  | | November 19, 2010 | Impact 
The trust in the most trusted brand LIC (Life Insurance Corporation of India) seems to be at brink, as the country's largest financial institution - LIC, with an asset base of  12 trillion, is running a valuation deficit of around 14,000 crore in three of its guaranteed-return annuity policies - Jeevan Dhara, Jeevan Suraksha and Jeevan Akshay.
Also all investments made by LIC during fiscals 2007-08 and 2008-09 are under the government's scanner, following complaints made about its investments in a few companies.
Defending their case, LIC said the valuation deficit has been provided on a year-on-year basis, at the time of actuarial valuations. In a rejoinder issued by LIC's Chief of Corporate Communication said, "LIC has earned the trust of crores of policyholders through its ethical business practices and efficient service over the last 54 years. The deficit is only a notional actuarially estimated figure pertaining to a period of over 20 years (incidentally reported by ourselves to Insurance Regulatory and Development Authority, or IRDA, in routine regulatory statements), as different from a financial deficit or an investment loss."
Commenting on this issue Financial Services Secretary, Mr. R. Gopalan said, "This is a routine investigation. Millions of policyholders' money is involved and we should act responsibly."
At present a parliamentary panel constituted by the Finance Ministry,.have entrusted to examine all the investments made by LIC in 2008 and 2009, and they have reported saying, "As investments in business ventures other than life insurance may involve the risk of incurring losses, the committee are of the view that such investments may not be allowed and the reserves, either fully or partially, be ploughed back into insurance business only."
We believe that the Finance Ministry has taken the right step in scrutinizing investments of LIC since the trust and money of millions of investors in LIC is at stake. However, in order to draw a strong conclusion on this, one needs to keep a constant vigil on the developments in this matter. Hence the question - "Is your trust taken for granted?" remains unanswered.
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Impact
Amidst wave of changes affecting the mutual fund industry in terms of growth, AUM (Assets Under Management) size and distribution network; some of the leading mutual fund (MF) houses such as Reliance, UTI, Birla Sun Life, Tata, DSP Blackrock, AIG, Fidelity and Religare are adopting a smart strategy by signing up with the National Stock Exchange (NSE), to sell systematic investment plans (SIP) on NSE's online platform. This move came in as an attempt to overcome distributors' reluctance to sell mutual fund schemes as they (distributors) no longer find it lucrative enough, to sell mutual fund schemes due to the present miniscule commissions offered by mutual fund houses.
Hence, now through the "online SIP" route investors in small towns and cities too, can now invest in this wonderful investment avenue for long-term wealth creation.
Endorsing the idea of "online SIP", Mr. Sundeep Sikka, CEO of Reliance Mutual Fund said, "Exchanges will give us more scalability; it will also lower transaction cost."
We believe that "online SIPs" will be the game changer for the MF industry, which is suffering the pain of the entry load ban. It will help them (mutual fund houses) to strengthen their AUMs, and reduce fund houses distribution cost, as under this "online" route the distributor would be eliminated. Also, in our opinion it will make transacting in mutual funds simpler, faster and one would be freed from the horrendous experiences which one may face with mutual fund distributors. | Impact
 (Source: CSO, PersonalFN Research)
The Index of Industrial Production (IIP) once again plunged to 4.4% in September 2010, thereby registering a 16-month low. However, the IIP for August 2010 was revised upwards at 6.9% from the earlier 5.6%.
This nose dive in the September IIP number was attributed to the following reasons:
- Decelerating manufacturing growth : The manufacturing index, which is the principal component of the IIP, mellowed down to 4.5% from 7.5% in August 2010.
- Poor sectoral performance : The capital goods index once again took the maximum beating by registering a negative growth of 4.2% (in the previous month it was 2.1%). However, the consumer durables registered a growth of 10.9% (in the previous month it was 8.5%) while consumer non-durables grew at 2.5% (in the previous month it was 0.8%).
- Core sector growth : The core sector which has a weight of 26.68% to the IIP, and comprises of six key infrastructure industries - crude oil, petroleum refining, coal, electricity, cement and finished steel, also took a blip. It dropped to 2.5% from 3.7% registered in the previous month on account of decline in refining of petroleum products and coal production.
Worried about the straight two consecutive month's fall in the IIP, Finance Minister Mr. Pranab Mukherjee said, "Overall, the numbers are okay, but two consecutive months, it has come down. We will have to analyse why it is happening. After that, considered comments can be made. But it is a matter of concern."
We think that the slowdown in IIP numbers may preclude RBI, from adopting to its calibrated exit path in increasing policy rates at least in the second quarter mid-policy review meeting (scheduled on December 16, 2010), as an increase in policy rates might hurt economic growth. However, inflation numbers till then will have to be watched carefully. | | | Weekly Facts |
| Close | Change | %Change | | BSE Sensex* | 19,585.44 | (571.5) | -2.84% | | Re/US$ | 45.23 | (0.9) | -2.03% | | Gold /10g | 20,030.00 | (395.0) | -1.93% | | Crude ($/barrel) | 82.60 | (6.1) | -6.82% | | FD Rates (1-Yr) | 6.50% - 7.50% | Weekly change as on November 18, 2010
*BSE Sensex as on November 19,2010 |
In this issue
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In an interview with Business Standard, Ms. Gita Gopinath, Professor of Economics, Harvard University shared her views on the lack of transparency in the monetary policy of India.
Ms. Gopinath believes that India does not want a strict inflation target because it wants to respond to both inflation and growth. This eventually in her opinion leads to lack of clarity on what the central bank is doing. Hence, according to her the RBI should make a clear statement on the tools which it has to bring it down, since 10% inflation is not good.
She feels that there is a need of other intervention techniques such as controlling credit expansion in the economy as the recent policy rate hikes by the RBI (six times) have not translated into controlling inflation. She believes that at this stage when the wholesale price index and consumer price index are high, it is not prudent for RBI to undergo further expansion of monetary policy to stimulate industrial production.
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Volatility : A statistical measure of the dispersion of returns for a given security or market index. Volatility can either be measured by using the standard deviation or variance between returns from that same security or market index. Commonly, the higher the volatility, the riskier the security.
(Source:Investopedia) |
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- The Employees Provident Organisation (EPFO) shortlisted CRISIL, Fitch, ICRA and CARE as possible consultants to help it appoint new fund managers for its corpus of over 3 lakh crore. Presently ICICI Prudential, HSBC, Reliance Capital and SBI are the fund managers and their term expires on 31st March 2011.
EPFO stated that though the number of fund managers will remain same, the criteria for choosing them would change to make management of the fund more efficient.
- According to a first ever study of the nation's labour market by the Government of India, the jobless rate in India as on 31st March 2010 is 9.4%. The jobless rate was 10.1% in rural areas and 7.3% in urban areas.
The survey covered a sample of 45,859 households across 300 districts, with respondents aged 15 to 59.
- The Conference Board (CB), a leading New York based think tank has forecasted that India and China will account for half the world's economic growth in the next 10 years. According to the CB, the world economy is expected to grow at 4.4% annually over the 2010-20 decade. China will account for 1.7% of that growth, India 0.6% and other developing economies will account for another 1.1%.
However, the CB cautioned that if the emergence of uncontrolled inflation or a mishandling of corrections to overvalued assets in China or India is not managed properly, that could reduce global growth for 2010-20 by as much as 2%.
- Nobel prize laureate Joseph Stiglitz sights US Federal Reserve's plan to expand stimulus ($600 billion over June 2011) as one which will fuel potential asset bubbles in emerging countries with strong growth that don't have capital control measures. He further added that he is not worried about India and China as they are in a position to manage the capital flows to their respective countries.
- According to a study conducted by the Associated Chambers of Commerce and Industry of India (ASSOCHAM) and Pricewaterhouse Coopers (PwC), India may overtake the US in terms of households' savings by 2020, touching the $5 trillion mark, as the growing economy would boost incomes of people.
ASSOCHAM President Swati A Piramal said, "The household savings rate of 33.4% would translate into incremental savings of $5 trillion over the next decade with growing incomes of Indian households."
- The Securities and Exchange Board of India (SEBI) plans to put in place a unified regulatory filing system called SUPER-D (SEBI Unified Platform for Electronic Reporting - Dissemination), for all listed companies and market entities in a standardised format to enable dissection of bulky documents for relevant information without any delay.
The new system SUPER-D is being developed in such a way that it is capable to manage simultaneous filing of 500 documents on normal days and have peak-period capacity to handle 15,000 simultaneous filings.
- The Infrastructure Development Finance Corporation (IDFC) will issue a second tranche of tax-saving long-term infrastructure bonds by March, 2011.
IDFC Managing Director (MD) and Chief Executive Officer (CEO) said, "We will come up with the second tranche of bond issue in Q4. I can not give the exact time, but it will be close to the time when you file your tax return."
- The Centre for Monitoring Indian Economy (CMIE) has estimated the Gross Domestic Product (GDP) growth in the second quarter to be at 8.7% which is marginally less the GDP growth of 8.8% in the first quarter.
However, CMIE retained the full year GDP forecast at 9.2% as it expects the economy to maintain the expansionary steam in the coming months.
- Asia's oldest stock exchange, the Bombay Stock Exchange (BSE) has launched its Sensex Realised Volatility (REALVOL) Index - the first of its kind in India. Realised volatility is a measure of actual price volatility, based on past price movements over a specific period of time.
BSE Managing Director & CEO Madhu Kannan said, "The introduction of the Sensex Realised Volatility Index, the first-of-its-kind in India, represents an important, new innovation that will give market participants a new way to measure and mitigate market risk. BSE plans to launch futures & options contracts on its new family of realised volatility indices, after the required approvals are received."
- Citing frequent changes in the expense ratio by various mutual fund (MF) houses, the Securities and Exchange Board of India (SEBI) is planning to charge a flat expense fee of 1.5% for equity schemes, 1% for debt schemes and 0.75% for index funds.
Reacting to this a Chief Executive Officer (CEO) of leading fund house said, "MFs are already reeling under higher redemptions from equity schemes, after the entry load ban. The lowering of expense caps could be the final nail in the coffin for us."
- The Professional Forecasters' survey (second quarter of 2011) conducted by the Reserve Bank of India (RBI), expect the real GDP growth rate to be marginally higher at 8.5% in FY11 from 8.4% in the last survey.
The growth will be driven by increased agricultural growth and increased growth in services in the subsequent quarters, according to the survey.
- Birla Sun Life Mutual Fund (BSMF) launched a mobile platform called Mobile Investment Manager in association with MCHEK India Payment Systems (mChek). Existing investors of BSMF can seek portfolio information, make additional purchases, register for SIPs and also make switches and redemptions.
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