Expert Zone
Straight from the Specialists
India Market Weekahead – Policy action, rupee to decide market direction
(The views expressed in this column are the author’s own and do not represent those of Reuters)
The week gone by displayed indecisiveness by participants as the markets garnered small gains after moving in a tight range. The Nifty managed to hold on to the 4900 level mark as investors cheered the government’s announcement to raise petrol prices in an attempt to revive the policy inaction tag.
State-run oil marketing firms took the long overdue step of raising petrol prices by 7.50 rupees per litre — the steepest ever increase in retail prices. The revision comes as the rupee hit an all-time low against the dollar leading to a jump in the oil import bill. As expected, the government faces strong protests by the opposition and a partial rollback could be on the cards in the next few days. This could also delay the decision on the increase in retail prices of diesel and LPG which form a lion’s share of the subsidy bill and is one of the important signals about the seriousness of the government to pull through bold and tough measures.
The rupee slid further during the week and crossed 56 a dollar. Token measures by the Reserve Bank of India (RBI) in the form of 50 percent conversion of exporters’ dollar holdings into rupee provided some respite. Given the short-term risk conditions, the rupee will remain generally on the defensive and a rally beyond 52-53 does not seem likely in the near-term.
The coming week may see heightened volatility as the derivatives contracts are set to expire on Thursday. The announcement of January- March 2012 quarter gross domestic product (GDP) data on Friday will provide an important indicator of the health of the economy but again the expectation is tempered. The Indian economy expanded 6.1 percent in the October-December 2011 quarter from a year earlier, the weakest pace of expansion in more than two years, hurt by slower growth in manufacturing output and a contraction in mining production. With current account and fiscal deficit along with weak investment climate playing a spoilsport, the GDP scare has intensified further.
HSBC’s monthly purchasing managers’ index (PMI), which indicates the health of the manufacturing sector, is likely to be released some time this week. The HSBC India PMI rose to 54.9 in April from 54.7 in March.
Automobile and cement shares will be in focus as companies from these two sectors will start unveiling monthly sales volume data for May 2012 from Friday. After a fall in April 2012 sales, demand continues to remain weak in May. Pessimism is expected to increase after the recent hike in fuel prices. May is a seasonally muted month for car makers and inventory levels are also expected to be high.
More joining the general insurance party in India
(The views expressed in this column are the author’s own and do not represent those of Reuters)
Well, I don’t know if it should be called a party. But while there have been talks of a few exits (or shall we say strategic re-alignment) in the life insurance space, we have seen three new entrants in the general insurance space in the last few months.
We had Religare Health Insurance Company being formed a few months ago and just two days back, we had Magma HDI and Liberty Videocon general insurance companies getting their approval from IRDA.
That takes the count of general insurance companies in India to 27. Some developed countries have a much larger count of health insurance providers. If service levels can be ensured, the more the merrier it is for the consumer — more players, more competition, more innovation and hopefully better services would be offered as differentiators.
India is a big country with an extremely large spectrum of customer profiles and there is enough scope for differentiation to be created with niche products and services and maybe even on pricing. Clearly, some of the existing players have already started distancing themselves from the price-war-for-market-share game.
While the profitability of general insurance companies may not look all that attractive currently with most making mostly investment income, they definitely seem to be growing. The general insurance industry grew at a healthy 23 percent in the last year compared to the previous year. With increasing healthcare costs and awareness regarding the same, more and more of the population would start buying health insurance plans. We currently have only four (including the latest entrant Religare) specialist health insurance providers — we may see a few more wanting to tap this large market.
Even on the motor insurance side, better tracking and hence refinement would come in. This would result in much better risk-based pricing of motor insurance plans. Indicators suggest that motor insurance premiums too would rise, which again makes the market bigger and may increase the price-sensitivity as it is a relatively standard product offering. Market share too is split between a larger number of players, unlike the life insurance space where LIC has very dominant market share of 70 pct + of the annual market.
Should the RBI delay a rate cut?
(The views expressed in this column are the author’s own and do not represent those of Reuters)
With the return of inflation, there are doubts whether the Reserve Bank of India (RBI) will go in for the next cut in repo rate any time soon. In April, inflation was up at 7.2 percent, 2 percent more than in March.
What is more disturbing — the food component of inflation was in double digits. With the extreme sensitivity of the RBI to inflation, it is difficult to expect it to take kindly to the fall in industrial production and cut the repo rate.
Food inflation, however, is not the parameter for the RBI to go by because it is outside the impact area of RBI policy. No one buys food by borrowing from the bank and, whatever the interest rate, the expenditure on food will not be reduced and food inflation will not ease.
It is more relevant for the RBI to look at the core inflation or principally, inflation in the industrial sector. No doubt, prices of industrial products have also been rising but at a much slower rate. In April, prices of industrial products were up 1 percent over prices in March. Inflation in the industrial sector was 5.1 percent over the year, well within the RBI’s tolerance limits.
Industry is the major sector that responds to RBI policy. An increase in the interest rate will most certainly crunch investment and a cut, stimulate it. In March, for instance, investment was down 21 percent because 142 projects involving an investment of 1,553 billion rupees were shelved, being rendered unviable due to the high rate of interest and absence of market for equity.
But the RBI’s single target is inflation. Even on April 17, the cut in repo rate was done quite reluctantly though it was a good beginning. It is critical that it has to be carried forward before it can regenerate investment and revive growth. The RBI had done that in 2008 when the economy had slowed down. The repo rate was 9 percent in 2008 and the RBI cut the rate by 1 percent in October, in spite of inflation raging at 12 percent. That cut was followed by another in November and once again in December. In just three months, the repo was down 2.5 percent from 9 to 6.5 percent, with inflation dropping to 5 percent.
India Market Weekahead – Time to start buying
(The views expressed in this column are the author’s own and do not represent those of Reuters)
May is typically a bear month for the stock markets as players often look to take advantage of the adage, ‘sell in May and go away’. Before going on vacation, I was expecting the markets to correct to levels of 5000/5050 but was pleasantly surprised to see the crack leading to around 4800 levels. All the negative factors compounded over the past few weeks gave momentum to the ‘sell’ sentiment which remained jittery over the fate of Greece after an inconclusive election.
Weighing on sentiment is a growing sense among investors that the euro zone debt crisis is aggravating, further fuelled by fears of a Greek euro exit and the deteriorating health of the Spanish banking system. There will be fears surrounding any contagion effect if Greece did exit the European Union. Investors continued to reduce positions in riskier assets, leading to a fall in oil prices and a drop to a 4-month low for spot gold, while lifting the dollar which tends to be seen as a safe haven in times of heightened uncertainty.
Facebook Inc priced its initial public offering at $38 per share, giving the world’s No. 1 online social network a $104 billion valuation in the third largest offering in U.S. history. However, it disappointed investors with a tepid market debut on Friday. Shares rose a scant 0.6 percent — nowhere near expectations for double-digit gains on the first trading day.
Back home, the rupee remained under sustained selling pressure during the week and it reached record lows beyond 54.50 against the dollar. Weak risk appetite undermined capital inflows and internally the twin deficit concerns — fiscal and current account deficit — moderating growth prospects, soaring inflation numbers led to the rupee weakness. A falling rupee would increase the threat to inflation, limiting the RBI’s freedom to cut rates. The central bank did intervene which helped drag the currency off its worst levels. The rupee would continue to remain vulnerable in the short-term.
The State Bank of India (SBI) surprised the street with a higher than expected net profit growth in the fourth quarter of 40.5 bln rupees. Slippages came in lower than the previous quarters leading to a decline in NPA provisions made by the bank. Its net non-performing asset (NPA) ratio declined to 1.82 pct, while the gross NPA ratio fell from 4.61 pct to 4.44 pct during the same period. We are positive on the SBI and expect a gradual alleviation of the asset-quality concerns and a turn in the rate cycle to drive the stock performance going ahead. The recent correction is a great opportunity to acquire this stock.
Coming to the cues for the coming week, internationally, U.S economic data including April’s existing home sales is due on Tuesday with new homes sales figures on Wednesday. Initial jobless claims and durable goods orders will be published on Thursday while the consumer sentiment data is due on Friday.
Dark clouds hover as Indian parliament turns 60
(The views expressed in this column are the author’s own and do not represent those of Reuters)
Despite the mounting criticism and steady loss of faith in democratic institutions and the many questions being raised by Indians about the personal integrity of those in public life, it was a proud moment for India when its parliament convened a special session on Sunday to mark the 60th anniversary of the first sitting of the Indian parliament on May 13, 1952. The luminaries at the time included Rajendra Prasad, S. Radhakrishnan, Jawaharlal Nehru, Sardar Patel and B.R. Ambedkar amongst others.
The celebratory speeches by MPs on Sunday cut across party lines and reflected the enormity of what had been achieved — the nurturing of the democratic ethos through the ballot box for six decades — despite the certitude, at the time when the colonial yoke was lifted, that democracy in India was doomed to fail.
Leading the charge was the redoubtable but congenitally imperialistic Winston Churchill who predicted that the natives were not fit to govern themselves and would soon “fall back quite rapidly through the centuries into the barbarism and privations of the Middle Ages”.
The billion-plus Indian glass is perhaps more empty than full and the spectrum of socio-economic and political challenges that need to be addressed, and the accumulated inequities that need to be redressed through the normative democratic principle is indeed daunting.
Sunday’s rich rhetoric captured this flavour with some stellar oratorical performances that were not oblivious to the compulsions of live TV coverage.
But dark clouds hover over the future trajectory of the Indian parliament as an institution and the omissions are many — and cause for deep shame and introspection.
Slow death for push marketing of insurance?
(The views expressed in this column are the author’s own and do not represent those of Reuters)
Just five of the 23 life insurance companies in India (I have excluded Edelweiss Tokio as they are new entrants) could increase their premium collection in 2011-2012 over the previous year. In fact, none of the top 10 premium collectors of 2010-2011 could increase their sales in 2011-2012. Why so?
It’s strange to put a disclaimer in the middle of an article, but here I must — lower premium collections or sales do not necessarily mean lower profitability. In fact, some insurance companies might have increased their profitability in spite of lower sales and it could even be a conscious strategy.
Mind you, all this is when India is considered an under-insured, under-penetrated life insurance market. So where does the problem really lie? The common reason associated with the drop is the change in regulations and maybe even the pace of change. Frankly, all the regulatory changes in the life insurance sector in the last year have been pro-consumer — the sooner they get implemented, the better it is for the customer. Commissions paid to intermediaries for some products came under the scanner and were reduced and rightly so. And then we saw a large dip in the interest levels of intermediaries to sell those products. Should a product sell only because an intermediary makes a lot of money out of it?
Life insurance in India is a strange beast — it is sold and purchased as a favourable tax-saving tool. To buy it, you have to shell out commission levels unheard of from any financial or non-financial sector intermediary, thereby eroding much of the tax benefit. And all the signals suggest that commission levels will see further dips, thus favouring the customer.
So, then the big question arises — who will be interested in PUSHING the insurance product? Or will the industry create its own innovations and start delivering the PULL? Online term plans definitely did that and it even became cafeteria talk — that was unthinkable a few years ago. Maybe channels like Bancassurance with a lower cost of sourcing will see much larger focus. Maybe new channels with higher volumes and lower commissions would start appearing – it’s not that simple, most would say. But then again, that’s what innovation has to deliver and will.
I think the old way of selling products by heavily incentivising intermediaries is gone. The change is happening and it is happening fast. Consumers are more aware and will ask more questions and are being guided by a phenomenal amount of free and high quality information easily available today.
How stable is South Asia 14 years after Pokhran II?
(The views expressed in this column are the author’s own and do not represent those of Reuters)
On May 11, 1998, India carried out a nuclear test and became a de facto nuclear weapon power. A few weeks later, Pakistan followed suit and demonstrated its own nuclear weapon capability. The covert nuclear weapon status of the South Asian region had become unambiguous. India had crossed the nuclear Rubicon after it had first signalled its technological ability to do so in May 1974 — with what was described as a Peaceful Nuclear Explosion (PNE).
Today, it is moot if the South Asian region has become more or less secure and stable as far as its strategic profile is concerned. The fact that Pakistan tested its Hatf III ballistic missile on the eve of the 14th anniversary of India’s Pokhran II nuclear tests is a poignant reminder of the dynamic and opaque nature of the regional WMD environment.
It may be recalled that on April 19, India tested its 5,000 km Agni V missile, thereby enhancing its deterrent capability — and the commitment to a NFU (No First Use) doctrine. The latter is predicated on absorbing a nuclear attack — should the exigency arise due to deterrence failure — but the Indian response would be ‘massive’ and overwhelming.
However, the regional framework is not limited to the India-Pakistan dyad and includes China — which is part of the extended southern Asian grid. Sino-Pak WMD cooperation is abiding and has both muddied and rendered more complex the challenge for India. The response matrix for India is to address two visible tracks — the Sino-Indian dyad and the Indo-Pak one — against the context of a subterranean Sino-Pak axis and define sufficiency in the most appropriate and affordable manner.
India’s status quo character is accepted by its principal interlocutor — China — and there does not appear to be any heightened anxiety about each other’s WMD capability, or that either side would resort to WMD brinkmanship to redress contentious issues such as the long standing territorial and border dispute. India has not sought equivalence with China in the WMD domain and is currently defining its own perch of sufficiency and mutuality.
But the same cannot be said about how the Pakistani WMD arsenal is perceived and Rawalpindi’s own comprehension of its strategic capabilities. Pakistan’s deep and congenital insecurity apropos India goes back to October 1947 and the loss of East Pakistan in the 1971 war for Bangladesh is embedded in the Pakistani military psyche. Zulfiqar Ali Bhutto, who became the PM after the war, provided the political support for the Pakistani ‘bomb’ and A.Q. Khan was one of his protégés who provided the purloined technical support.
Myanmar: The milestones ahead
(The views expressed in this column are the author’s own and do not represent those of Reuters)
The latest craze amongst destinations for the diplomatic community globally seems to be Myanmar. The deluge started with Hillary Clinton flying down in November 2011. However, is all the enthusiasm, easing of sanctions and ambassadors being deputed going to enhance the avowed objective of the democratisation of Myanmar? Is there a possibility of reforms slowing down with too much being offered too early?
A combination of America’s focus on the Pacific and the east, disallowing the Chinese greater space, and Myanmar’s rich natural resources may have pushed the pace. However, a review of the bigger issues that need resolution in Myanmar merit a debate.
The biggest challenge facing Myanmar is its 2008 constitution. The provisions of the constitution allow 25 percent military nominees in the bicameral parliament at the centre and elected houses in the regions/states. The army-backed ruling party USDP, led by Thein Sein, himself a former military general, is populated with ex-army officers who resigned to join the party before the 2011 election. The Commander-in-Chief (C-in-C) nominates the Defence, Home, and Border Affairs ministers. Further, the Myanmar president can also declare an emergency by following a procedure constitutionally laid down and the C-in-C can take over both executive and judicial powers. The Myanmar version of democracy, so far, is a far cry from text book stuff.
The new government has been able to negotiate ceasefire agreements with most insurgent groups but the Kachin Independence Army continues in a combative mode. The fact that talks with various groups include a political dialogue, rather than just operational issues, is certainly a big step forward. It addresses the issue of an inclusive architecture but some insurgent leaderships dumping their lucrative drug trafficking and smuggling interests is difficult to visualise. Myanmar also has to evolve as a federal state with equal opportunities for all. Any assimilationist pressures on its ethnic minorities will be counterproductive.
As far as the release of political prisoners is concerned, there is the requirement of their numbers being authenticated. There are also reports of the release being conditional to non-indulgence in certain activities, as also of jail terms having been suspended and not terminated. Given Myanmar’s history, a validation of the current regime’s claims would be prudent.
Fortunately, no one has as yet been vocal about bringing to justice Myanmar’s generals. Aung San Suu Kyi has also skirted the issue with tact. Any precipitate action against the retired generals can destabilise Myanmar. Such issues are best addressed at a later date.
GAAR: Irrational tax laws or misplaced arrogance?
(Rajan Ghotgalkar is Managing Director of Principal Pnb Asset Management Company. The views expressed in this column are his own and do not represent those of either Principal Pnb or Reuters)
The congratulatory press clippings proclaiming the ‘rollback’ of measures in Finance Bill 2012 have suddenly cleared the air and even the stock market cheered on Monday.
The implementation of the much riled General Anti-Avoidance Rules (GAAR) was deferred till April 2013.
The onus of proof when invoking GAAR will now be shouldered by the tax department. More importantly, it has also provided for an independent member on the GAAR board.
Finally, the GAAR has been subjected to the advance tax rulings facility so that its applicability can be established before the transaction is executed, thereby providing investors with the ability to plan their tax liability in advance. Such rulings will be binding to the applicant and the Commissioner unless there has been a misrepresentation of facts.
It has been well established for some time in Indian law that tax planning will only be legitimate provided it is within the framework of the law and the use of colourable devices which (even though within the letter of the law) results in defeating the basic legislative intent of the tax statute cannot be permitted.
At the same time, it was also well known that even countries like Australia and Canada, widely touted as examples of open economies, had enacted similar tax provisions as far back as the 1980s.
Hillary Clinton’s farewell visit to Delhi: from prickly estrangement to empathetic divergence
(The views expressed in this column are the author’s own and do not represent those of Reuters)
U.S. Secretary of State Hillary Clinton will rank as the most accomplished, poised and successful woman politician in American history. She has pierced many glass ceilings with tenacity and grace. She almost made it to the White House and future sociologists and historians will be able to more objectively assess the misogyny index that still lurks deep within American society and its relevance in the Obama-Clinton Democratic party tussle. The U.S. demonstrated in late 2008 that it had evolved to a point where it could accept a coloured President but not a woman.
However, South Asia with its distinctive dynasty-cum-family political ethos is more at home with strong woman politicians and the top leadership over the decades includes Indira Gandhi, Benazir Bhutto, Sirimavo Bandaranaike (the world’s first woman prime minister) and her daughter Chandrika to Sheikh Hasina. Thus, South Asia would provide a natural comfort zone for Hillary Clinton who has just completed a whistle-stop visit that took her from Beijing to Dhaka to Kolkata before she arrived in Delhi for high-level meetings with her Indian counterpart on Tuesday.
Clinton is no stranger to India and has visited many parts of the country — both as the U.S. First Lady and now as the Secretary of State. Paradoxically, even though she was not in the political loop at the time, her husband Bill Clinton (the U.S. President in 1993) castigated India for its nuclear profile and heightened the estrangement between the two democracies.
However, to his credit, the same Bill Clinton led the rapprochement with India in March 2000 and this was given a dramatic fillip in the second term of President George Bush in July 2005. Progressively, the bi-lateral relationship moved from prickly estrangement over the nuclear issue to one of greater dialogue, leading to a nascent partnership. Divergences do exist but they have been handled with empathy — till now.
On what has been billed as her farewell visit to Delhi, one of the more contentious divergences looms large — it is presumed in an unintended manner. An Iranian trade delegation arrived in India on the same day that Clinton touched Kolkata (on Sunday) and the symbolism is stark. The U.S. is encouraging Delhi to reduce its hydrocarbon dependence on Iran — as it has with many other nations – and June 28 is the date when Washington DC will impose a range of strictures and penalties on the defaulting nations.
Given its energy vulnerability, Delhi has conveyed its inability to comply with this U.S.-led diktat and has indicated that while it will respect all U.N. resolutions on the subject, it has a divergent perception about how best to deal with the Iranian nuclear nettle. The Indian position on Iran is more in consonance with that of Russia and China and the issue cannot be reduced to a binary “with us-against us” reminiscent of September 2001.
