Why the Rupee Could Become Weaker and Impact on Everyone's Finances

Now that the third quarter current account deficit figures of 4.3 per cent of GDP is out a few things are clear to me. We will see a situation in the future where the gap between growth of imports and exports will continue to be yawning. You don't need to be an expert to know that the top items in our imports list are things that we can't do without. I am talking about petroleum and edible oils. With rising international oil prices being the single most important threat to the global economy, especially India, the import bill could go into orbit any moment whether it is tensions in areas such as Iran or another round of currency pumping by some central banks. In the past, the huge amount of cash pumped by central banks found its way to commodities such as crude oil, pushing up their prices. On the exports side, things don't look too great with global economy showing weakness. In the US, joblessness is on the decline but the rate of fall is not brisk enough. We know how things are in Europe and China is now talking about far lower rate of growth. The one thing that government could try and do was checking gold imports which it tried to do in the Budget. But then, jewellers had other ideas with their strike.
Given this situation, one can expect people to seek more dollars and than the rupee or the rupee's value to weaken. This in turn will only mean more inflationary pressures and more stubborn inflation. Less likely will be a cut in interest rates and greater impact on the bottomlines of companies impacting their stock prices. Of course, this will also impact the investments in equity mutual funds and growth funds of unit linked insurance plans (Ulips) this year. Clearly, it looks as if the new financial year of 2012-13 will be fairly challenging.

Financial Inclusion's Exclusive Problems

I started this blog late last year but hadn't been putting up posts regularly for long. I have savings accounts that I don't use regularly. Why I am saying all this? For some reason, when I heard that most of the new bank accounts opened in the countryside under government's financial inclusion efforts are showing no financial activity, I only got reminded about myself. But there is an important difference. I can do something about it while people in the countryside can't. You need to be getting payments that will move into the banks. That isn't happening. During my interactions various chief executives of banks in the last one year I have realised that they are waiting for government payments such as that of MNREGA and pensions to make this effort worth the bother.  That in turn depends on the implementation of the Unique Identification Number project or the Aadhar scheme. Once this unique number is given to a large number of Indians, payments will be made using this number as the reference. The FM mentioned that the scheme is ready for implementation in his Union Budget speech recently. I got my formalities for Aadhar months back but have little idea where and how the closure of the process will happen with a card or the number coming in. There is a lot riding on Aadhar be it rifle-shooting for subsidies to stop leakage or making the bank accounts in rural areas work. If successful it will become a role model for many countries. Till then, for banks, it will be more of following the diktats of RBI and the government.

Looking Beyond Fidelity AMC Sale

Late afternoon yesterday, I got to see wire reports about the sewing up of the sale of Fidelity's MF business in India. There have been plenty of media reports since the reports first broke in about the imminent sale.  The usual hyperbole was there in many cases. Some even went to the extent of saying that this development was a result of Sebi's numerous regulatory changes in the MF business  while some focussed on Fidelity's "high costs". To me some other aspects are noteworthy.

First, Fidelity is not exiting India as some think or at least from what I understand. In India, they have about 10,000 employees in various functions such as global research support. It is only exiting the MF business after revaluation of  its business. I expect most people in its Bangalore and Gurgaon offices to keep working. Second, unlike Indian businesses, large global corporations enter, exit and re-enter businesses in a particular country. We now have an example of at least one foreign player which has re-entered the MF space. So, how about things like costs and the so-called regulatory squeeze. To really appreciate the realities, one needs to step back a little from the picture to get a better view. The Indian asset management business or shall we say the MF business has never been able to get the scale it needs to reduce costs. Is it their fault? Perhaps partly. But regulations have been a constraint. For instance, if AMCs are allowed to manage assets of insurance companies instead of insurance companies having a separate set-up for them a lot of benefits of economies would have accrued.

Next, if pension reforms had taken off instead of it still being discussed in seminars, the critical mass of assets would have given MFs the benefits that could have trickled down to their costs. In this episode, let's try to understand one more thing. Outfits like Fidelity didn't really come to India to be in the MF business. Their eyes were on the the pensions business. Top AMCs across the world focus more on pensions because that is where you get the scale and the long-term money. You don't get people--both corporates and individuals--who are moving in and out endlessly giving the fund managers and AMCs nightmares managing the investments. One can argue that AMCs could open branches across India and reach out to the people. While this can be done imaginatively but the ground reality is that this expansion is often not justified as experience of top AMCs indicate that most of their businesses gets generated in large cities. So beyond a point you can't justify the expenses.

To be honest, I will miss Fidelity for three reasons. First, the way they went about their business with a long term view. It was refreshing to see their retail focus. The had more equity assets than debt ones with the latter typically coming to AMCs from corporates. Second, they didn't join the thugee party of launching one scheme after the other with little changes in them, a norm till recently to raise fresh money and keeping the distributors happy. Most importantly, some of their schemes were quality offerings.

It is clear from this latest episode, that under the present circusmtances that there are too many AMCs and schemes keeping things murky for the investors. A consolidation may not be such a bad thing for the investors as long as their interests are protected and for companies losing money. Now, have I just lost some friends in the industry by saying that?

Can Online Investing be the Key to Access For Small City Investors?

Despite all the advertisements for financial products that we get to see in large cities access to modern financial products is quite limited for a person staying in smaller towns or even villages. The largest players in insurance and mutual funds don't still have the kind of reach that will allow people to easily buy an investment product. Also, at a time when there has been a regulatory squeeze on costs be it insurance or mutual funds and the markets have been less-than-friendly leading to tepid growth and in many cases de-growth, one can't exactly expect financial service providers to go around opening branches and adding advisors and agents. Selling financial products through banks would have been a potent tool but then there are restrictions on the number of tie--ups in case of insurance. Also, with banks getting into such relationships just for fee income, the whole thing becomes purely transactional in nature. In a country where you have low financial awareness credible and quality fiancial advice needs to be bundled with the sales of the financial product. That really can't happen if a banker is just pushing financial products. Given this state of affairs, the glimmer of hope comes from the results of recent surveys that seem to be indicate that a lot of e-commerce transactions are happening in the smaller towns including a recent one from Boston Consulting Group (BCG). This should be great news for online broking firms that seem to be providing a whole range of services and products to people along with material on their sites that inform the readers about various products and services. Thisshould work for selling plain vanilla products such as term insurance plans, travel insurance plans and index mutual funds. How about more complicated investment products especially unit linked insurance plans (Ulip)?  I suspect that would need some form of one-to-one guidance though there are online versions of products like Ulips. The more complicated products need to be evaluated for their fit to individual situations. As Internet penetration increases in our country, we can also expect this medium to be a catalyst in enhancing access to financial products. That's a very desirable outcome in a country where reasonably high savngs that are not optimally deployed. 

Bye Bye Rate Cuts?

The government is going to raise petrol prices on April 1. We shouldn't be surprised. They always wanted to do this after they had presented Budget and the Parliament session was not in progress so that they don't have to face the heat there. I don't think even if Mamata Banerjee, CM of West Bengal and also the head of Trinamool Congress, a major contituent of the ruling alliance UPA, protests the government can't roll back since its finances aren't exactly on a roll. Actually, they are in a mess thanks to rising global oil prices. Oil price hikes cause inflation is something everyone knows. To that now add the increase in service tax and excise and you know that high inflation that was begining to get subdued is all set to make a comeback. Where does that leave RBI in terms of rate cuts? Between a rock and a hard place. If inflation rebounds or remains high, it can't cut rates despite the fact that growth is flagging. I also get a sense of a liquidity crunch all around from anecdotal evidence. It is becoming increasingly clear to me that a rate cut if any will be a small one, say 50 basis points, more towards the end of the year than now. That is not good news for home and car loan borrowers, besides corporates.

PPF Rate Hike and PPF's Future

There were many years in late 90's leading up to early noughties when the rate of interest for 15-year Public Provident Fund commonly available in post offices and some PSUbanks was stuck at 12 per cent and it looked as if nothing could make it budge. After a change in 2004, it hasn't really gone anywhere (the rate). That was till last year when the government announced that the rate will change every year and will be linked to government securities. The government has announced a higher rate for of 8.9 per cent (I need to double check this) for 2012-13. Ironically, this comes at a time when the rate for Employees' Provident Fund has been reduced to 8.25 per cent. While this had to happen for the latter given that EPF sees a tug-of-war among the three ministires that overseee it, the PPF development interests me. Why? If the direct tax reform blue print, the Direct Taxes Code comes into force, then PPF's attractiveness thanks to tax-free contribution, interest and maturity proceeds will see a change as maturity proceeds will become taxable. Link with market rates will make the rate realistic and not artificially high or low. This means that in the future it will be like a very low risk investment since it is backed by the government. If other lower risk options come up well such as FMPs and similar form of debt funds that pay more, are more tax efficient and can give Indians some idea of their eventual returns besides being accessible, people in the higher tax slabs may not try and hit the investment limit of Rs 1 lakh. Indians typically are risk-averse and will either let their money vegetate their or go for a fixed deposit. The development I mentioned will mean that Indians would actually moving towards having a debt investments' portfolio. That will be quite an evolution.

Teaser Loans' Day of Reckoning

It is a little more than three years that banks started coming up with step-up home loans or "teaser home loans" where you paid lower equated monthly instalments (EMIs) in the first 2-3 years--though progressively increasing--with the rates being re-set at the prevailing market rates after the period is over. Thanks to the attractive pricing, people made a beeline for this kind of home loan. Now that this period is getting over in early 2012, lenders and borrowers are waking up to what it would mean to pay at the market rates. For borrowers, there is a sharp spike in EMIs or tenures depending on what the age of the borrower is. If you are young, your loan tenure would be increased but if you are not lucky, get ready to pay higher EMIs, in some cases as much as 20 per cent more. That's a lot in these times of downturn. With existing market rates being lower than the rates for the teaser loan rates after resetting, it makes sense for people to migrate to another borrower, though the difference in rates is not huge and there would be costs of migration such as for processing. Not surprisingly, loan providers have started offering fresh rates to "teaser loan" customers. Right now, only two major providers I know of have done this. However, I do expect more to follow suit. This is clearly a great case study of unfathomable long-term consequences of "smart customer acquisition moves". But, to be fair, global financial turmoil of the past four years have played havoc with everyone's calculations.

Will the Government's Disinvestment Trick Work?

The government in its latest Union Budget had proposed that it will raise Rs 30,000 crore in the next financial year through disinvestment. Now, given the fiasco it has experienced this financial year where it raised nowhere near the target, what are the chances it will do better next year? Well, the way the government has been going about disinvestment is probably not the best way of going about it. I might be wrong but most of the activity seems to be concentrated near the end of the financial year. There can always be a year-long timetable. The markets may or may not be in a good mood during a short period. Second, is the way issue pricing is done and the role of merchant bankers. Clearly, this set of people can't shed the greed that used to come into pricing even till some years back. When you don't have an euphoric upturn in the market and people are looking for value, aggressive pricing is going to backfire. Next, UPA-II has allies and opposition who just about oppose everything as if there were programmed to do so. Opposing disinvestment will come naturally to them. The ruling party itself has enough people who have not been able to move ahead of 70's and 80's. But the mostt important part of disinvestment is how its proceeds are used. If they are to be used to support wasteful and inefficient expenditures, then is disinvestment such a good idea? I don't think so. 

DTC by Frontdoor or Backdoor?

Will the Direct Taxes Code (DTC) make it to the Budget later this week or we will see bits and pieces as some of us had been suspecting? The recommendations of the Parliamentary Standing Committee is now out. Call it the perils of living in a democracy that we have had to wait almost two years to reach where we have now. The delay has meant that many of the original recommendations such as that of slabs individual taxes look less attractive that what they would have thanks to high inflation. By telling the world that tax reforms are being pushed via application of DTC might shore up sentiments. This also gives some momentum to implement the indirect taxes reforms by applying the GST regime which according to some, will not see the light of the day till end-2013. Will the government take the plunge? Well, we all know that government decision making is not necessarily dictated by economic rationale that makes sense to many.