RBI's stance to tame inflation   Jul 30, 2010

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Impact

In its first quarter review of monetary policy for 2010 -11, the Reserve Bank of India (RBI) increased key policy rates as under with immediate effect, thus making an attempt to tame spiralling double-digit inflation.

• Repo Rate is increased by 25 basis points, from 5.50% to 5.75% and
• Reverse Repo rate is increased by 50 basis points, from 4.00% to 4.50%,

However taking into account the present liquidity situation the Cash Reserve Ratio (CRR) is kept unchanged at 6.00%.

The decision on increasing policy rates came in as inflationary pressures are becoming more exacerbated. Presently, the WPI inflation has been sailing in double-digit space for five consecutive months (since February 2010). Moreover now, the deregulation of fuel prices (in the last week of June 2010), may also lead to WPI inflation for July 2010, staying in the double-digit space.

But despite this, taking into account the progress of monsoon (which will improve the chance of good harvest), and domestic macroeconomic scenario, RBI expects headline WPI inflation to settle down to 6.00% by March 2011.

Reacting to the monetary policy review, Finance Minister - Mr. Pranab Mukherjee said, "The decision to raise key rates will lead to an easing of inflation while keeping economic growth on track".

We think that an aggressive increase (by 50 basis points) in the reverse repo rate, may enable RBI to suck the excess liquidity, thus curbing demand side inflation. However, in our opinion core inflation will continue to exist. Moreover we think that RBI’s projection for WPI inflation is quite optimistic. In our opinion interest rates on fixed deposits may start firming up (by around 50 - 75 basis points), but lending rates are unlikely to firm-up immediately.

POLL

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Impact

The Securities and Exchange Board of India (SEBI) wants trustees and independent directors of mutual fund houses to be more proactive and be familiar with:

• The best practices in the industry
• Technical know-how of the mutual fund (MF) business

In order to achieve this, SEBI (through National Institute Securities Management) will conduct at least three workshops, (beginning September 15, 2010) in a year to educate trustees and independent directors on technical and regulatory topics such as:

• Insight into debt and money market instruments
• Reviewing mutual fund performance beyond returns
• Discharging fiduciary duties

We believe that such a move taken by SEBI will be in the long-term interest of investors since this will ensure investor protection and make trustees and independent directors of mutual fund houses, more accountable while discharging their managerial duties.

Impact

As per the new norms cleared by an inter-regulatory panel set up by SEBI, now life insurance companies planning to raise money from the bourses, will have to disclose their past five years performance track record, for their various Unit-Linked Insurance Plans (ULIPs), and will also have to provide guidance on the earnings from their present business and agreements with foreign promoters.

Moreover, as a measure to infuse transparency the new norms also mandate an insurer to provide information on the capital structure over the past five years, thus facilitating investors to know the capital structuring ratio and the proportion of capital infused by various stake holders.

Interestingly, according to a senior official privy to the development, most of Insurance Regulatory and Development Authority’s (IRDA’s) suggestions on disclosures have also been accepted, but now it will worth seeing whether SEBI board members approve the same.

Presently, none of the insurance companies in India are listed on the bourses. Moreover, the law too requires them to complete ten years in business to do so.

In our opinion, if the new norms go through SEBI’s board approval, it will be advantageous for investors, as it would:

• Help in gauging risk
• Infuse transparency through better disclosures.

Impact

IRDA barred lenders from distributing insurance policies under referral arrangements. In a gazette notification, the insurance regulator announced that as per norms, the referral company cannot be in the business of extending loans and advances, accepting deposits, trading in securities on its own account or on account of its customers. Moreover it has also stated that the referral company will also be prohibited from engaging into business that has a direct or indirect linkage with the transaction or distribution of insurance.

On this issue, senior officials from Vijaya Bank and Punjab National Bank (PNB) expressed shock as it could hamper their existing referral arrangement with Life Insurance Corporation of India (LIC). At present amongst the life insurance companies, LIC has one of the largest referral arrangements, with Vijaya Bank and PNB being the largest distributors. However as a solution to this, LIC may provide all the support it takes for a bank to become a corporate agent.

In our view this diktat is a welcome change as policyholders will encounter lower attempts of mis-selling (since lenders generally use to build volumes in insurance sales through such referral arrangements). Moreover, the policyholders can also look forward for a more professional and ethical approach and individuals will have an option to select appropriate insurance policy(s) suiting their financial goals.

INTERVIEW

In an interview with the Economic Times, Mr. Tushar Poddar - Chief India Economist at Goldman Sachs shared his views on India’s GDP growth rate for the fiscal year 2010-11, inflation and interest rate scenario.

On GDP growth rate, Mr. Poddar is rather cautiously optimistic and believes that India will grow at 8.2% in the current fiscal year, as he thinks that we will witness an external slow down in the second half of the year. On the International Monetary Fund’s (IMFs) forecast of 9.4% he said, "We’ll be worried if India achieves 9.4% growth, because that would mean that our current account deficit is just going to balloon, given the strength of domestic demand that such a strong GDP growth number would entail".

On inflation he expressed his concerns by mentioning that core inflation has picked up substantially and is growing above potential, however he feels that RBI is not behind curve in controlling inflation.

On interest rate scenario he believes that RBI will need to continue to hike interest rates, and a 6%-plus number by the year end, will be the right place for short-term interest rates. He also mentioned that, we will gradually move to neutral policy rates and then to tightening as we go into 2011.

AND OTHER NEWS...

• The Pension Fund Regulatory and Development Authority (PFRDA) launched its new schemes named "NPS Lite", for the economically deprived sections of the society. Under the scheme the minimum annual contribution which an individual can make in each account is Rs 1,000. Moreover, the "Swavalamban Scheme" (introduced in the union budget 2010) benefit would also be available to NPS Lite account holders.

• Western Union tied up with State Bank of India (SBI), in order to facilitate international direct cash-to-account transfers for its customers. Western Union stated the scheme will be operational early next year.

• Mahindra Finance Ltd. (a non-banking finance company) plans to foray into the mutual fund business by March 2011, subject to the approval of SEBI. If approvals are granted, then the company also intends to hire specialised people with domain knowledge.

• Reliance Life Insurance (a part of the Anil Ambani Group) roped in NetAmbit for distributing its products. With this tie-up Reliance Life Insurance intends to offer a wide range of products to large number of people in small towns and villages.

• SEBI is considering a proposal to have separate bidding days during Initial Public Offering (IPO) for retail and institutional investors. This proposal is being considered, as most often, traditionally retail investors put in their bids on the last day taking cues from the large institutional investors. However interestingly in recent times, even institutional investors wait till the last moment to put in their bids, resulting into many retail investors missing the IPO bus.
  
  We believe that SEBI’s contention behind this move, is a part of its efforts to attract more retail investors to the capital markets.

• In an attempt to increase its footprint in the country, the Bombay Stock Exchange Ltd. (BSE) is signing a Memorandum of Understanding (MoU) with regional stock exchanges. At present, BSE has signed a MoU with Madhya Pradesh Stock Exchange (MPSE), and is also likely follow suit with the Vadodara Stock Exchange (VSE) and Jaipur Stock Exchange (JSE).
  
  Under this strategic partnership the companies listed on a particular regional exchange will be available for trading on BSE, and members of local stock exchanges will also be able to trade in shares of companies listed on BSE.

• ICICI Lombard General Insurance launched an Overseas Student Travel Insurance - Gold Plan which covers various unforeseen medical expenses for students planning to study abroad. The medical expenses include personal accident and dental treatment, along with additional covers such as personal liability, bail bond, sponsor’s protection, repatriation of remains and checked-in baggage loss.

• Investors will hopefully be able to know their distributors better, as the Association of Mutual Funds in India (AMFI) plans to introduce Know-Your-Distributor (KYD) norms for mutual fund distributors with effect from August 1, 2010. These norms will be applicable to all who desire to engage in mutual fund distribution and ARN (AMFI Registration Number) holders.

• SEBI extended the date of providing ASBA (Application Supported by Blocked Amount) facility to investors for new fund offers (NFOs) launched by mutual fund houses. As per the SEBI circular, all mutual fund houses shall provide ASBA facility to investors for all NFOs launched on or after October 1, 2010, thus revising it from the earlier deadline of July 1, 2010.

• SEBI introduced a consultative paper on fees charged by Portfolio Management Service (PMS) providers, since it seeks to clarify on the fees to be paid by the client and the method of it calculation. It has also asked all PMS providers to clearly mention all the fees and charges in a readable font and also incorporate a "high water mark principle", while levying performance related fees.
  
  We believe SEBI aims to rationalise the fee structure by bringing in more transparency, thus being in the long-term interest of investors.

• A multi-ministerial Government panel has asked RBI to look into the possibility of mobile banking beyond checking account status. During the first meeting of the multi-ministerial panel, it was decided to allow all citizens to open a ‘mobile-linked-no-frills account’ for financial transactions.
  
  We believe that such an initiative if implemented, will help the weaker sections of the society to access such facilities at an affordable cost and thereby give a push to the financial inclusion process. However, banks and cellular companies would need to cooperate rather than compete with each other, in order to have positive implications on all.

New Issues

• Prakash Steelage Ltd. will launch their Initial Public Offer (IPO) on August 5, 2010 with 62.5 lakh shares to be offered (50% reserved for Qualified Institutional Buyers (QIBs)), which will result in 35% equity dilution. The price band for the IPO is Rs 100-110 and the company plans to raise Rs 80 crore to meet its planned capex of Rs 48 crore.

• SKS Microfinance Ltd. introduced an IPO on July 28, 2010, and became the first microfinance company in India, to access the equity markets (through IPO). The issue consists of a fresh issue of 7.45 million equity shares and an offer for sale of 9.35 million equity shares by the company’s shareholders. SKS Microfinance Ltd. plans to raise around Rs 1,300 crore through this IPO (with a price band at Rs 850-985), and plans to double its headcount to 42,000 by end of this fiscal as it expands capacity. The issue will remain open for subscription till July 30, 2010.