With interest rates likely to go up in the future, staying with liquid or liquid-plus funds will mean better returns and flexibility. Today, when the Reserve Bank of India raised key rates - repo and reverse repo - by 25 basis points, debt fund investors would have wondered if this was the time to get locked into medium or long-term schemes. The answer, however, is still no.Financial experts feel with inflation still not under control, the apex bank could raise rates in the future. Amandeep Chopra, head, fixed income, UTI AMC, said: "It is advisable to go for liquid and liquid-plus or ultra short-term schemes because more rate rise is likely in the future." Staying short will also mean provide flexibility, in terms of moving money from one kind of scheme to another, if there is a change in the interest rate cycle. Also, short-term debt funds will give better returns because the constant churn that fund managers have to do. According to Value Research, a mutual fund research agency, ultra short and liquid debt funds have returned 6.09 per cent and 6.02 per cent annually. While gilt, medium and long-term debt funds gave 5.63 per cent. This clearly indicates that short-term funds were able to stay ahead from longer-term funds, in terms of returns. However, there is a word of caution. If one were to move their money too much in one year, there would be a tax on short-term capital gains. The capital gains will be added to your income and taxed, according to the income tax slab. Another reason why fund managers are advising against locking-in money in medium or long-term debt schemes is because of the inability to take advantage of any rise in the rates in the future. Also, rise in yields will impact returns of long-term funds adversely because of the inverse relationship with price of bonds . Mahendra Jajoo, executive director and chief investment officer, fixed income at Pramerica Mutual Fund feels by June, when early indications are available for monsoon, a clear trend on long-term rates will emerge. However, if you want to lock-in money in existing rates, look at fixed maturity plans. FMPs are offering 9.9 per cent to 10 per cent for a one-year term. And despite being riskier than other debt schemes because of their exposure to corporate paper, these schemes get double indexation benefits for tenures that are slightly more than one year. Say, if one invests in an FMP in March 2011 which is maturing in say, May 2012, there will inflation indexation benefits for years 2010-11 and 2012-13. This would mean higher post-tax returns for the investor.
The very purpose of VITALINFO is to provide a platform for wider dissemination of updated information related to and happening of events in and around RBI.
Saturday, March 19, 2011
Friday, March 18, 2011
9.5% interest on PF gets nod
New Delhi The finance ministry approved higher interest rate of 9.5 per cent to over 4.7 crore depositors with the Employees Provident Fund Organisation ( EPFO) for 2010- 11. The EPFO had been paying 8.5 % interest on PF deposits since 2005- 06. In September last year, it had recommended an increase in interest rate to 9.5 % for 2010- 11 after discovering Rs 1,731 crore surplus in their books of accounts. " The finance ministry has ratified 9.5 % rate of return on PF deposits for 2010- 11. We have received a notification in this regard," Central Provident Fund Commissioner Samirendra Chatterjee told PTI. Chatterjee further added that " our calculations regarding Rs 1,731 crore surplus in the interest suspense account were found correct by the finance ministry and so they approved this higher rate of return". The finance ministry's approval is subject to the condition that any shortfall on account of payment of 9.5 % rate of return would be met by making adjustments in the interest rate in 2011- 12. Chatterjee, however, said that there would be no need for making any adjustment in the next fiscal as " EPFO calculations are correct regarding the discovery of a surplus of Rs 1,731 crore in the interest suspense account." The finance ministry has also asked the EPFO to update its subscriber accounts within the next six months.
Cabinet approves PFRDA Bill
The Union Cabinet on Thursday gave its nod to the long-awaited Pension Fund Regulatory and Development Authority Bill (PFRDA) that aims to grant statutory status to the pension regulator and open up the sector for foreign direct investment. The Cabinet also cleared the State Bank of India (Subsidiary Banks Laws) Amendment Bill, which proposes to transfer certain powers vested with the Reserve Bank of India, with regard to its subsidiaries, to the central government. “The PFRDA Bill has been approved and is likely to be introduced in the current session,” said a Union minister, after a Cabinet meeting chaired by Prime Minister Manmohan Singh. If the Bills are not introduced in the current session, they may be tabled in a special session to be convened in end of May or in the Monsoon Session (July-August). The Bill seeks to allow foreign direct investment in pension funds, in line with the insurance sector, in which FDI up to 26 per cent is allowed. PFRDA, which was set up as a regulatory body for the pension sector, is yet to get statutory powers, since the Bill pertaining to that effect lapsed in Parliament with the dissolution of the last Lok Sabha in 2009. An interim PFRDA has been functioning since 2003 through an executive order. The PFRDA Bill was first introduced in Parliament in 2005 and referred to the parliamentary standing committee which submitted its report and recommended that FDI in pension should not be at variance with the insurance sector. An amendment to the Insurance Bill, which seeks to raise foreign investment cap in domestic private insurance companies to 49 per cent, is also pending. The State Bank of India (Subsidiary Banks Laws) Amendment Bill seeks to amend the State Bank of Hyderabad Act, 1956 and the State Bank of India (Subsidiary Banks) Act, 1959. The amendment will reflect the transfer of ownership of State Bank from the Reserve Bank to the central government. The Bill seeks to empower the government to fix the authorised capital of SBI subsidiaries and appoint managing directors. It will also fix the terms of office, salaries and allowances of managing directors of the subsidiaries by the government. The Bill had earlier lapsed with the dissolution of the 14th Lok Sabha.
RATE HIKE SEASON JUST GOT LONGER
The message from the country’s central bank is loud and clear: Expect a series of policy rate increases through the next financial year, as inflationary pressures have accentuated, even as risks to growth are emerging. In its mid-quarter monetary policy review today, the Reserve Bank of India (RBI) increased key policy rates by a quarter point – the eighth increase in ayear – warning that rising oil prices will put more pressure on the already high inflation. This was on expected lines. The repo rate – RBI’s short-term lending rate – has gone up from 6.5 per cent to 6.75 per cent with immediate effect. The reverse repo rate – its short-term borrowing rate – has risen from 5.5 per cent to 5.75 per cent. But what worried the markets was the hawkish tone adopted by RBI while raising its wholesale price inflation forecast for the year to 8 per cent, a full percentage point higher than the number in the third quarter review in January. RBI said rising global commodity prices, particularly of oil, were a major contributor to inflationary pressures. Domestic fuel prices, which were yet to fully adjust to the global prices, might put further pressure on inflation, it said. “Based on the current and evolving growth and inflation scenario, RBI is likely to persist with the current antiinflationary stance,” the central bank said. RBI clearly articulated the risks to growth from high inflation. “The continuing uncertainty about energy and commodity prices may vitiate the investment climate, posing a threat to the current growth trajectory,” it said. Financial sector pundits are thus no longer debating whether there will further rate rises. Their discussions centre on how much. “RBI’s stance clearly makes a case for frontloading rate hikes to cool inflation. RBI is likely to squeeze in more rate hikes in the first half of the next financial year.
Reserve Bank must continue with its anti-inflation stance - C RANGARAJAN
C. Rangarajan, chairman of the Economic Advisory Council (EAC) to the Prime Minister (PM), said the Reserve Bank of India (RBI) must persist with its anti-inflation stance. Edited excerpts: Every time we are close to a 9% growth rate in the economy, we have inflation and all signs of overheating. That is a real quandary for policymakers and the government. I don't think it's the over- heating of the economy in the current situation. The in flationary pressures have been mounting primarily be- cause of the failure on the food front. Last year, it was the decline on the foodgrain output and in the current year it has been the extraordinary rise in the prices of vegetables and certain other agricultural products. It's only recently the manufacturing sector has seen a rise in inflation, but that isn't very high either. I personally do not think that it is the high growth that is creating the inflation. It is the supply- side bottlenecks in specific areas, which is resulting in current levels of inflation. So isn't it high time we looked at the larger picture and took more structural steps to improve the situation? Well, last year when we had the imbalance due to the decline in the foodgrain production, the public distribution centre was activated and more foodgrains were pushed into the system. So you see the impact of it in the current year. As you will see in the case of cereals, the in- crease in the current year has been very modest and also in the case of commodities like pulses, the year-on-year in- flation is negative. Therefore, action taken last year has had the impact of bringing down foodgrain prices. But in the current year, we also had problems with respect to vegetables and fruit, where the prices rose very high and there was no method where we could reduce the inflationary pressures arising from this group, because there is no stock available with the government to re- lease in the market. The only thing that could be done is allow import wherever possi- ble. So I feel inflationary action has been taken. In the coming months, we should see inflationary pressures softening. Where do you see inflation settling? For 14 months in a row, we've been above 8%, even though we've had a couple of rate hikes in the interim. How do you see it panning out? I think it will decline in March, because in the four weeks of March, you'll see a further decline in the food prices. Therefore it will have an effect on the overall head- line inflation. We had expected that by March 2011, the headline inflation will come down to 7%, perhaps it will stay a little higher or a little above that level. Should RBI go easy on increasing interest rates beyond this point? I don't think so. The over- all inflation remains at a high level, even after adjustments in foodgrain prices. Inflation even at the end of March will remain above 7%, which is a very high level and, therefore, RBI must persist, as they have indicated in their review, in the anti-inflation stance.
RBI's policy rate hike is too small to quell inflationary expectations
THE Reserve Bank has hiked the policy interest rate by 25 basis points. While this is a move in the right direction, as long as the rate hike is less than the hike in inflationary expectations, the stance of monetary policy is expansionary as real interest rates have not been raised. Since the inflation forecast of the RBI has gone up from 7 per cent to 8 per cent, a move of 100 basis points, this suggests an easier stance of monetary policy. While both fiscal and monetary policies are responsible for the present high inflation situation, the fiscal situation cannot turn out to be better than what it is estimated in the budget. The risk might be on the downside since oil prices may rise and the oil subsidy bill may be much higher than budget estimates.Unless the RBI believes that the fiscal situation will actually play out exactly as estimated, or may even be better, the policy stance will be easy. The other element of the monetary story right now is the tight liquidity situation in the market. Banks are borrowing at the repo window from the RBI on a regular basis. In this situation, a 25 basis point increase in the policy rate is seen as an effective increase unlike when there is an easy liquidity situation. But even though tight liquidity and small 25 basis point hikes have come to characterise RBI policy for many months now, it has not been effective in controlling inflation. Will the 25 basis point hike be enough to bring inflation down? Unlikely. There has been a long and persistent build-up in inflationary expectation and an upward drift in inflation for more than two years. Full capacity utilisation with growing demand coming from high government spending characterise the Indian economy today. While the 25 basis point policy is a "safe" one, since it cannot do much damage, it is not safe if inflation is the biggest risk as it can pull down investment and growth and damage the Indian growth story. The weak transmission of monetary policy and long lags suggest the policy rate should have been hiked by more. The longer the high inflation stays with us, the greater will be the build-up of inflationary expectations and the harder it will be to get rid of them.
BANKS keen on preserving priority sector status for the microfinance sector
THE Reserve Bank of India (RBI) is likely to implement some of the Malegam committee recommendations on microfinance companies from April 1 this year. "The Malegam panel proposals are likely to be implemented from April 1. Only new loans are likely to come under the guidelines," said a banker. Besides, banks are keen on preserving the priority sector status for the microfinance sector, irrespective of the individual conduct of borrowing microfinance institutions. "Bankers' main reservation is nothing should hap pen by which some act or conduct or misconduct of MFIs should result in the priority sector status being withdrawn," an official of the Indian Banks Association said after a meeting between bankers and top RBI officials. Even though the Malegam committee has suggested the continuance of priority sector status for loans to the MFI sector, there are some conditions wherein the status can be cancelled due to the misconduct of borrowing MFI like using coercion, charging higher interest rate, etc. “If the MFIs don’t do certain things vis-a-vis borrowers, don’t penalise me in terms of regulation by taking out sector,” he said. He said that RBI was appreciative of the reservations expressed by the bankers. To p bankers, including Corporation Bank’s CMD Ramnath Pradeep, HDFC Bank’s MD Aditya Puri, Axis Bank CEO Shikha Sharma met RBI deputy governor K C Chakrabarty to voice their concerns regarding Malegam Committee recommendations on MFIs before they are ratified into guidelines on April 1. vis-a-vis borrowers, don't penalise me in terms of regulation by taking out sector," he said. He said that RBI was appreciative of the reservations expressed by the bankers.Top bankers, including Corporation Bank's CMD Ramnath Pradeep, HDFC Bank's MD Aditya Puri, Axis Bank CEO Shikha Sharma met RBI deputy governor K C Chakrabarty to voice their concerns regarding Malegam Committee recommendations on MFIs before they are ratified into guidelines on April 1.
Thursday, March 17, 2011
Banks should raise money from mkts: Chakrabarty
Rather than counting on the government for additional capital, banks need to grow their balance sheets by raising capital from the market, as keeping them adequately capitalised would be a challenge once the Basel II accord comes into force, according to K C Chakrabarty, deputy governor, Reserve Bank of India (RBI). “The era of cheap capital is over. Investors are wary of the volatility of returns. Newer instruments and techniques would be required to attract investors. While the creation of enabling conditions for capital flow to the sector would continue to remain on the top of the reforms agenda, banks would need to grow their balance sheets by raising capital from the markets rather than count on government,” Chakrabarty said. He added that balancing the interests of shareholders and depositors alike would be a challenge for banks. Another key issue where banks might face challenges was meeting the funding requirements of the productive sectors of the economy, estimated to grow by nine per cent annually, Chakrabarty said. “The debate over channeling a larger portion of available credit to the most productive sector or to those where the investment efficiency is lower is yet to be fully resolved. In any case, to make banks allocate increased credit to the productive sectors of the economy is strongly predicted on the bank’s capital strength. To do so, more capital infusion for banks will be required,” he said.
Further rate hike by RBI may hurt growth: Experts
New Delhi: Terming the RBI`s move to raise key policy rates by 25 basis points as in-line with market expectations, analysts said the apex bank should not go for any further rate hikes in the current year in order to keep the India growth story intact. The Reserve Bank of India on Thursday raised its short-term lending (repo) rate and borrowing (reverse repo) rate by 25 basis points each to 6.75 per cent and 5.75 per cent, respectively, for the eighth time since March, 2010 in a bid to rein in inflation. Market observers feel the 25 basis points hike by the apex bank is on expected lines and was discounted by the market. "RBI has acted on expected lines. The problem of inflation is still on top of RBI`s mind, so they have continued tightening monetary policy even at the cost of growth momentum slackening," Motilal Oswal Financial Services Joint Managing Director Raamdeo Agrawal said. Analysts feel the RBI should not opt for another hike in the calendar year as it may hurt the economic growth of the country. "The increase of 25 basis points would be detrimental to our economic growth estimates and if banks opted to pass on all the increase to consumers, the capital formation in the economy will remain subdued. The inflation should come down in the fiscal year 2012, and this rate increase is almost all the increase we need in this calendar year," MAPE Securities Head (Research) Kislay Kanth said. Kanth added the RBI raising the inflation projection to 8 percent for March-end, against 7 per cent estimated earlier is a matter of concern. Echoing Kanth`s opinion, Padmakshi Financial Services Director (Institutional Equities) & Chief Strategist Sailav Kaji said, "We believe RBI is near end of tightening as inflation is expected to moderate with lag". Experts also feel the government needs to come out with more policies to tackle food inflation apart from the measures taken by monetary authorities, in view of the rising global uncertainties and soaring oil prices as the RBI`s continuous rate hikes may impact India`s long-term growth story.
RBI step to hike key rates in 'right' direction: Montek
The Planning Commission on Thursday said the Reserve Bank has taken the "right" step in hiking key policy rates by 25 basis points as inflation is above the comfort level. "I think it is on long expected lines. I don't think markets would be surprised by (RBI key rate hike) given that inflation is not in the comfort level, I think it has done the right thing, " Planning Commission Deputy Chairman Montek Singh Ahluwalia told reporters here. The central bank raised its short term lending and borrowing rates by 25 basis points each in a bid to contain inflation. About RBI increasing its March-end inflation forecast to 8 per cent from 7 per cent, Ahluwalia said, "I don't disagree with the (RBI's revision of inflation) forecast of 8 per cent inflation by March end." He said, "We are hoping that it would go down to 7 per cent level by March end. We have to admit that inflation rate in February is higher than what we wanted it to be." The overall inflation increased marginally in February to 8.31 per cent from 8.23 per cent a month ago. "If the fiscal deficit projections presented in the budget are maintained and (with) gentle tightening of monetary policy, I assume (that) with a normal production year, inflation during 2011-12 will definitely below 7 per cent," he said. Dismissing the contention that RBI's monetary tightening would hurt the economic growth, Ahluwalia said, "longer term economic growth rate is function of many things. "I don't agree with the view that in order to keep the long-term interest rate modest (lenders rates), you should keep the short-term interest rate (key policy rates of RBI) low," he added. Ahluwalia suggested that it does not make sense to keep RBI policy rates at low level and let inflation rise, for ensuring cheaper long-term credit from lenders.
Banks for maintaining priority sector status for MFIs
Banks today asked the Reserve Bank of India (RBI) for preservation of priority sector status for the micro lending sector, irrespective of the individual conduct of borrowing microfinance institutions (MFIs). "Bankers' main reservation is nothing should happen by which some act or conduct or misconduct of MFIs should result in the priority sector status being withdrawn," Indian Banks Association Chief Executive K Ramakrishnan told PTI here. Top bankers, including Corporation Bank CMD Ramnath Pradeep, HDFC Bank MD Aditya Puri, Axis Bank CEO Shikha Sharma and Dhanlaxmi Bank CEO & MD Amitabh Chaturvedi, met RBI Deputy Governor KC Chakrabarty to voice their concerns regarding the recommendations of the Malegam Committee on MFIs, before they are ratified into guidelines on April 1. Ramakrishnan said even though the Malegam Committee has suggested the continuance of priority sector status for loans to the MFI sector, there are some conditions wherein the status can be cancelled due to the misconduct of borrowing MFI like using coercion, charging higher interest rate, etc. "If the MFIs don't do certain things vis-a-vis borrowers, don't penalise me in terms of regulation by taking out sector (from priority sector)," he said. He added the RBI was appreciative of the reservations expressed by the bankers. Another banker said on the condition of anonymity the RBI is keen to implement the Malegam Committee recommendations from April 1 itself. The banker said if the Reserve Bank becomes the single regulator for the MFI sector, "it will be a great positive". All commercial banks are mandated to lend a certain amount to priority sectors, which mainly includes advances to boost the rural economy and encourage smaller enterprises. As the MFIs lend to micro enterprises in rural areas, loans given to them are also qualified as priority sector lending. The Malegam Committee was constituted after certain problems in the MFI sector which came to the fore after suicides by some borrowers of MFIs in the largest market of Andhra Pradesh, allegedly due to coercive tactics used by collection agents. AP has since come out with a legislation to regulate the MFIs, while the RBI constituted the Malegam committee, which has given a slew of recommendations, including the suggestion to allow RBI to regulate the sector, capping maximum lending limit to an individual at Rs 25,000 and interest rates at 24% per annum.
RBI: NBFCs' telecom tower loans can be considered infra loans
Credit for construction of telecom towers provided by non-banking financial companies (NBFCs) can now be categorised as infrastructure loans, said the Reserve Bank of India on Thursday after amending its definition of infrastructure loans. Also, only those credit rating agencies that have been approved by the RBI can rate infrastructure finance companies, the central bank said in a notification placed on its website.
HDFC Bank sees another rate hike in May
With the Reserve Bank of India revising upward its inflation estimate for FY 11 to eight% from the earlier 7%, the rate hiking cycle in FY 12 is now likely to be more extended than initially anticipated and far more front-loaded, a leading economist said. "We expect inflation to print in at 8.1% in March and move close to nine% by August," HDFC Bank's chief economist, Abheek Barua, said in a statement in Mumbai on Thursday. In his reaction to the Reserve Bank hiking its repo and reverse repo rates by 0.25% each in its mid-quarter monetary policy review on Thursday, Barua said that with inflation in February at a high of 8.3% instead of the sub-8% as expected, the apex bank's move was expected. "Indeed, with inflation for the month of February coming in as a rude shock to the market (the reading came in at 8.3% against expectations of 7.8% and on top of an upwardly revised estimate of 9.4% for December) at the start of the week, this is the very least the central bank could have done to assuage concerns on price pressures," he said.
Rate hikes will help curb price rise, says Pranab
New Delhi, March 17 (IANS) Finance Minister Pranab Mukherjee said Thursday the Reserve Bank of India's move to hike key policy rates by 25 basis points would help curb inflationary pressure. 'This (rate hike) is good. I do have a hope that it will have a salutary impact on the inflationary pressure,' Mukherjee told reporters here after the country's central bank raised key policy rates for the eighth time in 15 months to tame stubborn inflation. The central bank hiked the repurchase or repo rate to 6.75 percent from 6.5 percent and reverse repo rate to 5.75 percent from 5.5 percent. The finance minister said the 25 basis points increase in repo and reverse repo rates were in tandem with the government's fiscal policy. In the mid-quarter review of the monetary policy, Reserve Bank of India Governor Duvvuri Subbarao also revised upward the inflation forecast sharply to 8 percent by end-March, from 7 percent forecast in January, and a lower 5.5 percent in November. The projection on growth rate has been retained at 8.5 percent. Revising his earlier projects, Mukherjee said inflation was likely to remain 7.5 percent by March-end. 'By March-end we can say it will be around 7.5 percent.' The finance minister had earlier said inflation would come down to 7 percent by the end of the current fiscal. Inflation rose marginally to 8.31 percent in February from 8.23 percent in the previous month.
Subscribe to:
Posts (Atom)