RBI policy: No change in key rates

RBI in its monetary policy today kept the CRR, repo rate unchanged.

CRR remains unchanged at 4% while repo rate is unchanged at 7.25%. 

RBI also left MSF unchanged.

The central bank has cut the GDP growth forecast to 5.5% from 5.7% for FY14.

FMPs Can Be the Best Bet Amid Tight Liquidity

One-year FMPs could be an ideal option for risk-averse investors to benefit from the recent rise in short-term rates,says Prashant Mahesh 

Several fund houses like Birla Sun Life,DSP Blackrock,IDBI,L&T,ICICI Prudential,SBI,Reliance and UTI have launched one-year fixed maturity plans (FMPs) over the last week.They are trying to cash in on the sharp rise in short-term rates following a slew of measures taken by the Reserve Bank of India to tighten liquidity in the banking system to shore up a flagging national currency.The tightening has led to a higher rise in short-term rates than the long-term rates.Investors should lock in their funds into one-year FMPs to benefit from this hike, says Dhruva Raj Chatterji,senior investment consultant,Morningstar India.After the RBI restricted the availability of funds for banks,one-year certificate of deposit (CD) rates went up to 10% from 8.3%,a rise of 170 basis points,before stabilising at 9.5%.What it means is that after deducting expenses of half per cent,these one-year FMPs could give you a pre-tax return between 9-9.5% a good bet for investors who dont want to expose themselves to the interest rate risk.Invest in a combination of FMPs and bank deposits.If you feel you may need the money sometime within a year,use a bank deposit.Otherwise,go for an FMP, says Vishal Dhawan,chief financial planner,Plan Ahead Wealth Advisors.

FMPs Make Sense Now 

The recent RBI measures have put a big question mark on the future course of interest rates.Since the banking regulator has chosen an indirect method to curb liquidity,most banking experts are unsure about which way the rates would move in the near to medium term.There are many who believe that the banking regulator may reverse these measures as soon as the rupee settles at a level comfortable to the central bank.That is why many investors prefer to lock-in their money at current levels,especially because the volatility in the debt market has eaten into their earnings from debt funds.An FMP buys securities that will mature more or less on the same time the fund matures.So there is no interest rate risk for an investor holding an FMP till maturity, says Debashish Mallick,MD and CEO,IDBI Mutual Fund.

Checking on FMPs 

Though no fund house can declare the portfolio of a scheme beforehand,or indicate the returns expected,investors can get a fair idea of what to expect by checking the portfolios of similar schemes launched in the recent past.Such portfolios are available in factsheets of fund houses or with mutual fund tracking agencies such as Value Research.Go with fund houses that invest in AAA corporate bonds or PSU bonds.If the fund house has earlier invested in such bonds,it is likely that they will stick to that approach and not opt for lower quality paper,which may carry higher risk, says Anup Bhaiya,MD and CEO,Money Honey Financial Services.FMPs are tax efficient too,especially for those in the high tax bracket.If you opt for the growth option,long-term capital gains tax liability would be lower of 20.6% with indexation or 10.3% without indexation.Assuming a pre-tax return of 9%,the post-tax returns in an FMP could be 8.05%.Compared with this,a one-year bank fixed deposit that offers 8.5%,would only earn around 6% for investors in the highest tax bracket of 30.6%.

Liquidity is a Worry 

The major drawback of FMPs is illiquidity.Although they are listed on exchanges,they are hardly traded.Even in cases where trading takes place;it happens at a huge discount to the NAV.That means it will be very difficult for an investor to get out of these schemes before maturity.That is why experts advice clients who are unsure about their liquidity requirement,to settle for a bank fixed deposit.Bank deposits are very liquid.If you need the money,all you have to do is walk to the nearest branch, says Vishal Dhawan.

FIIs returning to Bond Street as yields turn attractive

International investors showed signs of returning to buy Indian government bonds at the latest permits auction by Sebi, but paid low premium that indicated their interest may be conditional on higher yields in the next few weeks. 

Bids from foreign institutional investors (FIIs) fully covered the available permits as they sought to buy 26,000 crore worth of bonds while Sebi had put on sale permits amounting to 23,500 crore. These permits are valid for 90 days before which the investor has to buy the bonds. 

The latest round of bids will be encouraging for the government as it indicates a reversal in thinking by FIIs, which have pulled out 51,214 crore from Indian debt since May 22 amid rising attractiveness of US bonds and the fear that the Indian rupee may slide to new lows eroding their capital. 

"They (FIIs) believe the currency will stabilise and yields at current level are a very attractive level to get in," said NS Venkatesh, head of treasury at IDBI BankBSE 1.29 %. "They expect short-term rates to come off in a month or so and that is when they expect to make money when bond prices rise." 

Indian bonds have turned unattractive after yields fell to a low of 7.1% on May 15 when the central bank reduced the repo rate. 

Repo rate is the rate at which RBI lends to banks. But US Federal Reserve Chairman Ben Bernanke's May 22 signal that he might taper the $85-billion monthly bond purchases - the fountain of liquidity to the emerging world - pushed up US bond yields by 100 basis points in a few weeks. 

The benchmark 10-year government bonds ended 15 basis points higher at 8.08% on Monday. The yields on US 10-year bonds were at 2.49%. Although numerically Indian yields are attractive, adjusting for the cost of hedging the currency, a foreign investor may still be losing 30-40 basis points in Indian government bonds. 

The latest round of FII response is slightly different to the previous round in June where the bids fell short of what was on offer. 

Fears that the central bank may reverse its interest rate stance and raise the repo rate to defend the currency is also making investors cautious. Governor Duvvuri Subbarao may raise interest rates if the currency touches 62 to the US dollar, reported Reuters citing unnamed officials in the government. The rupee fell to 59.72 to the dollar. 

The rupee has lost 10% since April when fears about India's current account deficit and the US turning off the liquidity tap spread. Even RBI's efforts to limit the fall had not paid off as the country's trade position also remains weak with merchandise exports falling 4.5% in June and imports rising 0.73%. RBI also banned banks from doing any proprietary trading in the currency, leading to a fall in volumes. 

In a roundabout way, RBI raised interest rates in the system. Last Monday, it capped the banks' borrowing through its liquidity window at 75,000 crore and lifted penal borrowing by 200 basis points to 10.25%. This led to chaos in the bond markets with yields surging as much as 63 basis points in a single day.

Bullish on RIL, brokerages upgrade EPS after 5 years; operating profit to double in 4 yrs

Reliance Industries' (RIL) five-year earnings downgrade cycle seems to be finally over, with brokerage houses upgrading the earnings per share (EPS) estimate of the company by 15% and 18% for 2015 and 2016, respectively. RIL's EPS is expected to be around Rs 79 and Rs 93 for 2015 and 2016, from the current Rs 68, according to data from Bloomberg.

The company has many positives riding for it in the coming years: the Street, for instance, expects RIL's operating profits to double in the next four years from the current 32,988 crore (FY13), which declined in the last two years. The company's gas production from the East Coast (KG basin) is also likely to increase four times over the next four years from the current 15 mmscmd, and its $12-billion refinery and petrochemical expansion are also likely to go full stream in the same period.

"We have seen 15% to 18% consensus EPS upgrades for RIL after five years of earnings downgrades. We expect this to continue on the back of weakness in the rupee against the dollar. The increase in benchmark gross refining margins (GRMs) is expected to boost performance of the company," said Vikash Kumar Jain, analyst at CLSA, in a note.

Many analysts seem to be bullish on RIL, one of the largest refining companies in the world. "We expect RIL's EPS growth for 2016-17 to be stronger than the pervious years' due to the jump in petrochem volumes and GRMs from coke gasification," said Vidyadhar Ginde, Many analysts seem to be bullish on RIL, one of the largest refining companies in the world. "We expect RIL's EPS growth for 2016-17 to be stronger than the pervious years' due to the jump in petrochem volumes and GRMs from coke gasification," said Vidyadhar Ginde, research analyst at DSP Merrill Lynch, in a note.

RIL's share price has also outstripped the markets by over 10 percentage points since March, its best run in the past four years. The government's approval to double gas price to $8.4/mmbtu from the next fiscal, and reserve upgrades by its oil & gas Canadian partner Niko Resources also boosted the stock price performance, with some analysts expecting gas production to quadruple in the next four years.

"The RIL management is more positive on the oil & gas business outlook and the regulatory environment. We believe the effective implementation of gas price hike could help it ramp up gas production to peak levels of about 50 mmscmd by 2017-18," said Nilesh Banerjee, analyst at Goldman Sachs, in a note.

The company had reported a 19% rise in net profit to 5,352 crore during the -June quarter on higher margins, achieved largely through refining low-grade crude oil into high-value fuel. The currency decline also boosted the earnings of India's biggest exporter. RIL earned $8.4 from every barrel of oil it refined during the quarter, up from $7.6 a year ago.

Analysts believe RIL may also weigh options to unlock value in retail and telecom businesses after the government recently raised FDI limits in both the sectors.

"The hike in retail FDI limit may encourage the company to explore options to leverageits retail infrastructure. We believe improved visibility on the launch of 4G telecom services, and any steps to unlock value through stake sale would be positive catalysts for the stock," said Ashish Jagnani, analyst at UBS, in a note.

FMCG stocks on a roll; HUL surges 10%

ITC, Dabur, Nestle, Britannia among top gainers

Equity investors have been a worried lot. Mixed signals from the US Federal Reserve regarding the bond buying programme, economic data from major economies across the globe such as China, coupled with deteriorating macros back home, have made most nervous and re-align their investment strategy.

As a result, investors have been flocking to defensive stocks such as fast moving consumer goods (FMCG). These were on a roll this Wednesday, with most frontline stocks hitting a record high on the BSE exchange.

Buying frenzy took the S&P BSE FMCG index, also the top gainer among sectoral indices on Wednesday, 3.4 per cent higher in trade as compared to the 0.5 per cent rise in the benchmark index, the S&P BSE Sensex and the 0.3 per cent rise in the CNX Nifty of the National Stock Exchange. In the process, the BSE FMCG index also hit its lifetime high of 7,437 in intra-day trade.

Among individual stocks, Hindustan Unilever (HUL), ITC, Dabur India and Nestle India hit their respective lifetime highs, up 10 per cent by close of trade. Colgate-Palmolive (India), Gillette India, Procter and Gamble Hygiene & Healthcare and Britannia Industries were up three per cent each on the BSE.

“The rise in the FMCG stocks can partly be attributed to the sell-off in the banking pack. A reallocation is happening and the money is flowing into defensive stocks. I think FMCG stocks will be in flavour for some time. Pharma and information technology stocks, too, can find flavour with investors, going ahead. So, there will be a round-robin between these three sectors,” said Dhananjay Sinha, head, institutional research, Emkay Global Financial Services.

HUL powers rally

HUL rallied 12 per cent in intra-day trade to Rs 699, also its record high, and finally settled 10 per cent higher at Rs 685 on the BSE. A combined 20.48 million shares representing 1.51 per cent of total free-float equity had changed hands at the bourses.

The rise, according to analysts, came on the back of rebalancing in FTSE's All-World and All-Emerging indices, coupled with the company raising prices of select products in the personal care segment. On the other hand, reports suggest HUL’s share in the MSCI India Index has been reduced from 40 per cent to 30 per cent from Wednesday.

“From July 22, its float in FTSE's All-World and All-Emerging indices will increase to 33 per cent from 24 per cent. HUL has also hiked prices of some of its best selling products in the soap category by up to 15 per cent, said Amar Ambani, head of research, India Infoline.

Points out A K Prabhakar, senior VP (retail research), Anand Rathi Financial Services: “A lot of investors had short positions in the stock, hoping prices would come down post the open offer. This did not happen and the investors were trapped.” Adding: “A rub-off effect of the price hike is being felt on the other stocks from this sector, with most counters, including Colgate-Palmolive, ITC, Britannia and Bajaj Corp rallying at the bourses. Even Emami looks strong at the current juncture.”

Outlook

Despite the surge, analysts suggest there are investment-worthy pockets in this basket. “At the current levels, FMCG stocks are safe haven bets. We like Asian Paints, Berger Paints and Colgate-Palmolive at the current levels,” adds Sinha of Emkay.

As compared to HUL, Prabhakar feels other stocks are likely to offer better returns. However, he does not expect any major correction in HUL till the futures and options expiry is over. “One can book partial profit in HUL and switch to the other counters. HUL and ITC can appreciate six to eight per cent till expiry, while Bajaj Corp and Emami can gain 10–15 per cent from the current levels over the next three to six months,” he says.

Caution

G Chokkalingam, managing director and chief investment officer of Centrum Wealth Management, has a cautious view on this space, given the rise seen in most of these stocks over recent months.

“We have seen a new theme play out every couple of years and valuation multiple for stocks go up manifold. I am sure FMCG stocks will not fizzle out like the others. But one has to be cautious given their steep valuation. However, if foreign players are willing to go in for an open offer, then this pack could be a different ball game altogether,” he says.

Adding: “One can exit stocks where valuation is high, say HUL or ITC, and buy Britannia and Tata Coffee, where the fundamentals and the valuations are supportive. These stocks can appreciate 20–40 per cent in the next one year.”

Plan to Buy a Corp FD Stick to Reputed Names

Though new players offer higher interest rates,investors must factor in risks,says Prashant Mahesh 

Unity Infra,IVRCL, Sumeet Industries, Rasoya Proteins and Gitanjali Gems are some of the new players to the fixed deposit space.These companies are raising money through the fixed deposit route for the first time.They are offering deposits at tenures of one year,two years and three years,with interest rates ranging from 11.5% to 12.5%.Gitanjali Gems and Rasoya Proteins are offering 11.5% for a one-year deposit,12% for a two-year deposit and 12.5% for a three-year fixed deposit. Sumeet Industries is offering 12% for a one-year deposit,12.25% for two years and 12.5% for three years,respectively.These companies are offering rates far higher than banks banks offer 8.75-9 % for a three year fixed deposit) to attract investors,say experts,adding that investors should be extremely careful while investing money in these new companies.The economy is going through a rough patch and most firms that tap the fixed deposit market are finding it tough to raise money from banks or through stock markets.They are tapping the fixed deposit route as a last-ditch effort.Fixed deposits are unsecured,carry high risk and investors should scrutinise each new entrant before investing, says Shankar S,certified financial planner,Credo Capital.

Possible Risks 

Investors should consider risk factors safety of capital,timely payment of interest and repayment of principal at the end of the tenure before putting money into fixed deposits.That is why it is important for investors to analyse these companies before investing in their fixed deposit plans.Consider the case of Gitanjali Gems,despite reporting a net profit of.265 crores for March 2013,the stock is down to.128 from.540 in the past one month,as investors are worried about the future prospects of the company due to policy changes.The central bank has put severe restrictions on import of gold to bring down the current account deficit.This will hit profitability of jewellery companies as they import gold, says Rupesh Bhansali,head of distribution,GEPL Capital.Since there is uncertainty about its future profitability,there are few takers for its fixed deposits despite the company offering a 12.5% interest, says Anup Bhaiya,MD and CEO,Money Honey Financial Service.In the case of Sumeet Industries,the promoter has pledged 55% of his shares as of March 2013.If the promoter has pledged more than 50% of his shareholding,it indicates poor financial health.It means a fixed deposit will carry higher risk, says Rupesh Bhansali.This is because if the stock price moves down,the lender would ask the promoter to maintain margin by either pledging more shares or by bringing in cash.If the promoter is unable to bring in the extra margin,the lender could sell the shares in the market.This could affect the financial health of the company,which is not in the best interest of a fixed deposit holder.The going is tough for companies in real estate as well as for infrastructure firms.In the case of Unity Infrastructure,margins are under pressure.Its net profit fell to.92.6 crore in March 2013 from.103.6 crore in March 2013.Many a time,real estate or infra companies could get stuck in environmental /land clearances,thereby delaying execution of a project and hence revenues will not come through as planned, says Anup Bhaiya.If there is a cash crunch,the company could end up delaying repayment of principal to fixed deposit holders.

Taking a Final Call 

If a fixed deposit plan is giving you higher returns,it always,without exception,carries higher risks, says Jyotheesh Kumar,VP,HDFC Securities.That means,you should be mindful of the extra risk you are taking for extra returns.A big chunk of fixed deposit investors are retired investors,for whom safety of capital is of prime importance.Such investors should not take high risks just to earn an extra 2% return.As a rule of thumb,any company offering 2% more than bank fixed deposit schemes,should strike an alarm bell, says Srikanth Meenakshi,founder and director, Funds India.com. Finally,since these companies are raising fixed deposit for the first time,there is no past track record of service quality.This means you dont know whether the fixed deposit receipts will be dispatched on time,interest warrants will be given on time and whether repayment of principal will happen on the due date.Distributors have no service experience with these companies,as they are dealing with them for the first time, says Meenakshi. Given the tough conditions the economy is going through,and the kind of risks that come with fixed deposits,Srikanth advises investors not to compromise on quality for an extra 2% return.In the fixed deposit space,he advises investors to stick to reputed corporates like HDFC, Shriram Transport,Mahindra Finance.prashant.

Bond investors set to lose a years gains

Retail investors who have bought mediumand long-term bond funds would end up losing the entire gains made during the year.With yields on the benchmark 10-year bond surging 52 basis points (bps),or 0.52%,in a single day to move past the 8% mark,gilt funds and medium- to longterm bond funds would end up as the biggest losers.

Prices of the benchmark 10-year bond slumped 3.5% on Tuesday alone.Bond prices and yields are inversely related.A fall in bond prices adversely affects returns from bond and gilt funds.Incidentally,the yield on the benchmark bond had closed at around 7.1% in the last week of May.

It is a nasty surprise for investors.This (price fall) would wipe out the gains made by them in the past few months, said Dhruva Raj Chatterji,senior research analyst,Morningstar India,an investment research firm.Gilt funds,which primarily invest in government securities,have given 5-5.1% returns in the past six months.Gilt funds and long-term bond funds would be the worst hit, experts said.

This comes at a time when gilt funds and long-term debt funds have been seeing an increase in investor interest.The assets managed by these funds rose in April-June due to sustained inflows as investors were expecting interest rates to ease.

The assets under management (AUM) of long-term debt funds have increased for eight consecutive quarters.The categorys average AUM rose by Rs 26,500 crore or 31% in April-June the highest absolute gain since industry body AMFI started declaring average AUM data in September 2010 to Rs 1.12 lakh crore.The AUM of gilt funds increased for the third straight quarter in April-June to Rs 8,600 crore.

Fund managers have also not significantly reduced the maturity of long-term and intermediate bond funds exposing them to the volatility in bond yields and prices.The average maturity for long-term funds has reduced from seven years at the end of May to 6.2 years in June,Dhruva said.

Mutual Funds Flock to Equity Market Amid FII Selloffs

MFs invest.937 crore in June,their highest in nearly two years,even as foreign investors sell stocks worth.12,000 crore 

Mutual fund houses flocked back to the equity markets in June,after avoiding them for nearly two years,investing.937 crore in stocks,their highest in 21 months.We are very positive on the Indian equity markets as the macro-economic indicators are showing signs of improvement.The governments policy initiatives are also very encouraging, said Navneet Munot,chief investment officer at SBI Mutual Fund.

The softening global commodity prices are likely to help India Inc,and the currency deprecation may also boost Indian exports. But,foreign institutional investors (FIIs),who have a different take on the Indian markets,sold stocks worth.12,000 crore in June,their highest monthly sell-off in nearly five years.Global fund managers believe theres no compelling reason to buy Indian stocks now since the deprecating rupee is a cause for concern.

The currency has fallen about 12% since April (depreciating rupee reduces market returns for foreign investors).The benchmark BSE Sensex also fell by over 1% in June in volatile trading conditions,though many analysts believe the Indian equity markets are currently priced very attractively,trading at 14 times to forward earnings.

The investor community is optimistic about the recovery of the Indian economy as the government has taken a slew of measures to fix the current account deficit and fiscal deficit,which are major worries, said Akshay Gupta,chief executive officer and managing director at Peerless Mutual Fund.Investors who have been bullish on debt markets for the past several quarters turned jittery in June due to a sharp fall of the rupee,dashing hopes of aggressive interest rate cuts by the Reserve Bank of India.

 The currency deprecation creates inflationary pressure in the economy by making imports more expensive.Thus,the underperformance of the debt markets in June has prompted some investors to explore equity markets as an asset class.The 10-year benchmark bond yield rose to 7.58% from 7.11% in June,leading to a fall in bond prices.Its quite heartening to see resumption of equity buying by mutual funds after they sold stocks continuously for over one-and-a-half years when markets were rising, said Dhruva Raj Chatterji,senior investment consultant at Morningstar India,a global fund-tracking firm.biswajit.

Backlog at old price will mean 7-year itch for RIL

If the government decides to make Reliance Industries Ltd (RIL) fulfil its past gas supply obligation before allowing it to avail of a higher price of $8.4 per million British thermal unit (mBtu), the company will take a good seven years from April 2014 before it can become eligible for a price increase.

Besides, at its current level of production, RIL will be bound to the current price of $4.2 an mBtu which will make the government decision to adopt a new pricing formula irrelevant for the company.

Following adverse media reaction to the June 27 decision of the Cabinet Committee on Economic Affairs (CCEA), the finance ministry had issued an office memorandum asking the petroleum ministry to see if there was a way to make RIL clear its gas supply backlog at the existing price.

It also favoured a cap on the eventual price so that companies did not make windfall gains. The suggestions came a week after CCEA clearing the gas pricing formula suggested by the Rangarajan panel and Finance Minister P Chidambaram pushing for an early resolution of the issue.

Though Petroleum Minister M Veerappa Moily on Thursday denied a review of the government decision on pricing, as well as any capping of the increase, the finance ministry suggestions left analysts worried. “Estimates suggest, at the current production rate of 15 million standard cubic metres a day (mscmd), RIL will take seven years to meet the shortfall of 37,500 million standard cubic metres of gas.

This implies there might not be a price revision for gas from RIL’s KG-D6 field from April 2014 onwards,” Religare said in a report released on Thursday. Though an RIL spokesperson did not deny the calculations, he did not comment on the likely implications for the company.

Asked about the content of the ministry’s letter, including the possibility of ensuring RIL delivered the shortfall at the old price, Moily said: “The price hike will be applicable uniformly and it will be difficult to estimate how much it will be. The finance ministry has just put some newspaper clippings to our notice.”

CCEA had on June 27 decided, starting April 2014, the price of domestic gas will be determined on a weighted average basis, depending on international hub price and imported LNG prices.

The finance ministry’s suggestions are not clear on whether the gas supply backlog will be calculated on the basis of gap in supply and allocation (63 mscmd) or it will also include the fallback gas allocation (which will take the supply commitment figure to 93 mscmd).

The other option is to take the difference between the actual gas supplied and the production quantity approved by the management committee since 2009, when the KG-D6 field started producing natural gas.

Religare sees any move to make RIL sell at the old rate beyond April 2014 meeting stiff resistance from the company and fears it might lead to arbitration.

The country urgently needs to shift focus from finance to commerce: Uday Kotak, Kotak Mahindra Bank

Uday Kotak, vice-chairman and managing director of Kotak Mahindra Bank, believes that solutions to India's problems are not in running after more US dollars, but fixing the broken Indian manufacturing. In an interview with ET, Kotak says that the society that has lost its bearings has to get it back -the middle class values that made the India story an attractive one globally. It will be a long and hard way to recovery. Edited excerpts:

Is the India story fading?

As we were all growing up there used to be a very big mantra in India which was called 'export or perish.' There was a long period when we used to focus on import substitution. In the past eight years, these two phrases 'export or perish' and 'import substitution' are no longer a part of the Indian economic vocabulary. I was looking at all the equipment and facilities, furniture for our new office. I was shocked that so much of it is imported. Tables and chairs are coming from Malaysia and China. You ask yourself what is happening to our manufacturing. If we are going to start importing, then we have a big challenge on our hands.

Is the adverse trade balance the problem?

You have to look at the March 2013 numbers and the number that strikes me the most - $500 billion imports and $300 billion exports. We have a $90-odd billion gap in terms of current account. It is a problem of commerce which is becoming a problem of finance. We have to get competitive. Can we afford to import Chinese Ganeshas?

Are import curbs a solution?

Today it has become a problem of finance. How are we trying to solve this - by getting more money to fix this. What about reducing the trade gap? If one is a heart patient, he needs a long walk. It's a long walk we must do.

Is the young population an obstacle, or a boon?

We have a billion mobile demand and 800 million users. Many are using more than one handset. Why are we not manufacturing it in the country? What is it that a Korea has that we don't? That's where the whole psychology and system in the last 10 years has moved away from competitiveness and we have not addressed the 500/300 problem.

When there is a finance problem staring at us, how do we attempt to fix broader issues?

We need to glorify people who solve the 500/300 problem. A weaker currency is a national tariff. After we get a weaker currency, we have to take advantage of that. Or else, we will waste it once more in inflation and in the inability to raise competitiveness.

So is a weak rupee a blessing?

If properly used and not frittered away. If a software professional's salary is in rupees but earnings are in dollars, then you are competitive. But if it leads to a disproportionate increase in inflation, then we would have wasted the opportunity.

Isn't inflation already a burning issue?

If I look at my branch one thing that shocks me is the rate at which ground floor real estaterentals have gone up and it is completely lazy money that a landlord gets. It reduces my competitiveness. We need a policy that is brutal about commerce. We have to think about this as not a problem of finance but a problem of commerce. Unfortunately, all our minds are focused on finance. But the issue is that a problem of commerce is being handled as a problem of finance.

Are financing problems addressed with higher debt limits for FIIs?

There is too much of pressure about cost of funds. In a country where your consumer price inflation is 8-9%, savers will not save money at less than 8%. Which depositor today will accept less than 8%? Then if you try and reduce interest rates your financial savings move to gold and real estate. We have to ensure that financial savings continue to be attractive. The move on FII debt was because borrowers are complaining. Most of the borrowers borrowed in dollars and did not hedge. So they thought they were borrowing at 2% while they were borrowing at 20%. The first principle of business is to borrow in the currency of your business, otherwise you are a forex speculator.

So there's a financial sector challenge?

There are issues when you have such a high government ownership. If the asset side of the balance sheet has pressure, you need capital. The correct liberalisation of the financial sector would have been broadening the public ownership in public sector banks. Which means you would have all public sector banks as widely-held private sector banks. But we can't take that decision for political reasons.

Is the financial system in trouble?

The banking system is going to be under greater pressure than what banks are willing to show. For both public and private sector banks, it is an issue of governance. It is about trusting the numbers. If you look at 2009, why did the recovery happen? Recovery happened because somebody in the world's largest economy opened the tap, the US, followed by Europe and now Japan. US is now shutting the tap and it's like all water levels coming down. Buffet's statement comes to my mind - only when the tide turns you know who all have been swimming naked. Therefore, for a quick recovery you need steroids. I don't see global steroids in a hurry. If steroids are being withdrawn, it is back to productivity, competitiveness, getting commerce right. It is about back to basics.

What needs to be done?

I was completely dreamy eyed in early 90s with Manmohan Singh as finance minister, Oh India is changing. Twenty two years later, cash in the economy, as a percentage, is more than what it was then. Control cash. The Gangotri of all problems is cash. Stop that. Find ways and means of encouraging non-cash payments or discouraging cash payments. We need to encourage exports, encourage manufacturing. We will make our laws simpler in every aspect so that people think it is worthwhile to set up businesses and factories. Most Indian enterprises are become arbitragers. Free coal... free land... free things and arbitrage profits. We need to move to an era where value-add is given a premium over arbitrage. Most of us have been brought up in the 90s and 80s on the core middle class values where something is right something is wrong. And then if you mix it in 2000, it got mixed with drugs and everything got blurred.

What you are saying is more scary than the Harshad Mehta scams because investors are doubting the integrity of companies.

There is a significant need to put building blocks. Go back to the 1980 and 90s. Why did the equity markets turn around? Because you had created a convertible instrument called UTI where downside was protected. Now there is no such product. That's gone. So the downside is fully to the investor. So if the upside and downside are fully to the investor and the poor guy for the first time came to the market in 2007-2008 and many of his ilk have been ravaged. For the longer term, you have to build trust.

Is there hope?

If you want growth in the next 10 years, it has to come from people-intensive and skill-intensive business. The single biggest resource India has is people and skill. The power of capital dominated over the last 10 years over everything else. If we threw money at a problem, you will fix it. Therefore, if we can get people, skills and knowledge as basis of our future, we will create jobs and we will create a future.

If you had to start your career all over again what would you do?

It would be in the real economy with digital. How can we not waste the opportunity created by a depreciating rupee? A simple example is that we had a 20% depreciation in a year. Our annual inflation rate is 10%, We have to make sure real wages don't go much more than inflation. Then your entire depreciation is bonus. It increases your competitiveness by 20%. We must focus on using this currency devaluation as a tool for economic turnaround.Environment is yet another big issue for me. Are we going to stay with blackouts for the next 50 years? It is not an easy one because there is huge destruction but how do we get the balance?

What about the role played by a tight monetary policy?

Policy has to be holistic. A fundamental aspect of any policy has to be are we competitive and are we creating jobs. The rest will follow. The biggest worry is that we need to create jobs. Whatever policy we follow should be job-intensive and not capital-intensive. The biggest problem that Clinton said the world would face in the 21st century is that as technology advances, it will eliminate so many jobs. People who are ready to do real economy jobs should be our future.

FMCG Growth to be Volume-driven

Low raw material prices to keep cos operating margins healthy 

Fast moving consumer goods,or FMCG,companies in India are likely to face another quarter of modest growth in volumes more so in case of discretionary consumption products.Industry growth,estimated to be in mid-teens,will largely be volume driven.This is because,fearing a setback in volume growth and thanks to lower input cost,most companies did not raise prices during the quarter to June.Operating margins are likely to be healthy thanks to benign raw material prices.

Slowdown in volume growth has not deterred companies from launching new products and brand extensions.Companies also spent more on advertising and promoting their products.In line with the quarter to March,spending on advertising is likely to remain high and savings on raw materials will be channelised towards more investments in brands.Since the past two quarters,consumer goods companies have been using the savings on raw materials to fund higher investments on brands.The benefit of these investments is likely to be reaped over the coming quarters.In the near term,the sector will face headwinds in the form of a slowdown in economic growth,high prices of fruits and vegetables and lower consumer confidence.

A good start to the monsoon augurs well for the sector,providing a fillip to rural consumption.Most FMCG stocks are quoting now at premium valuations with little room for a further appreciation in price.Yet,among the large FMCG companies,ITC is the favourite among analysts thanks to its robust cigarette business and the steadily-growing FMCG business.Among mid-cap companies,Godrej Consumer Products and Dabur are likely to do well.Bajaj Corp and Jyothy Laboratories are likely to be good performers among small-caps FMCG companies.HUL,Asian Paints and Marico are likely to face subdued growth in volumes especially on their discretionary product.

Telecom Commission gives nod to 100% FDI in sector

Inter-ministerial body Telecom Commission on Tuesday gave its nod for raising foreign direct investment (FDI) limit in the sector from 74 per cent to 100 per cent, subject to Cabinet approval.

"The Telecom Commission has approved raising of FDI limit to 100 per cent from 74 per cent at present, where 49 per cent of investment in an entity can be done through automatic route and FIPB approval will be required for raising further stake. The decision will come in force only after the Cabinet approves it," a senior government official said here.

The official said that the Department of Telecommunications (DoT) will send a detailed note to the Department of Industrial Policy and Promotion (DIPP), which would take it forward for inter-ministerial consultations before moving it to the Cabinet.

At present, FDI limit in the sector is at 74 per cent where 49 per cent is done through automatic route and the rest requiring nod from Foreign Investment Promotion Board (FIPB). The idea behind the proposal to increase FDI limit in telecom sector is to help the industry get fresh funds to lower financial burden. Reacting to the proposal, telecom operator Aircel's spokesperson said, "The move will help the industry to bring in more FDI to fund the high Capex demands of this sector especially in areas where coverage needs to be enhanced, and launch new 3G and broadband wireless access (BWA) services. This will undoubtedly have a huge benefit for our customers and higher licence fee for the government." Malaysian firm Maxis Communication holds 74 per cent stake in Aircel with rest of the stake being held by Sindya Securities & Investments Private Limited.

Russian conglomerate Sistema controlled SSTL's spokesperson said, "Sistema Shyam TeleServices is supportive of 100 per cent FDI in telecom. The much needed policy decision is certainly a pro industry and a pro-consumer move." Reliance Communications said, "100 per cent FDI in telecom will enhance value for all

Record June Rain to Aid Power,Farm Output

Rainfall at 32% above-normal level to support winter sowing;of the 85 main reservoirs across the country,60 now have 80% of normal storage 

Agriculture output is poised to accelerate and power deficits will narrow as the monsoon has begun bountifully in its first month,irrigating fields and filling up reservoirs with the heaviest June rainfall in more than a decade. Rainfall has been 32% above normal in June,injecting moisture into fields and preparing them for early sowing of kharif crops and reducing the farmers need for electricity or diesel to pump water into fields.A heavy rainfall in the Himalayan region has helped key reservoirs such as Bhakra and Tehri accumulate huge reserves of water,much higher than normal.

This will help generate more electricity and irrigate fields.Of the 85 main reservoirs across the country,60 now have 80% of normal storage,which is expected to help rabi crop sowing later in the year.Crop planting has already jumped,according to official data.By June 28,total sown area had jumped to 250.99 lakh hectare from 135.87 hectare at this time last year.There has been an unprecedented sowing this year with a good spread of rainfall.If the dry spell is not for a longer duration,we should be looking at a bumper harvest, said AK Sikka,deputy director general (Natural Resource Management),Indian Council of Agricultural Research.

Deficient and erratic rains in 2012-13 reduced grain output to 252.36 mt from 259.32 mt in 2011-12.The four-month-long rainy season began on June 1,recording 216.3-mm rainfall till June 30,which was 32% above normal.According to the MD,it was after 12 years that the country received such heavy rains in June.In 2001,the country received 35.6% normal rainfall at 219 mm in June and it saw a 37.7% above normal rainfall at 219.8 mm way back in 1980.

Monsoon was weak in 2002,2004,2009 and 2012,which impacted sowing pattern,yield and production.Apart from increasing acreage,no major change in crop pattern and good production,the rains will also help farmers who mainly grow long-duration crops like cotton,sugarcane and those in rainfed regions to save on labour,diesel and electricity cost to run tube wells.Initial signs are good.If the trend continues,it will be beneficial not only for farmers and consumers but for the economy.

Our growth rate has slowed down in the last two years.Agriculture can provide the much-needed push.It will also help in keeping a check on inflation and macro economic stability, said Ramesh Chand,director,National Centre for Agricultural Economics and Policy Research,New Delhi.July and August are of extreme importance as the maximum spell of rainfall is received during these months which helps moisten the earth for sowing and to mature planted crops.A good monsoon is of particular importance for paddy (42% of area is rainfed),which constitutes more than 60% of the kharif crop.Farmers in Punjab and Haryana exploit water resources and ensure that the crop is good even in a drought year.However,this is not the case in other parts of the country.

No Respite Seen for Uttarakhand 

NEW DELHI More rains are expected over Uttarakhand,which has been washed out in record downpour this season,in the next three days,reports Our Bureau.Monsoon activity is expected to strengthen over northwest India from July 4.Heavy to very heavy rainfall is expected at a few places on July 5-6 across Uttarakhand, said OP Singh,Deputy Director General of Meteorology,regional meteorological centre,New Delhi.He said that the state would get 3-4 cm rainfall in lower reaches from July 1-3.The state will get rainfall at most places with 7-13 cm rainfall at a few places each day during the period of July 4-7, he said.