My article in ET

http://economictimes.indiatimes.com/quickiearticleshow/6633781.cms

Kautilaya's management principles in play

Mutual Funds adopt all means to entice investors

The mutual fund industry is adopting Kautilaya's management principles of Saam, Daam and Dand to lure and retain investors.

The fund houses are exploring all possible means to attract new investors and retain the existing ones. On one hand the new Securities and Exchange Board of India (Sebi) regulations are forcing them to use the dand principle by raising exit load on the schemes and on other hand, using the Saam principle they are launching new schemes focusing on infrastructure stocks to optimize their returns and raise their asset base. The daam principle comes in focus with huge dividend announcements, aiming at enticing investors' money towards mutual funds.

In the past one month, many fund houses have hiked exit loads in their equity and debt schemes. The fund houses adopted this measure to discourage investors from exiting the schemes and re-investing when the Sebi's decision to ban entry load come into force from 1 August 2009.

In an investor friendly move, Sebi took decision of banning entry load for all schemes. On exit load charged to the investor, a maximum of 1% of the redemption proceeds would be maintained in a separate account that could be used by the asset management company to pay commissions to distributors and take care of other marketing and selling expenses, Sebi said, adding that any balance would be credited to the scheme immediately. It shall be applicable by 1 August 2009.

Fund houses like Reliance Mutual Fund (MF) revised the exit load from zero to 2% for Reliance Regular Savings Fund, an open-ended scheme, in case of redemptions before one year. UTI MF hiked the exit load from 0.75% to 3% under UTI Mahila Unit Scheme, in case of exit before 1 year.

Bharti Axa will now charge 2% exit load for investments of less than Rs 5 crore in its Regular and Eco Plan, an equity fund if redeemed within 1 year from the date of allotment. It used to charge 1% for redemptions before six months. Birla SunLife, HDFC MF, ICICI Prudential MF, ING MF, Kotak MF, LIC MF, Tata MF and IDFC have also revised loads for specific schemes.

The other side of the coin says that the Sebi's ban on entry load is likely to reduce the number of fresh NFOs and might incite fund houses to rush into launching the already cleared NFOs before the 1 August 2009 deadline. Since last week of June 09 till date as many as 7 NFOs have come into the market and many are waiting to get clearance from Sebi and hit the floor.

However these NFOs may not be able to garner good subscription amount as investors may wait until 1 August to invest. Also the entry load ban may make NFOs more unattractive among distributors and thus the number of new NFOs may make down drastically. As many as 16 funds and lined up for clearance from the regulator considering the months of June and July 09. Meanwhile three schemes' viz. Sahara Super 20 Fund, Mirae Asset Short Term Bond Fund and Franklin Build India Fund have their NFO running currently.

To attract investors and cash on the benefits of increased government focus on infrastructure development the fund houses have launched many schemes focusing on infrastructure sector. In June and July 09 till date around 6-7 funds have filed their offer document with Sebi focusing on infrastructure and rural growth.

The fund houses are free flowing dividends to hold back investors in the scheme on the back of volatile markets. The number has increased to a record of more than 250 schemes announcing dividend in the month of June 09. With the improvement in market conditions and to revive investors' confidence the fund houses are showering dividends. The quantum of dividend ranged between 10%-60%. Tata Life Sciences & Technology Fund announced dividend of 20%. Similarly Franklin India Prima Fund offered tax-free dividend of Rs 6 per unit. Birla Sun Life Basic Industries Fund announced dividend of 50%. Recently SBI MF has also announced dividend of 50% in Magnum Sector Funds Umbrella (MSFU)-Contra Fund.

Thus by applying all means the fund houses are assaying to lure investors besides revitalizing their interest in the schemes.

GDP Deflator

The Indian economy grew by better than expected 5.76% in the March 09 quarter from a year earlier. This led the yearly growth of 6.7% in real GDP in FY 2009. Moving away from the real GDP to nominal GDP the quarter growth in the two have shown some interesting facts.

The growth in Nominal GDP, which measures the value of all the goods and services produced expressed in current prices, decelerated to less than half in merely two quarters from 19.3% in Q2 FY09 to 8% in Q4 FY09 respectively (a near 60% drop in 2 quarters), marking its lowest growth in the last 6 years (since Q4 FY03). But the growth in Real Gross Domestic Product, which measures the value of all the goods and services produced expressed in the prices of some base year, fall by merely 25% from 7.7% in Q2 FY09 to 5.8% in Q4 FY09. This aberration can be answered by the growth in GDP Deflator.

Since the real GDP is derived by dividing nominal GDP by GDP Deflator, if the GDP deflator slows down i.e. there is disinflation, then the real GDP tends to increase even if the nominal GDP remains constant. That would be an unusual case.

The recent figures however depict that even if both the nominal GDP as well as the GDP deflator increases (or declines), but the GDP deflator increases (declines) at a slower rate (more sharply) than the nominal GDP, then the real GDP can record an unexpectedly high growth. Thus while the nominal GDP grew 8% (Y-o-Y) in Q4 FY09, the GDP deflator grew a mere 2.1%, thus helping the real GDP record a good growth rate.

We have calculated the quarterly GDP deflator index by dividing the nominal and real GDP numbers. The GDP deflator grew merely 2.1% Y-o-Y in Q4 FY09, as against 10.72% and 8.06% in Q2 FY09 and Q3 FY09 respectively. On the other hand, the nominal GDP grew merely 8% Y-o-Y in Q4 FY09, as against 19.30% and 14.23% in Q2 FY09 and Q3 FY09 respectively. Thus, while the growth in nominal GDP fell off the precipice in Q4 FY09, the real GDP grew at a rate equal to that in Q3 FY09, due to the steeper decline in the GDP deflator.

Further though the real GDP has shown an unexpected growth the steep fall in nominal GDP is a cause of concern as it may hit the main source of government revenues adding more pressure on fiscal position.

The above diagram clearly shows the relationship between GDP deflator, nominal and real GDP. Even though the nominal GDP has slowed down aggressively the falling GDP deflator has aided the real GDP to record more than expected growth of 5.8% in Q4 FY 09. Thus in reality the GDP deflator has been working as a real GDP inflator.

Even though the difference between the GDP deflator and a price index like CPI/WPI is often relatively small, it has shown some significant differences in few years. As per the data available in FY2001, WPI was 7.2%, while GDP deflator was 3.26%; in FY04, WPI was 5.50%, while GDP deflator was 3.43%; and in FY09, WPI was 8.41%, while GDP deflator was 7.00%. These three years had a common feature of rising crude oil prices and decelerating GDP growth except for FY04, which recorded a growth of 8.5%.

My comment in Live mint

Posted: Thu, Feb 5 2009. 9:31 PM IST

Inflation slows to 5.07%, near 1-yr low

The annual inflation rate was 4.78% during the corresponding week of the previous year

Cherian Thomas / Bloomberg

New Delhi: Inflation slowed to near a one-year low, giving the Reserve Bank of India (RBI) more room to cut interest rates and stimulate growth.

Wholesale prices fell 5.07% in the week to 24 January from a year earlier after gaining 5.64% the previous week, the commerce ministry said in New Delhi on Thursday. Economists expected an increase of 5.25%.

RBI governor D. Subbarao had said last week inflation will slow to below 3% by 31 March and indicated the central bank will reduce rates to help the economy weather the global recession. A top aide of Prime Minister Manmohan Singh said on Thursday that rate cuts may come after the government’s interim budget on 16 February.

“Interest rates are bound to fall as prices ease and the economy slows,” said N. R. Bhanumurthy, an economist at the Institute of Economic Growth in New Delhi. “The central bank will have to assess the government’s borrowing programme before it sets rates.”

The central bank will “have to figure out” the liquidity that will be needed in the banking system after seeing the government’s borrowing programme for the fiscal year starting 1 April, said Suresh Tendulkar, chairman of Prime Minister’s economic advisory council.
The government will announce an interim budget on 16 February as its five-year term ends in May. RBI kept interest rates unchanged last week after lowering them to a record on 2 January to help shield Asia’s third largest economy from a global slump.

RBI’s reverse repurchase rate is at 4% and the repurchase rate at 5.5%.

Wholesale prices in the week to 24 January fell after the index of manufactured products declined by 0.5%, Thursday’s statement said.. The index of fuel, power and light rose 0.6% on higher prices of naphtha and furnace oil. Thursday’s inflation rate may be revised in two months, after the government receives additional data. The commerce ministry cut the inflation rate for the week ended 29 November to 7.86% from 8%.

Anjali Said:
The inflation figures were in spotlight last year after it hit double digits. However end August 2008 proved to be a turning point as inflation figures have been declining since then and from November 2008 we have seen single digit inflation numbers, thanks to sharp decline in crude oil prices together with the slide in prices of metals, foodgrains and cement. Starting January 2009 inflation fell to an 11-month low of 5.24% on week ended 3 January 2009, but an eight-day nationwide truckers' strike that pushed up food articles prices caused the inflation to rise in the next two weeks. But with cut in domestic petrol prices by Rs. 5 a litre, diesel by Rs. 2 and cooking gas by Rs. 25 per cylinder the overall WPI based inflation is set to tumble down further. The Reserve Bank of India has also revised inflation projection downward to 3% by end fiscal year 2008-09 from 7% set earlier, in third quarter policy review 2008-09.
Posted On 2/6/2009 11:28:50 AM

My Comment in Business Standard

Monday, Aug 11, 2008

Industrial production likely to improve in June: Analysts
Bs Reporter / New Delhi August 11, 2008, 0:10 IST

Production output from factories in June is likely to improve with annual growth seen at 5-7 per cent as against 8.91 per cent in the same month last year, according to economists. The June data for the Index of Industrial Production (IIP) is to be released on Tuesday.
In May, the IIP grew 3.8 per cent due to dismal performance by the manufacturing sector.
“IIP growth is likely to be close to 5 per cent in June, which is an improvement from the previous month. However, the overall IIP growth is likely to remain subdued,” said Shubhada Rao, chief economist, Yes Bank.

Rao said the production growth in core industrial sectors like electricity remained subdued in June while that of crude oil declined. Moreover, due to a high growth of around 23 per cent in the capital goods sector in June 2007, growth in the sector is likely to soften this June.
According to an analysis by Saugata Bhattacharya, vice-president, Axis Bank, IIP growth in June is likely to be 5-7 per cent. However, the bank’s CLI (Consolidated Leading Indicators) suggests that industrial growth is likely to fall in July.

“Bank credit growth, for instance, has been increasing significantly since April, although a significant part of this is likely to have been short-term credit to oil-marketing companies (which seems to have been corroborated by the RBI data up to May),” said Bhattacharya.
“Although there is no clear idea of the relative contribution of this short-term credit on the growth rate, the overall effect of credit growth on the CLI level is clearly overstated. There was also an uptake in cement dispatches, which probably resulted in more railway freight movement in June, which is taken as a signal of logistics support. Currency with the public, an indicator of purchasing power, has also been increasing since April,” he added.

Comment
anjalir on 11-AUG-08
No doubt based on the above discussion the IIP may rise but the rising interest rates and high cost of inputs cannot be ignored. In a rising interest rates scenario, where easy money gets wiped out (thanks to equities turning unattractive), banks also turn stringent while lending to companies. continue...
anjalir on 11-AUG-08

For now, the fact that the prime lending rates (PLR), at which companies typically borrow from banks, have shot up and currently hover at about 15-17% as against the 12-13% 3 years back is a matter of concern. this increases the cost of production which leads to higher selling prices thus low demand and finally low production as there is no or very less demand. Also the rising interest rate reduces purchasing power and thus low demand n resultant low production.
anjalir on 11-AUG-08

Anchoring inflation at the cost of growth?

The first quarter review of Annual Monetary policy for the year 2008-09 came above the market expectation. The market expected a rise of 25 basis point in repo rate, which was hiked by 50 bps to 9.0% with immediate effect. This short-term rate at which the RBI lends cash to banks was last raised on June 24 by 50 basis points to 8.5%. The move is directed at cooling inflation that is running above 11.80% on an annual basis by containing demand.

The central bank has also raised the CRR (percentage of banks' deposits which they must keep with the central bank) by 25 basis points from the existing 8.75%. This will come into effect from August 30.

The reverse repo rate (the short-term rate at which the central bank absorbs cash from the market) remains unchanged at 6%. It has also held the Bank Rate (rates used to price long-term loans to firms and individuals) steady at 6.0%.

The RBI has maintained hawkish stance and given high priority to price stability, anchoring inflation expectations and orderly conditions in financial markets. This while sustaining the growth momentum.

The fresh hikes in rates have come at a time when previous hikes started showing their impact with inflation slightly moderating to 11.89% for the week ended 12 July 2008 above the previous week's annual rise of 11.91%. The twin hikes follows RBI’s assessment that inflation will remain high for some more time given the high global food and crude oil prices.


The rates hike will tighten liquidity in the system, making bond yields to rise. The investors’ fret of liquidity will part ways from Government securities making them unattractive investments. The prices of government securities remained bullish on 28 July since the market discounted a 25 basis point hike in the repo rate and unchanged cash reserve ratio in the monetary policy to be announced by the central bank. This led to buying demand, especially in the benchmark ten-year paper.

The bullish sentiment was further reinforced with the macroeconomic review of the Reserve Bank of India on the eve of its monetary policy review. In its review, the RBI has brought down its growth forecast to 7.9% from the earlier 8.1%. Since the growth forecast is moderate, the market assumed that credit offtake will be modest and in turn investments in government securities will grow. The prices of ten year benchmark 8.24% 2018 rose by 20-30 paise and therefore the yields fell from 9.17% last week to 9.07% on 28 July.

However, with the hike in key rates bond yields spiked up sharply to just short of seven-year highs. The yields are expected to remain firm and bond prices will move southward. The call rates may again zoom over 9%.

Also the rate hikes could lead to banks raising their deposit and lending rates again. However if the lending rates go up the credit demand may squeeze. The bank credit of all schedule commercial banks has witnessed acceleration in the month of June over last year (based on the week-on-week data) on above-normal demand from oil companies (as well as a degree of base effect). It will dent consumer sentiment, dampen housing demand, expansion plans of India Inc. and demand for inputs from cement to steel could slow growth more sharply when global environment is also uncertain. Growth has, in fact, already slowed down due to the tight monetary policy maintained by the RBI in the past year, as is borne out by the tempering GDP growth rate and IIP data. M3 yoy growth at 20.5% remains obstinately above the RBI’s comfort zone of 16.5-17%.

Thus overall the hike in rates by RBI can be seen impacting the economy in two ways. Firstly, reducing demand and thus anchoring demand driven inflation and secondly, impacting the economic growth which is already witnessing signs of moderation.

Exports up 35% in February 2008, FY08 goal can be achieved?

Merchandise exports registered a robust 35.25% growth to $14.23 billion during February 2008, as against $10.52 billion in the same month last year. This is the fastest export growth in the last four months and comes despite a strong rupee, which has risen over 10% against the US dollar in the last 12 months.

India’s export growth in the April-February 2007-08 period is pegged 22.9% higher than the comparable period in the previous fiscal. The modest performance in exports notwithstanding, exports from certain labour intensive sectors like textiles, handicrafts and some leather items are continuing to experience negative growth.

The buoyancy in exports, does not convey the real picture. Commerce ministry data show that the sectors with higher import content like petroleum products, gems and jewellery, engineering goods, pharmaceuticals, chemicals, and agriculture have provided the momentum for growth in exports, which have been hit by the appreciation of the rupee and infrastructure bottlenecks.

The real benefit to the economy is when sectors with less import content like textiles, handicrafts and leather show a higher export growth instead of petroleum products or gems and jewellery where the import content is high.

India’s imports during February 2008 are valued at $18.46 billion, representing an increase of 30.53% over imports valued at $14.14 billion in February 2007. Cumulative value of imports for the period April- February, 2008 was $210.89 billion against $161.95 billion exports in the comparable period of the previous year registering a growth of 30.21%.

Oil imports during February 2008, valued at $6.27 billion was 39.52% higher than oil imports worth $ 4.49 billion in the corresponding period last year. Oil imports during April-February 2008 were valued at $ 66.01 billion which was 26.81% higher than oil imports of $52.05 billion in the corresponding period last year.

Non-oil imports during February, 2008 were estimated at $ 12.19 billion which was 26.35% higher than non-oil imports of $ 9.65 billion in February 2007. Non-oil imports during April-February 2007-08 were valued at $ 144.88 billion which was 31.83% higher than the level of such imports valued at $ 109.902 billion in April-February 2007.

The country’s trade deficit for April-February 2007-08 was estimated at $ 72.46 billion which was higher than the deficit at $ 49.32 billion during April- February 2006-07.

Though the country has witnessed an impressive growth in exports in February 2008, narrowing the trade deficit, it looks a bit uncertain for the country to achieve its export target of $160 billion for FY 2007-08 (with only month remaining). Despite exports recording a surge of 35% in February 2008 to $14.23 billion, pulling the eleven months export figures to $138.4 billion, meeting the export target of $160 billion for FY 2007-08 is a tough call as it would require exports to touch $21 billion in March 2008.

Outlook

India’s monthly merchandise trade deficit narrowed during February. Although import demand remained robust in February, inbound shipments will likely moderate in the coming months as consumption by both households and businesses eases.

Nevertheless, India’s demand for imports will continue to remain firm on support from the country’s heavy dependence on imported energy and machinery and capital equipment to build domestic infrastructure.

FIIs focus on government debt market

On 31 January 2008, the Securities and Exchange Board of India (Sebi) increased the investment limit by foreign institutional investors (FIIs) or their sub-accounts in government securities (T-bills) to US$ 3.2 billion from US$ 2.6 billion.

The investment by FIIs in debt-oriented mutual funds (including the units of money market and liquid funds) will be hereafter considered as corporate debt investments and reckoned within the stipulated limit of $1.5 billion, which is earmarked for FII investments in corporate debt.

The capital market regulator has cancelled the individual limits on investment in debt allocated to FIIs.

In less than a week after the Sebi raised the limit for FII investment in government bonds, foreign institutional investors (FIIs) are now knocking on the doors of the markets regulator asking for a hike in their individual limits.

Yields in the government bond market have been on the rise in recent times. The interest rate differential is best computed between the 90-day secondary market rate on government bonds in the US and in India. On January 31, the 90-day rate in the US was 1.92%. The Indian 90-day rate is roughly 7.27%, yielding a massive differential of 5.35%. This, coupled with the rising rupee and lower borrowing rates in overseas markets, makes it lucrative for overseas investors to look at the gilt market.

SEBI has already been flooded with applications from FIIs, intending to invest in the gilt market on an incremental basis. There have been significant amounts of outflows due to the fact that SEBI has categorised all investments in liquid mutual funds as corporate debt investments.

Once approvals from SEBI come through, investments by FIIs in government bonds will see a huge spurt. In fact, the rise in investments could be so sharp, that it could even bring down the yields from their current levels. FIIs who ended up bidding aggressively for the Reliance Power public offer will now find the surplus bid amounts finding their way back to them, in the post-allotment phase.

Market sources said that these funds, which were initially channelised into the stock market, may now find an entry into the debt market rather than getting reinvested in forthcoming public offerings. Demand from overseas funds, subscribing to the IPO, totalled $100 billion. The public offer was oversubscribed by 73.04 times.

Typically, FIIs invest in government securities of a shorter tenure, when there is an uncertainty about where rates may head towards in the medium to longer run. These include bonds under the market stabilisation programme or treasury bills.

Bonds are likely to be in ample supply for the last quarter of the financial year, with an upsurge in issuances under the market stabilisation scheme (MSS). Bonds, which are issued under the MSS route, are mostly of a shorter tenure, too.

Now, the Reserve Bank of India (RBI) has been aggressively intervening in the foreign exchange market to curb the rupee from rising against the dollar. In this process, it does infuse rupee funds into the system, as it mops up surplus dollars flowing into the country. In order to absorb the rupee funds back, RBI sells bonds through the MSS route.

On the other hand, the corporate bond market has seen fresh issuances drying up substantially January 2008, and to some extent, even this month. Issuers were wary of coming out with bond issuances in January since most of them were anticipating that RBI would lower rates in its quarterly policy review. However, rates were left unchanged and the pipeline for corporate bond issues is still extremely thin.

This leaves very less room for foreign investors to look for investment options in the corporate bond segment, and in turn, makes gilts a more viable proposition. As of December 2007, the outstanding FII investment in government securities and treasury bills through the normal route was $326.64 million. The outstanding investment in corporate debt securities was $ 480.83 million.

FIIs have two routes to enter India. One is the 70:30 route for equity, for FIIs, who can invest a maximum 30% of the money in debt here. The second is the route for pure debt FIIs, where the foreign investor has to register with Sebi as an FII.

Time to sell your investments?

With the volatile markets, and the Sensex slipping below the 18000 level, the question running in everyone’s mind is whether to stay put or rush for the door.

Is it time to sell your investments?

Before you consider exiting your mutual fund investment/s, one of the important questions to ask yourself is the reason for buying this particular scheme. I am sure there might be several reasons but for most people it is “High (Highest) Returns”. This reason can easily fizzle out as it is very difficult if not impossible for schemes to consistently give high(est) returns. Some of the funds have performed consistently well in both up and down markets and have demonstrated their ability to be in the top quartile of funds, but there may be instances where these funds lag the market for various reasons.

Here are 6 such times when you should consider selling your mutual funds.

1. Poor Performance

The first and foremost reason for quitting any investment is that the fund has demonstrated poor performance. Infact this should be the last reason to consider quitting a scheme. First analyze the reasons for poor performance and the period over which the fund has demonstrated poor performance. Is it that the fund manager has taken some stock specific or sectoral calls that have gone wrong? Are some of the stocks out of favor currently? After all the reason that you have opted for a scheme is the track record of the fund manager in managing the scheme in good and bad times. So as long as there is no change in the fund manager you need to take stock whether underperformance for a few months warrants exit from the investment.

There are times when a star manager /fund management team will falter. You should not penalize the fund manager for sticking to the investment mandate of the fund. After all, this is what you would expect from him. However if he does not stick to the investment mandate of the fund but takes calls that he should not be taking, then one can look at moving out. For example someone who is mandated to be invested in equities at all times moves out when he takes the view that the markets are overvalued at 12,600. Since then the markets have delivered 20% and investors have lost on this opportunity. Well you can argue both ways that being in cash is a better strategy or not, a scheme that is mandated to be invested at all points should just do that.

For example Sundaram Select Mid Cap Fund has had consistently more than 22% in cash and this seems to have dented returns. One could attribute the high cash levels to a lack of conviction in the market or the belief that one can time the market. Both these reasons are detrimental to the future performance of a fund.

Keep an eye on the scheme whether it under performing continuously for a couple of quarters. If the fund doesn’t recover after several quarters of underperformance you can look at exiting the fund.

2. Follow the Manager

Fund houses often promote schemes that have done exceptionally well and the fund manager is accorded godly status. The scheme is then aggressively marketed and subsequently new schemes are launched using the star manager’s name. Then suddenly when the fund manager departs, the fund house is quick to do a volte-face and retort that we are a process oriented fund house. The fund house cannot have it both ways. So one needs to be careful of the statements a fund house makes.

When a fund manager departs, check whether a competent fund manager with a consistent track record has stepped in. Also check if the fund manager sticks to the investment strategy of the fund or deviates from it. Reading and a finer analysis of the fact sheet will give you a sense whether there has been a churn in the portfolio in terms of stocks , sectors , asset allocation or strategy.

If a team of fund managers manages the scheme, one exit will not disrupt the fund and hence you should stay put and evaluate the investment for two quarters. However if there is an experienced fund manager who comes in the picture, you can look at opting for better options.

3. Size of the Fund

Size of the fund could have impact on a scheme’s returns. Funds such as Reliance Growth, HDFC Equity continue to shine even with a corpus of 3900 and 4400 crore respectively just as they did when they were much smaller in size. However funds such as SBI Magnum Global and Sundaram BNP Paribas Select Midcap seem to have tapered down under the pressure of too much money. This is particularly true for small and mid cap funds as it is difficult to move in and out of such stocks quickly.

A look at Sundaram BNP Paribas Portfolio shows around 115 stocks. This shows that there are several marginal ideas besides some excellent ones. When the fund does not know what to do with the new money that comes in, it’s generally time to exit the investment and take it elsewhere. Whether it has 5 star rating or not is immaterial. A fund has got a 5 star rating because of its past performance and not because of its future performance. So 5 star or not, it’s time to look at the door.

4. Are your investments really diversified?

Having many funds does not mean you are diversified as funds often have similar kind of stocks in one’s portfolio. You can sell most of your funds if you find yourself in such a situation and keep only two funds with a good track record in each category diversified across fund managers, houses, type of stocks, sectors and style of investing. So take a hard look at whether a fund really complements your portfolio and exit where there is significant overlap between the funds.

5. Need Money for a Goal

This is one of the most important reasons to sell a fund. When you need money for a fund and you have achieved your targets, you can move partially 50% in debt or 100% depending on the market outlook. Since it is often difficult to time the markets, it is better to sell your fund and move into debt 6-12 months before you need money for a goal.

6. Rebalancing your portfolio / Moving into Cash or Debt

In today’s market, your equity allocation would have exceeded the figure that you like to have as a part of your portfolio. If this is the case, then you can either move some of your worst performing funds into debt / cash OR add additional funds to the debt part of your portfolio namely FMP’s. It’s best to undertake the asset allocation exercise as an annual ritual.

Finally before you select the sell button to click, take stock of the tax implications and exit loads if any. If you can save tax by being invested for a few days or months, it makes sense to wait and then sell on completion of 1 year. However sometimes it’s good to exit (at the cost of paying short term capital gains tax and exit loads) if you have made substantial profits in a very short period of time or if the scheme is in deep trouble.

My comment in Economic times

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

My comment on Business Standard news

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.

My Comment on Business Standard news

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

My comment on Business Standard news

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.

My comments on Business Standard news

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.

My comment on Business Standard news

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.

My comment on Business Standard news

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