An Interesting proposal of the Finance Bill…The Upcoming “PDMA”

The Reserve Bank of India has been performing the role of regulating the money markets, commercial papers and corporate bond. RBI thus had to perform multiple roles to fight inflation, regulate banks and raise funds for the GOI whenever required by auctioning Govt Securities. With the new finance bill proposed by the finance minister, the RBI is going to be more focused on its core roles of fighting inflation and regulating banks only.

Finance Bill 2015 has proposed that the RBI will now only regulate the repurchase and reverse repurchase rates for money, commercial papers and corporate bonds, and likely to lose powers to regulate repo and reverse repo rates on Gsecs (state and central govt securities). It will as well lose the powers to issue and regulate GSecs. This step is a big leap towards making the RBI independent in its working and focusing more towards its core responsibilities.

Instead of RBI, the finance bill has proposed to set up Public Debt Management Agency (PDMA)  for issuing Gsecs. Regulating the Gsecs will shift to SEBI (Securities Exchange Board of India). The proposed bill will amend the sections 45W and 45U of the RBI Act. Amendments will change the definition of securities and will tweak the definition of repo and reverse repo and its applicability. The word securities is likely to be dropped from the section. Subsequently, securities will only pertain to central and state government securities.

As soon as the finance bill is passed, the RBI act will be amended for the same. Although in practice, formation of the PDMA will take at least 18 months and also the transfer of responsibilities from RBI to SEBI would take some time. It might take time but seems to be a good proposal to enable RBI to function independently. Transparency and regulation of the Gsecs still remains a big challenge for the upcoming PDMA and the acting in charge for now, SEBI.

Thank you.

Gold’s Bleak Outlook

Gold. The word itself brings a lot of joy in the minds of Indians (especially the ladies out there :P). But, is gold a great investment in the current economic conditions ?? Would it be wise to buy gold right now or later in the coming years?? The answer is doubtlessly later in the coming years. Here’s why.

The equity markets have been doing very well from the past 15 months, since the NDA came into power. Global economies are as well picking up and are expected to revive in the coming years. This clearly indicates that, the global equity markets are also expected to do well in the near future which will probably put downward pressure on commodity prices. Indian gold prices anyways are in disparity because of the duty structure, and if these are reduced then the gold prices will decrease further. The import duty has already been curtailed.

Gold is the last investment you can make right now. Reason being very simple and completely market related. First and foremost being the returns, especially long-term returns, have always been lower than the overall equity returns. Returns on gold and gold funds have been negative as compared to equities in short-term, while in long-term they have generated returns of 8-9% levels against 15-16% of that of the equity markets.

Many would be of the opinion that ” Gold is a hedge against inflation“. But today we are looking at consistent inflation levels of 5-6% for the past 8 months and RBI with its FIT(Flexible Inflation Targeting) Policy intends to keep it at a level beneficial to the economy ( As it is said a certain level of inflation is good for the economy to grow). Gold as a hedge as well fails in this situation since there is hardly any inflation persisting.

Right from olden times, there is a lot of opacity that exists in gold trading. This causes a lot of loss for an investor or a buyer if he is not well-informed about the scheme and its loop holes. But never the less, the sellers make sure they make amazing profits from the same( thanks to ever-increasing Indians’ love for gold)

“Buy gold and keep them as gold deposits if you want returns is another myth”. Now when we say returns, always remember it should be more than the current inflation figures. If those are not exceeding inflation, you are not getting returns, but rather losing your value. And gold deposit schemes ?? Really ?? Interest rates of 0.75% for three years is hardly any return. A return of 0.25% per year, which if compared to current inflation of 6% would get you a return of -5.75%. Thank god, gold has appreciation of its value else with gold deposit schemes investors would have been in depression.

Invest in gold only for reducing risk on your overall investment portfolio, because they truly are a hedge against the highly unpredictable downside of the equities. To all those who already bought gold at the high rates of 27000-28000 levels, it will definitely help you in reducing the downside if at all you have invested in equities. Others, wait for a while, this bull run might not last for more than a year or two ( the Modi effect is already showing sign of fading away). The best use of your money as of now would be investing into equity directly or through a mutual fund route. Avoid investing into gold, until next year, unless you can put it to use immediately (consumption like in a marriage or to make ornaments. If you are a first time investor of gold, one should prefer coins over physical gold because of the lesser transaction costs of coins. Always remember this one guru mantra : When you equities are doing well commodities(gold) will always lose value and vice versa. No need to buy additional physical gold looking at the current levels of holdings of the Indian families  😉

Happy investing. Thank you.

The Failure of the Crop Insurance Scheme

A farmer somewhere in North India committed a suicide recently, because of the bad rains and the losses incurred. The unusual rains in the past two months would have made all of us happy and feel good because of the atmosphere but farmers had their night mare come true. Wheat cultivation especially was damaged tremendously.

Why are we talking about all this?? Reason being the focus on the “Crop Insurance Scheme” by the GOI and NABARD to supplement the farmer when he incurs a loss of because of adverse environment conditions. Is the scheme as efficient as it is on paper?? Not at all. 

The reason for suicides are definitely something more than just “rains”. One of the major ones being the worst failure of the crop insurance scheme and corruption in the system.

For example, if a farmer incurs a loss of 5000/- which is covered under his crop insurance( for which the farmer has to pay additional amount in the form of increased EMI) then he has to go to the insurance company and claim his losses. Now supposedly these lazy insurance officials take a pathetically long time of 6 months to settle a simple claim?? and worst of all is banks start sending notices to farmers that “we will auction your land”. How the hell is he supposed to pay you if his claim is not settled?? Then what is the difference between a money-lender and a bank (the so-called formal financial institution). He hardly has any savings of his own. Trust me if he had a lot of savings he would have managed without these stupid institutions who just claim to be helping the “agricultural sector to revive”. .

Of course there are some states which are efficient in their working for the same but, few states (not to name them) are just not efficient enough. This is having an intense impact on credit percentage reducing with years because if this is the way so-called strong banking sector is going to work then I don’t see any difference from a normal informal money lenders.

In some cases, a farmer was made to wait for a loan of 25000/- for a bribe of 300 bucks. Can you believe it? I just can’t visualize something like that and brings out a lot of rage against the system. This delay compels them to go the informal way and then get exploited by the money lenders.

Union Govt has although responded to this agricultural crisis with its following measures:

  1. Farmers who suffered 33 % crop damage were made eligible for input subsidy
  2. The input subsidy was also increased by 50%

The Govt has also instructed the insurance companies to settle such claims within 45 days which is far from reality. I feel all these changes are only going to show signs of changes if reducing corruption is taken as a top priority issue. We the common people are anyways getting used to such harassed practices but at least leave the farmers who are creating a source of living for each one of us. Don’t make them go through the ugly truth of the system is all I can . 🙂

Thank you.

The Volatile Oil Prices and the way forward…

We all have always been wondering how exactly do the oil prices react or move based on global sentiments and for what we all say “ye global gyan se oil prices pe kaisa effect padta hai??”.Well this is how it probably does. This is how I am analyzing it to be, the conditions today and the way forward.

Whats currently being going on is the ongoing deal discussions between the US and Iran. Well I will focus on that at the end of this one. Lets talk about what is been happening in the US lately. First and foremost thing is the reduction in the rig counts. Now what does this rig counts mean is the number of drilling rigs actively exploring or extracting oil or natural gas. Note here that Baker Hughes (the US giant which maintains the data on oil production) only counts the active rigs. This reduction in the rigs is the sentiment causing to believe that the oil production in US has slightly come down and that kinda explains the reason why the oil prices have jumped back to “$55 ish” recently. Apart from this the upward pressure is due to the weather conditions in Iran and the violent situation in Libya. Although the price did not suddenly spike up despite rig count reduction, because US was trying to optimally product maximum amount from their most productive wells. But recently Baker Hughes reported another reduction in the rig count, which definitely started affecting the supply and prices started inching up with time. On the other hand, US has its highest inventory of shale oil in the past 33 years, EOG Resources being the largest shale oil producer. Oh and yes we cant forget the invisible shale oil inventory though, estimates are that still companies have left 3000 wells untapped. That is a huge amount of inventory eh?? So we can actually not expect much demand from US for a while I must say.

The reason currently this serious and weirdest upward pressure is also because of the Saudi attacks on Yemen. Although Yemen is not a significant producer of oil, next to it passes the fourth busiest oil shipping bottleneck. Any guesses on that shipping bottleneck?? 😉 Yemen lies on one side of Bab el-Mandeb ( the fourth busiest oil shipping bottleneck I was talking about volume wise)

China, Japan’s recession (waat lag gayi hai boss unki toh) and the Euro Zone all showing slowdown, although ECB Chairman claims that Euro Zone is  revamping and the QE is working for them as such. Naturally the demand from those countries is going to be subdued for at least the following two quarters I suppose. China has just last night reported a GDP growth of 7%, the lowest since 2008.

And what to say about the OPEC countries. (*sigh*). They are in the condition to sell at whatever the hell price they can sell it at so no supply curtailing from them very soon.

Ah finally the most happening thing in the oil markets, the US IRAN nuclear deal. The agreement, which is aimed at curbing Iran’s nuclear program in return for the lifting of economic sanctions on the country, is to be finalized by June 30. If this deal is finalised then Iran is expected to pump up its production by the end of the next quarter thus increasing the supply in the markets again.

The way forward: 

Oil markets has been a game of demand supply dynamics and some absolutely political moves by these middle east countries. But anyway going forward the demand for oil is expected to increase for a month or so since the US maintenance season is going on, rather to be precise US will be back with its refineries producing by May end. Although in the short term we are unlikely to expect a sharp rise in the prices due to oversupply but in the long term oil will likely come back to around $75-80 levels. As far as India is considered, we are having a fantastic time with the oil prices staying low for a while (especially Mr. Finance Minister in meeting in petrol subsidies for the year :P). And I guess that is why MoF is also targeting for the Capital Account Convertibility with oil prices being favourable. Fingers crossed. Every time we have thought of Capital Account Convertibility  a crisis has occurred. Hope RBI and the MoF implement it at the right time and with the most reliable economic conditions in place. 🙂

Thank you.

Depositories Paying Dividends and Interim income??

SEBI has recently made some moves for making the depositories (an organisation which holds securities like shares, debentures, bonds, government securities, mutual fund units etc) the authority of distributing non cash as well as cash benefits. Now I would call that a real smooth way of trading for the investors.

What it implies is the benefits such as dividends, bonus shares,  interest payments etc will be given by the organisation holding the securities instead of the companies which issue them. This is really going to create a single point of contact for an investor for all his queries and requests. Centralised payments are always the best way of keeping track and increasing the efficiency.

The way NSDL (one of the depositories) has taken steps to facilitate this is by applying for the “Payment Bank” licences to RBI. Payment banks can only accept deposits up to 1 lakh and make payments whenever necessary.

Last year around 400 complaints were lodged for non receipt of dividends which was not really easy to trace and resolve for SEBI since each one was concerned to a different entity altogether.


My Take:

A big thumbs up for the move and that too strategically merged with payment bank licence. This move will really boost the market operations in an efficient way. I feel the only problem is are we ready with that kinda infrastructure to support that purpose?? Also the bank details of all the investors may be available partially which creates risk of wrong remittances as such. The financial inclusion and awareness, linking of adhaar to bank accounts( although adhaar is of no use apart from address proof for sim cards at present 😛 ) may help to resolve this problem. With this I hope the markets become more robust towards protecting investor rights and giving them a hassle free trading experience.

Thank you.

The Brand New “Real Estate Regulatory Bill”

The new and the very stringent Real Estate Regulatory Bill was passed in the Union Cabinet last week. Now that is something I would call a bill that would change the real estate business or rather to say ” the way of doing real estate business (positively and negatively)”. Concerns have always been there regarding the integrity, confidentiality and customer’s interest and bla bla bla. This bill has its prime focus on the eradication of the malpractices in the real estate. The most common malpractice being the diversion of the funds from one project to another based on the demand.

Some key points of the Dashing Real Estate Regulatory Bill:

  1. Buyers who have book a house can see the progress of the project online and lodge a complaint with the regulator if not on schedule.
  2. Only project registered with the regulator will be allowed for sale
  3. Builders will be depositing half of the booking money in an escrow account so that the end use of funds is administered.
  4. Before marketing the project, all the clearances must be in place.
  5. Online portals as well might come under this bill to showcase on those properties which are registered (housing.com, Indiaproperty.com etc)
  6. Setting up a special tribunal for decision making within 60 days.

My take:

I dont know about the passing of the bill ( it might even be passed) but the implementation?? i really doubt its efficiency. Mostly importantly the centre’s bill is not a binding on all the states (wheres the uniformity of the law). The money to be deposited in the escrow is going to be huge problem to track, (lets not forget we live in India for god sake we own the “black money” market), how is the regulator going to manage that I really cant predict at this point of time. That is why I said it might change the way of doing business which might as well become worse. But some of the points of registration and clearances are fantastic for the buyer’s interest.

Last but not the least regulations always come with a cost, both for the builder and subsequently for the buyer as well. The real estate prices are already sky high, the regulation is going to make it worse to buy (at least in the metro cities).

So for all those wanting to buy a flat in a nice lavish project in metros gear it up!!! 😉  Others with individual plots of less than 10000 sq.ft of area can relax..that bill wont be applicable anyways.

Thank you.