Prajna Capital - An Investment Guide

Instead of waiting till March to make tax-saving investments, take advantage of the attractive prices in the stock markets now Only two things, they say, are certain - death and taxes. Oddly, both topics are usually avoided in polite society. The annual ritual of year-end investing to save on taxes is almost five months away. So why bring up this dreadful talk about taxes now? It's not March already, by any chance, is it? No, don't bother to look at your calendar. It's only November. But there are attractive investment opportunities available today, if you plan to look at tax-saving equity options - equity-linked savings schemes ( ELSS ) or unit-linked insurance plans ( ULIPs ). The recent drop in equity markets has brought stock valuations down to compelling levels. Mutual fund NAVs have plunged, some by as much as 50 percent over the past three months. While this is obviously unfortunate for existing investors, it's extremely good news for those who are evaluating ...

A further drop in home loan interest rates is not expected as the inflation rate is under control now The unpredictable rate movements, the Reserve Bank of India's ( RBI ) moves and mixed response from the lenders has put borrowers in some confusion. The inflation monster which had pushed prices to unimaginable highs has finally been tamed. From as high as 12.91 percent this year, the inflation rate has almost come down to half of that. Does this mean borrowers can expect banks to reduce their home loan rates, if this trend persists? What is inflation? Inflation is an increase in prices and/or decline in purchasing power. An increase in the amount of currency in circulation results in a relatively sharp and sudden fall in its value, and rise in prices. It can also be defined as a persistent increase in the level of consumer prices or a persistent decline in the purchasing power of money, caused by an increase in available currency and credit beyond the proportion of availab...

When the government makes use of its revenue and expenditure programmes (to achieve the above mentioned goals) and affects the aggregate level of demand for goods and services in the economy, then this action is essentially known as fiscal policy. Related to fiscal policy are deficits and surpluses. When the government’s expenditure exceeds its revenue, then there is a fiscal deficit and the opposite of this is known is fiscal surplus. What is the difference between fiscal and monetary policies? Renowned economist Keynes believed that taxes and expenditure decisions, that is fiscal policy, should be used to stabilise the economy. According to him, government should cut taxes and increase spending to bring the economy out of a slump, this kind of a policy action is known is expansionary fiscal policy. On the other hand, government should increase taxes and cut expenditure to bring the economy out of inflationary pressure, that is, it should follow a contractionary fiscal policy. The cla...

Analysis on the status of debt options in the present market conditions Considerable action was seen on the monetary policy front over the last six weeks. The Reserve Bank of India (RBI) announced sharp cuts in the cash reserve ratio (CRR) and the repo rate. There has been a 3.5 percent cut in the CRR - 1.5 percent cut in the last one month. This is one of the sharpest cuts in key monetary policy parameters in such a short span of time. The intention of the RBI and the government is to ease the liquidity crunch and provide a boost to consumer sentiments by way of low interest rates. The inflation rate is also coming under control due to the slowdown and dip in the rates of many essential goods such as crude oil, metals and manufacturing products. Softer monetary policy measures are expected to influence the returns from debt instruments, but investors should weigh different options carefully before making any changes in their portfolios. Outlook on debt options: Bank fixed deposi...

REFLECTING tight liquidity conditions in the money market, banks have pulled out close to Rs 38,000 crore in the last four months from various mutual fund ( MF ) schemes. According to the latest Reserve Bank of India ( RBI ) figures, total MF investments dipped to Rs 27,691 crore as of Feb 12 09 from a high of Rs 59,700 crore as of May 08. Officials at fund houses point out that most of the MF investments by banks are in liquid or liquid-plus schemes, which almost work as a current account as far as liquidity is concerned and yet earn a return, which the banks do not earn in a current account. Banks often park surplus funds in such schemes that helps them earn some extra return and yet retain the liquidity of the funds. The tightening domestic liquidity in recent times has been primarily due to advance tax outflows and forex intervention. However, this is likely to be transient in nature once the quarter-end pressures are off and due to the liquidity measures undertaken by RBI. L...

THE present banking system is called a “fractional reserve banking system”, as the banks are required to keep only a fraction of their deposit liabilities in the form of liquid cash with the central bank for ensuring safety and liquidity of deposits. The Cash Reserve Ratio ( CRR ) refers to this liquid cash that banks have to maintain with the Reserve Bank of India ( RBI ) as a certain percentage of their demand and time liabilities. For example if the CRR is 10% then a bank with net demand and time deposits of Rs 1,00,000 will have to deposit Rs 10,000 with the RBI as liquid cash. How is CRR used as a tool of credit control? CRR was introduced in 1950 primarily as a measure to ensure safety and liquidity of bank deposits, however over the years it has become an important and effective tool for directly regulating the lending capacity of banks and controlling the money supply in the economy. When the RBI feels that the money supply is increasing and causing an upward pressure on inflat...

Some options for the risk-averse in times of rising inflation The term inflation refers to a rise in the general price levels. Inflation is measured by an index which is calculated by taking into consideration a set of goods and services, and then the prices of the items in that set are compared to prices one year ago. In India, inflation is measured based on the wholesale price index ( WPI ) which measures the change in prices of a selection of goods at wholesale rates. Inflation gradually reduces the purchasing power of your money and therefore it becomes very important for investors to understand the impact of inflation on their investments. Investors, especially senior citizens, put a lot of emphasis on the safety of their principal amount and in the process they sacrifice the yield on investments. For example, if an investor deposits his money in a savings bank account which generates 3.5 percent per annum and the inflation rate in the market is around seven percent, he is making ...

A loan to purchase or build a house is available at around the 10 percent level. It used to be around seven percent a couple of years ago. Also, the interest rates remained quite volatile over the last few quarters. However, this is a cyclical phenomenon. Over a long loan tenure, it will move upwards and downwards. The average rate and tax incentive together add up to make it good for the borrower. Here are some factors that influence interest rate movements: Inflation Inflation plays a significant role in influencing the monetary policy of the Reserve Bank of India ( RBI ). It forces the central bank to hike the interest rates. Currently, inflation has gone up over 11 percent (way above the RBI's mandated inflation level of around five percent per annum). The main reasons for this high inflation rate are a sharp rise in prices of basic commodities, and hike in rates of petroleum products (petrol, diesel and cooking gas). The RBI has announced a repo rate hike twice this month itse...

Prime Lending Rate (PLR) PLR or prime lending rate is a benchmark against which the lender sets his rate of interest. Cash Reserve Ratio (CRR) This is the portion of funds that banks have to retain with the Reserve Bank of India ( RBI ). When the RBI increases this percentage, the amount actually available with the commercial banks comes down. The RBI increases the CRR to draw out excessive money from the banking system and thus checks increase in prices. Bank Rate This is the rate at which the RBI lends to other banks. If the RBI increases its lending rate, the ripple effect will be felt across all the other banks that will hike lending rates to continue making profits. Repo Rate If banks face any shortfalls in funds they borrow from the central bank. Repo rate is the rate at which banks borrow money from the RBI. If the RBI reduces the repo rate, it will be cheaper for banks to borrow money. On the other hand, if the repo rate goes up, borrowing becomes expensive. Reverse Repo Rate T...

DURING the past six months, the financial and economic scenario has undergone a sea change due to high inflation of nearly 12%, softening property prices after reaching astronomically high levels, reduction in gross domestic product ( GDP ) forecasts and consequent slower growth rate of the economy, political uncertainty, sub-prime financial crisis and slowdown in the US. In view of the above, let us review what investment strategies one can adopt. STOCKS The stock market is a reflection of psychology as well as earnings, dividends and asset value. The BSE Sensex is currently at 15,000 level, implying a price to-earnings ( P/E ) ratio of about 18 (with EPS of say Rs 850) and an earnings yield of nearly 6%. So, is this the time to buy, hold or sell stocks? This is definitely a difficult question to answer as no one can accurately predict the future direction of stock markets. Historically, a P/E ratio of 15 for the stock market is considered fair, implying a BSE Sensex of 12,750. Alth...

It's time to visit your portfolio and weed out investments whose inflation-adjusted returns is low or negative On June 4, the central government announced a price hike of Rs 6 per litre of petrol, Rs 3 on diesel and Rs 50 per LPG cylinder, together with customs and excise duty cuts in an attempt to save the oil marketing companies from bankruptcy. Oil marketing companies buy crude oil from the international markets and distribute it in India. India imports 73 percent of its petroleum needs as the production of crude oil here is very little. The price of crude oil in the international markets has nearly doubled from a low of $60 per barrel in May 2007 to $130 a barrel in May 2008. The retail price of crude in India, administered by the government, has not been raised since 2004. Hence, these oil marketing companies have been running a very unprofitable business of buying crude at high prices and selling it to domestic consumers at low prices. In this process, they have accumulated m...

The domestic markets will recover if there is a drop in oil prices. The volatility seen these days is expected to continue for some more time Watch for: Crude oil prices Global cues Policy Action Political scenario The stock markets are in a bear phase. In fact, the markets are witnessing one of the worst phases in the recent past. Last week, on Monday, the bourses were in the red by $50 billion. The markets lost all the gains of the current year in market value with a depreciation of close to $50 billion on that day, amidst a fall of over 500 points in the benchmark Sensex . The Sensex plunged 506 points to close at 15,066 points - it's the lowest in the current fiscal. The cumulative market capitalisation of all the listed companies fell below the Rs 50 trillion mark. Out of this, nearly half the loss, amounting to about Rs 1 trillion, was contributed by the 30 biggest blue chips, which constitute the Sensex. The Sensex has also shed close to 6,200 points from its all-time high o...

INDIA, like many other economies, has embarked on a long, difficult road to check runaway prices. It’s now evident that policymakers will hike interest rates till it hurts and pulls down demand. The central bank as well as the government are willing to sacrifice a bit of growth to douse inflation — an issue that has captured the collective imagination. On Tuesday, the Reserve Bank of India hiked the benchmark short-term rate by 50 basis points, about 25 bps more than what the market had expected. Bonds and equities reacted sharply. Soon, home loan seekers and corporate borrowers will feel the pinch, since borrowing money will now be far more costly. RBI has not only raised the benchmark repo rate — the rate at which banks borrow from the RBI — from 8.5% to 9% with immediate effect, but has also hiked the cash reserve ratio ( CRR ) for banks by 25 bps — a measure that will drain Rs 9,000 crore from the banking system. Given the outright hawkish policy stance, it’s clear that RBI will no...

Some global factors that have a bearing on the domestic economy The sharp rise in oil prices was the last straw for the market that was trying to cope with lower GDP growth, higher inflation and flight of foreign institutional investor ( FII ) funds. Indeed one can wonder whether the economic scenario can get any gloomier than what it is today. Oil prices remain high It all started with the oil prices shooting up. They touched all-time highs of $145 per barrel. Crude oil prices had corrected to $100per barrel only to go back to higher levels. There are several theories attributed to this recent increase in the crude oil prices. Some say that cost of production has increased while others say that more speculative money is invested in crude for quick speculative returns. Usually, investors buy commodities such as oil as a hedge against inflation when the dollar falls. A weak dollar makes oil less expensive to investors dealing in other currencies. Hence, analysts are of the opinion that ...

An increase in the repo rate has put small businesses on the back foot yet again. How will they cope this time? IT is well known that small and medium enterprises ( SMEs ) are among the worst affected, when interest rates rise rapidly. Accordingly, these companies have been starved of funds of late, with the surge in interest rates in the last few months threatening to cripple their growth. In such a scenario, further rise in interest rates was the last thing these companies were expecting. But, contrary to such hopes, the Reserve Bank of India ( RBI ) early in June hiked the repo rate—the rate at which banks borrow from the central bank for short-term—as part of its attempts to contain inflation. The hike at 25 basis points raised the repo rate to 8% has resulted in the banks’ lending getting costlier. This has left SMEs fuming as it comes at a time when they are coping with rising raw material costs and an uncertain business outlook. Domestic apparel supplier Bang Overseas is among ...

While FY09 may be a crunch time for India, given the situation of a rising current account deficit and lower capital flows, the pressure could ease a bit from FY10 IT IS difficult to make a call on how FY10 is likely to pan out, but one thing is clear, the days of 9%+ growth are over, believes Citigroup. As per a recent Citigroup Global Market report, India has lost the opportunity to sustain those levels for now, with growth coming in around 7%+ levels in FY09-10. With supply side measures not really being effective in bringing inflation down, Citi expects RBI to continue to raise rates to temper demand-side pressures. Much further monetary tightening however poses downside risks to both Citi’s FY09 and FY10 GDP estimates of 7.7% and 7.9%, respectively. Rising interest rates and input costs are also likely to result in a deceleration in investments to 10.4% and 7.9%, respectively. But what could possibly offset this are the low real interest rates and improvements in productivity. Wh...