraging capital outflows and signalling another step towards fuller capital account convertibility.

The rupee today rose to the highest since May 1998 on speculation that the rallying stock market will attract investment from overseas. The rupee strengthened 0.1 per cent to 39.73 against the dollar.

Companies can now repay overseas loans of as much as $500 million ahead of maturity without RBI’s express permission. The earlier limit was $400 million.

The ceiling on investments in overseas ventures has been raised to 400 per cent of their net worth from 300 per cent, and interestingly this allowance has also been extended for the first time to partnership firms.

Listed companies have now been allowed to make portfolio investments in any company abroad, with the removal of a stipulation that such investments could be made only in companies which have a 10 per cent reciprocal share holding in the Indian company. The limit for such portfolio investments has also been raised to 50 per cent of the net worth from 35 per cent now.

Mutual funds would now be allowed to invest overseas an aggregate of $5 billion against $4 billion hitherto and the ceiling on remittances resident individuals can make has been doubled to $200,000 from $100,000.

After the US Federal Reserve cut its key rates by 50 basis points on September 18, foreign institutional investors’ (FIIs’) investments in India increased with $1.54 billion of investments during September 19-21.

RBI has been intervening heavily since December 2006 to absorb foreign currency flows and, in turn, had to hike the ratio of deposits that banks have to keep with the central bank several times to suck out liquidity and prevent it from impacting inflationary expectations.

The RBI bought $21.10 billion of dollars during April-July 2007, with $11.42 billion in July alone, resulting in infusion of rupee liquidity of Rs 84,934 crore.

Union Bank of India Chairman M V Nair said the liberalisation of overseas investment norms are enabling provisions. “These will provide enough scope for companies to plan their business strategies for overseas business and growth plans. However, the impact of these changes will be seen only over a period of time. These steps also make inflows and outflows of investments much easy,” he said.

The RBI, in a statement, said these liberalisation measures are acceleration of the implementation of the third phase of the recommendations of the Committee on Fuller Capital Account Convertibility (CFCAC) on foreign exchange outflows.

Nair said the use of higher pre-payment limit would depend on the interest rate differential at home and abroad, while the doubling of the existing limit under liberalised remittance scheme for individuals has marginal significance.

Investments overseas by individuals are yet to take off with returns available in Indian markets outstripping most markets.

Opening the floodgates

Individuals can remit up to $200,000 against $100,000
Companies allowed to invest overseas up to 400% of net worth overseas against 300% till now
Partnership firms also allowed to invest overseas 400% of net worth
Ceiling on portfolio investments by companies raised to 50% of net worth from 35%
The requirement of 10% reciprocal shareholding in listed Indian companies done away with for overseas portfolio investment
Companies can prepay ECBs up to $500 million against $400 million now
Mutual funds allowed to invest an aggregate of $5 billion overseas against $4 billion now


Story Comments
Total Post : 1
Posted By : anjalir on 26 September,2007
With the high interest rates domestically why will the investors move out of India to invest, when they have good returns domestically only? Surely in the near term it will help MFs to foray into global markets as they are many schemes being recently launched in this arena. Presently, RBI needs to focus on curbing Rupee appreciation. The unrelenting rupee rise is forcing exporters to take the unusual step of covering their foreign currency risks over a longer term.
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My comments on BS news

Thursday,Sep 20,2007

Fed cut may prod RBI to soften rate regime
BS Reporter / Mumbai September 20, 2007

Bankers expect the Reserve Bank of India to soften its view on interest rates in the light of the US Federal rate cut. Domestic loans and overseas borrowing may become cheaper.

The Indian financial system is driven more by the domestic factors and “Fed rate cut is one of the triggers to review rates “, said Union Bank Bank of India chairman M V Nair.

“There may not be direct correlation between the US Federal Reserve action and the RBI’s moves. But the country is more tuned to global trends especially capital flows which has implications on exchange rate and relative difference in interest rates,” said a chairman of medium size public sector bank.

Nair said: “the low domestic inflation, need to provide philip to credit growth (which has dipped to 22 per cent) and fed rate cut should see softening of stance (by the RBI)”.

The Federal Reserve lowered its benchmark federal funds target rate by 50 basis points to 4.75 per cent to avert any slowdown in the world’s largest economy. On the extent of decline in lending rates, S K Goel, chairman and managing director of UCO Bank, said the domestic interest rates could soften by about 50 basis points in the coming days.

This also means reducing deposit rates to control cost of resources. “The incentives for deposits may decline and the rate offered for bulk deposits would move down from 25-50 points from present level of 9-9.25 per cent”, he added.

The implications of Fed decision are not restricted just to lending rates. The Indian capital market may witness higher inflow from overseas. This has a impact on value of rupee which will make the RBI to do tightrope walk to avert sudden appreciation in value of the rupee versus dollar.

Another factor that will weigh on the RBI’s mind is the fact that the elevated domestic interest rate may attract funds further to take benefit of rate arbitrage.

Kaushal Sampat, chief operating officer of Dun and Bradstreet said ``the widened interest rate differential between India and the US could result in a further surge of capital inflows (especially FIIs), which may lead to an appreciation of the rupee”.

The RBI may be under pressure to intervene in the forex market to preclude appreciation of the rupee beyond its comfort zone. However, a sustained intervention in the forex market to support the rupee would lead to a further increase in the domestic money supply, which is already growing at above RBI’s target rate.

S S Mundra, general manager (treasury) with Bank of Baroda said the RBI may not follow Fed Reserves footsteps immediately but eventually will take cue and change monetary policy stance (read adopt soft rate policy).

The bond market has not impacted much here like what we saw in the US since some rate cut was discounted and the response from bond market players will evolve in coming trading sessions.

On the cost of overseas borrowing of banks and Indian corporates, BOB official said we can expect better pricing. Thus cost of funds may reduce slightly. The spreads (over the benchmark rates like LIBOR) may not change much.


Story Comments
Total Post : 2
Posted By : anjalir on 20 September,2007
RBI should not resort to rate cut immediately as a reaction to Fed's move. Firstly, ours is an emerging economy with domestic fundamentals entirely different from those of developed economies. Secondly, the rising oil prices, which may put inflationary pressures, cannot be ignored. Above this if RBI cuts rates it may further enhance inflationary pressures.The immediate and major concern for RBI in near term will be rising liquidity and rupee appreciation because of high inflows.

Posted By : anjalir on 20 September,2007
RBI should not resort to rate cut immediately as a reaction to Fed's move. Firstly, ours is an emerging economy with domestic fundamentals entirely different from those of developed economies. Secondly, the rising oil prices, which may put inflationary pressures, cannot be ignored. Above this if RBI cuts rates it may further enhance inflationary pressures.The immediate and major concern for RBI in near term will be rising liquidity and rupee appreciation because of high inflows.
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“A blessing in disguise”

Sub-Prime markets offer loan/credit facilities to individuals that have weak credit history and have higher probability of defaulting on the loan (principal or interest or both). Sub-Prime markets are present in most credit categories housing, credit cards, automobile loan etc. Concerns over a crisis in the US sub prime lending market - where loans are offered to borrowers who do not qualify for market interest rates because of poor credit history - had sent global markets into a tailspin since the mid-week of July.

Impact on Indian Economy and Financial Markets

As India has large number of Foreign Institutional Investors that invest in the equity markets and if there is an effect on foreign economies, the FIIs may withdraw funds from Indian equity markets. A simple analysis shows that covariance between US equity market (Dow-Jones) and India's equity market (BSE-Sensex) has increased in 2007 and in August 2007 the covariance is even higher. This indicates that markets have not only been tracking US markets, the change is higher than what it was in US markets previous day. This is a concern for Indian equity markets as US and other Markets are expected to correct post sub-prime meltdown. However, in the long run, with Indian economy still going strong (IMF has revised India's GDP growth rate for 2007-08 upwards from 8.5% to 9%), the Indian equity markets should track India's growth pattern.

FIIs sold Rs 7770.5 crore worth of stocks in August 2007 as problems in the subprime loan segment resurfaced in the US, sparking a sell off in the equity market everywhere. The last time foreign funds had sold as aggressively was in May 2006, when they pulled out Rs 7354.2 crore in a single month.

The US subprime meltdown has to a certain extent proved as a blessing in disguise for Indian market. Surplus liquidity in the market which resulted in rupee appreciation and fears of inflationary pressures regaining grounds subsided as result to a certain extent. The domestic market was flooded with capital from foreign investors which created surplus liquidity in the market along with absence of any sterilization methods adopted by RBI to rein in liquidity.

The impact of withdrawing of money by FIIs has put a downward pressure on the rupee and INR has depreciated with respect to USD. The rupee has appreciated to as much as 40.24 a dollar since the beginning of the FY 2007-08 tracking the surge in FII inflows. Till 31 July 2007 FII inflow was about USD 10.9 billion. However, because of the meltdown in equity markets in August 2007, the FII outflow in August has been around USD 1.9 billion so far. This has led to depreciation of the rupee. The rupee depreciated by 1.29% to 40.96 a dollar on 31 August 2007 over 40.44 a dollar on 31 July 2007. Hence, the future level of rupee with respect to USD would also depend on overall effect of the sub-prime meltdown.

This along with measures taken by RBI like hike in CRR, removal of Rs 3000 crore cap on reverse repo auctions and modification in the external commercial borrowing (ECB) policy to modulate capital inflows, resulted in relatively tight liquidity situation in the market. ECB of more than $20 million per borrowing company would be permitted only for foreign currency expenditure for permissible end-uses. Accordingly, borrowers raising ECB more than $20 million would have to park the proceeds overseas.

However, Indian economy would continue to grow resulting in sustained capital inflows. As a result upward pressure on rupee would continue, thus remaining a concern for the policymakers.

Market Volatility: Recites a new story!!

DIIs come to rescue

August volatility in the markets has come out with a new story. Investors and Market observers feel that the key risks in the Indian stock market is its overdependence on foreign fund flows. But that may not be the case for long, judging by the institutional inflows so far in August, which has been a very volatile month for equity investors across the world.

FIIs have sold Rs 8,841 crore worth of stocks so far in August as problems in the subprime loan segment resurfaced in the US, sparking a sell off in the equity market everywhere. The last time foreign funds had sold as aggressively was in May 2006, when they pulled out Rs 8,247 crore in a single month.

Large inflow or outflow of foreign money continues to influence sentiment, but domestic institutional investors — mutual funds, banks, insurance companies — are now beginning to emerge as a strong counterbalancing force.

In the current month, according to the Securities and Exchange Board of India (Sebi), MFs have been net buyers at Rs 2,869.2 crore (till 27 August 2007), which is the highest-ever since May 2006 (Rs 7893.36). In fact, August 2007 will feature among the top 10 months in terms of net inflows ever since January 2000. In the previous month, fund houses were net sellers at Rs 900.60 crore. Inflows are a result of money mobilised through new fund offerings and also because many of the asset management companies were sitting on cash.

It seems that the investors and the fund houses have changed their investment style. They have started looking current volatility in the market as an opportunity to invest. While Indian investors have become more resilient to volatility, the inflows in the mutual fund industry have also been good. There was a 21.41% rise in AUM of mutual fund industry in the month of July 2007 when it recoded an AUM of Rs 4.87 lakh crore highest since April 2006 (a rise of 89%). Most fund houses were sitting on 15-20% cash in July month, which seems to be flowing in the market now. Further, around 30% of the new fund money was also lying idle that seems to have made to the bourses now.

Meanwhile, it is not only the fund houses that have upped the ante in the recent past. Insurance companies and some of the public sector banks (PSBs) are also believed to be using the current volatility as a good buying opportunity. Incidentally, LIC is believed to have mobilised a few thousand crore in its recently-closed unit-linked plan (ULIP) — Money Plus. According to market buzz, agents were pushed into overdrive to garner money in the ULIPs as it came to a close in mid-August.

Recent instances of the Sensex shedding 400-500 points in one single day could have been much worse, if LIC and SBI had not come to the rescue. However, this can’t be corroborated with figures as there is no data available for insurance companies and banks separately.

BSE provides data under the heading ‘domestic institutional investors (DII)’ that includes banks, domestic financial institutions, insurance companies and MFs. In August, according to BSE, this group is said to have invested Rs 8,518 crore (BSE and NSE), which is only marginally lower than what FIIs have pulled out.

However India’s growth story remains intact. The strong fundamentals will continue to attract foreign investments in the economy along with domestic investors.

Inflation-What the picture depicts?

India is in the midst of a rapid growth regime, thanks to growing consumerism, increasing global competitiveness and massive investment in infrastructure and capacity building. The long-term growth potential of the country is tremendous, and as the global markets has realized this, there are huge and rising forex inflows through FDI, and Indian debt, quasi equity and equity instruments attract huge interests. Also, strong corporate earnings, better visibility for the long term and general rally in the global markets together have facilitated BSE to surpass 15000 mark in July 2007.

One of the characteristic features of the economic performance in the first six-month of the Calendar year 2007 has been easing of headline inflation, which slipped from 6.69% for week ending 27 January 2007 to around 4.40% in July. Higher base effect, impact of monetary and fiscal policies and also sharp appreciation of rupee together facilitated taming down of inflation.

The headline inflation, which is measured by change in Wholesale Price Index (WPI), stood at 4.05% during the week ended 4 August 2007 lower than the previous week at 4.45%. The recent WPI figures though are well in RBI’s tolerance limit, the whole sale price index of all commodities which are given in the lack of eight weeks are being continuously revised upwards, considering the calendar year 2007 creating a high base for corresponding next year figures (though the final index for the week ending 9 June 2007 remains unchanged).

The impact of this high base will be witnessed in the WPI growth figures next year, which may show deceleration as a result. The continuous rise in final all commodity inflation figures has been the result of rising inflation of primary articles as well as manufactured products group index, which grew on an average by 0.07% and 0.27% in January-May 2007 period respectively. Among the manufactured products group edible oil group index grew on an average 0.48% and iron and steel group index grew 0.54% during January-May 2007 (final inflation figures).

Also though the overall inflation rate was barely above the 4% mark in early August, official statistics reveal that the price index for the food articles group had risen by 8.36% over a twelve-month period. Within this group, cereal prices have hardened by 8.72% and fruits and vegetables by 10.42%.The spurt in pulses is a modest 3.33% because large-scale imports have beefed up their availability.

The rise in edible oil prices has been the sharpest at 13.46%, implying that, despite liberal imports, the supply-demand equation is skewed.

Though, sugar and gur have charted a downward course, with their prices plunging by nearly 18% and 13%, respectively, the soaring food prices are a reality but this is not reflected fully in the wholesale price index- measured index. This is because of low weights accorded to food items in this index.

The food articles group has a weightage of about 15%; if to this, the 11.5% weight assigned to a subgroup —- food products in manufactures—-is reckoned with; just 26% of the weight is allotted to the food group in this index. That’s too low to impact on the final inflation figure. Though overlooked, the food inflation contained in the wholesale index is substantial and should engender concern.

Outlook
While there is an abatement of inflation in the recent period, upward pressures persist emanating from high and volatile international crude prices, the continuing firmness in key food prices and the uncertainties surrounding the evolution of demand-supply gaps, both globally as well as in India. In this regard, it is essential to carefully monitor developments relating to continuously assess the risks to the inflation outlook. It is also necessary to assess aggregate supply conditions and the supply response to the impulses of demand in the short-term, while stepping up efforts to expand production capabilities over the medium-term.

Infrastrucuture: Losing Momentum

Slower growth in five of the six core sectors pulled down the overall growth rate in the index of infrastructure industries to 5.3% in June 2007 against 7.7% in the year-ago period.

This is the slowest growth rate in the past year in the country, raising concerns about an overall economic slowdown.

This is a significant drop. On the supply side, the economy is dependent on the infrastructure industries so the June numbers are a cause of concern as it could have an impact on overall growth.

The highest dip in growth of production was in coal. This is not good news as a dip in coal production growth will have an impact on all the sectors, including steel and power and this is another area of concern. Coal production during June this year stood at 32.34 million tonnes.

Another crucial sector which saw a dip in production growth was crude petroleum, which recorded a negative growth of 1.8% against 1.2 %during the same month of the previous year. Data also showed that the growth in crude oil production has been slowing down since December 2006. The dip in coal production and crude petroleum shows the problem is on the supply side.

The only core infrastructure sector which showed healthy growth during June was electricity. Electricity generation registered a growth of 6.8% (provisional) in June 2007 compared with a 4.9% growth rate in June 2006. Electricity generation grew 8.3% (provisional) during April-June 2007-08 compared with 5.3% during the same period of 2006-07.

The slowdown in the infrastructure index follows a similar deceleration in industrial growth in June, which slipped into single digits of 9.8%, the lowest in the past three months, from 10.92% in May.

The slowdown in industrial growth is attributed to a dip in manufacturing production, which stood at 10.6% in June as against 11.7% in May.

The economy has shown signs of a moderate slowdown due to the monetary tightening measurers initiated by the Reserve Bank of India as well as the appreciation of rupee, which is impacting export growth.


The growth of the six infrastructure industries, with a combined weight of 26.7% in the index of industrial production (IIP), during the April-June quarter also decreased to 6.9% from 7.4% in the first quarter of 2006-07.

Crude petroleum production declined to 1.8% in June 2007 compared with a growth rate of 1.2% in June 2006. Crude petroleum production declined 0.7% during April-June 2007-08 compared with 0.2% during the same period of 2006-07.

Though petroleum refinery output did not decline, its growth slowed down to 9.8% in June 2007 from 10.5% in June 2006. However, petroleum refinery production registered a growth of 13.2% during April-June 2007-08 compared with 11.9% during the same period of last year.

Coal production growth plunged 1.3% in June 2007 compared with 11.8% in June 2006. Similarly, it fell drastically to 0.7% growth during April-June 2007-08 compared with an increase of 8.0% during the same period of 2006-07.

Cement production growth slowed down to 5.6% in June 2007 compared with 11.7% in June 2006. For April-June 2007-08, it slipped to 6.8% compared with an increase of 10.2% during the same period of 2006-07.

Also witnessing a decline in growth rate was finished (carbon) steel production at 5.6% in June 2007 compared with 10.2% in June 2006. Finished (carbon) steel production growth rate declined to 7.7% during April-June 2007-08 compared to an increase of 10.3% during the same period of 2006-07.

Led by roads and ports, power and telecom sectors, credit disbursement by banks to the infrastructure sector has grown in the last two years at 43 %and 36 per cent, respectively, according to industry chamber Assocham.

The chamber conducted a study covering financial years 2000 to 2007 on sectors such as iron and steel, construction, petroleum, power, telecommunication, roads and ports.

The study revealed that compounded growth in credit disbursement has been highest in the power sector at the rate of 58%, followed by roads and ports at 46%.

Lending to power as a share of infrastructure lending was 22% in 1998, which grew to more than half of the total infrastructure lending to Rs 57,863 crore in March 2006.

Outlook
The government may increase the credit exposure limits of banks to corporate groups taking up infrastructure projects. The finance ministry has asked the Reserve Bank of India to allow banks a bigger credit window for such companies, with the aim of helping credit flow to infrastructure sectors like roads, airports, power and ports.

At present, the credit exposure ceiling is 15% of the bank’s capital funds (equivalent to net worth) in case of a single borrower and 40% of capital funds in case of a borrower group. Borrowers belonging to a group may exceed the exposure norms of 40% of a bank’s capital funds by an additional 10% (a total of 50%), provided the additional credit exposure is on account of extension of credit to infrastructure projects whereas in the case of a single creditor, the limit can go up by 5%.

Retirement planning: Start early, save prudently

Mutual Fund a better option amongst all

You may wonder how to go about planning for retirement. You may have been procrastinating, thinking that it is a complicated exercise, which is beyond you. That’s not true. Retirement planning can be as simple as you want to make it.

Mutual funds offer a host of scheme-types to suit varied needs of investors. One such need is retirement planning. Stocks and post-office schemes in isolation may not be the ideal investment avenues for individuals to plan for retirement.

Stocks, because they are too complex and post-office schemes because they may not be able to give you an adequate return considering the high cost of living.

Start planning
The first step is to start setting aside some of your income to build up your retirement kitty. If you are young, even setting aside a modest amount (say, 10% of your income) will suffice. However, if you are older, set aside as much as possible. Make sure you do this on a regular basis. Merely doing this once or twice is not enough.

Invest what you set aside
Simply allowing the amount set aside towards retirement to lie ‘in a coma’ in your savings bank account, earning a measly interest, will get you nowhere. You should invest this amount.

Invest regularly
Investing a lump sum amount at one go, will not fetch the same kind of returns that you will get by investing the same amount in smaller portions over a period of time. This is referred to as systematic investment plan (SIP) by fund houses and allows investors to benefit from rupee-cost averaging.

Avoid drawing from your retirement savings as this defeats the very purpose of starting early.

Review your retirement portfolio from time to time (every 2 years or so). If there is an increase in expenses at present or if you anticipate higher expenses later, you may have to commit more resources to meet that shortfall.

Retirement investment options
‘Where should I invest?’ If you are young, the best investment option for you is equity. Stock markets around the world, including the Indian stock markets, have proven that investing in equity over the long term (over a decade and above) ensures significant wealth creation.

Why are we so gung-ho on equity funds vis-à-vis relatively safer instruments like bonds, fixed deposits, property and gold? There are several reasons for that, but we list the three most important below.

Equities have a proven track record over the long term. Several studies have shown that over the long term (about 20 years) stocks have, in most instances, outperformed all other comparable asset classes viz. bonds, property, gold, fixed deposits. So if you do your homework well, there is a good chance that you will benefit from better than average long term returns.

Equities are your best bet to counter inflation. The abovementioned study also reveals that gains on equities have been highest after accounting for inflation. In other words, equities counter the inflationary impact better than other asset classes.

Currently, given the concerns about inflation and interest rates, investors are better placed to appreciate this point.

If you are uncomfortable with investing in equity directly, use the mutual fund route. Mutual funds offer various equity schemes; the basic equity schemes are diversified equity funds (these invest in equity of companies across different industries), sector funds (these invest in equity of companies in a particular industry like pharma, telecom, banking, etc.) and index funds (these invest in equity of companies forming a particular stock market index like the BSE Sensex, NSE Nifty, etc.).

By investing in equity through mutual funds you are relieved of having to track the markets regularly. However, do keep an eye on the scheme’s performance. Ideal option in early part of your career is to systematically invest in diversified equity funds. While in 20s and 30s, consider small-mid cap funds and even contrarian funds.

If you are older, you should invest a portion of your retirement corpus in equity and the balance in debt. A ratio between equity and debt of approximately 50% each, would be suitable. Again, mutual funds come to the rescue. They offer hybrid schemes, which invest a portion of the corpus in equity, and a portion in debt. Some of these schemes are Monthly Income Plans (MIPs), which invest about 25-30% of their corpus in equity and the balance in debt, Capital protection schemes, which also invest like MIPs, but with the added comfort of guaranteeing return of your capital, and balance funds, which invest about 35-40% of their corpus in debt and the balance in equity.

If you are moving headlong into retirement, you could use debt schemes of mutual funds. These schemes invest in a number of debt securities, most of which are not directly accessible to individuals. Some debt securities that debt schemes invest in are commercial paper, call and money markets, government treasury bills, corporate bonds, corporate debentures, government securities, etc. Some debt schemes suitable for building your retirement corpus are income funds (which invest in medium-to-long-term debt securities, i.e., securities with tenures of 5-7 years and above), gilt funds (these invest mainly in government securities) and floating rate funds (these invest in debt securities which have a floating rate i.e. the interest rate on these securities is reset when there is a change in market interest rates).

Charges
Market-linked pension plans are very similar to mutual funds in their functioning. They also offer various options, growth, balanced and income according to the risk preference of the customer. However, there is a vast difference between mutual funds and insurance companies when compared on the basis of investment or management charges. Market-linked pension plans offered by insurance companies charge a hefty sum in the form of administration and investment charges. The first is knocked off even before your contributions are invested and can make a dent in your corpus.

Moreover, given the intense competition in the sector, mutual funds have stared phasing out entry/ exit loads. The same might happen with insurance companies too with the entry of more players and with more schemes becoming available.

If you are investing in such plans now, do build in the charges while computing your overall returns.

Tax implications
From a taxation perspective too, mutual funds and insurance companies differ. From the assessment year 2006-07, the total amount of deduction available under Sections 80C, 80CCC and 80CCD cannot exceed Rs 1 lakh. Since the contribution to pension plans qualifies for deduction under Section 80CCC, the maximum deduction available is Rs 1 lakh only.

Mutual fund pension plans do not qualify for rebate under the section. However, contributions towards certain specified funds, such as the UTI Retirement Benefit Plan and Frankin Templeton India Pension Plan, qualify for rebate. Both funds envisage redemption of amount invested (along with growth) when the investor reaches the age of 58. Option is then provided to either retain the amount with the fund or opt for pension in the form of dividends/systematic withdrawal or withdrawal of the lump sum at the prevailing NAV or a combination of the two. Both funds invest in a mix of debt and equity. Since investment in equity in the case of both funds is below 65% of assets, both the funds do not qualify to be equity-oriented funds.

Plain vanilla mutual fund Systematic Investment Plans (SIP) do not qualify for either deduction or rebate. Therefore, you should opt for SIP only if you have exhausted your limits under section 80 CCC. Taxation policies may change over a long period and it makes sense to make the most out of it, when it is available.

Exit option
Market-linked plans and mutual funds are more flexible. They not only allow you to choose your asset mixture according to your risk - return requirements and give you an opportunity to earn a higher return, you can also walk away with your accumulation (equal to the NAV of your units) if you are not too happy with the performance and invest elsewhere.

Here mutual funds score over normal (not market linked) insurance plans. Mutual fund schemes require a lock-in of three years and thereafter you can exit any time by encashing your units at the prevailing net asset value (NAV). In case of non-market linked pension plans, only a portion of your contribution is returned if you surrender an insurance plan during the contribution period. All these factors must be borne in mind before you decide on the product that is right for you.

End Note
Retirement planning is still at a nascent stage in India, and the options are limited, as of now. But this is a growing area, and many choices will become available soon enough.

As of now, you can allocate funds among the Employees Provident Fund (EPF), Public Provident Fund (PPF), Post Office Monthly Income Scheme (POMIS), systematic investment plans (SIP) of various mutual funds (they allow you to contribute a sum of money regularly, like a recurring deposit scheme), the UTI Retirement Benefit Plan, the Franklin India Pension Plan or pension plans offered by various insurance companies.

You can opt for a market-linked plan that operates much like a mutual fund or a simple plan that allows you to pay a fixed premium every year and gives the option of taking an annuity at the end of the contribution period.

But do consider the positives and negatives of all the products before choosing the one that suits your requirement best.