News just in - Annual inflation at 3.94 pct on Aug 18

August 31, 2007

India's wholesale price index rose 3.94 percent in the 12 months to Aug. 18, lower than the previous week's 4.10 percent due to a decline in some manufactured product prices, government data showed on Friday.

The rate matched a median forecast of 3.94 percent in a Reuters poll of analysts. See related news at Inflation seen at 3.94%

It is the first time annual inflation has been below 4 percent since the end of April 2006.

The annual inflation rate was 5.12 percent during the corresponding week of the previous year.

ICICI Pru Indo Asia Equity Fund

Inline with many Mutual Fund houses that have brought out funds that aim to invest in equities outside of India, primarily in SE Asia and China, ICICI Prudential also has come out with an open-ended fund named ICICI Prudential Indo Asia Equity Fund.

The scheme endeavors to generate long term capital appreciation by investing in equity, equity related securities of companies, which are incorporated or have their area of primary activity, in the Asia pacific region. In the beginning the scheme will be investing in share classes of International Opportunity Fund - Asian equity fund and thereafter they may choose to make investment in listed shares, securities in Asia.

The fund manager shall broadly analyse the global and domestic economy, industry trends and business cycles. He will invest in companies that benefit from larger industry and sectoral trends, using bottom-up analysis, quality of management in terms of corporate governance, transparency in reporting, commitment to minority shareholders and a certain minimum size of the company before considering any company as a prospective investment.

Between 65% to 100% of the portfolio allocation will be in equities and equity-linked instruments. Debt will comprise 0% to 35% of the portfolio.

Highlights
Issue Opens: August 23, 2007
Issue Closes: September 21, 2007
Investment Options: Growth, Dividend payout and reinvestment.
Plans: Retail and Institutional
Minimum Investment: Rs 5000(retail) and Rs 5 crores (institutional)
Face Value: Rs 10
Entry Load: Entry load of 2.25% would be charged for investment less than 5 crores.
Exit Load: Exit load of 1% would be charged for investment less than 5 crores if redeemed before 6 months from the date of allotment.

The above load structure is applicable only for the retail plan. The fund would not charge any load for the institutional plan.

Benchmark Index: The benchmark would constitute 65% of S&P CNX Nifty and 35% of MSCI AC Far East Free ex - Japan Index.

This is a good scheme along with other similar finds that were launched for people to diversy their holdings outside of India and such funds gain popularity because of the liberalization where RBI allowed Indians to invest abroad to the extent of USD 100,000 per annum.

Inflation seen at 3.94%

I am back after a long silence as i was busy in my personal life and could not devote much time to the blog.

India’s wholesale price inflation rate is forecast at 3.94% for the 12 months to 18 August, its lowest in nearly 16 months, a poll of 11 analysts showed on August 30.

Annual inflation in the previous week was at 4.10%, and had last dropped below 4% in April 2006.

It would be the eleventh consecutive week that inflation has remained below 5%, the central bank’s target for the 2007/08 fiscal year.

Last month, the Reserve Bank of India raised banks’ cash reserve ratio to 7% from 6.50% in a bid to mop up excess cash that could fuel inflation.

The central bank held its short-term lending rate steady at the monetary policy review in July, as expected, after raising it five times since mid-2006.

This means that the rate cut that many banks have adopted will continue for some more time to time and lending rates may remain stable to a bias downwards.

Kotak Gold ETF lists on NSE

The open-ended Kotak Gold ETF got listed on the NSE yesterday (August 9th 2007) (Read Investing in Gold to get a good idea of investing on gold) and opened at the price of Rs 919, which is also day’s high, against its issue price of Rs 892.15. It touched a low of Rs 880 before closing at Rs 892.15. The total quantity traded was 15,257 units, of which 17 per cent was presented for delivery. The Kotak Gold ETF will invest in gold, engage in gold lending, deposit gold with banks in return for fees to the extent permitted by regulators. The asset base of this open-ended Gold ETF is between Rs 40-42 crore.

Please note that this is the third ETF where the underlying asset is gold that is trading at the National Stock Exchnage. The other schemes traded at the national Stock exchange are UTI GOLD EXCHANGE TRADED FUND (NSE Code - GOLDSHARE) and GOLD BENCHMARK EXCHANGE TRADED SCHEME (GNSE Code - OLDBEES).

Did you miss filing your income tax returns by 31st July ?

Have you missed filing your returns by 31st July 2007 ?. What does one do now ?. The proverb 'Better Late than Never' kicks in at the most appropriate time. You can file the return till March 31, 2008, without attracting any penalty as long as you don’t have any outstanding tax to be paid. Therefore, salaried people (if TDS is deducted correctly) need not worry as their taxes are deducted at source. However, if one has other sources of income for which advance tax has not been paid, then one will have to pay 1% per month on the outstanding tax liability.

Layman’s view of Credit Policy - Part 2

This is continuation of the two part series on the recent credit policy Layman’s view of Credit Policy - Part 1

LAF cap removed
The RBI has also allowed banks to keep more funds with it under the daily liquidity adjustment facility by removing the Rs 3,000-crore cap imposed in March this year.

What is LAF ?
Prior to this policy, there was a cap on the amount of cash that a bank can hold with the RBI after taking care of the basic reserves that it has to maintain with the RBI. This was called the Liquidity Adjustment Facility (LAF) where excess money can be given to the RBI.

However, the interest paid by the RBI on such short-term funds can henceforth be either at fixed rate or at variable rates. In other words, the RBI will undertake short-term lending and borrowing through repo and reverse repo at a rate of interest which its thinks appropriate.

The removal of the Rs 3,000-crore LAF limit is expected to push up overnight call rates which have been ruling at below 1 per cent.

All other rates have been retained have been retained at the previous rates.

What is Repo rate and Reverse repo rate ?
Repo rate is the rate that RBI charges the banks when they borrow from it. Repo operations increase liquidity in the system. Reverse repo rate is the rate that RBI offers the banks for parking their funds with it. Reverse repo operations suck out liquidity from the system.

What is Call Rate ?
Call rate is the rate that one bank has to pay another bank for borrowing funds between themselves. These rates are typically charged for deposits that are borrowed overnight (typically to meet RBI commitments etc)

How does Repo rate relate to the call rate?
Repo rate typically acts as a floor rate (bare minimum rate) for the call rate. If not, banks would make arbitrage profits. How? Suppose call rate is lower than repo rate, banks will borrow on call (if there are lenders) at a lower rate, and lend on repos to the RBI at a higher rate. As the Repo acts as a floor rate, the call rates will tend towards the Repo rate.

Thus in the recent past because of the high liquidity in the system, the overnight call rates became very low and also the LAF ensures that the banks could not park more than what was allowed with the reserve bank of India. Now this ceiling has been removed.

Layman’s view of Credit Policy - Part 1

This is part 1 of the series where I will try and explain the key terms and the changes that have been made by the Reserve Bank of India (RBI) in the policy announced on July 31.

What is CRR?
Yesterday the RBI increased the CRR from 6.5% to 7%. What does CRR mean and how does it impact you ?. Read on. Indian banks are required to hold a certain percentage of their deposits as cash. This means if you deposit Rs 100 in a bank, they will have to maintain Rs 7 as cash and can only use Rs 93 for their business purpose as against Rs. 93.5 that was available to business earlier(There is something called SLR also, which we will see later on). However, in reality the banks don’t hold these as cash with themselves, but with Reserve Bank of India (RBI), which is as good as holding cash. Thus the RBI uses the CRR an instrument in the hands of a central bank through which it can control the amount by which banks can lend or do business.

The RBI kept unchanged its key rates such as the reverse repo at 6 per cent, the repo rate at 7.75 per cent, and the bank rate at 6 per cent. We will look at these terms at a later point of time.

What does a hike in this rate mean ?
The hike in CRR from 6.5 to 7 per cent will increase the amount that banks have to hold with RBI. It will therefore reduce the amount that they can lend out. The move is expected to shift Rs 16,000 crore of resources that could have otherwise been lent for business to the RBI. In the past few months the money that banks had for giving credit (read as loan to others) was much higher than the amount they have been actually lending out. The objective of the CRR hike is to mop up some of the excess liquidity in the system.

Will this mean a rise in interest rates on my deposits and home loans too? By when and by how much?
The hike in CRR is not likely to lead to an immediate increase in interest rates. There is excess liquidity in the system even after a higher amount is deposited with RBI as reserves. In fact banks have started reducing the deposit rates for 1 year deposits which has reduced from on an aveerage 9.5% to 9% p.a. At the same time, while lending rates may not come down immediately, most bankers feel that the interest rates have peaked out atleast for some time to come.