Highlights of RBI's FY11 Annual Policy Statement

MAIN HIGHLIGHTS

* Hikes reverse repo, repo rate, CRR by 25bps each
* Reverse repo, repo rate hikes with immediate effect
* CRR hike effective from Apr 24
* CRR hike to impound 125 bln rupees from banks
* FY11 GDP growth projection at 8.0% with upside bias
* March end inflation projection at 5.5%
* FY11 banks' credit growth projection at 20.0%
* FY11 banks' deposit growth projection at 18.0%
* FY11 money supply growth projection at 17.0%
.
STANCE

* Hike in policy rates, CRR to help contain inflation
* Hike in policy rates, CRR to anchor inflationary expectations
* Measures to sustain recovery process
* Govt borrow needs, private credit demand will be met
* Hikes to align policy tools with evolving state of econ
* To closely monitor macro events, prices; take warranted steps
* Econ firmly on recovery path, industrial growth broad based
* India economy resilient, recovery consolidating
* FY11 econ growth to be higher, more broad-based vs FY10
* Lower policy rates can complicate inflation outlook
* Lower policy rates also impair inflationary expectations
* Despite 25bps hike in rates, real policy rates still negative
* Need to
normalise policy rates in calibrated manner
* Inflationary pressures "accentuated" in recent period
* Inflation getting increasingly generalised
* Capacity constraints to re-emerge as econ growth rises
* Must ensure demand-side inflation does not become entrenched
* FY11 fresh govt bond issuances 36.3% higher vs FY10
* FY11 fresh govt bond issuances "a dilemma"
* Policy considerations demands liquidity be curbed
* Govt borrow needs supportive liquidity conditions
* Need to absorb liquidity without hurting govt borrow plan
* To respond swiftly, effectively to inflationary expectation
* To actively manage liquidity, ensure private credit demand is met
.
INFLATION
* Significant changes in drivers of inflation in recent months
* Overall food inflation high despite seasonal ease
* Rise in global commodity prices upside risk to inflation
* Household inflation expectations remain at elevated level
* Demand pressures may rise as recovery gains momentum
* Monsoon prospects unclear, blur FY11 inflation outlook
* Volatile crude prices cloud FY11 inflation outlook
* To ensure price stability, anchor inflationary expectations
* To monitor overall, disaggregated components of inflation
* keeps medium-term inflation objective of 3.0%
* An unfavourable monsoon may exacerbate food inflation
* Unfavourable 2010 monsoon may add to fiscal burden
.
GROWTH
* GDP projection assumes normal monsoons
* GDP projection also assumes good industrial, services growth
* Industrial growth to take firmer hold going forward
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FISC
* Fiscal prudence to avoid crowding out private credit demand
* Fiscal prudence must shift to structural improvements
* Govt borrow "very large", can pressure interest rates
.
GLOBAL
* Pace of global econ recovery remains uncertain
* Uncertain global econ recovery downside risk to India GDP
* Trade, financial linkages to other economies may impact India GDP
* Commodity price seen up more if global recovery gain momentum
* Rise in global commodity prices may up inflation pressure
* Expansionary fiscal policy may not be unwound in advanced economies
* Expansionary policies may trigger large FX flows to India
* Excessive flows challenge to FX rate, monetary mgmt
* FX rate policy not guided by pre-announced target
* Keep flexibility to intervene in FX market to manage volatility
* Need to be vigilant volatile FX rate movements
.
MARKET

* RBI panel to mull single point reporting for OTC FX derivatives
* To launch reporting platform for secondary deals of CDs, CPs
* Asked FIMMDA to develop CD, CP reporting platform
* To allow banks to purchase non-SLR bonds by infra companies in HTM
* OKs bourses to launch plain vanilla dollar/rupee options

The New Pension Scheme: Good intentions, poor execution

 In the current Budget, the Central government had announced that it would contribute Rs1,000 towards each New Pension Scheme (NPS) account opened this year. The Pension Fund Regulatory and Development Authority (PFRDA) plans to make the scheme more attractive. While various efforts have been made to make the NPS attractive, the Centre has failed to attract its own States towards the scheme.

Even after six years of its launch, only 12 States have executed the NPS scheme, eight have merely entered into an agreement with the NPS Trust. Administrative difficulties in identification of eligible employees and the difficulties of implementation of a payroll-linked programme are some of the difficulties that have been cited by various States for non-implementation of the scheme.

The NPS was introduced by the government in April 2004, to cover all entrants in government service. It was subsequently extended to the general public later. At that time, around 23 States in the country had notified adoption of the NPS for their employees.

However, even after six years, the implementation of the scheme has not taken off. According to the 13th Finance Commission Report (2010- 2015), only 12 States have executed their agreements signed with the Central Record Keeping and Accountancy Agency (CRA). In the case of NPS, the National Securities Depository Limited (NSDL) has been appointed as the CRA.The Report further states that an additional eight States have entered into agreements with the NPS Trust.

This lacklustre performance from the States has led to an abysmal transfer of funds worth Rs 133crore so far to the NPS. The amount is quite meagre compared to the total corpus that the government had transferred to pension fund managers. As on 31 March 2008, this amount stood at over Rs1,117 crore. Thus, the total amount transferred to the NPS stands at around 10% of the total amount that the Centre had allocated to the Scheme. According to the Report, this Rs113 crore is the transfer amount put together for only two States.

The Report states, “The contributions of State employees are lying in the State public accounts, earning a return equal to the interest rate allowed for the General Provident Fund. The migration to the NPS needs to be completed at the earliest.” The Report has also recommended a grant to assist States build a database for their employees and pensioners.
The Centre’s intentions may be noble, but if it can’t get the States to follow the NPS, how will it convince the general public to go in for what otherwise is a well-conceived scheme? — Amritha Pillay

Important changes in PPF rules

Public Provident Fund Scheme, 1968: (1) Clarification regarding reckoning of the date of deposit (2) Reiteration of instructions on opening of an account for a minor

Circular No. DGBA.CDD. H-7530/15.02.001/2009-10, dated 29-3-2010

1. Reckoning the date of deposit in case of cheque payment:

(a) As you are aware, in terms of Ministry of Finance letter No. F. 3(9)-PD/72 dated September 4, 1972, in the case of Public Provident Fund Scheme, 1968 (PPF) “when a subscriber makes a deposit by local cheque or demand draft, the date of tender of cheque or draft at the Accounting Office is treated as date of deposit, provided the related cheque is honoured on presentation for encashment.” However, in case of all other Small Savings Schemes of the Government of India (GoI), such as, Post Office Savings Schemes (POSS), as also Senior Citizens Savings Scheme, 2004 (SCSS), if the money is deposited in the account by means of a cheque (local or outstation),the date of encashment of the cheque is treated as the date of deposit.

(b) In order to bring uniformity in the reckoning of the date of deposit in the PPF vis-à-vis POSS and SCSS, the GoI, vide their letter F. No.7/7/2008/NS-II dated February 10, 2010, have decided that hereafter in modification of Ministry of Finance letter No.F.3(9)-PD/72 dated September 4, 1972 “when a deposit is made in the PPF account by means of a local cheque or demand draft by the subscriber, the date of realization of the amount will be the date of deposit.”

(kindly ensure that your cheque is cleared by the 5th of the month to earn interest for that month,

also do not wait for 31st March to make PPF deposits)

(c) You may bring this to the notice of your branches undertaking PPF business and ensure that the same is also incorporated in the computerized system. The information should also be duly displayed at the branches for awareness of the customers.

2. Opening of an account for a minor:

(a) In view of complaints being received about non-opening of accounts for minor by some Agency banks, it is reiterated that as per Rule 3 (1) of PPF Scheme, 1968, an individual may, on his own behalf or on behalf of a minor, of whom he is the guardian, subscribe to the Public Provident Fund. Further it is reiterated that as clarified, vide Ministry of Finance letter F.7/34/88/-NS II dated November 17, 1989, either father or mother can open a PPF account on behalf of his/her minor child but not both.

(b) You are advised to reiterate these instructions to your branches operating the PPF Scheme.

FinMin puts Sebi's Ulips order on hold

The government today said the two regulators Sebi and IRDA have agreed to maintain the status quo that existed before market regulator's ban on 14 life insurers from raising funds for unit-linked schemes.
The status quo will be maintained till a court decides who can regulate ULIP schemes, Finance Minister Pranab Mukherjee told reporters here.
ULIP is an insurance product in which a bulk of the premiums is invested in equities and bonds.
"To resolve any ambiguity and to ensure smooth functioning in the market, the regulators have agreed to jointly seek a binding legal mandate from an appropriate court," Mukherjee said.
"Meanwhile, status quo ante is being restored," he told reporters outside the finance ministry.
Mukherjee's comments came after a series of meeting between Finance Ministry officials and IRDA Chairman J Hari Narayan Sebi chief C B Bhave.
Sebi last Friday banned 14 life insurance companies from raising funds through unit-linked insurance policies.
A day later, insurance sector regulator IRDA asked the companies to ignore the Sebi order and do business as usual.
The ball had since gone into the Finance Ministry's court. Bhave and Hari Narayan held separate meetings with Finance Secretary Ashok Chawla on the ongoing tussle between the two regulators.
The life insurance companies against whom Sebi passed the order are SBI Life, ICICI Prudential, Tata AIG, Aegon Religare Life, Aviva Life, Bajaj Allianz, Bharti AXA, Birla Sunlife, HDFC Standard Life, ING Vysya Life, Kotak Mahindra Old Mutual Life, Max New York Life, Metlife India and Reliance Life.

Insurance houses present a united front; defy SEBI ban on ULIPs

The government today said the two regulators Sebi and IRDA have agreed to maintain the status quo that existed before market regulator's ban on 14 life insurers from raising funds for unit-linked schemes.
The status quo will be maintained till a court decides who can regulate ULIP schemes, Finance Minister Pranab Mukherjee told reporters here.
Several of these companies have been flooded by customer enquiries, with anxious policy holders desperate to know whether their policies are safe and operational. Even those that have not been named among the 14 companies are getting regular calls from nervy customers.

Following the insurance sector regulator Insurance Regulatory and Development Authority’s (IRDA) go-ahead to continue selling ULIPs, insurance companies have presented a united front in openly ignoring the SEBI diktat. When Moneylife contacted several companies under the pretext of customer enquiries, we were told that ULIP products would continue to be offered until further communication to the contrary is received from the company management. We were also informed that existing holders of ULIPs would face no difficulties and that they would continue collecting premiums as usual.

These companies include AEGON Religare, Aviva Life, Bajaj Allianz, Bharti AXA Life, Birla Sun Life, HDFC Standard Life, ICICI Prudential, Kotak Mahindra, Reliance Life, SBI Life, Tata AIG Life, Max New York Life. Officials from Metlife India and ING Vysya Life could not be reached.

An official from Bajaj Allianz said, “This ban will not affect our customers—existing or new. You can buy new plans or continue paying premiums on existing policies.”

Another official from Bharti AXA Life said, “We will continue to issue new ULIP policies till the time we get a directive to the contrary from our management. Existing policy holders need not be concerned about their policies.”
A representative from Reliance Life reiterated, “Our customers need not worry. ULIPs are regulated by IRDA and not SEBI. As such, we will continue to offer ULIPs to new customers.”

With IRDA firmly standing by insurance companies, the battle between the two financial regulators has taken an ugly turn. SEBI had on Saturday issued a startling order barring 14 insurers from selling ULIPs without its approval. The very next day, IRDA took the market watchdog head-on by challenging SEBI’s ban and stating in its directive, "Notwithstanding the SEBI order, these insurance companies can continue to do business as usual, including offering, marketing and servicing ULIPS." — Moneylife Digital Team

JM Financial Buys Out Partner SRS In $500M Real Estate JV

Kampani citing conflict of interest with the US partner launching independent PE play in India.

Infinite India Investment Management, an equal joint venture between JM Financial and US-based SRS Investments, managing real estate assets worth $500 million, has been called off. JM has acquired SRS stake in the four-year-old JV, which ceased to exist from April 1 this year.
SRS plans to start its independent private equity operations in India, while limiting its exposure to real estate. JM Financial will continue investing in realty and is expected to raise a new $100-million fund next year.
Infinite has been an active investor in the Indian real estate even though one of its portfolio firms Maytas Properties, promoted by the disgraced B Ramalinga Raju family of Satyam Computer, turned a risky asset.
"We have bought the stake of SRS in Infinite India Investment Management. They have decided that they want to set up a fund that does private equity in India. This would have been a conflict of interest for us since we already have a $225-million private equity fund. The separation was done in a very cooperative manner," Vishal Kampani, Managing Director, JM Financial Group, told VCCircle.
Without disclosing the amount, Kampani said, JM bought SRS' stake at a nominal value "since we were doing all the work on the ground in India". Infinite India Investment Chairman Karthik Sarma, who represented SRS, could not be contacted immediately for comments.
JM Financial will assist SRS in managing its real estate portfolio and work towards unlocking value from co-investments in the sector.
Infinite India was set up as a 50:50 JV between JM Financial and SRS Private Investment Management LLC in late 2006. It was initially managing India-focused real estate assets worth around $380 million, of which JM Financial raised around $170 million. The rest was contributed by SRS, which managed $260 million for real estate investments in India.
In 2008, it roped in third party investors for $150 million investment in Maytas Properties, which took the funds under management to $520-$530 million.
JM currently has an investible surplus of $50 million from its allocation towards the JV. SRS, on its part, may utilize the surplus for the PE play, though this could not be confirmed independently.
Besides Maytas, Infinite had invested in a host of projects across tier-I and tier-II cities, including $50 million infusion into the Kolkata-based Srachi Developers and almost a similar tranche into Heera Group in Thiruvanathapuram. Some of its other investments were into a 32-acre mixed-use development in Mumbai, a 1.8 million IT park in Chennai, a large retail space in Vishakapatnam and a few other entity level investments in real estate hospitality firms in Bangalore and Delhi.
The JV was one of the largest India-focused real estate funds behind HDFC Property Fund and IL&FS Realty Fund, both of which are in excess of $800 million, and Sun Apollo's $630-million operations. "We now believe that India's real estate market is very localised and there is no scope for international expertise there. If you look at most of large India-focused realty funds, they are all managed by local expertise," Kampani added.
This will not be the first time when JV partners in a real estate PE play have parted ways. ICICI Venture had a joint venture for real estate investments with US-based real estate developer and investor Tishman Speyer. In 2008, the JV fell apart with ICICI Venture exiting TSI Venture India Pvt Ltd, which has investments of $700 million.
Meanwhile, Kampani added that Infinite was trying to recover value from its investments in Maytas Properties. "We have won a stay order from the High Court in Andhra Pradesh directing Maytas not to sell assets. The arbitration proceedings have also gone in our favour till now," Kampani said.
Infinite India roped in third party investors to pump in $150 million into the company, which were routed into specfic projects across cities. The largest investor in that consortium was one of JM's realtions in the US, Kampani added. Months later, the promoter family at Satyam Computer, which also managed Maytas, was rocked by a Rs 7,000-crore financial scam.

India's first monthly income plan with Gold!

As an Indian investor, you have found comfort in two places traditionally, one is fixed income and the other is gold. Fixed income investors, whose investment objective over the years has been to grow their capital at a steady rate which can outdo inflation in the long run, have found equities as a necessary ally - however, the accompanied volatility at times may have given you sleepless nights. The question to be asked is whether there exists an asset class which can do the job of protecting portfolio from the impact of inflation, without overly relying on equities. Well, the answer is Gold. The shiny yellow metal has been regarded as an effective hedge against inflation, and is known to preserve the purchasing power over a long period of time. Religare MIP Plus fits the bill in this regard, by combining asset classes like debt, equity and gold (through Gold ETFs) in a portfolio, not only it lends a steady look, but also reduces the volatility of equities to a large extent.

Equity mutual funds record Rs2,016 crore in outflows 

After sailing in positive territory last month, equity mutual funds have again witnessed an outflow in March. Equity schemes recorded Rs2,016 crore of redemption in March compared to Rs1,514 crore net inflow in February while the BSE Sensex gained 7% during the same period. The assets under management (AUM) of equity schemes has increased 3% in March at Rs1,74,054 crore from Rs1,68,672 crore last month while the combined AUM of all schemes declined 20% in March (Rs63,979 crore), from Rs7,66,869crore in February 2010.

Redemptions of all combined schemes jumped 81% at Rs99,35,942 crore in FY09 compared to Rs54,54,650 last year. March witnessed Rs11,27,635 crore redemptions, up 50% from February which saw redemptions of Rs7,52,798 crore. There is a sharp increase of 51% redemption in March 2010 compared to the corresponding period last year.

“Markets are improving so there is some profit booking. Very restrictive NFOs were allowed during this year. There was also a pressure on commission paid to distributors,” said D Mohanty, country head (Retail), UTI Asset Management Company Ltd (UTI).—  Ravi Samalad

 

Back Capital-hungry Manipal may tap Kotak PE fund

Manipal Health Systems, the Bangalore-based healthcare chain, is close to raising around Rs 150 crore from Kotak Private Equity Fund in a structured transaction. The investment, if it comes through, is expected to give an exit to IDFC Private Equity Fund, which had invested Rs 90 crore during late 2006.
Industry sources indicate that Manipal Health Systems is looking at a holding company structure to draw in the investment from Kotak PE fund, which will then funnel the investment to consolidate its hospitals across South India. Manipal Health has been in the market for the past 18 months with a mandate to raise as much as $100 million.

The company was close to sealing deals with two large global PE players in addition to a global strategic player, but due to economic downturn and valuation differences the deal did not materialise," sources close to the deal said.
Manipal Health Systems, with a topline of around Rs 500 crore, offers tertiary, secondary and primary healthcare delivery services from 17 hospitals, nine primary care clinics and 55 community health programmes. The five-decade-old group has over 7,000 beds and 5,000 doctors and treats around 1.5 million out-patients and 400,000 inpatients annually. Manipal is also looking to expand its presence in Mumbai and Delhi markets. Manipal Health Systems and Kotak PE Fund officials could not be reached for comments.
The scenario of healthcare chains consolidating in India has come to fruition in the recent past with Fortis taking giant strides in the market. Flush with funds by exiting Ranbaxy, Fortis after acquiring Wockhardt Hospitals for around Rs 900 crore recently went on to acquire a significant position in Singapore-based Parkway Hospital for around $686 million.
The emergence of Fortis as a pan-India player in this segment is expected to be matched closely by the established Apollo Hospitals Group, which according to industry information is also readying for consolidation.

ELSS Funds emerge major gainers for week ended Apr. 9

ELSS Funds

NAVs of the ELSS funds category gained 1.91% in the week ended Apr.09, 2010.

Among the ELSS funds, SBI Tax Advantage Fund Series 1 gained 3.50%, IDFC Tax Saver (ELSS) Fund added 2.83%, Bharti AXA Tax Advantage Fund - Eco Plan rose 2.78%, Bharti AXA Tax Advantage Fund - Regular climbed 2.74% and L&T Tax Advantage Fund - Series I gained 2.63%.

Equity-Diversified Funds

NAVs of the Equity-Diversified funds category gained 1.73% in the week ended Apr.09, 2010.

Among the Equity-Diversified funds, JM Core 11 Fund - Series 1 gained 5.80%, HSBC Small Cap Fund added 5.34%, SBI Magnum Midcap Fund rose 5.11%, DSP BlackRock Micro Cap Fund - Regular climbed 4.96% and SBI Magnum Sector Funds Umbrella - Emerging Business Fund gained 4.90%.

Index Funds

NAVs of the Index funds category gained 1.31% in the week ended Apr.09, 2010.

Among the Index funds, SBI Magnum Index Fund gained 2.08%, Benchmark S&P CNX 500 Fund added 1.42%, LICMF Index Fund - Sensex Advantage Plan rose 1.36%, Tata Index Fund - Sensex Plan - B climbed 1.34% and UTI Master Index Fund gained 1.34%.

Balanced Funds

NAVs of the Balanced funds category gained 1.08% in the week ended Apr.09, 2010.

Among the Balanced funds, ICICI Prudential Child Care Gift Plan gained 3.94%, JM Balanced Fund added 3.80%, Canara Robeco Balance rose 2.72%, Principal Child Benefits Fund-Career Builder climbed 2.67% and HDFC Children`s Gift Investment Plan gained 2.48%.
Debt Funds

NAVs of the Debt funds category gained 0.13% in the week ended Apr.09, 2010.

Among the Debt funds, DWS Fixed Term Fund - Series 50 - Plan A gained 2.64%, ICICI Prudential S M A R T Fund - Series G - Retail added 2.25%, SBI Magnum NRI Investment Fund - FlexiAsset Plan rose 2.13%, Birla Sun Life Equity Linked FMP - Series A - Retail climbed 1.91% and DWS Fixed Term Fund - Series 43 - Regular gained 1.60%.

Sector Funds

All the sector fund categories gained during the week ended Apr.09, 2010. Among major gainers in the sector fund categories, were Media and Entertainment (2.76%), Auto (2.6%), Infrastructure (2.21%), Financial Services (2.19%), Bank (2.1%), Services (2.03%).