RBI’s ‘baby steps’ instead of ‘big leap’ favoured the bond market

Highlights:


• RBI announced policy rate hikes; Repo, Reverse Repo and CRR hiked to 5.25 per cent, 3.75 per cent and 6 per cent respectively, up by 25 bps

• RBI followed “baby steps” instead of “big leap” as a part of unwinding accommodative measures

• RBI’s M3 growth, Deposit Growth and Credit off-take projected at 17 per cent, 18 per cent and 20 per cent respectively for Fiscal Year 2010-11

• CRR hike of 25 bps drained out Rs. 12,500 crore from the system; liquidity still abundant with weekly average of above Rs. 48,000 crore

• Bond Markets reacted positively to RBI announcements; Yields moved down. Benchmark G-Sec 6.35% 2020 settled at 8.06 per cent or Rs. 88.64; Introduction of new security G-Sec 8.20% 2022

• Bond Markets remained buoyant throughout the week following the RBI’s announcement of policy rate hikes.

• Inflationary pressures (food including non-food) and overseas cues such as US Treasury Yields and Crude Oil Prices may also influence domestic bond yields
View & Recommendation:

The policy rate hike is unlikely to put any large impact on short-term yields due to abundance liquidity in the system. The high steepness at the shorter end (1-5 years) of the yield curve may prompt fund managers to roll-down the yields to generate extra returns provided the yield curve does not move significantly. Liquid Funds and Ultra-Short Term Bond Funds will continue to be preferred for investors having investment horizon of 1-3 months and 3-9 months respectively. Investors should avoid investing in high average maturity funds and should restrict investments to funds having average maturity up to 1 year. Short Term Income Fund will fill the void in this category.
Broader Perspective:

The bond markets reacted positively at RBI’s Annual Policy for Fiscal Year 2010-11. The RBI’s calibrated approach in exiting accommodative measures announced during the crisis period of 2008 and early 2009 was welcomed by traders as RBI announced 25 bps hike each in CRR, Repo Rate and Reverse Repo Rate, lower than the market expectations of 50bps. The RBI seemed more concerned on Inflation front and accordingly shifted its actions to inflation-led, thus, giving a balanced approach to Growth-Inflation dynamics. However, the markets could not cheer for the later part of the week and yields moved northwards across the curve in the following days. High Inflation pressure, large week-on-week gilts supply including overseas cues such as US Treasury Yields and Crude Oil Prices has continued to weigh on the gilt prices. However, the better-than-expected 3G auction sentiments (The government hopes to collect Rs. 50,000 crore than its expectation of Rs. 35,000 crore), positive MET forecast of normal monsoons and lower than expected net borrowings (Rs. 25,000 crore net of redemptions) in the month of May can keep the sentiments positive.

During the week, the benchmark G-Sec 6.35% 2020 lost its significance and reported very thin volume as it got replaced by G-Sec 8.20% 2022 amid expectations that the RBI will announce a new benchmark next month. The 10-year 6.35% 2020 and 8.20% 2022 yields moved down. While the benchmark yield settled at 8.06 per cent, 2 bps less than the previous week close, the new G-Sec 8.20% 2022 lost 16 bps since its inception. Traders feared that 6.35% 2020 supply would either shrink or stop and volume shifted to G-Sec 8.20% 2022. Apart from this, the RBI successfully auctioned bonds worth Rs. 12,000 crore – the 7.02% 2016 for Rs. 6,000 crore, the 8.26% 2027 for Rs. 3,000 crore and the 2020 Floating Rate Bond for Rs. 3,000 crore. The RBI sold its first floating rate bond in this fiscal year 2010-11. Floating rate bonds are preferred by investors as the coupon is adjusted every six months, allowing to avoid booking nominal losses in their books. The RBI also announced that it would announce auction results of gilts on the following Monday of auction week instead of Friday of same week.

Liquidity as measured by bids for reverse repo/repo under Liquidity Adjustment Facility was comfortable with bids averaging Rs. 48,738 crore. The coming week may see a slight contraction in liquidity following Rs. 12,500 being drained out as a part of hike of CRR.

Corporate bonds also saw its credit spreads shrinking. Five- and Ten-year spreads dropped by 18 bps and 10 bps to 52 bps and 53 bps respectively. The 10-year AAA Corporate Bond yield closed at 8.75 per cent, a loss of 12 bps.

MF Industry saw a dip of Rs. 1.53 lakh cr; Equity also saw outflows

Indian Mutual Fund industry suffered a major jolt at the concluding month of fiscal year 2009-10. The Asset Under Management (AUM) for the month of March stands at Rs. 6,13,979 crore, a loss of Rs. 1,52,890 crore or 19.94 per cent over its last month figures. The industry saw a net outflow of Rs. 1,52,890 crore against a gain of Rs. 6,365 in the month of Feb. The Income category saw a maximum outflow of Rs. 1,64,487 crore or a loss of 34.57 per cent. Last month, this category had seen a net inflow of Rs. 4,887 crore. However, the Liquid/Money Market category has shown an improvement over its last month figures. The current month saw a net inflow of Rs. 3,971 crore. In Income Fund category, there have been net outflow as the banks have redeemed their investments from Mutual Funds following strict directives from RBI and SEBI. The major surge in Mutual Fund Industry AUM has been happening due to increased participation from banks. They have been keeping their surplus money with Mutual Funds as the credit off-take has been slow following the bleak economic. However, in the month of March, banks have reduced their Mutual Fund positions from Rs. 1,09,453 crore as on Feb 26, 2010 to Rs. 55,502 crore as on Mar 2010. In March 2009, the banks have total investments of Rs. 36,781 crore in instruments issued by Mutual Funds. Last year in Dec 2009, RBI issued a directive to all banks after banks increased their total investments in Mutual Funds to Rs. 1,69,236 crore. RBI argued that the money invested in Mutual Funds have been revolving in the system in the form of Certificate of Deposits (CDs) which banks have been placing with Mutual Funds. The category added three new income fund schemes. JP Morgan India Short Term Income Fund and Sundaram BNP Paribas Monthly Income Plan – Conservative & Aggressive were new schemes added.


On the other front, the Equity category AUM rose to Rs. 1,74,054 crore in Mar 2010 in comparison to Rs. 1,68,672 crore recorded last month, up by 3.19 per cent. However, in terms of total flows, it saw a net outflow of Rs. 2,016 crore. In the month of March, Fund Managers booked profits seeing stretched valuations of stock market. Moreover, they also distributed dividends rampantly. SEBI also banned the dividend distribution out of Unit Premium Reserve (UPR). It said that the dividend distribution amount must be from the profits booked by the scheme. Since the ban of entry loads, equity category has seen a constant outflow of its assets. However, the first two months of 2010 had seen some inflows. In fiscal year 2009-10, the equity category has seen a net inflow of Rs. 595 crore only. However, the overall Mutual Fund AUM has grown 47.13 per cent in FY 2009-10. Bharti AXA Focussed Infrastructure collected Rs. 41 crore from its NFO.

The ELSS category saw its maximum inflow in last 15 months. The category added Rs. 641 crore to its kitty. The inflows had been mainly due to tax-season month where investors put their money in ELSS to get tax rebate under Sec 80C of Income Tax Act 1961. It saw a total inflow of Rs. 1,554 crore in last one year.

The ETF category saw some major outflows in other ETFs category. While Gold ETF added Rs. 45 crore to its kitty, other ETFs category saw an outflow of Rs. 439 crore. Current the total AUM stands Rs. 957 crore, a loss of 28.69 per cent over its last month figures. Two ETFs were added to the category. Religare Gold ETF garnered Rs. 19 crore in its NFO period while Hang Seng Benchmark Exchange Traded Scheme added Rs. 55 crore from its NFO. Hang Seng ETF is the first international ETF being launched in India by Benchmark Mutual Fund.

Gilts saw a net inflow of Rs. 267 crore. Its AUM rose to Rs. 3,395 crore in the month of March 2010, a gain of 7.06 per cent over its last month figure. Given high borrowing programme, bond yields are poised to rise further. The category may saw some inflows in the months to come once the benchmark yield level reaches to 8.25 per cent to 8.5 per cent.

The industry also saw a herd of FMPs in the month of March 2010. A total of 69 schemes were launched which collectively garnered Rs. 14,642 crore. FMPs have seen a comeback after a brief lull. March sees the maximum numbers of new NFOs in FMP category as these products are launched mainly to avail the double indexation benefit, thus, minimizing the tax burden to investors on income earned.

Bond yields laddered to 8 per cent level on devolvement

Highlights
• Benchmark bond 6.35% 2020 yield touched to 8.01 per cent on account of devolvement* in first week auction
• Primary dealers had to devolve Rs. 448 Cr. of 6.35% 2020 paper
• Food inflation rose to 14.50 per cent for data on Mar 27, 2010 against 13.86 per cent observed a week before
• Limits for Ways and Mean Advance (WMA) set at Rs. 30,000 Cr. for first half of FY and Rs. 10,000 Cr. for second half of FY
• Inflationary pressures (data to be available next Thursday) and Industrial Output data to influence the policy review due on April 20, 2010; inflation likely to be in double digits
• Market to witness an auction of Rs. 13,000 Cr. on Government Securities and Rs. 5,800 crore of State Development Loans (SDL) this week

*Devolvement - is a mechanism used by Reserve Bank of India as part of its monetary policy to counter the volatility in the price of Government Securities. Under this mechanism Primary dealers would have to absorb the underwritten amount, when the bid prices are unacceptable to the RBI.

Views & Recommendation:

• The weekly bond issuances are likely to impact the bond prices in a greater way; any further devolvement will put pressure on bond yields.
• Liquid Funds and Ultra Short Term Funds (erstwhile called as Ultra Short Term Funds) would see its yields rising from the current yield as shorter end of yield curve is likely to move up in near future once the policy rates go up.
• Investors having longer investment horizon (more than 2 years) should wait for yields to reach to 8.25-8.5 per cent level and can then invest in Income Funds.

Broad Perspective:

The week started with a cooling in bond yields; the 10-year benchmark 6.35% 2020 G-Sec slipped to 7.80 per cent on Monday, down by 5 bps over its last week closing. However, the sentiments went against the market and the yields rose to its three week highs ahead of first week auction of Rs. 12,000 crore and monetary policy tightening to contain high inflation.
The auction results disappointed the market and the benchmark yield passed 8 per cent mark to close at 8.01 per cent on account of devolvement. It touched to 8.03 per cent level, its highest in more than 17 months and a level it touched on Mar 22, 2010. The auctioned bonds got timid response and primary dealers had to devolve Rs. 448 crore of 6.35% 2020 paper. RBI set the cut-off yield of 7.9645 per cent for the 6.35% 2020 bonds. The other bonds were fully subscribed amidst high demand. Both received demands for more than two times. Due to devolvement, primary dealers demanded high cut-off yields. This week, the choice of securities will decide the momentum of bond yields and primary dealers will demand higher underwriting fees and higher yields in fear of devolvement of securities. Moreover, the subdued response on 6.35% 2020 bond is putting pressure on its existence as the benchmark yield and traders have been demanding for a new benchmark so that they could concentrate on the movement on interest rates instead of choice of a benchmark bond.
Inflationary pressures continue to remain intact; food prices accelerated for second straight week. The inflation based on primary articles rose to 14.50 per cent for the week concluding on Mar 27, 2010 against 13.86 per cent observed a week before. Industrial output data for February due on Monday and March inflation data on next Thursday are the factors which will decide the direction of RBI Policy review due on April 20, 2010.
Liquidity as measured by bids for reverse repo/repo at the Liquidity Adjustment Facility auction went to an average level of Rs. 1 lakh crore against Rs. 2,000 crore reported last week. Overnight rates also remained at the level of reverse repo rates due to high liquidity in the system.
However, Corporate Bonds yields saw an increased activity in the trading circles. Its spread over its counterpart G-Sec slipped in all categories. The 5-year and 10-year corporate bond spread over its counterpart G-Sec slipped to 76 bps and 63 bps from 81 bps and 82 bps respectively. The 10-year Corporate Bond closed at 8.80 per cent for the week concluding on April 09, 2010.
RBI set the limit for Ways and Mean Advance (WMA) at Rs. 30,000 crore for first half of fiscal year (April to September) and Rs. 10,000 crore for second half of fiscal year (October to March). WMA is a window through which the government borrows from RBI to meet mismatches between payment and receipts. Any borrowing within the WMA limit is done at Repo rate and over the WMA limit, it is done at Repo plus 2 per cent.

MF Industry assets grew 51.6 per cent y-o-y

Highlights:
• Mutual Fund Industry assets grew 51.6 per cent on year-on-year basis; shrink by 4.6 per cent on month-on-month basis
• The AAUM touched Rs. 7.47 lakh crore as on Mar 2010; saw its historical high of Rs. 8.07 lakh crore in Nov 2009
• Reliance Mutual Fund (Rs. 1.1 lakh crore) continues to be the top fund house in terms of AUM
• SEBI dedicated fiscal year 2009-10 for investors bringing in many regulatory changes which changed the mutual fund industry trends
• Equity funds saw major outflows after the ban of entry loads
• Liquid Funds/Income Funds/Ultra Debt Short Term (erstwhile called as Liquid Plus Funds) will continue to see the inflows given the uneven interest rate scenario in near future

The fiscal year 2009-10 ended into a happy note with Mutual Fund Industry assets growing 51.6 per cent year-on-year. The industry added a total of Rs. 2.54 lakh crore to its kitty with total Average Assets under Management (AAUM) of Rs. 7.47 lakh crore. The year also saw Mutual Fund AUM’s historical peak of Rs. 8.07 lakh crore as on Nov 2009. However, it lagged the bellwether indices Sensex and Nifty 50 which clocked 80.54 per cent and 73.76 per cent returns respectively for the fiscal year 2009-10. On monthly basis, the Mutual Fund Industry Assets slipped to Rs. 7.47 lakh crore or a loss of 4.6 per cent over its Feb end of Rs. 7.82 lakh crore. The Feb month saw a hike of 2.64 per cent on monthly basis.
Reliance Mutual Fund continues to top the chart with AAUM of Rs. 1.10 lakh crore with a hefty gain of 36.4 per cent. The other leading fund houses in terms of AAUM are HDFC Mutual Fund (Rs. 88,780 crore), ICICI Prudential Mutual Fund (80,989 crore) and UTI Mutual Fund (Rs. 80,218 crore). On absolute basis, the fund houses which saw windfall gains are UTI Mutual Fund (Rs. 31,463.6 crore), HDFC Mutual Fund (Rs. 30,823.4 crore), ICICI Prudential Mutual Fund (29,556.3 crore) and Reliance Mutual Fund (Rs. 29,450 crore). The massive increase in AUM was mainly due to inflows in Debt/Income/Liquid/Liquid Plus categories. However, equity had a net outflow after SEBI banned entry loads post Aug 2009.
The fund houses which saw maximum decline on month-on-month basis are JP Morgan Mutual Fund (-31 per cent), AIG Global Investment Group Mutual Fund (-24.9 per cent), Deutsche Mutual Fund (-19.5 per cent) among others. The prominent gainers in double digits were Peerless Mutual Fund (60 per cent) and Edelweiss Mutual Fund (23.3 per cent).

Yields to reel under inflationary pressures; rate hikes imminent

Highlights:

• Government borrowing schedule of massive Rs. 4.57 lakh crore declared; 63 per cent of total borrowings are front-loaded in first half of fiscal year 2010-11.


• On an average, the weekly borrowing would be in the range of Rs. 11,000 to Rs. 13,000 crore; the May month may witness the maximum borrowing of Rs. 65,000 crore with minimal borrowing of Rs. 22,000 crore in September.


• No Open Market Operations (OMOs) transactions declared; unlikely to put any pressure on yields due to sufficient liquidity.


• The week saw a sudden yearend decline in bond yields following the borrowing schedule declaration; unlikely to sustain the spurt in bond prices.


• Inflationary pressures to continue putting pressures on bond yields.


• The 10-year benchmark G-Sec 6.35 % 2020 to trade in the range of 8-8.5 per cent for most of the year.


• There was a combined transaction of Rs. 9,540 crore under Repo Facility in the last 3 days of Fiscal Year 2009-10.


• The G-Sec spread between 1-5 years have widened to 238 bps from 227 bps in the previous week.

Views & Recommendation:

·         For few weeks, the market may absorb the bond issuances without any impact on yields but in long term, the bond yields may witness upward revisions.

·         The short-tenure bonds would be in demand in the month of April and May in the current fiscal year due to negligible issuances. This may lead to unexpected hike in prices of short to medium term papers. An opportunity lies ahead in booking profits in short-to-medium term bonds/Income Funds/Short Gilt Funds after a couple of months.

On return basis, Tata G S S M F – Growth (6.67%), UTI G Sec Fund – STP – Growth (5.06%) among others has been front runners under Short-term Gilt Funds in two-year category. 

·         Liquid Funds and Ultra-Short term Debt Funds (erstwhile called as Liquid-Plus Funds) will continue to see inflows as investors would continue putting their surpluses for a short duration.

Broader Perspective:

The market reacted positively on the announcement of Government Borrowing Schedule; about 63 per cent of total borrowings (Rs. 2.87 lakh crore) are front-loaded in the first half of fiscal year 2010-11. Thus, it would prevent crowding out for private firms as post-October used to be busy borrowing month for them. The market will see an average weekly auction of Rs. 11,000 – Rs. 13,000 crore. The benchmark bond 6.35 per cent 2010 yield saw some swings.  The yield fell from 7.85 per cent to as low as 7.74 per cent before closing at 7.85 per cent level again. The 10-year benchmark G-Sec price closed at Rs. 89.90 down from Rs. 90.30 level as on Mar 30, 2010. Bond Prices and Yields move in opposite direction.

The high inflationary pressure is on the top agenda of policy makers as they are closely scrutinizing to negate its effects on yields since it would increase their borrowing costs. The inflation as measured by Wholesale Price Index (WPI) has already touched 9.89 per cent for the month of Feb 2010 and the March figures may touch the double digit. Though the government officials are of the view that inflation would drop down in couple of months citing the high base effect and falling food prices as the prominent reasons, it will continue haunting on non-food sides. The high crude prices including the high petrol and diesel prices for EURO IV vehicles will add pressures to inflation further.

The market may factor into the weekly bond supply and will see a smooth transition of bonds for first few weeks but the yields may harden in the weeks to come citing the absence of any Open Market Operations (OMOs) from the government side.

The other bonds 7.02% 2016 and 7.32% 2014 saw yields moving up 13 bps and 1 bps to 7.59 per cent and 7.25 per cent levels. Corporate bonds also saw yields dropping down. The shorter end of the curve saw yields falling piercingly after March-end liquidity worries went out of the system. The last three days of the fiscal year 2009-10 saw a total repo transaction of Rs. 9,540 crore under Liquidity Adjustment Facility (LAF). The liquidity as measured by Reverse Repo transaction under Liquidity Adjustment Facility (LAF) remained tight with an average volume of Rs. 4,027 crore.

New Mutual Fund regulations to benefit investors

The Mutual Fund Industry has a happy ending in 2009 with assets growing to a fabulous high. The industry also saw some investors’ friendly regulations turning to be unfriendly for distributors and IFAs. Starting from No-Load scenario post Aug 01, 2009 to host of other regulations, SEBI threw another set of regulations to all fund houses in the month of March 2010 signaling another round of reforms in world’s fastest growing Mutual Fund industry.

 

Reduction of NFO’s Period

Starting with the list, SEBI reduced the New Fund Offers (NFOs) duration to a maximum of 15 days from 30 days for open-ended funds and 45 days for close-ended funds. On completion of NFO period, the units’ allocation and dispatch of Statement of Accounts (SoAs) are required to be done within five business days after the closure of NFO period. The rule also says that Mutual Funds shall make investments out of NFO proceeds only on or after the closure of the NFO period. The new rule is effective from July 01, 2010.

 

Introduction of ASBA for MF Investors

SEBI introduced ASBA or Applications Supported by Blocked Amount in July 2008 for all equity investors investing in IPOs or Right Issues to make effective use of money put into it. Under this, the application money you put for subscribing to IPOs/Right Issues does not leave your bank account unless the allotment is done. So, there is no need for refund of money, thus, reducing the operational issues and you also earn interest even on blocked amount. Now, this facility is extended to Mutual Fund investors putting money in NFOs. Nevertheless ASBA means little for investors as most investors put money only on the last day of NFO period. Moreover, SEBI has mandated that the fund house has to allot units five days after the closing of NFOs.

 

Dividend distribution from realized profits

SEBI also mandated that the dividends to be paid to investors have to be out of realized profits only. Currently, some Mutual Fund houses pay dividends from their Unit Premium Reserve instead of booked profits. E.g. A fund XYZ has an initial NAV of Rs. 10. The amount Rs. 10 goes to an account called as Unit Capital or Face Value. Let us say the NAV grows to Rs. 15. The appreciation amount of Rs. 5 goes into a separate account called as Unit Premium Reserve (UPR). This ruling might affect many fund houses which used to declare dividends as a marketing gimmick to attract inflows. After this ruling, many fund houses have cancelled the dividends declared.

 

FoFs commission to decline

In case of FoFs, AMCs have been entering into revenue sharing agreements with offshore funds in respect of investments made. Typically they get around 50-100 bps from Offshore Funds along with 75 bps which they charge from investors. Out of 75 bps, they used to take care of marketing expense and other expenses. The Fund Houses used to pocket the sharing revenue (50-100 bps) from Offshore or Local Funds where they have invested. Post this ruling, an FoF may not be a profitable avenue for Mutual Funds in India.

 

Adherence to Corporate Governance

Since Mutual Funds invest in companies on behalf of investors, SEBI wants them to be more participating in company affairs and voice their opinions. SEBI has mandated that Mutual Funds must disclose participation in company’ annual or other affairs such as exercising voting rights in mergers, AGMs, changes to capital structure, appointment or removal of Directors, stock option plans and other management compensation issues and many more in their website and Annual Reports.

Following Satyam scam, SEBI wanted the companies to be more accountable for their acts and business rules and Mutual Funds which represent a group of investors will be the best fitted for this role.

 

Conclusion

 Time to time, SEBI comes out with different regulations which ultimately helps retail investors. Thanks to our robust financial system which surpassed the economic crisis of 2008 post Lehman collapse, SEBI wants to ensure that India remains decoupled with financial breakdown which galloped major big names. Moreover, SEBI wants to make MF and its fund managers more transparent and accountable for investors’ money. However, the challenges lie ahead how the fund houses implement these changes. Happy Investing!

 

 

Bond markets awaits borrowing calendar; yields to remain under pressure

Highlights:

•  The 10-year benchmark (6.35 per cent 2020 G-Sec) traded in range bound; closed at 7.85 per cent, up by 2 bps


• The average volume under Reverse Repo remained at Rs. 15,500 crores


• Inflationary pressures to continue; unwinding of accommodative measures by RBI to continue


• Non-food inflation also factoring into the overall inflation figures; will remain high in near term


• Borrowing calendar for the fiscal year 2010-11 to be announced on March 29, 2010; expected to be front-loaded


• Short-term yield curve to remain under pressure; G Sec spread for 5-1 years and 10-5 years at 220 bps and 39 bps respectively

Detailed View:

The policy rate action by RBI post market hours left traders dazzled on Monday and the yield on 10-year benchmark (6.35 per cent 2020 G-Sec) soared to 8.03 per cent, its 18-month peak before easing to 7.85 per cent, up by 2 bps over its last closing. This immediate reaction in the market was inevitable after RBI raised short term policy rates by 25 bps. Post action, the repo rate and reverse repo rate stand at 5 per cent and 3.5 per cent respectively. During the week, the yields on the benchmark G Sec remained in range bound and closed at 7.85 per cent, up by 2 bps. One basis-point is one-hundredth of a percentage point. Traders have been waiting eagerly for the weekly borrowing calendar to be announced on Mar 29 and expect that most of the borrowings are scheduled to be front loaded (60-70 per cent of total gross borrowings) in the first half of the fiscal year. The market will also keep a watch on the tenure of the bond issuances. The government has indicated that it would raise Rs. 4,57,000 crores from market in 2010-11, up by Rs. 6,000 from last year’s gross borrowing. Traders have been demanding short to mid term papers to be the major part of borrowing schedule in first half of the fiscal year following high inflation, unwinding of accommodative monetary policies by the central bank etc.

The RBI has been under high pressure on soaring inflation which is on continuous rise and has already touched near to 10 per cent. The inflation which used to be mainly due to food prices’ factors has moved to non-food prices’ factors too. Fuel inflation soared to 12.5 per cent for the week ended March 13. It might continue to remain high after the recent oil price hike by the government. Manufacturing inflation is also running at 4 per cent level and is expected to remain high as manufacturers pass the rising input costs to consumers.

The yields on 5-year 7.32% 2014 G-Sec rose by 6 bps to 7.24 per cent while 7.02% 2016 yield rose by 8 bps to 7.46 per cent.

On the liquidity front, the liquidity as measured by bids for reverse repo/repo under the Liquidity Adjustment Facility (LAF) remained comfortable with average bids for reverse repo amounting to Rs. 15,000 crores in the concluding week.

View and Recommendations

The yields at the shorter end of the curve will remain under pressure as the market would be witnessing a new round of borrowing next week onwards.
Liquid Fund and Ultra-short term debt funds (erstwhile called as Liquid-Plus Funds) should be the preferred choice for investors looking to invest their surpluses for a short duration (3-6 months) while for an investor having investment horizon of 9-12 months should invest in Income Funds. On return basis, LIC MF Income Plus Fund – Growth, IDFC Money Manager – Invest Plan – Growth and Kotak Floater – LT – Growth have been the front runners in Liquid Plus category in 6-months horizon. In Income Fund category, some of the actively managed funds are Fortis Flexi Debt Fund – Growth, Birla SunLife Dynamic Bond Fund – Retail – Growth and HSBC Flexi Debt Fund – Retail – Growth scoring 10.33 per cent, 8.27 per cent and 7.28 per cent respectively in 1-year category.
New FMPs have been flowing into the market on a continuous basis. Investors looking to lock-in their investments for a longer period (13-20 months) can consider this avenue as they will also get Double Indexation benefit (if invested before March 31, 2010) which will reduce the tax outflow on their FMP earnings.

RBI acts on Repo and Reverse Repo, a surprise for all

Indian Debt Markets are increasingly more on middle-of-the-road as traders awaited the borrowing calendar from RBI anxiously due on Mar 29, 2010. The inflation as measured by Wholesale Price Index (WPI) already reached to 9.89 per cent on month-on-month basis surpassing the RBI projection of 8.5 per cent. This has put policy makers to analyze all the monetary scenarios before announcing a roll back in accommodative measures. The Deputy Governor K C Chakraborty commented that the RBI might take measures anytime before the RBI policy meet on April 20 to tame the inflation which had shifted from Supply Side constraints to Non-food inflation constraints. An increase in non-food i.e. manufacturing inflation coupled with high IIP numbers (already in double digits nearing 16 per cent for two times in a row) prompted the RBI to announce a hike in policy rates, the first step seen in unwinding the stimulus packages and normalizing policy rates to tame the high inflation. The RBI hiked the Repo Rate and Reverse Repo Rate under the Liquidity Adjustment Facility (LAF) to 5 per cent and 3.5 per cent respectively with immediate effect, a hike of 25 bps over its last figures. Repo Rate is the rate at which the banks borrow money from RBI for meeting its short term liabilities and Reverse Repo Rate is the rate at which the banks put their surplus/money with RBI. This unexpected move may increase the sell offs by traders and yields may move northwards.

The inflationary pressures were of high concern as evident from RBI statement “Notwithstanding some moderation in recent weeks, food prices remain at elevated levels. In fact, consumer price inflation, as measured by various consumer price indices, has accentuated further. The acceleration in the prices of non-food manufactured goods and fuel items in recent months has been of particular concern.”  

The 10-year paper benchmark 6.35 % 2020 G Sec cooled off to 7.82 per cent, down by 18 bps week on week while the 5-year paper 7.32% 2014 saw yields slipping to 7.18 per cent, down by 13 bps. The cut-off price for the 91-Day T Bill was seen at Rs. 98.91 or at 4.42 per cent compared to previous cut off of 4.34 per cent. There was also a pressure seen on Corporate Bonds. On the shorter end of yield curve, the spread over G Sec in one-year category rose to 142 bps as on Mar 19, 2010, up by 16 bps. In 10-year category, the spread rose to 90 bps, up by 17 bps. The 10-year AAA bond traded at 8.88 per cent vis-à-vis 8.90 per cent as observed in last week.

Bond market nervous amid advance tax outflows

The Bond Markets traded northwards amid thin volumes. The yields sharpened northwards amid speculation that government will complete 60-70 per cent of total borrowing estimates in first half of the fiscal year 2010-11. Since the bond markets have already factored most of the economic developments related to bond markets, the traders awaited for the borrowing schedule program to be announced on March 29, 2010 by RBI before initiating their plan of actions. High inflationary pressures also dampened the mood among traders. The market is expecting an inflation to remain in the range of 9.5-10 per cent, much higher than the RBI estimate of 8.5 per cent. The banks’ credit growth has also shown encouraging numbers giving a fear among traders that the banks would be forced to subscribe to Government Securities and private firms would be crowded out. The banks’ non-food credit growth has reached 16.8 per cent level, higher from 11 per cent recorded in the month of Dec 2009.
The benchmark bond 10-year 6.35 % G Sec hardened to 8.01 per cent, a hike of 4 basis points (bps) over the last level of 7.97 per cent. One basis point is one-hundredth of a percentage. Index of Industrial Production (IIP) for January grew 16.7 per cent year on year basis, little below the market expectation of 17 per cent. The numbers prompted yields to ascend with 10-year benchmark G Sec to end at 8.01 per cent level. The other securities 7.02 % per cent 2016 saw yields rising to 7.68 per cent, up by 1 bps. The five year 7.32 % 2014 saw yields down by 4 bps to 7.30 per cent level and the 8.34 % 2027 yield dropped 2 bps at 8.38 per cent levels. Corporate bonds yields closed lower on weak to weak basis. The Five- and Ten-year corporate bond yields closed at 8.60 per cent and 8.90 per cent levels respectively. Moreover, the advance tax outflows may cramp the liquidity in the market.

Invest in ULIPs – A good Wealth Creator tool in long term

Out of the blue, the Indian insurance industry is the talk of Dalal Street as it has become a major contributor of investment in the equity market. Though premium collection slowed to some extent in early 2009, it has been gaining pace with the overall healthy market sentiment. Premiums collected under ULIPs are a major driver in boosting equity investment. Renewal premium of the industry in the ULIP category increased from Rs.26,638 crore to Rs.37,543 crore, an increase of 41 percent year-on-year. Insurance companies invested Rs.44,358 crore in equity between April and December 2009.

The practice of mis-selling ULIPs has largely been curbed after the insurance watchdog, the Insurance Regulatory and Development Authority (IRDA) introduced investor-friendly rulings, capping charges up to three percent and 2.25 percent for ULIPs with maturities of up to 10 years and those beyond 10 years, respectively. Moreover, the IRDA ruling on solvency ratio, corporate governance, public disclosures, payment made to intermediaries and allowing unit-linked health insurance plans, have greatly benefited the insurance industry.

How do ULIPs perform well in the long-term?

The major objective of ULIPs is to build wealth, steadily in the longterm as well as providing insurance cover, though investors must be clear that, investing in ULIPs is not to get high insurance cover. A fund manager in insurance companies can hold stocks for a longer period than his counterparts in other industries. Hence, churning in portfolio stocks, measured by Portfolio Turnover Ratio (PTR) is relatively less or negligible. Since churning involves costs, it has a major impact on a fund's performance. Higher the Portfolio Turnover Ratio, higher is the cost involved. Moreover, IRDA's cap on charges including a cap on Fund Management Charges (FMC) in case of ULIPs, bring more benefits to policyholders in the form of increased returns. A close look at the performance of other market related products vis-à-vis ULIPs throws up a startling fact. Other market related products lag ULIPs' returns by a large margin in the long run, which confirms that ULIPs are an ideal investment vehicle for wealth creation in the long term. On an average, the historical FMC in other market related products are lower. For mutual funds they come to about 2.1 percent whereas for ULIPs, the maximum FMC is capped at 1.35 percent.

For example, a periodic investment of Rs.1 lakh in a diversified equity linked fund (ELSS) for 15 years grows to Rs. 28.54 lakh at an assumed growth rate of 10 percent, giving a net yield of 7.69 percent

(Considering an average FMC of 2.1 percent). The same amount invested in ULIP for the same period may range from Rs.28.63 lakh to Rs.31.59 lakh at an assumed growth rate of 10 percent, giving a net yield ranging from 7.97 percent to 9.03 percent. The final value falls further if we consider other tax-saving instruments such as PPF, which gives a return of eight percent a year. An investment of Rs.1 lakh a year in PPF for 15 years grows to Rs.27.15 lakh.

So, clearly, ULIPs score over other products in terms of returns and additional benefit such as insurance cover. But it scores below PPF as an investment in ULIPs involves high risks. Returns on ULIPs rise due to lower FMC if the investment choice is a debt fund and assumed rate of return is 10 percent (in debt funds, the FMC is generally about 0.75-1 percent). The table shows the different returns.

However, the high entry costs and operational costs mar the performance of ULIPs on shorter maturity periods. Thus, we see that ULIPs appear to be the obvious choice for investments for creating considerable wealth in the long term.

SEBI’s ruling on Mark-to-Market may shun the attractiveness of Ultra-short term funds

Since the SEBI made mandatory for Liquid Fund managers to invest in papers with maturity of up to 91 days only, the Liquid Funds lost sheen among institutional investors due to reduced portfolio returns. This allowed the market participants to shift its focus to Ultra Short Term Funds (erstwhile called as Liquid-Plus Funds). Thanks to superior returns and tax benefits over Liquid Funds, Ultra Short term funds have found a favour among all class of investors.

However, the market watchdog SEBI still not very confident about the credit stability in the market issued another directive asking all mutual funds to value money market and debt securities with maturity over 91 days (or with maturity up to 182-days) on a mark-to-market basis with effect from July 01, 2010. The ruling will require all fund managers to factor in any movement in securities prices on a daily basis to calculate the Net Asset Value (NAV) of fund. The new valuation method may increase the volatility of Ultra Short Term Funds while Liquid Funds being shorter tenure funds will be less volatile. Currently securities having maturities over 182 days are already valued at daily weighted average (mark-to-market) method. The move will ensure that the Liquid Funds and Ultra Short Term Funds are undeniably liquid by asking them to be valued in a more transparent manner.

Ultra short term schemes which comprise 40 per cent of Indian Mutual Fund industry’s asset under management (AUM) of Rs. 7.59 lakh crore have been fetching returns in the range of 5-5.5 per cent having an edge over its sibling Liquid Funds fetching returns in the range of 4-4.25 per cent. The debt instruments held by Ultra Short Term Funds (or Liquid-Plus Funds) have a longer tenure i.e. the average maturity of these funds is comparatively higher than that of Liquid Funds. Long term papers (over 91 days) help fund managers to generate extra returns over short term papers (up to 91 days). Recently the RBI hiked the CRR by 75 basis points which increased the returns on Commercial Papers and Certificate of Deposits by around 100-150 basis points.

In the last few months, there have been continuous net outflows from Liquid Funds due to high dividend tax structure and restrictions to invest in papers having maturities up to 91 days only. Liquid Funds charge a dividend distribution tax (DDT) of 28 per cent unlike in Ultra Short Term Funds where the DDT is 14 per cent for individual and 22 per cent for corporate, thus, clearly giving a tax advantage of 8 per cent. Treasury Officials, CFOs etc prefer Liquid Funds and Ultra-Short Term Funds over Banks’ Fixed Deposits where interest income is charged at 33 per cent.

By issuing out the current directive, the regulator SEBI wants to make sure that the Oct 2008 Credit Crisis is not repeated where the RBI has to open a lending window for Mutual Funds for a limited period to ease out the crisis. However, the industry will continue to enjoy additional returns in Ultra Short Term Funds, though at a slightly higher risk as long as the tax-arbitrage is in existence over Liquid Funds and banks’ Fixed Deposits. The market will actively watch the upcoming Annual Budget on Feb 27, 2010 where the government may take away the tax arbitrage in Ultra Short Term Funds to make sure that Banks’ FDs are actively used for placing excessive unused funds, thus, bringing out a kind of stability in the credit market.

LIC Jeevan Anand - Review

Endowment plans were the darling of insurance companies, before ULIPs came into the picture. Over the years they might have lost their top slot but are not out of demand; conservative investors still prefer them for their survival benefits, which are missing in term plans. ‘LIC Jeevan Anand’ is one such popular endowment assurance plan which also comes with whole life benefits...more

SBI vs HDFC – Home loan war is on!

It’s showdown time for the two biggies in the housing finance sector: SBI and HDFC. After the economic meltdown, most banks switched their attention from not-so-profitable commercial lending to retail lending, which have formed a sizeable part of their credit portfolio in the recent past. State Bank of India (SBI) was the frontrunner with its special 8 per cent home loan scheme till it was challenged by Housing Development Finance Corporation Ltd (HDFC). So what does HDFC offer to outdo SBI’s much-publicised scheme?

Best of 2009 – Stocks

Bonanza year 2009 ended on a happy note and would be remembered for many reasons. Indian stock markets recovered remarkably from their March 2009 lows and went on to register the best year-to-date (YTD) performance in the history of Indian stock market since 1991, with more than 80 per cent return in 2009 and above 110 per cent from their March lows. But it was not all rosy for the investor community, especially for retail investors, with some of them managing the bull ride and a majority missing it...more..

Best of 2009 – Mutual Funds

Mutual funds are an ideal product for the retail investors who do not have the required knowledge or time to invest in stocks. They have become an effective means to create wealth by maximising returns and minimising risks.
Indian mutual fund industry experienced a bad patch in 2008 when it was hit by liquidity crunch coupled with the global liquidity crisis. The industry, which was growing at 30-50 per cent in terms of AUM on year-to-year basis, plummeted to an AUM of Rs. 4.02 lakh crore in Nov. 2008 from a high of almost Rs. 6 lakh crore in May 2008, a substantial fall of 33 per cent in just six months. more..

Mutual fund trigger: Should you activate it?

Prasoon was on cloud nine when he saw NAV of his MF scheme; it was doubled. But his joy didn't last long as the market plunged...

Mutual fund trigger: Should you activate it?

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Home Loan war is on!

The home loan war just seems to be getting intensive with major domestic lenders such as SBI, ICICI Bank, HDFC Bank and others jumping into the bandwagon. The situation reminds a similar event seen in 2003 when foreign banks lined up to provide home loan at 6 per cent for first 2 to 3 years followed by floating rates unlike 7 to 8 per cent provided by their private and PSU counterparts. ICICI Bank and Kotak Mahindra Bank took the fight further with the announcement of new rates so called ‘teaser rates’. Kotak Mahindra Bank has announced the special offer of 8.49 per cent for 30 months for all loan categories followed by the interest rate linked to retail prime linked rate in subsequent years. Similarly, ICICI Bank offers home loan at 8.25per cent for first two years followed by rates linked to in house built Floating Reference Rate (FRR) in subsequent years. Earlier this year, State Bank of India (SBI), the largest lender in India has launched ‘SBI Easy Loan’ offering home loans at 8 per cent for first year, 8.5 per cent for next two years followed by interest rates linked to State Bank Advance Rate (SBAR). HDFC, an another big lender in home loan segment which once described these moves as ‘teaser rates’ also announced a fixed cum floating scheme where it offers home loans at 8.25 per cent for first three years followed by interest rate linked to retail prime lending rates in subsequent years. However, this time they have given out different reasons such as ample liquidity, improved operational efficiency and good quality portfolios among few. So, the question arises what have made these lenders to jump into lucrative home loan segment and which rates are cheapest at the current conditions?

Lucrative home loan portfolio: is it attractive?

In the current economic scenario, the credit growth has almost dried, currently growing at little over 10 per cent down from 20-22 per cent a year earlier. The banks’ credit portfolio which comprised mainly of commercial loans witnessed slow commercial lending due to subdued market conditions and this led to a fall in net interest income, a difference between interest income over interest expenditure. This forced banks to concentrate to home loan borrowers to cover up the losses. Moreover, the real estate boom after a long two year lull added another spark among prospective buyers, thanks to combined home loan sops from lenders and discount offers from builders. Sops to Customers Banks have been offering sops in terms of low interest rates to new customers, just bypassing the existing customers. Initially some banks offered nil or reduced processing and documentation charges but they had scrapped it too. But the question arises, would the teaser rates jeopardize the cash flows of borrowers if the rates arise in future? The answer lies in the effectiveness of borrowers’ planning.

So effectively, the interest rates vary across all the banks at the current BPLR of respective banks which may vary in future as per the interest rate scenario in future.

Are these loans easily available to borrowers?

Simply no! Rupeetalk has interacted with some of the prospective home loan borrowers and many have complained that banks have put stringent norms before sanctioning these teaser loans to them. Some of the norms put are compulsory new home (no 2^nd home buying), compulsory guarantor, no refinancing, listed developers and increased processing time.

Sanjay Bhange, a prospective home loan borrower applied for a home loan with PNB in last Aug 2009 and got sanctioned his home loan in Nov 2009, that too, after repeated reminders along with a warning for complaint in consumer forum.

The logic is simple: have patience, check the listed developers with them, arrange the guarantor in advance and get all your documents ready before applying for these new home loan schemes.

What can the regulator do?

To some extent, the Reserve Bank of India (RBI) has been successful in creating a positive competition among banks to offer low interest rates to borrowers as banks were initially reluctant to pass the monetary policy benefits given by RBI to them. Currently, the RBI in consultation with a special committee has been working to float a new benchmark rate applicable for all home loan borrowers (old and new). So, in near future, the home loan borrowers will have the ease to select the bank on the basis of services provided.

Is Social Impact/Value Creation Key to Microfinance’s Commercial Success?

All organizations create value in terms of economic, social and environmental components. The aim is value creation in terms of improved social surroundings. Microfinance institutions started their work on a social platform and needed to grow in order to deliver on its potential to reduce poverty. All microfinance programs target one thing in common: human development which is geared towards both the economic and social uplift of the people they cater for. It needs to scale up rapidly to reach out to poor in large numbers, it must realize its potential as a broad platform and social environment and it must tap the commercial financing to achieve the first two goals.

No doubt the grass is growing rapidly. Microfinance has been establishing new norms of behavior and cultivating a new level of trust. Like any other emerging industry, microfinance has grown by leap and bound in last few years and consolidations or tie-ups are inevitable among the top 200-300 microfinance institutions. Commercial banks have begun partnering microfinance institutions in an innovative way where they outsource a majority of lending activities with new and improved technology. In today’s environment, commercial financing represent the largest source of financing. If microfinance has to scale up significantly, it must look beyond its basic social building. In recent developments, microfinance institutions have also extended its lessons to other business opportunities for providing goods and services sought by poor.

So, the question arises: does it confine to just social impact or value creation? May be true or false; true in the sense that the basic concept of microfinance is to bridge the societal gap among poor human beings while false in the sense that it must look out of box to provide continuous cash-flows to needy persons for which it needs capital. Nevertheless, rapid technology growth has made the flow easier enabling maximum people to come in its vicinity.

Today, many microfinance institutions have started tapping commercial financing in order to spread their reach to billions instead of millions. Stakeholders who eye a pie of the microfinance institutions pre-capitalization require an assessment of social impacts, impacts on lifestyle and empowerment issues etc. They also analyze the society as a system and societal impacts, hoow deeply it is connected to the poor people where it has worked and how deeply it has gone in improving their livelihoods.

But the greedy game has followed its own course. There is no denying the fact that the high recovery rates (as high as 96 per cent) have forced commercial lenders to move towards microfinance institutions in order to tap the burgeoning growth in micro-lending. The MFI growth has been diluting the interests of microfinance. For the success of an MFI, rapid growth is not necessary rather how deeply it goes in assessing the societal impacts. The signal is clear: Reach to big numbers without making big bucks. But commercial greedy lenders will surely imbalance the strong pillars of pyramid i.e. microfinance. It may lose its relevance in the years to come. White claims that microfinance is a proven anti-poverty intervention thus seems ambiguous.