Price Hikes - Are we really ready?

The shock and anger ran through the nerves of billions of Indians when Indian government hiked the diesel prices, kerosene and LPG by Rs. 3, Rs. 2 and Rs. 50 respectively. With these rate hikes, the government targeted all sections of the economy – poor people would have to bear the kerosene prices’ hike, middle men would be poorer Rs. 50 every time they buy a cylinder of Liquified Petroleum Gas (LPG) and transporters would have to shell out more for filling their oil tanks. Most likely, they would pass the buck to end consumers; thus, biting them even harder. And, affluent riders especially of Sports Utility Vehicles (SUVs) would also face the wrath; but this would hardly be any game changer for them.

We call it as a life cycle – Consumer to Consumer riding across the circle of life and reaching the same destination.

Is the price hike justified?

No doubt the international crude oil prices have gone off the roofs, thanks to unrest in MENA regions and growing demands across the world. In India, the oil prices are administered and decided by the government. The freeing of Petrol prices has already sent the petrol price beyond the affordability. The hike of other dependent fuels was long awaited and now it is being passed.

In a situation where the country has been going through various governance issues including series of scandals which have hurt India’s image internationally, the recent price hike would hurt the domestic consumers. The ‘aam aadmi’ is being targeted. While the various social security programmes have increased the purchasing power of end users, the recent hikes would empty their pockets. So, the question arises – is it justified for the Government of India to dole out various employment related sops during various elections’ times and increasing the price of basic needs of Indians. The government must answer – why the policy is towards benefitting private companies? Are we moving towards a capitalist economy? We have already killed the maharajas of India – Air India by doling out the lucrative destinations to private airlines and ditto with oil companies where lot many sops have been provided.

Cost-benefit analysis

It is estimated that roughly Rs. 21,000 crore would be added to state coffers in one swift. Most likely, the public transport, truckers, retail manufacturers using road transport in a large, railways et al would pass the buck to retail consumers, thus, bending the consumers’ backbone further.

We are going through a very rough phase of our life – a series of scandals have already dented India’s image plus common persons are already overburdened with the wrath of various government policies which have benefitted more to private capitalists instead of social consumers. Hope India would rise! We would eagerly wait for the FTD (Fast till Death) on Aug 16; no need to mention why this date is very important to all Indians!

Good Luck Indians!

Happy Reading!

End of an era – 25 paisa or 4-Anna or Chawanni

All the living/non-living things have got a life cycle; some has longer survival period and some has shorter existence. Imagine the time when we were bound by “Barter System”. People used to exchange their belongings to get things of their choice – so some of the transactions used to be rice-animal, vegetables-wheat and many more. Then came the era of coin system which streamlined the trading activity and people understood the power of money circulation. The initial coins in India used to be 1-paisa, 1-anna, 2-anna, 4-anna, 8-anna and many other denominations. While 1-anna and 2-anna became inexistent with the passage of time, 4-anna is still in circulation.

Now go back to your early school life or ask your grandparents how important coins used to be in our life; the kind of achievement, fulfillment and purpose it used to serve. In fact it evoked nostalgia among old timers. The power of 4-anna – hire a bicycle for an hour, a breakfast of idlis, postal envelopes, postcards, stamps and many more for not much old timers; however, ask an old timer in late 60s or early 70s who will tell how a 4-anna coin used to bring a long day planning with their friends – watching movie in nearby theatre in the front rows and making delightful comments in the theatre, a full party with delicious meals and many more.

But this 4-anna is going to be a history; may be it would find place among hobbyists. From June 30 onwards, the RBI has banned the circulation of 4-anna and it would no longer be legal tender. It is being phased out as it is unviable to produce coin because of rising metal costs. The metal scrapper nerds had been hoarding the coins to melt and sell it in scrap to earn arbitrage on the metals used in coins.

The era has come to an end; the chavanni era which many must have cherished would find solace in collectors’ item. All thanks to rising metal costs, global inflation and big demand out of industrialization which increased the demand for metals making them unviable for making small denomination coins.

Miss you naal-anna!

Net inflows dwindled by Rs. 48,850 Cr in May 11; Equity shows a net inflow after a lull

The lull in Equity in the month of May 11 didn’t deter Mutual Fund investors from investing in Equity Mutual Funds which showed an inflow after a brief lull. The broader indices Sensex and Nifty 50 which nosedived by 3.30 per cent approximately affected the diversified Equity AUM too which lost 1.72 per cent to Rs. 1,67,470 crore in May 2011 vis-à-vis Rs. 1,70,406 crore in April 2011. However, there has been a net inflow of Rs. 1,546 crore in Equity category in May 2011, much to the reprieve of Mutual Fund Industry which has been witnessing outflows continuously except for few occasions since the ban of entry loads in Aug 2009. In debt and other categories, net outflows were reported. The recent regulation of RBI to cap the banks’ investment in Mutual Fund up to 10 per cent of total banks’ net worth as on Mar 31 has started affecting the Liquid/Money Market category which saw an outflow of Rs. 39,603 crore in May 2011. Moreover, the Income category also reported an outflow of Rs. 11,141 crore. As on May 20, 2011, the banks’ net investment in Mutual Funds stood at Rs. 106,233 crore. It is estimated that the total net worth of the banking system stands at Rs. 3.13 which essentially means that the current investment of Rs. 1.06 lakh crore will drop to Rs. 30,000 – 35,000 crore in next six months which may impact the net flows in Income/Liquid categories.

Net Outflows in May 2011

In totality, the MF Industry AUM dropped by Rs. 53,926 crore or 6.87 per cent to Rs. 7.31 lakh crore in May 2011 from Rs. 7.85 lakh crore in Apr 2011. The categories which saw major fall are Other ETFs (-25.09 per cent), Liquid/Money Market Instruments (-17.43 per cent), Income Funds (-3.39 per cent), ELSS (-2.86 per cent), Gilt (-2.37 per cent) and Equity (-1.72 per cent). However, Gold ETF and FOF Investing Overseas lapped the AUM with a gain of 13.81 per cent and 10.83 per cent respectively. The trends of gold price continue to head for a bull run which prompts investors to invest in Gold ETFs. The table below shows the comparative flows and AUM of all major categories of Mutual Fund industry.

FMPs still rule the inflows

Perhaps FMP (Close ended Income Fund) is the only category which has been showing continuous inflows. In May 2011, there were 37 NFOs which collected a total of Rs. 7,416 crore. The burgeoning interest rates and tight liquidity in the financial system seem to remain in place; moreover, it is more likely that RBI may go for additional policy rate hike in upcoming mid-quarter review as on June 16, 2011.

New Funds enter into industry

Apart from FMPs, there were four open ended Funds in Income, Equity and Gold ETF category. While ICICI Prudential MIP 5 collected a total AUM of Rs. 27 crore, Sundaram Equity Plus garnered Rs. 134 crore in their NFOs. First of its kind, HSBC Brazil Fund collected a total amount of Rs. 313 crore in May 2011.

Unique Investors

For the first time, AMFI declared the unique investors data which clearly shows that Equity investors rule the industry. There are a total of 3.77 crore unique investors out of which 2.43 crore (65 per cent) investors belong to Equity, 72.65 lakh (19 per cent) to ELSS, 30 lakh (8 per cent) to Income, 22.29 lakh (6 per cent) to Balanced and remaining to other categories. In Gold ETFs, there are 3.87 lakh unique investors.