RBI raises key rates; FM says may impact short-term growth

Hardening its stance on inflation, RBI on Tuesday raised some key policy rates prompting Finance Minister Pranab Mukherjee to caution that it could have some short-term negative impact on growth.

The apex bank increased its short-term lending (repo) and borrowing (reverse repo) rates by 25 basis points to 6.25% and 5.25% respectively, but the commercial banks said they would not increase their lending rates immediately.

``This tightening may have some negative impact on the growth rate, but I expect such an effect to be only a short one. In the medium to long term, the changes announced by the RBI today should actually help the Indian economy do better in terms of growth,`` Mukherjee said.

This was the sixth time this year that the Reserve Bank of India (RBI) has raised repo and reverse repo rates.

The apex bank, however, hoped that going forward it may not have to up the rates further.

India Inc expressed apprehensions that the RBI decision would make loans expensive and may dampen industrial growth.

``This (RBI move) in turn would adversely impact the interest sensitive sectors like consumer durables and auto, which have led the growth hitherto as also on the housing demand,`` Ficci Secretary General Amit Mitra, said.

RBI has pegged the growth rate for the current fiscal at 8.5%, up from 7.4% in the previous fiscal.

The mid-year policy initiatives, according to Planning Commission Deputy Chairman Montek Singh Ahluwalia, was in sync with the actions of other central banks.

Although banks said they would refrain from immediately hiking rates, they may not be able to hold on to the existing rate-level for long as demand for credit increases and depositors put pressure on them to raise interest rates.

``So, whether it (hike by RBI) will raise pressure on the system Eventually, it will. Whether there would be immediate reaction Not likely,`` said, SBI Chairman O P Bhatt.

The hike in the key interest rates according to RBI are aimed at containing inflation, which is above the `comfort level.`

Inflation was 8.62% in September and food inflation was 13.75% in mid-October. RBI has pegged inflation at 5.5% by the fiscal- end.

``Today is not such an easy time. The signals from the economy have been mixed. Industrial growth showed a slight slowing down in August. Inflation, while less than what it was some months ago, is still not in a zone where we can sit back,`` Mukherjee added.

RBI, however, refrained from raising the cash reserve ratio (CRR), which is the proportion of deposits that the banks keep with the central bank, in view of tight liquidity situation.

``I am glad that RBI has risen to the challenge and used a very careful combination of policies to complement what the government is doing to steer our economy to grow better and harness inflation,`` Mukherjee said.

Stock markets reacted mildly to the hike in policy rates by RBI with the benchmark Sensex ending the day flat.

``RBI`s move to hike the key policy rates are in line with the Street`s expectations and equity markets have not reacted much to the announcement since it has already be factored in,`` Axis Mutual Fund CEO and MD Rajiv Anand, said.

Expressing concern at excessive borrowing for homes, the Reserve Bank also tightened norms for housing loans as well as controversial teaser loans.

The Reserve Bank also cautioned against rising stock and gold prices.

It said huge capital inflows in emerging economies are resulting in appreciation of local currencies and asset prices.

The central bank said it may intervene if Forex flows are lumpy and volatile.

Source: http://www.myiris.com/newsCentre/storyShow.php?fileR=20101102213728200&dir=2010/11/02&secID=livenews

Light up with gold

Before you go investing, here are some aspects you need to factor in.

Buying gold during Diwali is considered auspicious. But is it only superstition or has the ‘yellow' metal really brought riches for its buyers? Well, investors who bet on gold for capital appreciation have made money, if the trend in the last five years is anything to go by. The price of gold has gone up from Rs 875/gm during Diwali 2006 to around Rs 1,968/gm now, appreciating at about 22 per cent annually on a compounded basis over the last four years.

So what has helped the yellow metal to put in such a performance? The precious metal benefited immensely from the rising investment demand led by ETFs and Central Bank buying, to the economic downturn in the US and the greenback's value depreciation seen in the last few years.

The scene back home too hasn't been any different. Predominantly a gold jewellery market for years, India too has seen increase in gold-related investment demand.

Benchmark Mutual Fund's gold ETF- GoldBeES, the largest gold-based exchange traded fund in India, has bought 4.6 tonnes (4,600 kg) of gold over the last two years and holds 6.6 tonnes currently.

Read on to find out how you can add some bling to your investments.

ETF route

Introduced in 2007, the ETF route to investment in gold is pretty new to India. Presently, there are eight mutual funds that have gold ETF products listed.

Interested investors can buy units of the fund during the NFO period or even through the stock market, as units of gold ETFs are listed in stock exchanges. Each unit of a gold-ETF represents a certain grammage of gold. India-listed gold ETFs generally track the London Bullion Market (in US dollars) and represent standard gold of 99.5 per cent purity.

Being market listed, the gold ETFs, however, behave in tandem with the demand-supply forces in the market, delivering somewhat higher or lower return than the spot gold. GoldBeES has delivered a return of 21 per cent over the last one year while the spot price of gold (in rupee terms) has appreciated 23 per cent.

One thing to watch out for before buying into gold ETFs is the specific ETF's average daily volumes. Know that scarce volumes increase the cost of transaction. Currently, the Benchmark MF's GoldBeES has the highest daily volumes. GoldBeES have seen an average volume of 70,000 units every day over the last one month.

Other options

Buying gold from banks is also an option. Banks sell gold as coins and bars of different grammage. Purity and guaranteed caratage is the advantage with buying gold from a bank. But buyers should bear in mind is that banks may charge a stiff premium over the prevailing gold price. The pain point is banks do not buy these coins back if customers intend to sell them. You will then have to go to a local jeweller to sell them. But if you are looking to buy some gold coins , look up our ‘Check It Out' column, that showcases gold coin offers from many banks.

There's also an option of buying gold jewellery. However, it isn't the great way to go about it, unless you are buying it for ornamental value. The wastage charges on old jewellery typically tend to eat into a significant share of your returns.

The other way to buy gold is through the futures contract in the commodity market. Both MCX and NCDEX offer future contracts in gold. Contract sizes vary from 8 gm, 100 gm to 1 kg. If you want to trade in gold, you pay only a margin of 4 per cent of the contract value and buy it. You would, however, have to square your position before expiry or roll it over, if you wish to hold. And, in case you wish to take a delivery, you would be required to pay the full contract value five days before the expiry of the contract, says Jajati Barik, Manager-Commodities, Motilal Oswal Commodities. All deliveries of MCX, however, happen only in Ahmedabad. Among other charges that add up the delivery cost are brokerages, service tax on brokerage and VAT and C&F charges. For an 8 gm Gold Guinea contract, whose current contract value is around Rs 15,500, delivery charges in total would be around Rs 350 (2.2 per cent).

The dollar effect

Gold, be it any form, tracks the international gold rate denominated in US dollars. Returns for Indian investors will depend on rupee's value against the dollar in that period. A falling rupee will enhance gold returns while an appreciating rupee will erode returns. For example, since last Diwali, gold has appreciated 27 per cent in dollar terms. But in rupee terms, the return is only 23 per cent, as the Indian currency has appreciated from Rs 46.3/dollar last year to Rs 44.56/dollar now.

Source: http://www.thehindubusinessline.com/iw/2010/10/31/stories/2010103151021600.htm

Fund managers see marginal stocks rise; eye engineering stocks

Indian fund managers expect shares to move up but only marginally, making them averse to raising equity exposure in the next three months, a Reuters poll of 10 domestic fund houses showed on Friday.

Four of them expect shares to rise up to 5 percent, two managers see shares rising up to 10 percent and one bet on a rise of more than 10 percent. Fund managers said they expect shares to consolidate with a marginal rise rather than show a sharp upmove.

"We are not increasing exposure to equity. I will increase exposure in mid-cap and reduce in large-cap and thereby seek alpha," Jayesh Shroff, fund manager at SBI Mutual Fund said.

Alpha is the excess return over the benchmark fixed by the fund.

India's benchmark stock index which is trading at a 19 times forward earnings ended flat in October at 20,032.34 points. The 30-share index is still up 14.7 percent year to date, as foreign funds have invested a net $24.7 billion in Indian primary and secondary equities in the period. About half of the fund managers polled plan to increase exposure to mid-caps, while decreasing in small cap and large-cap stocks.

Engineering tops buy chart

Six money managers said they would increase exposure to engineering stocks as they were positive on the back of the Indian growth story.

"Engineering has not performed very well this year for couple of reasons like they due they were low on returns...if this underperformance was to be bridged over next three months then this trade should play out," said Amit Nigam, senior fund manager at BNP Paribas Mutual Fund .

India's economy is seen growing by 8.5-9.7 percent in the 2010/11 fiscal year, according to a report released by the finance ministry. The International Monetary Fund projects growth at 9.7 percent for calendar 2010.

Fund managers are also betting on the spending in the engineering and construction sector which is likely to accelerate due to backlog in the 11th Five Year Plan.

Indian fund managers said they see the stocks fairly valued at the current levels.

Source: http://economictimes.indiatimes.com/markets/analysis/Fund-managers-see-marginal-stocks-rise-eye-engineering-stocks/articleshow/6835911.cms

Top equity funds maintain growth tempo in Q2

Top-ranking equity funds have been consistent in their performance over the past three months. Seventeen of the 22 equity funds that were ranked one (Fund Rank 1) for the quarter ended June maintained their rankings during the September quarter, according to a press note issued by CRISIL .

"Investors prefer to hold funds that are superior and consistent in their performance over time to avoid churning costs. Top-ranking equity schemes showcased strong performance and outperformed the relevant index during the latest quarter," said Tarun Bhatia, director-capital markets, CRISIL.

Rank 1 diversified equity schemes gave the highest return among all equity categories at 14.95% and outperformed both the S&P CNX Nifty and the S&P CNX 500 which gave returns of 13.50% and 11.41%, respectively, the press note added.

CRISIL's MF rankings covered 452 open-ended funds accounting for 72% of the average assets managed by Indian mutual funds in September 2010. Among fund houses, HDFC Mutual Fund led the tally of top ranked funds - with 16 funds under rank 1 - across equity and debt categories. HDFC MF was closely followed by DSP BlackRock Mutual Fund with eight funds and Birla Sun Life Mutual Fund with seven funds under Rank 1. Taking a category wise split, Fidelity India Growth, HDFC Top 200 and ICICI Prudential Focused Bluechip led the large-cap equity fund group while Birla Sunlife Dividend, DSP Blackrock Opportunities and Fidelity Equity Fund topped the diversified category.

Birla Sunlife Basic Industries Fund and DSP Blackrock Natural Resources Fund managed top slots under thematic funds. DSP Blackrock Micro Cap Fund, DSP Blackrock Small & Midcap Fund along with HDFC Mid-cap Opportunities Fund were ranked best among small & midcap funds.

While Canara Robeco Equity Tax Saver and Fidelity Tax Advantage bagged top slots in the ELSS segment, HDFC High Interest Fund and HDFC Income Fund were ranked first among long-term income funds.

DSP Blackrock Equity Fund, HDFC Equity and HDFC Top 200 were adjudged consistent performers by CRISIL.

CRISIL's fund ranking framework provides a single-point analysis of mutual funds taking into consideration all factors such as risk-adjusted returns, asset concentration, liquidity, asset quality and asset size. The rankings also include categories that focus specifically on long-term consistency in performance. The ranks are assigned on a scale of 1-5, with 'CRISIL Fund Rank 1', indicating 'very good performance'.

Source: http://economictimes.indiatimes.com/personal-finance/mutual-funds/mf-news/Top-equity-funds-maintain-growth-tempo-in-Q2/articleshow/6839618.cms

RBI calms jittery market, as call rates top 12%

Second LAF window opened, SLR norm temporarily relaxed

Interbank call money rates surged to more than 12 per cent this morning, even after banks on Friday net borrowed Rs 1,17,660 crore from the Reserve Bank of India (RBI) repo window — the highest in two years. Around noon, RBI announced measures to cool the market.

The central bank opened a second liquidity adjustment facility (LAF) window, which it said would be offered on Monday, too. The facility will also be available on Saturday, when it is normally closed.

Simultaneously, RBI temporarily eased the statutory liquidity ratio (SLR) requirement for banks. They will not be penalised if their minimum SLR holding dips to 24 per cent of deposits if they pledge government securities to borrow through Saturday’s repo auction. The leeway is ad hoc and applicable only for the Saturday repo.

Banks have to invest up to 25 per cent of their net demand and time liabilities in government securities to maintain SLR. Any shortfall typically invites penal action from RBI.

As a result of the central bank’s actions, call money rates closed at 7.15 per cent. This was still its highest level this financial year, according to Bloomberg data. In the second LAF auction, banks borrowed only Rs 350 crore, as the window opened too late, say bankers. RBI described Friday’s shortage as “frictional liquidity pressure”.

“The regulator should not wait until panic spreads, which was the situation in the morning,’’ said a dealer.

The liquidity shortage this week averaged Rs 90,000 crore, mainly because of the Coal India initial public offering, which mopped up a record Rs 15,500 crore. Pressure rose as the IPO received 15 times the bid amount. Money from refunds is expected to flow back next week, providing some relief.

Given the scarcity of funds in the banking system, some bankers argue that RBI should leave rates untouched. Many money market dealers and bankers expect a 25-basis point increase in key policy rates on Tuesday, as RBI continues its action against inflation.

Mutual funds are feeling the pressure of redemption by corporates, banks and financial institutions. Rs Rs Banks have sucked out money from liquid funds to a large extent this month. With several IPOs in the pipeline and due to the central bank's intervention, which is squeezing liquidity, banks are no longer parking money with mutual funds," said the chief executive officer of a mid-sized fund house.

“One of the factors precipitating the problem is the lack of government spending, despite maintaining huge balances with RBI,” explained a senior State Bank of India official. Government balances with RBI stood at Rs 25,662 crore on October 22.

However, overall liquidity is unlikely to improve in a hurry, as several companies have lined up fund-raising plans in the busy season. There will be additional pressure from year-end investment liquidation by foreign institutional investors, say fund managers. Adding to the strain on liquidity will be the third tranche of advance tax, which falls due in mid-December.

Moreover, the government has lined up several big-ticket public issuances over the next few months, including those of Shipping Corporation of India, Hindustan Copper, Manganese Ore India and Power Grid Corporation. In January, Indian Oil Corporation is expected to come to the market with an offering of around Rs 19,000 crore -- the largest to date. The private sector also plans to tap the market with mid-sized and large issues.

“The present liquidity situation may improve, but it will take time. I don’t expect any immediate rate hike by RBI, as it will aggravate the situation. There is no real credit uptake and not much is expected in the third quarter, except from the infrastructure sector,” said Bhaskar Sen, chairman & managing director, United Bank of India.

However, the central bank may still be compelled to go for another rate hike, say some bankers. This is because headline inflation has stayed much above RBI’s tolerance level. Food inflation is now becoming structural in nature.

“The market has factored in a 25-basis point hike in both policy rates. As a result, short-term rates have gone up. I don’t think RBI will react to the present liquidity tightness, as it may be temporary, and will probably go ahead with a rate hike,” said Jahangir Aziz, India chief economist at JP Morgan.

Source: http://www.business-standard.com/india/news/rbi-calms-jittery-market-as-call-rates-top-12/413200/

Reliance MF limits subscription of units in Reliance Small Cap Fund

Reliance Mutual Fund has decided to limit the subscription of units in Reliance Small Cap Fund, an open ended equity scheme, with effect from 1 November 2010 till further notice. The limit on subscription of units has been done with a view that increasing the size of the corpus of the scheme further may prove detrimental to the interest of the existing unit holders. The aforesaid limit will be applicable subject to the following conditions:

1. Fresh/additional subscription/switch-ins will be allowed/accepted for an amount less than or equal to Rs 5 lac per investor (including all folios) at any point in time going forward till further notice.

2. Subscriptions through Systematic Investment Plan (SIP), Systematic Transfer Plan (STP) will be continued with each installment being less than or equal to Rs 5 lac per investor (including all folios) till further notice.

For this purpose, investor identification (per investor) will be done on the basis of Permanent Account Number (PAN) of first holder of the folio or PAN of guardian in case of minor. The aforesaid restriction will not affect SIP or STP registered prior to 1 November 2010 and the unitholders under the dividend reinvestment and payout option.

Source: http://www.apollosindhoori.cmlinks.com/MutualFund/MFSnapShot.aspx?opt=9&SecId=10&SubSecId=22,24#

SEBI move: MF industry could see consolidation

The mutual fund industry may soon see consolidation of its plethora of schemes as SEBI makes the process easy, said analysts.

The Securities and Exchange Board of India recently issued a circular mandating that the current scheme, resulting from a merger or consolidation of schemes, will not undergo any change in its fundamental attribute.

The large number of schemes in the industry may soon see a reduction in their numbers, if fund houses choose to take advantage of the SEBI circular, say analysts.

Reactions

“Product rationalisation is important for a growing industry and leads to improved efficiencies. The change in regulations should help in reducing operational complexity for this process, without diluting investor interests,' said Mr Jaya Prakash K, Head-Products, Franklin Templeton Investments.

This circular is investor-friendly and has been modified to suit investor needs, believe analysts. “This circular is very beneficial for the investor as it gives them the choice to exit or continue with the scheme, depending on the surviving scheme and its attributes. From an investor's point of view, this gives a clearer view of the funds involved,” said Mr Raju Singh, mutual fund analyst at SBI Cap Securities.

This circular is in direct contradiction to an earlier circular from SEBI in June 2003.

Then, the regulator had mandated that the surviving scheme would undergo a change in its fundamental attributes. This confused the investor, said analysts.

“The earlier circular was lenient, while this is a little bit more stringent. This circular gives a clearer rationale for the surviving scheme. Fund houses will now have to launch their schemes carefully as they will be very wary of SEBI's action,” said Mr Dhirendra Kumar, CEO, Value Research.

“This is a trivial matter and will not make too much of a difference to the industry,” he added.

Analysts believe that there are way too many products in the industry and merger of some of the schemes will reduce confusion and boost investor confidence.

“There are several schemes in the industry today which have an AUM of just about Rs 10 crore, some of even Rs 1 crore. So, why not merge these small schemes into one big scheme?” asks a mutual fund analyst who did not wish to be named.

However, there are certain limitations with respect to mergers of these schemes, as the investment mandate for each fund is different.

Source: http://www.thehindubusinessline.com/2010/10/28/stories/2010102852871300.htm

UBS eyes MF business in India once again

Zurich-headquartered UBS is looking to start asset management business in India. According to Christof Kutscher, group MD, head of Asia-pacific, “In Asia, we have picked up assets in China, Korea, Taiwan and Japan. India is a big gap in our offering. We are waiting for the right opportunity to enter the Indian asset management business.”

Currently, there are over 41 fund houses in the country while another 22 are awaiting approvals from the market regulator. Major foreign fund managers, including Fidelity, Franklin Templeton, T Rowe Price, ING and Mirae, already have a presence in the Indian asset management business and currently around eight mutual funds are predominantly foreign-based.

In the last one year, three companies—Pramerica MF, Peerless MF and Motilal Oswal MF—started their mutual fund operations. As per data provided by Association of Mutual funds in India (Amfi), the total average assets under management of the 41 fund houses stood at over Rs 7.13 lakh crore in September 2010. Kutscher added the bank will soon look for a partner and was keen on taking a controlling stake. This is not the first time that UBS is looking to enter the asset management business in India. In 2007, it had planned to acquire Standard Chartered’s mutual fund business in the country but the deal was later called off. The bank also plans to increase its footprint in the wealth management segment. UBS group already has a presence in the banking industry after it received a banking licence from RBI in 2008-09. It is also one of the top brokers for international entities investing in Indian equities. UBS India Securities Private’s brokerage and advisory services have been available from its Mumbai office since 1990.

Source: http://www.financialexpress.com/news/UBS-eyes-MF-business-in-India-once-again/702892/