India Inflation Unexpectedly Quickens, Curbing Rate-Cut Room

Indian inflation unexpectedly accelerated in April, crimping the central bank’s scope to bolster economic growth by extending interest-rate cuts. Stocks fell, erasing earlier gains.

The benchmark wholesale-price index rose 7.23 percent from a year earlier, after climbing 6.89 percent in March, the Ministry of Commerce and Industry said in a statement in New Delhi today. The median of 32 estimates in a Bloomberg News survey was for a 6.67 percent gain.

Reserve Bank of India Governor Duvvuri Subbarao signaled last month that inflation might limit the room for further cuts after he slashed the benchmark rate by half a percentage point, flagging price risks from the fiscal deficit, energy costs and a weaker rupee. Greece’s political turmoil and a deepening debt crisis in Europe are increasing pressure on Asian nations to support growth as exports falter from Taiwan to Malaysia. China cut banks’ reserve requirements on May 12 to revive demand.

“The Reserve Bank of India faces somewhat of a dilemma,” Robert Prior-Wandesforde, Singapore-based director of Asian economics at Credit Suisse Group AG, said in a note after the report. “Our guess is that the chance of a June rate move has diminished.”

Sensex Falls

The BSE India Sensitive Index (SENSEX) fell 0.7 percent as of 2:22 p.m. in Mumbai, heading for the longest losing streak this year as State Bank of India and ICICI Bank Ltd. (ICICIBC), the nation’s two biggest lenders, erased advances of more than 2 percent each.

The yield on the 8.79 percent note due November 2021 rose two basis points immediately after the inflation data, before sliding five basis points, or 0.05 percentage point, to 8.52 percent.

The central bank lowered the repurchase rate on April 17 for the first time since 2009, by 50 basis points to 8 percent. A report last week showed Indian industrial production unexpectedly contracted in March as weaker domestic demand and tumbling exports hurt the economy.

“The inflation numbers are a very uncomfortable statistic,” Chakravarthy Rangarajan, chairman of the Prime Minister’s Economic Advisory Council, said in New Delhi today. “Many people have been calling for an easing in monetary policy but it makes it difficult for RBI to moderate policy. It is not a good sign.”

Worst Performer

Concern India’s outlook has worsened because of trade and fiscal deficits, political gridlock, elevated inflation and faltering global growth has pushed the nation’s currency toward a record low. That prompted the central bank to say last week exporters must convert half their foreign-currency earnings into rupees as it stepped up efforts to check the decline.

The currency weakened 0.5 percent to 53.885 per dollar in Mumbai. It is down almost 17 percent in the past year, the worst performer in a basket of 11 most-traded Asian currencies tracked by Bloomberg.

Governor Subbarao’s 13 interest-rate increases in the last two years helped tame price pressures in a nation where 75 percent of the people live on less than $2 a day. The wholesale- price inflation gauge has fallen below 9 percent in 2012, after breaching that level most of last year.

Aside from cutting the benchmark rate, the central bank has also reduced the amount of deposits lenders must set aside as reserves twice this year by a combined 125 basis points, to 4.75 percent, to ease cash shortages in the banking system.

Fastest Inflation

Credit Suisse predicts India will cut its repurchase rate by another 125 basis points by March 2013, Prior-Wandesforde said today.

Still, the central bank’s scope to cut interest rates further to boost growth is constrained by the threat of price increases, Ashima Goyal, a member of the bank’s technical advisory committee, said in an interview in Mumbai last week.

While the wholesale price gauge has cooled after the Reserve Bank raised rates by a record 3.75 percentage points from mid-March 2010 to October last year, India still has the highest inflation in the so-called BRIC group of biggest emerging markets that also includes Brazil, Russia and China.

“The inflation number underscores that the room to ease monetary policy is quite limited because there are still upside risks to inflation,” said Leif Eskesen, Singapore-based chief economist for India and Southeast Asia at HSBC Holdings Plc. “There isn’t a lot of spare capacity in the economy because growth has slowed on the back of policy paralysis, lack of structural reforms and therefore it makes inflation a structural problem rather than a cyclical one.”

Maruti Profits

Maruti Suzuki India Ltd., the nation’s biggest carmaker, posted a 3 percent decline in fourth-quarter profit because of high raw material costs and discounts on some models.

The country imports 80 percent of its annual crude requirements and the government compensates state oil firms for selling products below market prices.

Asia’s third-largest economy probably expanded 6.9 percent in the 12 months through March 2012, the least in three years, government estimates show. Standard & Poor’s cut India’s credit outlook to negative from stable last month, putting at risk its investment grade status.

Source: http://www.bloomberg.com/news/2012-05-14/india-inflation-unexpectedly-accelerates-curbing-rate-cut-scope.html

Mutual funds AUM up 16% in Apr: Crisil.

The mutual fund industry's month-end assets under management (AUM) surged by nearly 16% or Rs 929 billion to Rs 6.8 trillion in April 2012 primarily on the back of inflows returning to money market funds post the outflows seen in March. The month on month percentage gain in assets was the highest in the last one year.

Liquid funds witnessed highest inflows in the last one year

Liquid Funds saw inflows of Rs 757 billion, which constitutes 82% of the total inflows, in the month. Historical trend shows that quarter-end outflows in the category are reversed in the subsequent month (March witnessed outflows while April saw inflows) as corporates re-invest their surplus funds that were withdrawn to pay advance tax. Liquid funds thus saw assets rise to Rs.1.6 trillion in April as compared with Rs 803.5 billion in March.

Income funds saw inflows for the first time in last six months

Income funds (including ultra short-term debt funds), which saw outflows for the last five consecutive months witnessed inflows of Rs 179 billion (highest in the last one year) in the April. Income fund’s AUM rose by 6.5% or 189 billion to Rs 3.09 trillion in the month.

Gold ETFs assets crossed Rs 1 trillion mark

Assets managed under Gold Exchange Traded Funds (ETFs) surpassed the Rs 1 trillion mark in the month. The category’s AUM rose by over 3% or Rs 3 billion to Rs 1.02 trillion primarily due to mark to market gains. Gold prices represented by the CRISIL Gold Index rose 1% in the month due to high demand for yellow metal amid ongoing marriage season and Akshya Tritya festival during the month.  

Equity funds’ assets fell on outflows and MTM losses

Equity funds' AUM fell by 1.4% or Rs 25 billion to Rs 1.8 trillion on the backdrop of outflows of over Rs 6 billion as well as due to market to market losses. The equity market represented by the benchmark S&P CNX Nifty fell nearly 1% in April, dragged down by weak global and domestic cues.

Source: http://www.moneycontrol.com/news/mf-news/aumby-16aprinflows-into-liquid-funds-crisil_704007.html

Stocks that found favour

Banks, Power and FMCG sectors make up the top three sectors in terms of allocation now.

So which stocks did mutual funds favour the most? A look at the shareholding patterns of stocks comprising the BSE 500 throws up many interesting insights.

While there are exceptions, MFs were able to spot multi-baggers and add exposures in time.

For instance, stocks such as VST Industries, Fag Bearings, Hexaware Technologies and Strides Arcolab saw a drastic increase in MF holdings over the year. These stocks returned in the 53-127 per cent range during the period.

Similarly, some of the stocks that were dumped by MFs went on to post losses.

Stocks such as Graphite India, Rallis India, EID Parry, GNFC, Jagran Prakashan and Indian Hotels shed 11-25 per cent.

While banks, power and FMCG sectors make up the top three sectors in terms of allocation now, among the ones that saw the highest increase in allocation in the January-March 2012 period were FMCG, fertilisers and auto. In terms of stocks, United Spirits, Max India, Persistent Systems, Sadbhav Engineering and NIIT were among the ones that saw a significant rise in MF holding in the same period.

On the other hand, stocks such as Bilcare, Jyoti Structure, IDBI Bank, BHEL and Welspun Corp reported a drastic fall in MF holding during the same period.

Another interesting sidelight here is that within the mutual fund universe, it was the stock choices in a sector, investment strategies and styles that made all the difference. Funds that invested in MNC stocks or adopted a value-investing approach or dividend yield strategy were among the better performers. This is evident also in the good performance of funds based on these themes.

Source: http://www.thehindubusinessline.com/features/investment-world/mutual-funds/article3412510.ece?ref=wl_features

No regulatory vacuums, says SEBI

In 2008, large pools of money were used to play the market, without anybody even having an idea of the dimension of the problem.

‘If you are raising money in India, you need to submit to our regulations.' That is the guiding principle behind SEBI's recent moves to regulate portfolio managers, venture funds and other investment entities, says the SEBI Chairman, Mr U.K. Sinha. Excerpts from an interview.

Your recent regulation was on alternative investment funds such as private equity, venture capital funds and so on. These are vehicles for informed investors. Why the regulation?

SEBI has two guiding principles. One is investor protection and the other is containing systemic risk. In 2008, large pools of money were used to play the stock market, without anybody even having an idea of the dimension of the problem. If we had the data on these funds, we may have been alerted to the crash. That is why we would like to regulate alternative investment funds. If you are setting up a PE, VC or hedge fund, you cannot collect less than Rs 1 crore. And anyone collecting above Rs 1 crore per investor has to register with us and be regulated.

On investor protection, we are looking at a hierarchy of regulations. For mutual funds, where one can invest Rs 500-1,000, regulations will be tight, as these are uninformed investors. Alternative investments will have light-touch regulations. We have set the threshold at Rs 1 crore. The idea is that the uninformed retail investor will be permitted to invest only in areas where regulation is tight.

So was there a regulatory vacuum in terms of large entities raising money and not being regulated?

Yes. Previously there was no requirement that all venture funds must register with SEBI. Now that has been changed. All venture capital funds which raise domestic money need to be registered with us. The concept is that if anyone is raising money in India they need to be registered with us. If they don't register, they are violating rules.

To give an example, in 2005, 2006 and 2007, many firms raised money for real-estate. They pooled small sums of money such as Rs 5 lakh and that went into real-estate funds. Now, even for activities like that, the minimum investment is Rs 1 crore. Now, some people may not be happy with that. But we feel that these vehicles are not suitable for small investors.

The original concept paper asked alternative funds to register under seven categories. You have now reduced that to three broader categories. Why?

We felt that administrating the seven categories will pose a problem. Besides, the firms felt that water-tight compartments will restrict their mandate.

Therefore, we tweaked this based on whether alternate funds get some concessions from the government. Venture funds invest mainly in unlisted securities. They get regulatory forbearance, for instance, a pass-through status on taxes because we feel they are a good means to promote entrepreneurship. The second category is private equity, which can invest in public securities. They too get certain facilities from the government. These two categories need to accept restrictions, they can't use leverage.

The third category is hedge funds, which don't get any facilities from the government and are allowed to leverage. Hedge funds globally do rely on leverage and to restrict this would be not be in keeping with trends across the world.

However having said this, we have to watch the extent to which they are allowed to borrow and the size of such funds in the Indian market. For this they need to be registered. For instance in 2006, 2007, many such firms raised $ 1-2 billion funds and nobody did much about them. But this applies only to funds raising money from Indian investors. Hedge funds and others who raise money from abroad will come under the FII regulations.

You spoke of filling the regulatory vacuum. What about collective investment schemes such as teak schemes, gold bonds and so on?

Yes I agree there are grey areas there. Now, collective investment schemes are to be regulated by SEBI. But we find that very few schemes are willing to submit themselves; they usually claim that they are not collective investment schemes. They are generally taking advantage of the Chit Fund Act or are NBFCs.

In one or two States, this activity has been going on in a big way. The money is often collected from remote areas. We have issued orders in some cases against such firms, but they have gone to Court over this. In the case of collective investment schemes, we need clarity on who the enforcement agency is.

Source: http://www.thehindubusinessline.com/features/investment-world/article3412511.ece?ref=wl_companies