Market Outlook-VRK100-18072011

Market Outlook

Rama Krishna Vadlamudi, HYDERABAD July 18, 2011

www.scribd.com/vrk100

MY BLOG: http://www.ramakrishnavadlamudi.blogspot.com/


Driven by negative sentiment about Infosys’ first quarter results and weak industrial growth numbers, the stock markets were volatile last week with the Sensex shedding close to 1.5 per cent and ended at 18,562 for the week. The Nifty closed at 5,582. The industrial growth, represented by the Index of Industrial Production or IIP, has dipped to 5.6 per cent in May 2011 due to a sluggish growth in manufacturing and capital goods sectors. The 5.6 per cent growth is much lower compared to 8.5 per cent growth recorded in May last year. The investment cycle in India is experiencing a slowdown due to a variety of factors.

First Quarter results

For the April-June 2011 quarter, Infosys Limited has shown a revenue growth of 3.2 per cent and net profit growth of minus 5.3 per cent compared to January-March 2011 quarter. Even though the results matched the guidance given by the company, the market was clearly disappointed with the results and the stock was down 4 per cent the day the results were announced. The disappointment stemmed from the fact the company did not revise its estimates for the full year 2011-12. In contrast, TCS, India’s leading IT company, has posted good results with the net profit for the first quarter soaring by 27 per cent compared to the same quarter last year. The first quarter revenues shot up by 31 per cent. Unlike Infosys, TCS does not give any forecast of its revenues or profits. Among other companies, Bajaj Auto has posted good results for the first quarter with net profit rising by 21 per cent year-on-year. Sales turnover was up 23 per cent for the quarter.

Robust tax collections

Even as the industrial production is showing signs of weakness, the indirect tax collections have gone up by 30 per cent during first quarter of this fiscal. Between April-June 2011, the indirect tax (customs duty, central excise, and service tax) collections were at Rs 95,800 crore compare to Rs 73,600 crore last year. With such strong collections, the Government is confident of meeting this year’s tax targets which augurs well for the fiscal situation. However, the tax collections will be adversely impacted by the Government’s latest decision to reduce taxes on crude oil and petroleum products. Another negative could be the large increase in tax refunds this year.

Gold’s dream run continues

The rally in international gold prices continues unabated. Gold rose to $ 1,595 per ounce on Thursday before closing at $ 1,583 at the weekend. Silver rose to $ 39.4 per ounce before closing at $ 38.2. Gold prices are mostly driven by investment demand rather than jewellery. The sovereign debt crisis in Greece, Portugal and other countries is contributing to the gold’s investment demand. The London Metal Exchange (LME) has doubled delivery size for top warehouses with a view to easing backlogs in Detroit and moving aluminium faster. It is interesting to note that many LME-approved warehouses in Detroit are owned by Metro International, a Goldman Sachs group company.

Money managers for EPFO

The Employee Provident Fund Organisation (EPFO) has appointed State Bank of India, ICICI Securities Primary Dealership, Reliance Capital and HSBC Asset Management Company as fund managers to manage its Rs 3 lakh crore corpus for the next three years. SBI will manage 35 per cent of the corpus, ICICI Securities PD 25 per cent, and the other two will manage 20 per cent each.

India is at 62nd place…

According to the 2011 edition of the Global Innovation Index, India is ranked 62nd in innovation. For the year 2010, India’s rank was 56th and for 2009, it was 41st indicating that India has been losing on innovation to other competitors.

For 2011, Switzerland is at the top followed by Sweden, Singapore, Hong Kong and Finland. The important parameters for computing the innovation index are: institutions; human capital & research; infrastructure; market sophistication; and business sophistication.

Global cues

In the next few weeks, the US congress will decide on raising the US debt level. The present debt limit is $ 14.3 trillion. There are some differences over raising the debt level between the Republicans and the President. If they fail to sink their differences, the country may plunge into an economic crisis. Meanwhile, Moody’s Investor Services has warned that it would review the US rating, currently at Aaa since 1917, if the lawmakers do not raise the debt limit. Standard & Poor also gave a similar warning by putting the US on the negative watch list.

The outlook

During the fourth week of this month, the Reserve Bank of India will be reviewing its interest rate policy. It is expected that RBI will raise the policy rates by another 25 basis points. With rising interest rates, auto sales have slowed down. The real estate sector is also listless. More quarterly results are expected next week. As such, the volatility in stock markets will continue for the time being.

Top Central Bankers

Managing Director, International Monetary Fund Christine Lagarde

President, World Bank Robert B Zoellick

Governor, Bank of England Sir Mervyn King

Chairman, US Federal Reserve Ben Shalom Bernanke

President, European Central Bank Jean-Claude Trichet

Governor, Bank of Japan Masaaki Shirakawa

Governor, Reserve Bank of India Duvvuri Subbarao

Disclaimer: The author’s views are personal. The author has a vested interest in the stock markets. Before taking investment/trading decisions, consult your personal certified financial planner/adviser.

Market Outlook-VRK100-11072011

Market Outlook

Rama Krishna Vadlamudi, HYDERABAD July 11, 2011

All my articles on: www.scribd.com/vrk100

MY BLOG: www.ramakrishnavadlamudi.blogspot.com

To read this article on reader-friendly PDF version, just click:

www.scribd.com/doc/59759489

When you thought the markets were poised for a breakdown, just the opposite happened. During the middle of June 2011, the sentiment on Indian equities was very weak and most of the market people expected the stock indices to go lower. But, in a matter of one week, the sentiment turned positive suddenly, following a couple of events. When I wrote the ‘Market Outlook’ almost a month ago, I suggested that market would climb down from 18,000 Sensex level to 17,000 levels. Against my expectation, the Sensex rebounded and closed at 18,858 last week.

During the first week of this month, equities staged a rebound led by inflows from Foreign Institutional Investors (FIIs) following the Government’s decision to hike prices of heavily-subsidized diesel, kerosene and LPG. Added to the positive sentiment were: the sharp decline in international crude oil prices; and the decision by the International Monetary Fund (IMF) and the European Central Bank (ECB) to give an aid of USD 170 billion (120 billion euro) to Greece to help it out of the sovereign debt crisis.

What investors ignored

Investors, rather traders, seemed to have ignored a variety of factors. The south-west monsoon seems to be weak with the India Meteorological Department (IMD) suggesting that rainfall so far is deficient in several met sub-divisions of the country. The IMD estimates that rainfall, during this kharif season, may be five per cent below the long-term average. Inflation is at elevated levels though food inflation seems to be on the bend. Food inflation is down to 7.6 per cent due to a high base effect of last year. The policy drift in India continues with the government not being able to go ahead with policy reforms.

Commodities

Commodities prices have come off their peaks in the last one month. After touching a low of $ 90 per barrel, the Nymex crude oil rebounded to 98-level before ending the week at $ 96 per barrel. The upheaval in Libya, Syria and other Middle East countries and the supply-demand gap are likely to drive crude oil prices to higher levels in the following months. Gold prices rose to $ 1,530 per ounce while silver ended the week at $ 36 per ounce. In Mumbai, gold was quoting at around Rs 22,000 per 10 gm and silver at Rs 54,200 per kg. World cotton and wheat prices have fallen 20 per cent off their recent peaks.

Global cues

The US unemployment rate rose unexpectedly in June 2011 from 9.1 per cent to 9.2 per cent. The US jobs data softened the commodities prices. The European Central Bank raised its benchmark interest rate from 1.25 per cent to 1.5 per cent for the second time this year. China raised its benchmark interest rates for the third time this year from 6.31 per cent to 6.56 per cent. Europe continues to be troubled with its sovereign debt crisis prompting Moody’s to cut Portugal’s credit rating by four notches to ‘junk’ status.

Amidst all the gloomy news, the Nikkei – Japanese benchmark stock index, crossed 10,000 last week. Interestingly, the Nikkei was at 10,000-level when tsunami hit Japan on March 11, 2011. It is expected that Japanese companies are recovering well from post-tsunami supply chain disruptions.

Foreign Flows

Foreign Institutional Investors (FIIs) have brought in USD 1.3 billion or Rs 5,700 crore in this month alone to the Indian stock markets. The total inflows from FIIs are at USD 2.7 billion or Rs 11,700 crore for this calendar year, as per SEBI data. The Indian stock prices are heavily influenced by FII flows.

As per Reserve Bank of India (RBI) data, foreign direct investment (FDI) in India has fallen by 62 per cent to $ 7.1 billion in 2010-11 from $ 18.8 billion in 2009-10. The steep fall is attributed to a variety of reasons, like, weak investment climate in India following the issues surrounding corruption which has dented country’s image among foreign investors, slow government decision making in business deals such as Vedanta Resources acquisition of Cairn India, and policy issues in government’s new exploration licensing policy (NELP).

India’s Exports and Imports

India’s exports have been growing rapidly in the last six months. Data from the commerce ministry shows that merchandise exports in June 2011 grew strongly at 46 per cent to $ 29 billion led by engineering, oil, gems & jewellery, and cotton yarn; while imports rose to $ 42 billion led by crude oil, precious metals, gems and machinery.

Current account deficit (CAD) for 2010-11 stood at $ 44.3 billion representing 2.6 per cent of India’s gross domestic product (GDP). This is much higher than the $ 38.4 billion deficit, 2.8 per cent of GDP, recorded in 2009-10.

Hauling over the coals

The draft mining bill proposed by the government spooked the stock price of Coal India. The bill proposed that Coal India should share 26 per cent of its net profit with the people affected by the project. The proposal will adversely affect the profits of Coal India in future. As a result, the stock price of Coal India nosedived by eight per cent on July 9th and closed at Rs 362 per share. The draft bill is likely to negatively impact others firms, like, NMDC and Sesa Goa, though the impact on these iron ore miners may be lesser compared to Coal India. A peculiar feature of Indian stock market, of late, has been that whenever the Government eyes a particular sector, the stocks in that particular sector are falling heavily. Markets, in general, do not like government intervention or control/regulation. Previously, the telecom sector was beaten down in a similar fashion.

Banking results

Banks were the first to announce their first quarter (April to June 2011) results heralding the start of results season, which opened on a positive note. HDFC, the country’s biggest housing company, clocked a 22 per cent rise (quarter on quarter) in net profit to Rs 1,176 crore boosted by a healthy loan growth of 22 per cent. HDFC says the demand for housing loans is strong despite rise in interest rates. Mid-sized private sector bank, IndusInd Bank has shown a good 52 per cent rise in net profit spurred by healthy growth in non-interest income and reduced interest costs.

In other developments, State Bank of India, India’s biggest lender, has raised its base rate and benchmark prime lending rate (BPLR) by 25 basis points (0.25 per cent) each to 9.5 per cent and 14.25 per cent respectively. SBI raised deposit rates also. Several banks, including ICICI Bank, IOB and Corporation Bank, have increased their lending rates in the last one month following a series of rate hikes by Reserve Bank of India.

Banking sector seems to be bogged down with large spike in bad loans prompting the finance minister, Pranab Mukherjee to direct the public sector banks to exercise due diligence in sanctioning of new loans and taking necessary steps for recovery in bad loans. It is no wonder that the stock market finds the stocks of public sector banks unattractive compared to private sector banks. Media reports suggest that SBI is planning to raise overseas debt of $ 5 billion as its biggest stakeholder, Government of India, seems to have no interest in investing in SBI through rights issue. The government is facing funds crunch as fiscal deficit’s target for the current financial year appears to be a difficult achievement.

Reserve Bank of India has imposed a penalty of Rs 25 lakh on Citibank for violating Know Your Customer (KYC) norms. Earlier this year, the foreign bank’s relationship manager reportedly duped several corporate customers. Due to the fraud, the bank’s customers had lost hundreds of crores of rupees.

Insurance

The regulator of insurance sector, Insurance Regulatory and Development Authority (IRDA) has imposed a penalty of Rs 70 lakh on SBI Life Insurance Company for violation of guidelines on group insurance policies.

Direct Cash Transfer

The Central Government is proposing to transfer subsidies, like, fertilizers, kerosene, cooking gas, and food grains worth thousands of crores, to the needy consumers directly. As per a task force, headed by Nandan Nilekani, the government will directly transfer cash to the consumers with the help of Aadhar-linked bank account. Aadhar is a unique identification number being given by the Unique Identification Authority of India (UIDAI), a government body. The UIDAI has already issued one crore Aadhar numbers in the last nine months.

What lies ahead?

The continuing uncertainties in Europe over sovereign debt will keep the prices of commodities under check. Other factors that are negative for commodities are the unexpected rise in unemployment rate in the US and rising interest rates in China and India, two of the top importers of raw materials. Even the ECB is going to raise its interest rates further in future. However, due to fundamental factors and the political unrest in the Middle East, crude oil is likely to go up.

The important stock indices around the world have rallied in the last one or two weeks. Last week, the Sensex closed at 18,858 and the Nifty at 5,661. Last week’s closing levels for world indices are: Dow Jones – 12,657; S&P 500 – 1,344; Nasdaq – 2,860; FTSE 100 – 5,991; Dax – 7,403; Hang Seng – 22,726; and Nikkei – 10,138.

In the short term, Indian stocks are looking to be in an uptrend led by strong FII inflows. The quarterly results also may give some positive surprises, especially from private sector banks, pharma, metals and consumption-oriented sectors. However, the long term trend for Indian stocks is hazy due to concerns on problems being faced by the central government, weak south-west monsoon, inflationary concerns and the possible decline in GDP going forward. Overall, these are interesting times for Indian stock markets.

Disclaimer: The author’s views are personal. The author has a vested interest in the stock markets. Before taking investment/trading decisions, consult your personal certified financial planner/adviser.

RBI Monetary Policy - Mid-Quarter Review of June 2011-VRK100-17062011

RBI Monetary Policy

Mid-Quarter Review of June 2011

Rama Krishna Vadlamudi, HYDERABAD June 17, 2011

As expected, the Reserve Bank of India has raised its benchmark Repo rate (under its Liquidity Adjustment Facility or LAF) by 25 basis points to 7.50 per cent when it announced the mid-quarter monetary policy on June 16, 2011. The new rate is with immediate effect. The Reverse Repo rate under LAF and the interest rate under Marginal Standing Facility are linked to Repo rate. As such, both the Reverse Repo rate and Marginal Standing Facility rate stand increased to 6.50 per cent (one per cent below Repo rate) and 8.50 per cent (one per cent above Repo rate) respectively with immediate effect.

Since the beginning of year 2010, RBI has been increasing the interest rates continuously. The latest Repo rate hike is tenth increase since March 2010 when RBI increased Repo rate from 4.75 per cent to 5.00 per cent – the cumulative increase in Repo rate amounts to 275 basis points (or 2.75 per cent) in the last 15 months.

Rationale

What is the rationale behind RBI’s latest increase in rates?

 Inflation rate of 9.1 per cent (provisional figure) remains at highly uncomfortable levels due mainly to high commodity prices

 Non-food manufactured goods prices have gone up in May 2011 in addition to higher inflation of food articles

 Manufacturers are passing on the increase in wage cost and service cost to consumers as is evident in the inflation indices

 Private consumption is at higher levels even though there is some deceleration in some sectors, like, automobiles

Impact

The present rate hike from RBI is on the expected lines. The stock market as well as the bond market has weakened considerably well before the announcement of the RBI’s rate hike. In its Annual Policy announced on May 3rd this year, RBI raised the Repo rate by 50 basis points in one go. After the Annual Policy announcement, commercial banks were quick to increase their lending rates suggesting strong monetary policy transmission, which indicates the ability of the RBI to pass on its policy initiatives to the broader economy.

On June 16, 2011, the benchmark Sensex closed at 17,986 down 0.81 per cent over the previous day’s close and the Nifty was down at 5,397. The downtrend is likely to continue till the next policy announcement by RBI. One can expect Sensex to drift down another 10 per cent from the current 18,000-level.

The bond market too had been reacting negatively in the last six weeks or so to the expected increase in RBI rate hikes. The benchmark 7.80 per cent 10-year Government of India security maturing in 2021 was showing signs of weakness till the policy announcement yesterday. But, after the rate hike announcement mid-day, the bond prices have gone up and the benchmark paper’s yield declined to 8.30 per cent from 8.38 per cent the previous day (bond prices move in opposite direction to bond yields). The future for Government bond prices looks weak now.

Commercial banks have been enjoying good net interest margins. As such, they may absorb some of the present rate hike themselves while some portion of the burden will be passed on to borrowers. Banks may increase their deposit rates also depending on the credit offtake. Overall, borrowers can expect rate increases in home loans, car loans, coporate loans, etc. This in turn will adversely affect domestic consumption.

Outlook

It is not clear whether the RBI’s actions in the last 15 to 18 months have been able to contain inflationary expectations even as GDP growth rate has moderated to 7.8 per cent in the January-March 2011 quarter from 9.4 per cent in January-March 2010 quarter. There is visible slowdown in manufacturing as indicated in the Industrial Index of Production (IIP). In the month of April 2011, IIP is at a sober level of 6.3 per cent. However, the apprehensions regarding the effectiveness of monetary policy in containing growth-induced inflation remain unanswered at this point of time.

Diesel price may be increased by the Government as the fiscal deficit may go out of control this year due to higher cost of imported crude oil. The subsidy burden of diesel, LPG and kerosene is too heavy for the Government. The liquidity situation seems to be comfortable now. Credit growth is around 21 per cent year-on-year above the RBI’s indicative projection of 19 per cent. The monsoon is most likely to be normal this year providing some hope on the food inflation front.

With stock markets languishing in sideways to downward trend, it remains to be seen whether the Government will be able to go ahead with its disinvestment programme. If it fails to raise additional money through disinvestment, its hold on the fiscal situation will deteriorate leading to higher fiscal deficit. Higher fiscal deficit may translate into higher interest rates in future. If the Government increases diesel prices, it may further accentuate inflationary expectations in the economy.

The financial markets have been expecting another rate hike of a minimum of 50 – 75 basis points before the end of this fiscal year. However, what needs to be emphasized is that RBI will be keenly watching the important data, like, inflation, GDP growth, tax collections, disinvestment of public sector companies, oil prices, global cues, and others, before making further moves on its fight against inflation monster.

In the last 15 months, RBI has been increasing interest rates as per market expectations as inflationary pressures have been building up in the economy. But the same cannot be said for the future RBI’s moves on interest rates. Next time, we need to expect the unexpected from RBI. Even though many experts and analysts have been expecting 50 to 75 basis points increase, we need to keep our fingers crossed and keep a close eye on data.

Repo rate: The overnight rate at which banks borrow money from RBI by pledging Government securities with RBI

Reverse Repo rate: The overnight rate given by RBI to banks when the latter keep their surplus funds with RBI (one per cent below Repo rate)

Marginal Standing Facility (MSF): Banks can borrow overnight from the RBI’s MSF up to one per cent of their respective net demand and time liabilities or NDTL. The rate of interest on amounts accessed from this facility will be 100 basis points (one per cent) above the repo rate.

LAF – RBI’s Liquidity Adjustment Facility

RBI – Reserve Bank of India,

LPG – Liquefied Petroleum Gas

GDP – Gross Domestic Product or national income

IIP – Index of Industrial Production

Disclaimer: The views of the author are personal.

The author writes copiously on financial markets – equities, bonds, currencies, taxes, Indian economy, etc. You can read these articles on:

www.scribd.com/vrk100

or

www.ramakrishnavadlamudi.blogspot.com





- - -

Market Outlook-VRK100-14062011

Market Outlook

In a state of flux

Rama Krishna Vadlamudi, HYDERABAD June 14, 2011


With Sensex hovering around 18,250 and Nifty well below 5,500 at the end of June 13, 2011, the Indian stock market looks to be in a lackluster phase. Investors seem to be worried about inflationary concerns, GDP growth deceleration, lack of governance, policy paralysis and political controversies surrounding anti-corruption stirs. However, investors are looking to a good monsoon, some solution to the anti-corruption agitations and some policy reforms. It remains to be seen whether investors’ expectations will be met. More rate hikes are expected from Reserve Bank of India in this fiscal year.

Inflation

Food inflation proves to be a nemesis for the Government with the latest figures showing a jump in food inflation to 9.01 per cent for the week ended May 28, 2011 compared to previous week’s 8.55 per cent. There is a big mismatch between supply of and demand for food items. Adding to the supply constraints is the rise in demand for food fuelled by rising income levels for the middle income groups in the urban as well as rural areas. Government seems to be having no right solution to control the food inflation in the immediate future. The Government seems to have passed on the buck to the RBI.

RBI rate hikes

Reserve Bank of India has been increasing policy interest rates for the past one year in order to contain inflationary expectations in the economy. It is expected to increase the benchmark repo rate by another 25 basis points or 0.25 per cent when it announces the mid-quarter review of its monetary policy on June 16th. The rate hikes are expected to continue for another two to three quarters. The markets have been bracing themselves for a further rate hike of 50-75 basis points in policy rates in this fiscal year. The banks may absorb some of the rate hikes themselves by compromising on their net interest margins and may pass on only a portion of the rate hikes to borrowers. The banks’ margins at present are at elevated levels giving them some cushion to absorb the rate hikes.

India’s GDP Growth

In the last four quarters, India’s GDP growth has come down substantially. After touching a high growth of 9.40 per cent (year-on-year) in the January-March 2010 quarter, the growth rate has come down progressively to 7.80 per cent in the January-March 2011 quarter. But the consumption theme seems to be in good shape despite the visible signs of a slowdown in the economy.

FII inflows

After pumping in $ 17.5 billion in 2009 and $ 29.4 billion in Indian equity markets, foreign institutional investors (FIIs) have slowed down their investments in Indian stock market during this calendar year. At $ 85 million of net inflows in this calendar year, their investments have been almost negligible. However, in the first two weeks of this month, they have put in $ 467 million or Rs 2,103 crore in the Indian equity market. The FII appetite for Indian stocks will depend on several global factors, including inflationary concerns in India. The US Federal Reserve (Fed) has been buying bonds worth $ 600 billion. The buying programme, known as Quantitative Easing 2 or QE 2, is coming to an end on June 30th. It is not yet clear whether the Fed will continue or stop its easy money policy after June 30th. If the Fed continues with another round of bond buying or QE 3, this easy money from the US will chase commodities and may push up commodities’ prices which may be negative for India in general.

Commodities

In the last one month, most of the commodities have come off their inflated levels. Silver has lost 30 per cent from record levels of close to $ 50 (per ounce) levels to $ 35.5 now. Crude oil on Nymex has come down to $ 97 (per barrel) levels with Brent crude hovering around $ 119. But gold prices remain steady at around $ 1,530 per ounce. Gold may continue its dream run for some more time as Europe is going deeper and deeper into a bigger mess following the sovereign crisis affecting Greece, Portugal, Ireland and Spain adversely. The latest news from Europe is that Standard and Poor’s has cut Greece’s rating making it the least creditworthy nation. The ratings agency cut Greece’s rating three notches from B to CCC and said the country was likely to default on its debts at least once by 2013. With such anxieties, most of the commodities may come down going forward but gold may remain at elevated levels because of its status as a ‘safe haven’ asset in times of economic woes.

India imports 80 per cent of its crude oil demand making it vulnerable to oil prices. High oil prices increase inflationary expectations in India which in turn adversely impacts India’s growth rate. High oil bill is likely to increase fiscal deficit as the Government is unable to pass on fully the rise in international oil prices to consumers. Diesel, LPG and Kerosene are heavily subsidized in India.

With problems persisting in the Middle East, low inventories and lack of spare capacity, crude oil prices may not come down significantly in the near future unless something dramatic happens in OPEC (the body of oil exporters).

The US dollar index (against a basket of six major currencies, like, Euro, Yen and Pound Sterling) is around 74.5. The US dollar has been weakening against these major currencies in the last six months. However, in the last one week, it has shown some resilience and the index has moved up from lows of 72.5 to the present 74.5. The dollar’s overall weakness is pushing up commodities’ prices to some extent.

Global factors

The Dow Jones is at around 11,950 well below 12,000 after reaching a high of 12,800 recently. The S & P 500 is hovering around 1,270 after reaching a high of 1,360. The US indices have been in a bullish range in the last six to eight months. However, the Asian indices have been mostly in bearish territory. The Shanghai Composite (China) is at a low level of 2,700. The Hang Seng (Hong Kong) index is at 22,500 and Nikkei 225 is at a weak level of 9,400. The FTSE 100 and DAX indices are much stronger at 5,770 and 7,080 respectively.

China is going through its own problems. The non performing assets of Chinese banks are expected to go up significantly in the next one year. The central bank there has been increasing interest rates to tackle inflation. China wants its growth rates to slow down a bit to avoid any hard landing. There are concerns of overinvestment and overcapacity in China’s manufacturing sector. Following the global financial crisis of 2007/2008, China had pumped in huge amounts into its infrastructure and manufacturing sector.

Summary

The Indian Government and the RBI have to tackle inflation both from the fiscal and monetary angles. Some economists have suggested that allowing Indian rupee to appreciate against the US dollar may help in containing inflation in India. The data from RBI indicates that it has not been intervening in the foreign exchange market. The Government and RBI have to take both immediate and long-term measures to tackle inflation head on. However, the Government seems to be in some sort of a gridlock embroiling itself in controversies about how to tackle corruption monster. The general impression is that the Government may not be able to push the economic reforms forward in such a situation. The disinvestment programme seems to be in a limbo. The markets have noticed this policy drift and have been expecting further slide in stock indices. Investors need to be cautious at this point of time. As such, it is not a bad idea to hold some cash and wait for a correction and start buying Indian stocks at Sensex levels of between 16,500 and 17,500.

Nomination Facility and Its Importance-VRK100-18042011

Nomination Facility and Its Importance

Rama Krishna Vadlamudi, HYDERABAD April 18, 2011

For a reader-friendly version of this article, just click: www.scribd.com/doc/53226624

Nomination is a facility provided to depositors of commercial banks in India. If a depositor opts for nomination facility for his/her deposit, it will be very easy for legal heirs to claim the deposit amount in the event of the unfortunate death of the depositor. Wherever nomination is there, the process of settling the claim in favour of the nominee (who was authorised by the deceased depositor to receive the deposit from the bank) is very simple and painless.

However, if the depositor dies without any nomination for the deposit, the legal heirs will have to either bring a succession certificate from a court or claim the money from the bank through a lengthy, expensive and cumbersome process commonly known as Settlement under Indemnity-cum-Affidavit basis.

In view of the above, all depositors have to insist on utilising the Nomination Facility in their own interest. To use the nomination facility, depositors have to fill in a form (which will be provided by the bank) and submit the same to the bank. Bank’s will register the name of the nominee in their books and give an acknowledgement to the depositor for having registered the nomination as per the depositor’s requirement.

All commercial banks in India are governed by provisions of the Banking Regulation Act of 1949 and The Banking Companies (Nomination) Rules, 1985. The Nomination Rules of 1985 were framed by the Government of India in consultation with the Reserve Bank of India.

Reserve Bank of India has been, time and again, sensitizing commercial banks in India about the importance of Nomination Facility and has been advising banks to give wide publicity to Nomination Facility and provide guidance to the depositors – new as well as existing.

Enclosed are a set of guidelines on Nomination Facility in respect of bank deposit accounts. The guidelines are in a simple question and answer format and are easily understandable by everyone.

FREQUENTLY ASKED QUESTIONS ON

NOMINATION FACILITY

NOMINATION RULES FOR BANK DEPOSIT ACCOUNTS:

1. What is a nomination?

o Nomination is a facility extended to depositors to nominate an individual who can claim the deposit proceeds in the event of the unfortunate death of the depositor.

2. Whether nomination facility can be extended to deposits held by a bank by several types of depositors?

o No. As per the nomination rules, the nomination facility is extended only to deposits held by individual depositors and not to deposits held by others – like, companies, associations, partnerships, government agencies, societies, HUF, etc.

o However, nomination facility can be extended to all types of deposits, like, savings bank account, current account, fixed deposit accounts (by whatever name they are called), flexible rate deposit accounts, recurring deposits, etc, held by individual depositors in their individual capacity.

3. Whether nomination facility can be extended to deposits held by a bank in the name of a sole proprietary concern?

o Yes. Nomination facility can be extended to deposits held by a sole proprietary concern.

4. Who can nominate?

o The nomination can be made by the depositor. In case of joint accounts, all the depositors have to sign in the prescribed nomination form to make a nomination.

o A nomination may be made only in respect of a deposit account which is held in the individual capacity of the depositor, and not in any representative capacity such as the holder of an office like director of a company, secretary of an association, partner of a firm, or karta of an HUF.

5. Whether a nomination can be made in respect of a deposit held by a minor?

o Yes. In case of a deposit made in the name of a minor, the nomination shall be made by a person lawfully entitled to act on behalf of the minor.

6. Who can be a nominee?

o A nomination shall be made in favour of only one individual. As per nomination rules, any nomination other than in favour of a single individual will not be valid. Nomination can not be made in favour of an association, trust, society or any other organisation or any office bearer thereof in his/her official capacity.

o Hence, banks accept only one nomination in respect of one account.

7. Whether a minor can be a nominee?

o Yes. Where the nominee is a minor, the depositor or, as the case may be, all the depositors together, may while making the nomination, appoint another individual, not being a minor, to receive the amount of the deposit on behalf of the nominee, in the event of the death of the depositor or, as the case may be, all the depositors, during the minority of the nominee.

8. Whether a nomination can be cancelled?

o Yes. The cancellation of a nomination is to be made by the depositor or all the depositors as the case may be, in the prescribed form.

9. Whether a variation of nomination is permitted?

o Yes. A variation of the nomination (cancellation of existing nomination and making of fresh nomination) can be made by the depositor or all the depositors as the case may be, in the prescribed form.

10. Whether the bank has to give an acknowledgement to the depositor(s) after making a nomination?

o Yes. An acknowledgement has to be given, in writing, to the depositor(s) concerned irrespective of whether the same is demanded by the depositor(s). Acknowledgement has to be given in case of cancellation and variation also. This is mandatory as per RBI.

11. Is it necessary that all nominations and cancellation/variation of nominations are required to be witnessed?

o No. As per a clarification given by Reserve Bank of India, vide their notification dated 30.03.2011, the signatures of the depositor(s) in forms DA1, DA2 and DA3 need not be attested by any witness. However, as per the nomination rules, banks are required to take signatures of two witnesses in case of illiterate depositor(s) who give their thumb impression(s) in the prescribed nomination forms.

12. Whether a nomination is compulsory?

o Nomination should be a rule (rather than an exception) and the bank shall make necessary efforts to cover all accounts, existing as well as new, with the facility of nomination exception being the ones where the depositor himself/herself would prefer not to nominate, a separate letter shall invariably be given by the depositor to the bank stating that he/she is not willing to nominate any person to the deposit account.

o As per RBI guidelines, banks have to give wide publicity to the nomination facility and persuade depositors to avail the nomination facility. RBI has advised banks to insist that the person opening a deposit account makes a nomination. In case the person opening an account declines to fill in nomination, banks should explain the advantages of nomination facility. If the person opening the account still does not want to nominate, banks should ask him/her to give a specific letter to the effect. In case the person declines to give such a letter, banks should record the fact on the account opening form and proceed with opening of the account if otherwise found eligible. Under no circumstances, banks should refuse to open an account solely on the ground that the person opening the account refused to nominate.

13. What are the procedure to be followed by the nominee while claiming the amount from the bank after the death of the depositor?

o The nominee authorised by the deceased depositor has to approach the bank where the money was deposited.

o The nominee has to make a claim to the monies and submit a claim form (which will be provided by the bank) to the bank.

o The nominee has to submit a death certificate issued by the competent authority to the bank.

o The nominee has to identify himself/herself to the bank and may have to satisfy the bank as per the existing Know-your-customer (KYC) guidelines and provide a proof of his/her identify to the bank.

o After submitting death certificate, claim from and proof of identify as per KYC norms, the banks usually settle the claim in favour of the nominee in a matter of one or two weeks.

14. What are the benefits of Nomination facility to depositors/claimants:

o The depositor will be sure that the monies/articles left by him/her will go to the person(s) as desired by him/her provided the depositor has submitted a valid nomination to the Bank before his/her death.

o In the event of unfortunate death of the depositor, the nominee can get the monies deposited with the Bank very easily and in a quick manner where nomination is available. Settlement of claims on the basis of Indemnity/Affidavit or Succession Certificate is very expensive, lengthy and burdensome – both to the Bank as well to the claimants.

15. What are the benefits of Nomination facility to banks?

o It is easy to settle a claim in favour of nominee in the event of unfortunate death of the depositor/locker hirer.

o Bank wins the trust and confidence of the customers when customers are apprised of the benefits of nomination. The increased confidence will bring repeat business to the Bank. Bank’s image also goes up with the public as nomination facility is in public interest.

o Good compliance with the RBI regulations enhances the credibility of the Bank in the eyes of the regulators.

16. Whether banks can enter the name of the nominee in pass books/deposit receipts?

o Yes. The name of the nominee may be entered by banks in Savings Bank pass books or the fixed deposit receipts, etc, only with the specific written mandate of the depositor, that is, in case the depositor is agreeable to the same.

o Reserve Bank of India has advised banks to record on the face of the pass books or fixed deposit receipts, the position regarding the availment of nomination facility with the legend “NOMINATION REGISTERED.”

17. What are the nomination forms available in case of deposit accounts?

o DA 1 – appointment of nomination

o DA 2 – cancellation of nomination

o DA 3 – variation of nomination

o These three are standard formats for bank deposit accounts.

18. What are the statutes that provide nomination facility to bank depositors?

o The Banking Regulation Act, 1949; and

o The Banking Companies (Nomination) Rules, 1985 – framed by the Government of India.

o Commercial banks in India are guided by the above two statutes in respect of nomination facility to bank deposits, safe deposit lockers and articles in safe custody.

References:

 RBI master circular

 Other RBI circulars

 The Banking Companies (Nomination) Rules, 1985

Disclaimer: The views of the author are personal.

Stock Market View-Stock Picks-VRK100-08032011

Dear Reader,




Where are the Indian stock markets headed? This question has been exercising the minds of investors in the last two months.



Let me make a brief analysis of things in this newsletter.



At the outset, I’d like to point out what I’ve been sharing with you for long:



1. Any equity portfolio must be seen from one’s own overall asset allocation



2. Any analysis of an equity portfolio has to be done on a comprehensive basis from a portfolio management perspective.



3. Here, one has to take into account one’s specific needs, surplus in hand and risk appetite.



4. Any portfolio has to be diversified across all sectors. But, too many stocks will definitely spoil the broth. An individual shall not hold more than 15 to 25 stocks in one’s equity portfolio.



5. A staggered approach –whether in selling or buying – will help us in wealth creation



These are the golden principles in equity investments.



The structure of the Indian Economy has undergone a radical shift in the last two decades. We’re part of the globalised world now. Any outside shocks are reaching our shores in no time impacting our financial markets. The global risks are too complex. As an individual, we’re not in a position to analyse them properly.



Stock markets between 2003 and 2007 and again from 2009 to 2010 have given very good return to many investors. There are three things that have brought these tremendous benefits:



1. Domestic consumption

2. Infrastructure development

3. Outsourcing (IT, Pharma, ITES, etc.)



Now, we’re facing some real risks from one-way rise in crude oil prices, runaway inflation and lower estimates of corporate profits.



Broadly, there are three things that influence markets:



1. Liquidity (money flow)

2. Sentiment

3. Corporate profits

Now, liquidity in the form of FII inflow and money from LIC (which had invested heavily in stock markets with the help of ULIP plans – now the music has stopped for LIC and other insurance players as far as ULIP collections are concerned) is tight. RBI too has been tightening its monetary policy. Stock indices of Developed Markets have been on the rise, while emerging markets are showing decline in the last six months. On this front, we can’t foresee any dramatic shift for the time being. But, the tide may turn positive at any point of time.



On the sentiment front, Indian markets are facing a lot of headwinds in the form of European sovereign debt crisis, MENA (Middle East-North Africa) crisis in the form of mass revolutions including Libyan Crisis, weakening dollar, rising commodities and food prices, political uncertainty in India, lack of governance in the UPA Government, corruption issues, scandals, etc. Sentiment is a wild animal; nobody knows when it will get bubbled up again.



Estimates from several brokerages indicate that corporate performance may not be as robust in future as it has been till the December 2010 quarter. This is one of the reasons for the steep fall in Sensex since first week of January 2011. With inflation showing no signs of abating and with no respite from surging crude oil prices, corporate profits may show some slackening in the next one year.



Overall, we’re going to face bumpy rides in the next one to two years as far as Sensex, Nifty, and BSE-200 indices are concerned.



Many are scaring us with doomsday scenarios due to surging oil prices. The markets are rife with reports that oil will touch USD 200 a barrel very soon. And they say we’re living on cheap oil. The experts opine that oil below USD 100 is cheap from an historic perspective. India is dependent on the world for 80% of its oil consumption. As such, India is more vulnerable to oil price shocks.



However, I’ve a few simple questions to ask. If crude oil price goes to USD 200 a barrel,



what will Government of India (GOI) do?



will GOI increase prices of diesel, petrol, kerosene and LPG?



Let us assume GOI increases fuel prices. With increased fuel prices,



will consumers stop buying cars?



will car owners keep their cars in garage and travel in public transport?



if we start using creaking public transport, can it sustain the extra burden?



will public start taking to their feet? (This is a remote possibility since our towns, cities and villages don’t have any pavements or sidewalks!)

will consumers bitten by high fuel prices stop eating ice cream? (If they stop eating ice cream, it’s bad for dentists in particular and doctors in general)



will they cut down their talk on mobiles or will they talk more due to high stress?



will people stop indulging in big-fat weddings?



will they stop watching TV serials/sports/cartoons?



will any radical shift take place toward green fuels and green technologies?



It’ll be very interesting to watch the tectonic changes in consumer behaviour and government regulation if fuel prices go up substantially in India. Unless we are able to predict the future consumer behaviour, all our scary analysis will not help us in anyway as far as picking stocks is concerned. I think no expert can predict the future consumer behaviour under the above circumstances. Our past models will not be useful to predict the future trends.



One thing is sure, steep and sudden rise in oil prices will have a deleterious effect on the profits of several Indian companies due to rise in input costs.



If we are not able to predict the future, what shall one do in stock markets? To buy, hold or do nothing except watching the volatile prices like Himalayan monks?



At last, everything boils down to one’s risk appetite, cash surplus in hand, asset allocation and specific needs.



However, in general, I’m optimistic about the long-term prospects of Indian companies and ‘India Story’ even though several hiccups will be on the way. If we are serious about wealth creation, we have to invest certain percentage of our assets in equities depending on our risk appetite and cash surplus.



You can consider the following stocks for long-term investment. In the short-term, I’m not in a position to tell the prospects in the stock market.



(Name of the company followed by current market price in Indian rupees as on March 8, 2011)



1. Bharti Airtel – 335



Good fundamentals – good biz model – to watch its African operations closely



2. HCL Tech – 464



Good biz model – has shown good traction in earnings of late – forex losses are behind



3. Axis Bank – 1,316



Good growth though valuations are rich – vulnerable to interest rate risks



4. ICICI Bk – 1,022



Its problems are behind – came out of the shocks of 2008 well – bad debts were cleaned up



5. SAIL – 151



Good opportunities domestically – cash rich company – reasonable valuations – to watch international trends closely



6. Cairn India – 351

Oil price rise will be cushioned with this stock – to watch the Government of India’s response to Cairn-Vedanta deal closely



7. Federal Bank – 377



8. Corporation Bank – 565

Strong fundamentals



9. Bank of Baroda – 910

Good earnings of late with clean balance sheet



10. Exide Inds – 138



11. Thermax – 609

(beaten down recently due to slowdown in infrastructure)



12. Biocon – 322

(beaten down recently due to failure of the cholesterol drug)



13. Gujarat Gas – 410

(Strong earnings growth - you can pick it up if it comes down to 370 or 380)



14. NMDC – 270

(If you are already having MOIL and Coal India in your portfolio, I’m not sure whether you’d want to pick it up)



15. Maharashtra Seamless – 335

It may test your patience with its boring stock performance– strong balance sheet



16. Bluestar – 330

(beaten down recently due to weakness in earnings)

17. Praj Industries – 67.35

May benefit from oil rise – it was darling of the markets till 2007



18. HDIL – 160

Though real estate stocks are shunned like plague, this company is having a low debt-equity ratio of 0.71 only (March 2010) among realty stocks. Weak cash flows. Worst may be over for the company. To watch interest rates closely for volatility in stock price. Make sure you don’t have any other realty stocks in your portfolio.



19. Fortis Healthcare – 152

The ‘misery’ tax imposed in the Budget will be passed on to the patients – there are rumours that this impost may be withdrawn



20. Financial Technologies – 785

(promoter of MCX Limited-the commodity and currency exchange)



21. Allcargo Global Logistics – 148

Logistics in India has great potential – but stock price may be volatile



22. Unichem Laboratories Limited – 175





You can pick up these stocks at different price and time levels over a period of three to six months. If you visualise any possibility of scary scenarios that analysts are predicting, then you should consider exiting stocks depending on your view of the stock market.



Watch the following high-risk and volatile stocks though they are having some corporate governance issues:



Sesa Goa – 277 (beaten down after excise duty hiked steeply in recent Budget)

Suzlon Energy – 47.95 (buried in debt – rumour is that promoter may sell stake)

Reliance Power – 122 (It is fashionable to treat Anil Ambani as a pariah these days)





Happy investing,





Rama Krishna Vadlamudi

Hyderabad

March 8, 2011

Disclaimer: I’ve a vested interest in the stock market going up. It’s safe to assume that I own some of the stocks mentioned above. The views are personal. Please consult your certified financial advisor before taking any investment decision.

All Season Funds For Long-term Profits-VRK100-15022011

Follow @vrk100

ALL-SEASON FUNDS FOR LONG-TERM PROFITS

Basing a strategy on general maxims, such as “Sell when you double your money,” “Sell after two years,” or “Cut your losses by selling when the price falls ten percent,” is absolute folly. It’s simply impossible to find a generic formula that sensibly applies to all the different kinds of stocks. Thus wrote America’s start fund manager of the 1980s Peter Lynch in his Best-Selling Book “One up on Wall Street.”

Many mutual fund (MF) investors book profits too frequently/shortly or sell their MF units completely if the stock market starts falling. Or they hold too many mutual fund schemes in their portfolio. They mistake mutual funds for stocks and try the ‘diversification’ mantra with too many mutual fund schemes. If you want to build wealth, such investing mantras do not help you. To start with, selecting two or three well-diversified equity mutual funds is a good idea. Two or three well-diversified mutual funds are good enough to make long-term profits for small investors. The following is a list of seven well-diversified equity mutual funds with sustainable performance that are worth considering for investors in India who are interested in wealth creation over the long-term of five to 10 years. You can select two or three funds from this list and start investing at regular intervals without bothering about the general trend in the markets.

SEVEN ALL-SEASON MUTUAL FUND SCHEMES FOR LONG-TERM PROFITS:

1. Birla Sun Life Frontline Equity Plan A – Growth Option

2. DSP BlackRock Top 100 Equity – Growth Option

3. Fidelity Equity – Growth Option

4. Franklin India Bluechip – Growth Option

5. HDFC Top 200 – Growth Option

6. Quantum Long-Term Equity – Growth Option

7. UTI Dividend Yield – Growth Option

The details of the above seven funds are discussed below:

1. BIRLA SUN LIFE FRONTLINE EQUITY PLAN A – GROWTH OPTION

--- Its NAV is Rs 84.91 as on 14.02.2011

--- This low-risk fund’s long-term performance is good

--- It has got the ability to protect downturns in stock markets

--- The share of large-cap stocks is more than 80 per cent in the portfolio

--- It is managed by Mahesh Patil, a fund manager with good long-term record

2. DSP BLACKROCK TOP 100 EQUITY – GROWTH OPTION

--- Its NAV is Rs 97.01 as on 14.02.2011

--- This low-risk fund is suitable for conservative investors

--- Large-cap stocks constitute more than 95 per cent in the portfolio

--- It is managed by Apoorva Shah, an experienced fund manager

3. FIDELITY EQUITY – GROWTH OPTION

--- Its NAV is Rs 34.12 as on 14.02.2011

--- This fund aims for consistent returns with little downside risk

--- Large-cap stocks make up of around 80 per cent of the portfolio

--- It is managed by Sandeep Kothari, who follows bottom-up stock picking

4. FRANKLIN INDIA BLUECHIP – GROWTH OPTION

--- Its NAV is Rs 208.22 as on 14.02.2011

--- Launched in 1993, its long-term record is superior and consistent

--- Large-cap stocks make up of around 90 per cent of the portfolio

--- During stock market crashes, this fund provides protection to investors

--- It is managed by Anand Radhakrishnan, who focuses on long-term value

5. HDFC TOP 200 – GROWTH OPTION

--- Its NAV is Rs 203.14 as on 14.02.2011

--- Launched in 1996, its long-term record is matchless and impeccable

--- Large-cap stocks make up of around 85 per cent of the portfolio

--- During stock market crashes, this fund provides protection to investors

--- Prashant Jain of high repute has been managing this fund for nine years

6. QUANTUM LONG-TERM EQUITY – GROWTH OPTION

--- Its NAV is Rs 21.69 as on 14.02.2011

--- Large-cap stocks make up of around 70 per cent of the portfolio

--- Even though the fund house is small, the fund has built up a great record

--- Atul Kumar has been managing this fund for more than four years

--- The fund manager held 22 per cent in cash as on 31.01.11 and this cash call was proved correct as markets crashed in the past five weeks.

7. UTI DIVIDEND YIELD – GROWTH OPTION

--- Its NAV is Rs 31.09 as on 14.02.2011

--- Launched in 2005, it has provided consistent returns since 2007

--- Large-cap stocks make up of around 70 per cent of the portfolio

--- The fund has done well both in bear markets and bull markets

--- Swati Kulkarni with 18 years of experience is managing this fund

Notes: The above funds do not charge any Entry Load. However, they charge exit load of about one per cent if units are sold by investors before 180 days or 364 days from the date of investing; except Quantum Long-Term Equity fund which charges a heavy exit load of 4 per cent if redeemed before 180 days.

Other Mutual Fund schemes worth considering are: HDFC Equity, DSP BlackRock Equity, Templeton India Equity Income, UTI Opportunities, Canara Robeco Equity Diversified, IDFC Premier Equity Plan A, ICICI Prudential Dynamic, Tata Pure Equity, etc.

FIVE GOLDEN PRINCIPLES OF MF INVESTMENT

1. Well-diversified equity mutual funds with sustainable performance are the best for long-term investment of five to ten years...or even more. However, past performance may not be repeated in future.

2. Never borrow to invest in equity mutual funds. Invest only your surplus money which you may not need in the next three to five years.

3. Invest as per your asset allocation and risk profile.

4. Please remember that equity investments are vulnerable to market movements. At any point of time you may lose 20 per cent of your money in less than three months due to high volatility in Indian stock markets.

5. While selecting mutual funds, check whether they are protecting your money when the stock markets are in a downward trend.

NEVER INVEST IN EQUITY MUTUAL FUNDS…

--- if you are the type of person to overreact to scary newspaper/media headlines, like, “Blood on the Street,” “Stock markets in bear grip,” or “Investors have lost billions of rupees in three trading sessions.”

--- if you are the type of person to enter the market at peaks, like Sensex level of 20000 and sell at 10000 levels.

--- if you are the type of person to get carried away by the so-called market experts who say Sensex will reach 25,000 in one year or Sensex will lose 40 per cent in one year.

--- if you are like the greedy-gullible-sacrificial lambs (or High Networth Investors with low common sense) who had given blank cheques to a foreign bank based in Gurgaon and lost crores of rupees in December 2010.

                                           “FINALLY, HAPPY INVESTING!”

- - -

For a reader-friendly PDF versions: www.scribd.com/vrk100

Abbreviations:

MF – Mutual Fund
NAV – Nest Asset Value

Data Source: ValueResearchOnline
All the data are as on 31.01.2011 except NAV which is as on 14.02.2011.

About the Author: Passionate about financial markets. Watches Equity, Bond and Currency markets from a macro point of view. Loves writing articles on financial markets. So far, wrote more than 100 articles running into about 650 pages of original content, which have attracted more than 140,000 readers on SCRIBD. www.scribd.com/vrk100

Disclaimer: The views of the author are personal. Please consult your certified financial advisor before making any equity investments. The author is an equity investor and he has a vested interest in the stock market movements. It is safe to assume that he has investments in a few of the above mutual fund schemes.

European Central Bank-Key Policy Rates-VRK100-06012011

EUROPEAN CENTRAL BANK

KEY POLICY RATES

Rama Krishna Vadlamudi    HYDERABAD

January 06, 2011


(To read this document in reader-friendly PDF version, just click: http://www.scribd.com/doc/20134025)



Estonia has become 17th member of the Eurozone, adopting euro as its currency from January 1, 2011. This article discusses the key policy interest rates of European Central Bank (ECB). It also throws light on the intricacies of Eurozone, Eurosystem and such other terms connected with the European Union and its economy. The Eurozone is now facing some sort of a crisis after the global financial crisis of 2008 with several EU nations, like, Greece, Ireland and Spain facing economic chaos due to enormous public debt and bankruptcy.

European Central Bank (ECB):

The European Central Bank was established on June 1, 1998. The ECB sets the interest rates and is responsible for the single monetary policy of the euro area. It is headquartered in Frankfurt, Germany. It is part of the eurosystem.

Eurosystem:

Eurosystem is the central banking system of the euro area. The ECB and the national central banks of the European Union (EU) member states that have adopted the ‘euro’ as their common currency are part of the eurosystem.


Euro area (or Eurozone):

Those EU member states that have adopted the ‘euro’ as their single currency are part of the euro area. A single monetary policy for the euro area is conducted by the ECB under the responsibility of the Governing Council of the ECB. It is informally known as Eurozone, while the official name is euro area. The ‘euro’ was launched on 1 January 1999 on foreign exchange markets, and euro currencies replaced national currencies on 1 January 2002.

There are now 17 European countries which are members of the eurozone, with a common currency, the euro, and a single interest rate set by the European Central Bank (ECB). Estonia is the seventeenth country to adopt ‘euro’ as its common currency with effect from January 1, 2011. The list of these 17 EU member countries that have adopted ‘euro’ as their single currency are given in the annexure on page four. They make up of around three-fourths of EU’s GDP. The following graphic shows 15 countries that adopted ‘euro’ before 2009.

Note: The micro-states of Monaco, San Marino and Vatican City also use the euro, on the basis of a formal arrangement with the European Union. Andorra, Montenegro and Kosovo likewise use the euro, but without a formal arrangement.

Key interest rates of the ECB: There are three important rates set by the ECB. The most important of them is the refinancing rate of the Main Refinancing Operations (MRO).

1. Refinancing Rate:

This refinancing rate is considered as the key policy rate of the ECB. Main Refinancing Operation is a regular open market operation conducted by the national central banks (NCBs). Under the MRO, the NCBs provide the majority of the liquidity to the banking system in the euro area. MRO is conducted on a weekly basis and normally has a maturity of one week. The latest refinancing rate of 1.00%, effective from May 13, 2009, is the lowest in the ECB’s 10-year history.

MAIN REFINANCING OPERATIONS (MRO)

w.e.f.      Refinancing Rate (key ECB policy rate)   Action



13-May-09    1.00% fixed     down by 25 bp

8-Apr-09       1.25% fixed     down by 25 bp

11-Mar-09    1.50% fixed     down by 50 bp

21-Jan-09      2.00% fixed     down by 50 bp

10-Dec-08     2.50% fixed     down by 75 bp

12-Nov-08    3.25% fixed     down by 50 bp

15-Oct-08    3.75% fixed     down by 50 bp

9-Jul-08       4.25% variable  up by 25 bp

2. Deposit Facility: It enables commercial banks in the euro area to park their surplus funds with their respective national central banks (NCBs) at this rate. It is an overnight facility. The present rate is 0.25%, effective from April 8, 2009. (It is similar to Reserve Bank of India’s Reverse Repo rate under its Liquidity Adjustment Facility.)

3. Marginal Lending Facility: It is an overnight facility by which liquidity is offered to the financial sector from the eurosystem. It is a standing facility through which counterparties receive credit from a national central bank at a pre-specified interest rate against eligible assets/securities. The present rate is 1.75%, effective from May 13, 2009. (It is similar to RBI’s Repo rate under LAF.)

Rate Corridor: The interest rates on marginal lending facility and deposit facility normally provide a ceiling and a floor for the overnight market interest rates. Overnight market rates are expected to move within this corridor.

OVERNIGHT FACILITIES

Deposit Facility Marginal Lending Facility

w.e.f               Rate Action w.e.f Rate Action

13-May-09    1.75% down by 50 bp

8-Apr-09      0.25% down by 25 bp 8-Apr-09 2.25% down by 25 bp

11-Mar-09   0.50% down by 50 bp 11-Mar-09 2.50% down by 50 bp

21-Jan-09 1.00% down by 100 bp 21-Jan-09 3.00% down by 75 bp

10-Dec-08 2.00% down by 75 bp

12-Nov-08 2.75% down by 50 bp 12-Nov-08 3.75% down by 50 bp

9-Oct-08 3.25% up by 50 bp 9-Oct-08 4.25% down by 50 bp

8-Oct-08 4.75% down by 50 bp

9-Jul-08 5.25% up by 25 bp

ANNEXURE:

European Union enlargement:

The European Union (EU) was established on November 1, 1993 after the ratification of the Maastricht Treaty by the member states. It was previously known as the European Economic Community (EEC). It is a political and economic union of the member states, mainly consisting of European nations. It aims to provide a single market for the member states. Its important institutions include the European Commission, the European Parliament, the European Court of Justice and the European Central Bank.

The EU is an amalgam of 27 Member States. In addition to the first six Member States of the EEC — Belgium, France, Germany, Italy, Luxembourg and the Netherlands — additional 21 countries are now members of the Union. These are: Denmark, Ireland and the United Kingdom (1973); Greece (1981); Spain and Portugal (1986); Austria, Finland and Sweden (1995); the Czech Republic, Estonia, Cyprus, Latvia, Lithuania, Hungary, Malta, Poland, Slovenia and Slovakia (2004); and Bulgaria and Romania (2007). Croatia, Macedonia and Turkey have been waiting in the wings to join the EU.


Note: Seventeen EU countries have adopted ‘euro’ as their common currency; while ten EU countries have not adopted ‘euro’ as their currency and continue to use their own national currencies.



Data is as on January 6, 2011 SOURCES: ECB, BBC, Britannica Encl, etc.

RBI's Monetary Policy-Mid-Quarter Review of Dec.2010

RBI's Monetary Policy
Mid-Quarter Review
of December 2010


Rama Krishna Vadlamudi, HYDERABAD
December 17, 2010

(For a reader-friendly PDF version, just click: www.scribd.com/doc/45486596)

Central Bankers around the world would try to move smoothly along with the markets or they expect markets move according to their (Central Bankers) wishes. This seems to be happening of late in India too. The intentions of the Reserve Bank of India seem to be to take the markets in lockstep with itself.

As expected by the markets, the Reserve Bank of India – in its mid-quarter review of the Monetary Policy announced on December 16, 2010 – has kept both the Repo and Reverse Repo rates unchanged. This is as indicated by RBI in its Second Quarter Review of November 2010.

However, the RBI has taken certain measures to boost liquidity in the Banking system. Banks by statute are required to invest a minimum of 25 per cent of their deposits in Government Bonds/Securities. Now, the Statutory Liquidity Ratio (SLR) has been “permanently reduced” to 24 per cent from 25 per cent. In addition, RBI will buy back Government Securities from banks to an extent of Rs 48,000 crore in the next one month. These two measures are expected to ease the liquidity crunch being faced by banks due to sluggish growth in bank deposits, low government spending and others.

Let us examine the Monetary Policy Review decisions and their implications.

Monetary Measures: There are no monetary measures:

1) There is no change in LAF-Repo Rate of 6.25 per cent

2) There is no change in LAF-Reverse Repo Rate of 5.25 per cent

3) The Cash Reserve Ratio (CRR) is kept unchanged at 6.00 %

4) Bank Rate has been retained at 6.00 %

5) Saving Bank rate has been kept unchanged at 3.50 %

Liquidity Measures undertaken by RBI on December 16, 2010:

However, the RBI has taken certain measures to boost liquidity in the banking system. Of late, commercial banks have been borrowing on an average more than Rs one lakh crore daily through the Reverse Repo window of the Liquidity Adjustment Facility (LAF) of the RBI. To alleviate the misery of commercial banks, the RBI has cut (it calls this cut as “permanent reduction” whatever that means) Statutory Liquidity Ratio (SLR) by 100 basis points to 24 per cent. This may not immediately give any relief to banks as RBI has already been temporarily allowing banks till January 28, 2011 to go below SLR up to 23 per cent without any penalty being suffered by them.

Another measure being undertaken by RBI is to buy back Government Securities to the tune of Rs 48,000 crore from banks in the next one month through open market operations (OMO). Banks will sell Government Bonds in their books to RBI and get money in return from RBI. This will put more money in the hands of several banks.

Impact of RBI’s liquidity measures on Markets:

The main impact of RBI’s liquidity measures will be on bond markets. The short-term interest rates will cool down reflecting in T-Bill rates, call money market, commercial deposit and commercial paper rates. Even long-term yields may soften due to the buy back programme of the RBI in Government Bonds. Banks which have, of late, been raising deposit rates steeply too will get great relief.

Why the flip-flop on SLR?

The RBI seems to be revising the SLR too frequently – one year down, one year up and next year down. The following chart illustrates this. In November 2008 following the global financial crisis in the aftermath of the collapse of Lehman Brothers, RBI reduced SLR by 100 basis points to 24 per cent. RBI hiked it again to 25 per cent one year later saying that there was excess liquidity in the banking system. It has now “permanently” reduced SLR to 24 per cent as part of its liquidity measures.

Why has the RBI been revising SLR too frequently? Since the beginning of banking sector reforms in the 1990s, RBI has got a commitment to fulfill – that is to bring down SLR/CRR so that more lendable resources will be available with banks. Of course, there are times when banks keep higher percentage of securities in eligible Government Bonds more than the statutory limit. The excess for some banks would be in the range of 3-10 per cent.

The Government seems to be comfortable with the strong revenue collections and windfall revenues from the 3G Telecom Spectrum auction. So it has, apparently, given a green signal to the RBI to reduce SLR “permanently.” It would be interesting to see how long the so-called “permanent reduction” will hold.

What caused the liquidity crunch:

Banks have been borrowing consistently from the RBI through the LAF-Repo window in the past few months. The average daily borrowing is in excess of Rs one lakh crore which makes RBI uncomfortable.

What caused the liquidity squeeze in the first place?

1. Faster rotation of money lubricates all the components of the economy. However, the money seems to be stuck in Government’s coffers lately. Government of India has been holding money to an extent of more than Rs 80,000 crore in its account with RBI instead of spending it for productive purposes. As the financial year-end draws to a close, the Government may be tempted to spend more.

2. Bank deposit growth has been anemic of late. Savers seem to be attracted to other avenues like – initial public offers or follow-on offers of public sector undertakings in the equity market; postal savings; and fixed deposits and debentures of companies. But now with banks raising their deposit rates by 50 to 150 points across the whole spectrum of time periods, savers may be tempted to invest more in bank deposits.

3. Credit growth driven by stronger growth of the economy is much more than the deposit growth.

4. RBI has been consistently increasing the policy rates and reserve ratios in the past eight to nine months, though it has undertaken certain measures to inject more liquidity in to the system in the past one month.


Notes:

One per cent is equal to 100 basis points (bp)

CRR-Cash Reserve Ratio

LAF-Liquidity Adjustment Facility of the RBI

RBI-Reserve Bank of India

SLR-Statutory Liquidity Ratio


Disclaimer: Views of the author are personal and not necessarily those of the organization he represents

----------------------------------------------------------------------------------------------

For author’s articles on financial markets, just click any one of the below links:

http://www.scribd.com/vrk100

http://www.ramakrishnavadlamudi.blogspot.com/

http://groups.google.co.in/group/random-thoughts-on-investments/files?hl=en&&sort=date


THE BEST OF MY STUFF ON Reads

http://www.scribd.com/vrk100

1. Goods and Services Tax-GST-an introduction 9072

2. Currency Futures in India-UPDATE 5 862

3. Income Tax Slabs 2010-11 for salaried class, etc. 5 640

4. India Budget 2010-11-Highlights and its impact 4 456

5. Direct Taxes Bill 2009-Impact on salaried class 3 921

6. IFRS-A Guidebook on Convergence to Global Accounting Standards 3 829

TOTAL READS have crossed 1,30,000!

From A Total of 108 Documents in about 16 months

The author writes copiously on financial markets – equities, bonds, currencies, taxes, Indian economy, etc. Some of the other articles are on:

 Government Securities market in India

 Public Provident Fund account

 Best Tax-saving Mutual Funds

 Best Equity Mutual Funds

 Base Rate System

 Forex Swaps and IRS

 Money Market Mutual Funds

 What is Sensex and its importance

 What is NIFTY BeES – Exchange Traded Fund

 Commodities Trading in India