English is a funny language-VRK100-23Sep2011

Hyderabad, July 23, 2011

“I can talk English, I can walk English, I can laugh English because English is a very funny language,” thus spoke Amitabh Bachchan, veteran Bollywood actor, in his 1982-film ‘Namak Halaal.’ Such dialogues endeared him to millions of Indians in his hey days. No wonder his dialogues remain eternal!

This famous dialogue of Amitabh can be watched on YouTube at:

http://www.youtube.com/watch?v=XSrMb8IBsTQ

There are several versions of English the world over. Two main types are American English and British English. In India, we have our own Indian English. If we don’t use our language properly, we can also find ourselves in such funny situations. Language defines a person. With increasing globalisation, businessmen, travellers and students are exposed to several hues of English. A week ago, Infosys founder and chief mentor, N R Narayana Murthy, had exhorted the youngsters to improve their written and spoken English.

Foreigners would find it amusing if we use the word ‘prepone’ instead of ‘advance,’ because there is no such word as ‘prepone’ in English language. However, this word ‘prepone’ as the opposite of postpone is widely/wrongly used by Indians. In India, we have been mostly using British English even though, of late, we have been veering towards American English.

George Bernard Shaw once said: "England and America are two countries separated by a common language." However, we need to be aware of the main differences among the different flavours of English language. The important differences are in spelling, pronunciation, grammar, vocabulary and usage.

More and more people, including the Brits, are now being influenced by American English due to the overwhelming use of social media, like, Facebook, Twitter, and others in our daily lives. All the social media are from the US. The world’s most popular computer software MS Office also follows mostly American English. American English is racy, vibrant and more flexible. Whereas, British English is considered conservative.

In India, we love Good Day biscuits, but in the US we need to say Good Day cookies. We say ground floor whereas Americans start with first floor. In India, if we write 11/7/2011 it means July 11, 2011. But, in the US it means November 7, 2011. Americans can’t walk on ‘pavements.’

In British English r is pronounced before a vowel only, whereas in American English, r is pronounced in all positions in a word. For example, in British English, first r only is pronounced in ‘river,’ whereas in American English both the first r and the last r are pronounced. News is pronounced like ‘nyooz’ in British English, whereas in American English it can be pronounced like ‘noose.’ Watching television channels, BBC or CNN, may help in improving our knowledge of English.

Spelling differences:

British/Indian English *	American English		British/Indian English *	American English
Noun	Noun		Noun	Noun
aeroplane	airplane		nappies	diapers
aluminium	aluminum		notice board	bulletin board
autumn	fall		number plate	license plate
bank cheque	bank check		parcel	package
behaviour	behavior		pavement	sidewalk
biscuits	cookies		petrol	gasoline or gas
bonnet	hood		plough	plow
catalogue	catalog		pram	baby carriage
cemetery	memorial park		programme	program
centre	center		pyjamas	pajamas
chemist	druggist		race-course	race-track
clamour	clamor		railway	railroad
colour	color		right-angled triangle	right triangle
cutting (newspaper)	clipping		rubbish	junk
dynamo	generator		sceptic	skeptic
flat	apartment		silencer (of a car)	muffler
flavour	flavor		single ticket	one way ticket
glamour	glamor		speciality	specialty
hairdresser	beautician		sulphur	sulfur
honour	honor		sweets	candy
interval	intermission		tap	faucet
jewellery	jewelry		theatre	theater
leader	editorial		torch	flashlight
lift	elevator		tram	street car
lorry	truck		traveller	traveler
maths	math		trunk	boot
metre	meter		tyre (of a car)	tire (of a car)
motor car	automobile		waste paper basket	waste basket
motorway	highway		windscreen	windshield
mould	mold		woollen	woolen
moustache	mustache		* At times, Indians follow American words

British/Indian English	American English
Verb/sentence	Verb/sentence
	to meet with someone
to meet someone
got (past participle of get)	got or gotten (past participle)
to stay at home	to stay home
programmed	programed
to analyse	to analyze
I'll write to her	I'll write her
I'll talk to him	I'll talk with him
to black shoes	to shine shoes
to protest against something	to protest something
signalled	signaled
travelling	traveling
worshipped	worshiped
Have you got children?	Do you have children?
levelled	leveled

There have been many more divergences between them. Currency notes are called bills, in the US, for example, one dollar-bill. In Britain, it is one-dollar note. English is a universal language. It is a sponge language. It has absorbed many words from other languages. Appreciating such nuances in the language will make us a better person.

Finally…

Famous British author Oscar Wilde wrote: "We have really everything in common with America nowadays except, of course, language."

References:

1. “A University Grammar of English” by R Quirk and S Greenbaum

2. The Hindu

Personal note:

The author is a prolific writer with interests spanning from financial markets, book-reading, English and wildlife. This article on English is inspired by N R Narayana Murthy, who, a week back, exhorted youngsters to improve their written and spoken English.

Cash Management Bills and Government Borrowing-VRK100-21072011

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Cash Management Bills

Rama Krishna Vadlamudi, HYDERABAD July 21, 2011

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or,

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

Reserve Bank of India (RBI) had, on July 21st, 2011, issued a press release stating that they were advancing the auction of Government securities to third week of August 2011. This auction was advanced by around five weeks. This advancement has added significance in the light of the fact that the Government has been borrowing more money through the Cash Management Bills (CMB) route during this calendar year. As given in the table below, the total borrowing through CMB route since April 1st of this year is Rs 58,000 crore. Of course, this gets repaid in shorter period of less than 91 days. This CMB borrowing is in addition to money raised through the normal 91-day, 182-day and 364- day Treasury Bills.

CMB for days Auction date Total amount (Face value) Rs crore YTM %

56                   21-Jul-11         4,000                                          8.0500

56                   18-Jul-11        8,000                                           8.0500

42                  4-Jul-11           8,000                                          8.1580

35                  28-Jun-11        6,000                                         8.0923

77                   5-May-11       6,000                                          8.0017

77                  29-Apr-11       6,000                                         7.6588

49                  21-Apr-11       6,000                                         7.3722

70                  20-Apr-11       6,000                                         7.3500

63                  19-Apr-11       8,000                                         7.2743

TOTAL                                58,000

The Government has been facing some problems in keeping the fiscal deficit within the target set in the Budget 2011-12. The GDP growth is expected to decelerate this year and this in turn may adversely affect tax collections; even though the indirect tax collections between April-June 2011 were strong. The Government may face difficulties of raising the budgeted Rs 40,000 crore through the disinvestment programme owing to weak stock market, which has been languishing in a range of 17,000-19,000 for quite some time. This implication is that Government bond prices may fall and yields may go up due to the difficult fiscal situation. (Bond prices and yields move in opposite direction). The 10-year benchmark security yield is now quoting around 8.27 per cent and this yield may move up by another 20 to 25 basis points in the next few months.

NB: The following few pages explain the importance of cash management bills (CMB) with a live example of the cash management bill.

Governments, in general, are hungry for money. They always find new methods of raising money from the public, be it debt or taxes. Central Banks usually act as money managers and raise money on behalf of the Governments.

To meet temporary cash shortages on its account, Government of India had proposed to introduce a new instrument called Cash Management Bills, which are short-term in nature. Even though the guidelines for issuance of Cash Management Bills were issued in August 2009, the Government of India had started using the new instrument only in the second week of May 2010.

Let us examine the contours of this new instrument:

What is a Cash Management Bill?

A Cash Management Bill is a Government Security through which Government of India raises money in order to meet its temporary cash shortages. It is issued for a maturity of less than 91 days. It is a new type of government debt paper. Reserve Bank of India (RBI) acts as a money manager and issues these Cash Management Bills on behalf of Government of India.

Government of India (GOI) had, along with RBI, issued guidelines in August 2009 itself for the Cash Management Bills. But, it started using the new instrument since May 2010 when the first auction was conducted by RBI on behalf of GOI.

The US Treasury also issues Cash Management Bills for maturities of less than six months.

What are the salient features of Cash Management Bills?

 The maturity period will depend upon on Government’s temporary cash needs. But, the tenure of the Bills will be less than 91 days. (Effectively, the tenure can be between one day and 90 days)

 They will be issued at a discount to the face value, similar to Treasury Bills

 The settlement of the auction will be T+1 basis

 The Non-Competitive Bidding Scheme for Treasury Bills will not be extended to the Cash Management Bills

 They will be tradable and qualify for ready forward (repo) facility

 Investment in the Bills will be reckoned as an eligible investment in Government Securities by banks for SLR purpose under Section 24 of the Banking Regulation Act, 1949

 It will be an integral part of the Money Market

What is the difference between a T-Bill and a Cash Management Bill?

Debt obligations of the government that have maturities of one year or less are normally called Treasury Bills or T-Bills. Treasury Bills are short-term obligations of the Treasury/Government. In India, T-Bills are usually issued for maturities of 91, 182 and 364 days.

The Cash Management Bills will have the generic character of Treasury Bills. Even though Cash Management Bills will be treated as Government of India Treasury Bills technically, there is a one big difference in practice with regard to maturity period. That is:

A T-Bill can be issued for a maturity period of between 91 days and 364 days

A Cash Management Bill can be issued for maturity of between 1 day and 90 days

However, both these instruments will have the following similarities:

 These are instruments issued at a discount to the face/par value

 Both are money market instruments and form part of the money market

 Both of them are zero-coupon instruments

 They are tradable and offer ready forward (repo) facility

A Live Example of a Cash Management Bill:

A Cash Management Bill is essentially a zero-coupon instrument in the sense that it does not carry any interest rate (coupon). As a zero-coupon instrument is issued at a discount, the implicit interest for the investor (holder) will be the difference between the par value and the discounted price. The interest on this zero-coupon instrument is paid at the end of the maturity period including the price paid at the time of purchasing the instrument.

Let us see a real-life example. RBI conducted an auction for Cash Management Bills (28 days maturity) on May 18, 2010 for an amount of Rs 6,000 crore. According to the bids received from investors (typically, banks, insurance companies and pension funds), the cut-off price was set at Rs 99.70, which is the discounted price for a par value of Rs 100. The implicit interest is Re 0.30 (Rs 100 – Rs 99.70). On the date of investment, the investor would pay an amount of Rs 99.70 to RBI for a par value of Rs 100. After 28 days from the date of investment, the investor will receive par value of Rs 100 (interest of Re 0.30 plus price paid Rs 99.70) from RBI on June 16, 2010.

How is the interest calculated in percentage terms in the above example? The investor received an interest of Re 0.30 for an investment of Rs 99.70 for a holding period of 28 days. The interest in percentage terms is:

    Re 0.30          365
= ------------- x ------ x 100 = 3.9225 % (rounded off)
   Rs 99.70 28

The implicit rate of interest is 3.9225 per cent for this 28-day Cash Management Bill. Technically, this is called yield to maturity (YTM).

                                                 - - -

References:

1. RBI circular dated August 10, 2009

2. RBI press releases dated May 10, 2010 and May 17, 2010.

3. http://www.rbi.org.in/

Disclaimer: The author’s views are personal. This article was originally published on SCRIBD on June 15, 2010 and updated on July 21, 2011.

My documents relating to debt market can be read at:

http://www.scribd.com/my_document_collections/2333349

Government Securities Market & Bond Duration Management

http://www.scribd.com/doc/20833001

Bond Basics and All You Wanted to Know about Bonds

http://www.scribd.com/doc/20618363

Good Liquid Funds or Money Market Mutual Funds in India

http://www.scribd.com/doc/23073415

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

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MY BLOG: www.ramakrishnavadlamudi.blogspot.com

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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





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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.