Time to hold on to cash

With the Sensex tanking over 1,000 points in the past two trading sessions and bond yields rising to over nine per cent due to a fall in the rupee, investors are in a tight spot. Returns on investment, already going through a rough patch, have plummeted.

The question is whether it is time to go back to traditional instruments such as gold and fixed deposits (FDs). The former was at Rs 31,155 per 10g on Monday.

The advice from Ajay Bagga, managing director and head of private wealth management, Deutsche Bank, is simple. “Stay on the sidelines. But wait for the opportunities. Opportunity will come both in equity and debt. Stay liquid. Stay solvent."

The present circumstances do not give much confidence. In the past three months, the Sensex has fallen by 9.75 per cent. Diversified equity funds have fallen 9.7 per cent. 

Debt funds, a traditional investor’s favourite asset class for some time now, have taken a sharp knock. Bond yields have gone past nine per cent, taking a toll on bond funds, especially long-term ones, which plunged 7.1 per cent in three months. Debt income funds have dived 4.25 per cent in three months, shows data from Value Research (see box). Experts advise that one should review their bond funds but not react to the panic in the markets. Says Vishal Kapoor, head of wealth management, Standard Chartered: “This is a mark-to-market loss (on writing down the assets on current values). A reaction to sell or switch is unwarranted.”

Market experts also say there will be opportunities soon. Says Parag Parikh, chairman, Parag Parikh Financial Advisory Services, “Good stocks are available at a 30 per cent discount. So, there are buying opportunities. But don’t put all your eggs in the same basket.” According to him, one could look at investing 25 per cent and invest in three-four tranches.

For debt investors, given the volatility, experts advise to stay invest in very short-term liquid funds or short-term bond funds. Wealth managers are also suggesting that investors stick to high-quality bonds, those largely AAA-rated, and to not look beyond such funds.

In the short term, the traditional FD has also been gaining ground with investors. However, wealth managers say here, too, investors should invest for the short duration, such as two or three months. The trend is already there. “We are seeing more entry into the shorter end of the debt market segment and in fixed maturity plans (FMPs),” adds Bagga. Investors could get an opportunity to invest at higher yields in the longer run.

If the trend continues, the interest rate on FDs is expected to go up. There has been a spate of increase in issuance of FMPs at better yields. Experts say one should look at high-quality short-term FMPs.

As Bagga says: “For a bit of diversification outside the rupee, one should take a look at feeder funds that invest in the US market. It also helps to hedge the currency.” Feeder funds that invest into the US market have risen lately on the back of the rupee’s fall.

Then, there is gold. The yellow metal has held firm, thanks to the festive demand. Besides, the scarcity premium has increased in the domestic market and, of course, the falling rupee. Experts say it could be a very low part of your asset allocation now, purely for the sake of diversification into another asset class. Gold should not be more than five per cent of your portfolio.

This Article is written by CMA Samir Biswal. He can be reached at cmasamirbiswal@gmail.com.

Business Standard 

Read more »

Economic slowdown won’t last long time

Prime Minister Mr. Manmohan Singh on Thursday announced a new scheme of financial assistance for the youth to promote skill development and employment as the ruling UPA prepares for general elections early next year, banking on its flagship rural jobs scheme, direct benefit transfer (DBT), and with a food security law on the cards.

He also said the current economic slowdown will be short-lived, adding that the recent measures to speed up infrastructure projects, increase coal output and ease FDI flows would produce “visible results” soon and “our growth will accelerate, new employment opportunities will be generated”.

The proposed skill development scheme would benefit about 10 lakh young men and women in the next 12 months, Singh said, addressing the nation from the ramparts of the Red Fort on the 67th Independence Day. “We will shortly launch a new scheme under which those who have successfully acquired new skills will be given a grant of about R10, 000,” the minister said.

Singh also said that a high-level committee has been set up to collect accurate information about the socio-economic, educational and health status of the tribal population to design better schemes for them.

India would go to polls early next year, but policymakers are grappling with a series of socio-economic problems on account of reduced economic growth rate, high cost of living, a record current account deficit (CAD) and a sharply weaker rupee against the dollar that is impacting the country's competitiveness as well as inflation.

Wholesale-price based inflation rose 5.79% in July from a year earlier, its fastest pace in five months as the weaker rupee made imported raw materials costlier. The domestic currency has lost more than 10% so far this year.

Singh expressed optimism that the proposed Food Security Bill, already being implemented through an Ordinance, will get passed in Parliament shortly. “This law will benefit 75% of our rural population and half of our urban population. Under the law, about 81 crore Indians would be entitled to receive rice at R3 per kg, wheat at R2 per kg and coarse grains at R1 a kg. This is the largest effort of its kind in the whole world,” he said. Computerisation of public distribution system is a priority.

India's economy expanded at 5% in 2012-13, its slowest pace in a decade. “We are trying our best to remedy the situation,” he said. “I believe that this phase of slow growth in India will not last long. In the last nine years, our economy has grown at an annual average rate of 7.9%. This pace of development is the highest in any decade so far,” he said.

UPA is pinning hopes on rural welfare for its fortunes in the next elections. Singh said that the average annual rate of agricultural growth in the 11th Plan was 3.6%, which is more than both the 9th and 10th Plan levels.

“We now see clear indications of enhanced economic prosperity in our rural areas. In the period 2004 to 2011, rural per-capita consumption has increased four times.

This article is written by CMA Samir Biswal. He can be reached at cmasamirbiswal@gmail.com

Get Sudycafe's Updates by SMS in your mobile by Following below two Steps: 

1. Download our SmartPhone Application & 

2. Send a SMS, Type: JOIN CASTUDYCAFE & send to 9219592195

Subscribe to Studycafe by Email

Subscribe to Studycafe by Email

Read more »

What is the rate of economic growth that India can sustain, why is the rupee losing value and what should the level of interest rates be????

The national commotion over the new poverty data released by the government last month has elements of the bizarre, with television anchors, Twitter gurus and political leaders weighing in on what would be an adequate poverty line for India. The debate on macroeconomic policy is less ridiculous in comparison, though it too is often unconnected with any firm analytically basis.

Three questions should be salient right now. First: What is the rate of economic growth that India can currently sustain without sparking off high inflation? Second: Why is the rupee losing value against the dollar? Third: What is the correct level of interest rates given the current economic situation? The answers could help us get a bit more clarity on what the policy response should be.

The rate of economic growth that India can sustain

 It provides clues on whether the government should try to stimulate the economy at this juncture to get it back on track. There are clear indications of a drop in what economists call the potential growth rate. One rough indication is the puzzling persistence of high consumer inflation as well as a high current account deficit despite the sharp slowdown, a sign of excess demand. A more rigorous way to estimate the potential growth rate is by either using statistical techniques to smoother time series data on growth or using production functions. The recent empirical evidence clearly points to a large drop in the growth potential of the Indian economy, perhaps to as low as 6%, or about 2.5 percentage points below what it was in 2008.

The slide in the growth potential is strongly linked to the investment crisis. That suggests that policy should focus on getting investment back on track rather than once again stimulating demand with a larger fiscal deficit.

Rupee losing

The large trade deficit is perhaps an indication that the Indian economy has lost export competitiveness, which also means it, is unable to earn enough dollars to pay for its imports. A cheaper rupee is one way to correct the problem.

There are two reasons underlying the fall in the rupee—high inflation and falling productivity growth. The decline in the international purchasing power of the rupee can be considered to be a mirror image of the decline in its domestic purchasing power because of rising prices. The decline in rupee in the past decade tracks the excess inflation in India compared to its trading partners. It is also interesting to note that the rise of the rupee during the early years of this century was at a time when India had low inflation as well as rising productivity growth. That situation has now reversed.

What actually matters is not the nominal value of the rupee that grabs headlines but its inflation-adjusted real value, which can be calculated in several ways. But what is important to note here is that the real value of the rupee can correct in two ways: a drop in the nominal value or a drastic fall in inflation. The latter has not happened which is why the nominal value of the Indian currency is correcting.

Level of interest rates

Much ink has been split on the issue of whether the Reserve Bank of India should cut rates from their current levels. The question cannot be adequately answered till the underlying problem of what the level of interest rates should be in the first place is sorted out.

The most elegant solution to the problem is to be found in the Taylor Rule, named after the Stanford economist John B. Taylor. It uses measures of the output gap and the inflation gap to calculate the required interest rates at any point of time. The output gap measures the difference between actual and potential economic growth. The inflation gap measures the difference between the actual rate of inflation and the level targeted by the central bank. An earlier installment of Cafe Economics had cited three recent studies that had used the Taylor Rule to show that Indian policy rates in recent years have been lower than needed. Indian monetary policy has been too loose.

The entire issue of interest rate policy could then be framed in a different way. An increase in policy rates should be seen as normalization after years of loose monetary policy or a further rate cut could be seen as additional monetary loosening.

To be sure, none of these techniques offer unambiguous answers. Nothing is written in stone. Hence the significant difference of opinion among serious economists about each of these three questions. But what is important is that the ongoing debate on macroeconomic policy needs to take on board the empirical evidence as well as the underlying analytically base.

This Article is written by CMA Samir Biswal. He can be reached at cmasamirbiswal@gmail.com

Business-Standard 

Subscribe to Studycafe by Email

Read more »

Summary of economic survery

Survey Pegs GDP Growth At 6.9% in 2011-12 Outlook Brighter for Next Fiscals
Indian economy is estimated to grow by 6.9% in 2011-12 mainly due to weakening industrial growth. This indicates a slowdown compared not just to the previous two years, when the economy grew by 8.4%, but also from 2003 to 2011, except 2008-9 economic downturn, when the growth rate was 6.7 percent. The Economic Survey 2011-12, presented by the Finance Minister, Sh Pranab Mukherjee in the Lok Sabha, however predicts 7.6% GDP growth in 2012-13 and 8.6% in 2013-14. With agriculture and services continuing to perform well, the slowdown can be attributed almost entirely to weakening industrial growth. The services sector continues to be a star performer as its share in GDP has climbed from 58% in 2010-11 to 59% in 2011-12 with a growth rate of 9.4%. Similarly, agriculture and allied sectors are estimated to achieve a growth rate of 2.5% in 2011-12 with foodgrains production likely to cross 250.42 million tonnes owing to increase in the production of rice in some States. The industrial sector has performed poorly, retreating to a 27% share of the GDP. Overall growth during April-December 2011 reached 3.6% compared to 8.3% in the corresponding period of the previous year.


The Survey points out that inflation as measured by the wholesale price index (WPI) was high during most of the current fiscal year, though by year end there has been a clear slowdown in price rise. Food inflation, in particular, has come down significantly, with most of the remaining WPI inflation being driven by non-food manufacturing products.
Monetary policy was tightened by the Reserve Bank of India (RBI) to control inflation and curb inflationary expectations. The growth rate of investment in the economy is estimated to have registered a significant decline during the current year. The year witnessed a sharp increase in interest rates that resulted in higher costs of borrowings; and other rising costs affecting profitability and, thereby, internal accruals that could be used to finance investment.


But despite the low growth figure of 6.9%, India remains one of the fastest growing economies of the world as all major countries including the fast growing emerging economies are seeing a significant slowdown. The global economic environment which was tenuous at best throughout the year, turned sharply adverse in September, 2011, owing to the turmoil in the euro-zone countries and questions about others, reflected in
sharp ratings downgrades of sovereign debt in most major advanced countries. While a large part of the reason for the slowing of the Indian economy can be attributed to global factors, domestic factors also played role. Among these are the tightening of monetary policy owing to high and persistent headline inflation and slowing investment and industrial activity. However, for the Indian economy, the outlook for growth and price stability at this juncture looks more promising. There are signs from some high frequency indicators that the weakness in economic activity has bottomed out and a gradual
upswing is imminent. The Economic Survey expects the growth rate of real GDP to pick up to 7.6% in 2012-13 and faster beyond that. The main reason for a gradual recovery is the decline in overall investment rate. Gross capital formation during the third quarter of 2011-12 as a ratio of GDP was at 30%, down from 32% one year ago. As fiscal consolidation gets back to track, savings and capital formation should begin to rise; moreover, with the easing of inflationary pressures in the months to come, there could be a reduction in policy rates by RBI, which should encourage investment activity and have
a positive impact on growth. Preliminary calculations suggest that the growth rate of GDP in 2013-14 will be 8.6%. These projections are based on assumptions regarding factors like normal monsoons, reasonably stable international prices, particularly oil prices, and global growth somewhere between where it now stands and 0.5% higher .The Global economy remains quite fragile and concerted efforts will be needed through G-20
and other forums to restore stability and renewed growth, including addressing the sovereign debt crisis, financial regulation, growth and job creation efforts and energy security. The Economic Survey suggests that the progressive deregulation of interest rates on savings accounts will help raise financial savings and improve transmission of monetary policy. Other key areas include the deepening of domestic financial markets, especially
corporate bond market and attracting longer-term inflows from abroad. Efforts at attracting dedicated infrastructure funds have begun. India’s foreign trade performance will remain a key driver of growth. During the first half of 2011-12, India’s export growth was a high 40.5%, but has been decelerating since. Imports have growth rapidly, by 30.4% during 2011-12 (April-December). Similarly, country’s Balance of Payments has widened to $ 32.8 billion in the first half of 2011-12, compared to $29.6 billion during the corresponding period of 2010-11. The foreign exchange reserves increased from US $ 279 billion at end March 2010 to US $ 305 billion at end March 2011. Reserves varied from an all-time peak of US$ 322.2 billion at end August, 2011 and a low of US $ 292.8 billion at end-January, 2012.


The Survey recognizes that sustainable development and climate change are becoming central areas of global concern and India too is equally concerned and engaged constructively in global negotiations. Climate change challenges ahead are large and India is doing more than its fair share in reducing its energy-intensity of growth. India is now much more closely integrated with the world economy as its share of trade to GDP of goods and services has tripled between 1990-2010. At the same time, the extent of financial integration, measured by flows of capital as a share of GDP, has also increased dramatically and the role of India in the world economy has commensurately expanded, along with the other major members of emerging markets.
DSM-RM-SNC-DT
(Release ID :80972)
To Downlaod This Article Click here
This Article has been Authored By CA Sumit Vasudev. He Can be Reached at: sumitvasudev1987@gmail.com

Read more »