WEEKLY MONEY NOTES-INDIA AND WORLD
Rama Krishna Vadlamudi, BOMBAY
January 10, 2010
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CONTENTS PAGE
1 PM Manmohan Singh is talking up the economy! 1
2 Argentine president sacked its central bank governor! 2
3 Woes of life insurance companies continue 2
4 General insurance companies are reeling under losses 3
5 Mark Mobius is bullish on Emerging Markets’ equities 3
6 IRDA penalizes eight insurers for various violations 3
7 Currency Futures volumes shoot up as rupee appreciates 4
8 SEBI mandates standard lot sizes for derivatives 4
9 The after-effects of global financial meltdown still linger on 5
10 Will they, won’t they? 5
11 GST implementation gets postponed 6
Prime Minister Dr Manmohan Singh is talking up the economy!:
Prime Minister Dr Manmohan Singh seems to be talking up the economy with his pet theme of ‘Nine to ten per cent growth’ while speaking to Indian diaspora in New Delhi on Friday. Interestingly, the PM does not give any timeline for achieving that target growth rate; nor does he give any indications about how he is proposing to convert his noble intentions into a ground reality. To be fair to the economic scholar, one should say he was candid enough to admit that: “I cannot say that we have delivered in full measure on the enormous promise and potential of our country!”
Let us examine another thundering statement from the country’s CEO in another time period and in a different context: “We will soon gain mastery over inflation.” What a contrast it turned out to be with food inflation touching all-time high rate 20 per cent now! Significantly, his statement was more than five-year old when the then WPI inflation was more than eight per cent. Even after five years and three months (his ‘mastery-over-inflation’ speech was made on September 4, 2004), the Government does not seem to have got any clue to arresting the run-away food inflation the masses have been suffering all these years. Even his economic advisor and former RBI Governor, Dr C Rangarajan once boasted that India had slain the inflation monster for good.
Meanwhile, other policymakers, like, the Finance Minister Pranab Mukherjee, Planning Commission deputy chairman, MS Ahluwalia, chairman of the Economic Advisory Council in the Finance Ministy, Kaushik Basu, want us to believe that India is poised for double-digit growth next year, that is, 2010-11. One way it’s good that all the policymakers have been trying hard to push up the growth rate of the economy with their ‘pep talk.’ If we start thinking that the economy is recovering, it increases our confidence about the future. This positive sentiment feeds on itself, like a self-fulfilling prophecy, and may perk up our spirits and the level of economic activity may go up eventually. In fact, in 1937, “Think and Grow Rich,” a book by Napoleon Hill egged on readers to adopt a positive mental attitude and channel the power of the subconscious mind so that real wealth would follow. It seems our economic choreographers are following the footsteps of Napoleon Hill. Let us hope their ‘pep talk’ would really work at the ground level!
Argentine President sacked its central bank governor:
After YV Reddy took over as Governor of Reserve Bank of India in 2003, there was intense speculation in the media about the simmering differences between him and the then Finance Minister, P Chidambaram over RBI’s autonomy. May be, India is not alone in having differences between central bankers and the Government authorities.
Martin Redrado, Governor of Central Bank of Argentina, officially known as BCRA-Banco Central de la Republica Argentina, was dismissed by an executive order from the country’s president Cristina Fernandez after the former refused to use country’s foreign exchange reserves to repay its foreign debts. The Governor was asked by the President to transfer USD 6.5 billion of forex reserves into a government fund. Its forex reserves are to the tune of USD 48 billion according to the latest available figures for December 2009. Argentina is having a mounting debt problem. This year, it needs to repay foreign debt to the tune of USD 13 billion. In December 2001, it defaulted on its USD 80-billion debt obligation leading to economic chaos in the country.
Media reports suggest that the Governor has merely stepped down for the time being and is challenging the decision of the President in a court of law, arguing the President does not have the authority to sack him. There seems to be a long-drawn legal battle ahead.
Woes of life insurance companies continues:
Even after 10 years of existence, the life insurance industry in the private sector is yet to find its feet as far as profits are concerned. They have pumped in huge amount of capital to increase their business. While business growth is good, they seemed to have got it wrong when it comes to profit-making. LIC of India, the country’s biggest life insurer has made a net profit of Rs 957 crore in 2008-09, a rise of 13 per cent over the previous year; while the total life insurance industry recorded a total loss of Rs 4,878 crore against a loss of Rs 3,414 crore in the previous year. In 2008-09, the biggest losers are Reliance Life Insurance, ICICI Pru Life Insurance, Birla Sun Life Insurance, Tata AIG Life Insurance and HDFC Standard Life Insurance with losses of Rs 1,085 crore, Rs 780 cr, Rs 702 cr, Rs 565 cr, and Rs 503 respectively. The only private sector life insurers who made a net profit in 2008-09 are Met Life, Kotak Mahindra, Shriram and Aegon Religare with nominal profits of Rs 15 crore, Rs 14 cr, Rs 8 cr and Rs 4 cr respectively.
As can be seen from above, it will take some more years before these companies break even in their operations. Meanwhile, some of these loss-making life insurance companies, like, Reliance and HDFC Standard, are in a hurry to monetize their businesses by going for public issues. In this regard, the market is awaiting guidelines from IRDA, the insurance regulator in India.
General Insurance companies are reeling under losses:
The profitability of general insurance companies is no different and in fact is much worse than that of life insurance companies. According to IRDA, the total profit of the general insurance companies has plunged by 82 per cent to Rs 398 crore in 2008-09 compared to the previous years. The biggest profit makers are (with net profit in Rs crore for 2008-09 in brackets): United India (476), New India Assurance (224), Bajaj Allianz (95), ICICI Lombard (24) and Cholamandalam (7). Among the top losers are (with net loss in Rs crore for 2008-09 in brackets): National Insurance (149), Future Generali (85), Bharti Axa (58), Oriental Insurance (53) and Reliance (52). The losses are due to the 37-per cent increase in underwriting losses to Rs 5,326 crore in 2008-09 compared to previous year. Moreover, investment income in 2008-09 was hit by the stock market crash in that year.
Mark Mobius is bullish on Emerging Markets’ equities:
Mark Mobius, the fund manager known for his financial wizardry, says Emerging Markets are likely to hit fresh highs in 2010. He says they are finding opportunities in all EMs, especially, China and Brazil. He is favouring Russia, India and Turkey also. Emerging Markets are likely to grow four times faster than the developed economies. Even though the current valuations are not as cheap as they were in December 2008, he finds opportunities for good and solid companies. Valuations are currently in the middle of their historical 10-year range. He is bullish on commodity and consumer stocks. In India, he is seeing opportunities in materials, financials and information technology. However, he cautions there will be corrections along the way in bull markets and we can expect corrections of 15 to 20 per cent. This investment guru is executive chairman, Templeton Asset Management.
IRDA penalized eight insurers for violations:
IRDA, the insurance regulator, penalized several insurers for various violations in 2008-09. General Insurers who were penalized were with the amount of penalty in brackets: Reliance General Insurance (Rs 20 lakh), New India Assurance (Rs 7 lakh), National Insurance Co (Rs 7 lakh), ICICI Lombard General Insurance (Rs 5 lakh), HDFC Ergo General Insurance (Rs 5 lakh), IFFCO-Tokio General Insurance (Rs 5 lakh) and United Indian Insurance (Rs 2 lakh). While in life insurance players, Max New York Life Insurance paid a penalty of Rs 5 lakh for regulatory violations.
Meanwhile, Cholamandalam MS General Insurance and Star Health Allied Insurance fell short of meeting the mandatory solvency ratio of 1.5 in 2008-09, as per IRDA. The former has got a solvency ratio of 1.02 and the latter 1.38. In the life insurance segment, all the 22 players met this criterion.
Currency Futures Volumes shoot up as rupee appreciates:
Currency Futures volumes on the two exchanges where they are actively traded have gone up substantially this month as the rupee started to appreciate against the US dollar. The total turnover of currency futures on NSE and MCX-SX has touched a peak Rs 32,000 crore or USD 7 billion on January 7th. The average daily total turnover on these two bourses this year is Rs 24,940 crore or USD 5.44 billion which is significantly higher than previously. The turnover is boosted by sudden volatility in the rupee against the dollar. The rupee (USD-INR) has appreciated up to 45.60, a 15-month high, on January 7th. The rupee appreciated by about 100 paise in the last one week alone. It started at about 46.60 on the first day of the week and touched a high of 45.60 before closing at 4.80 at the end of this week.
By the way, what are currency futures? Who can trade in them? How to profit from the rupee volatility using currency futures trading in India? If you want to know about all of them, JUST CLICK:
Currency Futures in India and status check
www.scribd.com/doc/21686968
SEBI mandates standard lot size for derivatives:
SEBI has standardized the lot size for derivatives contracts in the Futures and Options segment of the stock market with effect from March 31, 2010. SEBI has further instructed stock exchanges to revise the lot size every six months based on the average of the closing price of the underlying security for last one month. The revised lot sizes are:
Price Band Lot Size Price Band Lot Size
Rs No of shares Rs No of shares
≥1601 125 101 - 200 2,000
801 - 1600 250 51 - 100 4,000
401 – 800 500 25 - 50 8,000
201 - 400 1,000 < 25 A multiple of 1,000
Source: SEBI
Lot size is the number of shares of the underlying security of the particular derivative contract. As per the new table, if the current market price of say, company A’s share, is Rs 150, then the lot size of its derivative contract shall be 2,000 shares of that particular company. And if another company’s price is Rs 500, then the lot size shall be 500 shares of that company. Market men are of the opinion this move would boost volumes.
The after-effects of the global financial meltdown still linger on:
WorldSpace has abruptly closed down its Indian operations, based in Bangalore, sending its 300-odd employees (including 150 employees on contract) in India into a state of utter shock and confusion. These employees are still not sure whether they would get their final settlement dues even as all of them lost their jobs. WorldSpace is a satellite radio service provider with the parent company based in the US. A few weeks back WorldSpace was sold to Liberty Media. Nobody is sure about the fate of its 1.5 lakh subscribers, who paid Rs 2,000 per year for its radio services. The world is still grappling with the after-effects of the global financial meltdown.
Will they, won’t they?
Even as the Prime Minister has been trying his best to talk up the economy, the mandarins in New Delhi have been trying their best to add to the confusion about the timing of the withdrawal of monetary and fiscal incentives bestowed on the economy following the Lehman Brothers collapse in September 2008. While the Finance Secretary, Ashok Chawla, says the time is ripe for exiting the economic stimulus as the GDP had grown by 7.9 per cent during the second quarter of this year, other officials seem to be having a different opinion. The new Chief Economic Advisor in the Ministry of Finance, Kaushik Basu, says the present spiraling food inflation (at around 18 per cent as of now) cannot be tackled with monetary tightening by RBI. He cautions the present food inflation has to be tackled with the help of supply-side mechanism.
The Finance Minister, Pranab Mukherjee, too seems to be veering towards postponing the exit strategy for another three to four months until he is fully sure of the economic recovery across all segments of the economy. Even the deputy chairman of Planning Commission, MS Ahluwalia, is toeing the line of Finance Minister saying that there is no need for haste in withdrawal of stimulus. Meanwhile, the US and Europe seem to be not in favour of implementing an exit strategy for the time being. Economists, like, Paul Krugman, argue that the US may not start raising its rates until the unemployment rate in the US starts coming down and the job recovery takes place. So, these economists are of the opinion that the US may not resort to any exit strategy till the end of 2010. Is there any method in their maverick pronouncements? The million-dollar question seems to be: “will they, won’t they?” – even as the market players keep guessing about the exit strategy of the Governments.
GST implementation is likely to be postponed:
Present indications are that the implementation of the Goods and Services Tax-GST is likely to be delayed by another year. First, it was believed it would get implemented from April 1, 2010 as part of the Government’s efforts to reform indirect taxes in India. The Empowered Committee of State Finance Ministers has been advised by the Finance Minister to bring their comprehensive recommendations to him by the end of January. In all likelihood, GST implementation may not see the light of the day for the time being.
To know more about GST and its implications for the stock market, JUST CLICK:
Goods and Services Tax-GST-First Discussion Paper
www.scribd.com/doc/20582103
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