Beyond Market - Issue 97

Coming
Circle
Full
The bull run is likely to
make a comeback in the
markets after a bear run
prevailed for the past
couple of years
RNI No. MAHENG/2009/28962 | Vol ume 6 I ssue 11 | 1st - 15t h Jun 14
Mumbai | Pages 48 | For Pr i vate Ci rcul at i on
Its simplified... Beyond Market 01st - 15th Jun 14 3
DB Corner Page 5
Dawn Of A New Era
By winning the first parliamentary majority after decades of coalition governments, the
ruling party is hoped to usher in economic growth and end policy paralysis Page 6
Coming Full Circle
The bull run is likely to make a comeback in the markets after a bear run prevailed for the
past couple of years Page 10
Steadily Catching Up
Infosys earning results have not been spectacular, but they are steady nonetheless
suggesting that Narayana Murthys Midas touch is reviving fortunes of the company
Page 14
A CleanUp Act
The trend of selling NPAs to ARCs is on the rise among banks to clean their books
Page 17
A Huge Relief
The RBI has directed banks not to levy any penalty on individual borrowers for pre-paying
floating loans, offering a huge respite to them Page 20
A Growing Chasm
The luxury housing segment is facing increasing sluggishness but it is still doing better
than other sections on the whole Page 23
Tiding Over Tough Times
The FMCG sector is doing fairly well despite the ongoing slowdown in the economy
Page 26
Smart Moves
Experts, including renowned investors like Warren Buffett, contend rationality is more
important than high intelligence quotient when investing in the markets Page 30

Mortgage Guarantee Enables Release Of Capital For The Lending Institution, The
Benefit Of Which, Over Time Can Be Passed On To The Consumer.
Mr Shrikant Shrivastava, Chief Risk Officer at India Mortgage Guarantee Corporation
(IMGC) talks to Beyond Market about mortgage guarantee and its need in India Page 33

A Judicious Decision
It would be wise for investors to chalk out investment options to save taxes at the start of
a new financial year instead of the end Page 36

Technical Outlook For The Fortnight Page 39
Breaking A Pattern
Divergence is an important tool, which shows disagreement between the price of a
security and its indicator Page 40
Important Jargon For The Fortnight Page 45
Volume 6 Issue: 11, 01st - 15th Jun 14
Editor-in-Chief & Publisher: Rakesh Bhandari
Editor: Tushita Nigam
Senior Sub-Editor: Kiran V Uchil
Art Director: Sachin Kamble
Junior Designer: Sagar Padwal
Operations:
Shreelatha Gollavathini
Printed and published by Mr Rakesh Bhandari
on behalf of Nirmal Bang Financial Services Pvt
Ltd, printed at Uchitha Graphic Printers Pvt Ltd
65, Ideal Ind. Estate, Senapati Bapat Marg,
Lower Parel, Mumbai 400013 and published
at Nirmal Bang Financial Services Pvt Ltd, 19,
Sonawala Building, 25 Bank Street, Fort,
Mumbai-400001. Editor: Tushita Nigam
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beyondmarket@nirmalbang.com
Tel No: 022 - 3926 8047
Research Team:
Sunil Jain, Dipesh Mehta,
Manav Chopra, Vikas Salunkhe
A Tale Of
Market Cycles
Two
Market cycles are common phenomena across all economies, and India is no exception. The country witnessed a strong bull
run from 2004 to 2008, which was followed by a bear run in 2009, continuing up until last year.
However, market mavens are expecting the cycle to reverse and the bull run to dominate the markets this year hence. And there
are sufficient factors to support this view. The cover story attempts to explain the return of the bull run in the markets and what
investors and traders can expect from this development in the near future.
Apart from this topic, there are articles on the triumph of the Bharatiya Janata Party and the decimation of the Congress party in
the Lok Sabha Elections 2014, the impact of Narayana Murthys return to the IT bellwether Infosys on the companys earnings
results, the Reserve Bank of Indias directive to allow banks to sell their non-performing assets to asset reconstruction companies
(ARCs), thus reducing the burden on banks financials as well as the norms introduced by the RBI on the pre-payment of retail
loans and the current state of the fast-moving consumer goods (FMCG) and luxury housing segments in India.
Another interesting topic in this issue is how rationality scores over high intelligence quotient when it comes to investing in the
markets, a view espoused by none other than billionaire investor Warren Buffett.
In the Beyond Portrait section, we have featured Mr Shrikant Shrivastava, Chief Risk Officer at India Mortgage Guarantee
Corporation (IMGC) wherein he talks about the growing trend of mortgage guarantee in India.
Its never too early to start planning for your investments to save money on taxes. Starting early will help you gain optimum
benefit from your investments while accounting for tax deductions. We have suggested investment avenues that can be
considered by investors like you to save taxes in an article in the Beyond Basics sectioN.
Tushita Nigam
Editor
of India and the introduction of
measures by the European Central
Bank to boost the European
economy could give direction to
the Indian markets and must,
therefore, be watched eagerly by
the market participantS.
Disclaimer
It is safe to assume that my clients and I may have an investment interest in the stocks/sectors
discussed. Investors are required to take an independent decision before investing. Investment in
equity is subject to market risk. Our research should not be considered as an advertisement or
advice, professional or otherwise. The investor is requested to take into consideration all the risk
factors including their financial condition, suitability to risk return profile and the like and take
professional advice before investing.
n the previous fortnight,
stocks rallied on the bourses
following NDAs thumping
victory in the Lok Sabha
Election 2014, lifting the equity
markets to an all-time high on
hopes that a stable government
would help bolster growth in the
country, which was besieged by
sluggish economic growth and
policy paralysis.
Further, remaining Q4 and
year-ending earnings results of
India Inc for FY13-14 have been
more or less in line with street
expectations with the hope of a
revival in the economy in the
coming quarters on the back of
reforms and quick policy decisions
by the new government.
I
The Indian stock markets are likely
to remain range-bound in the
coming fortnight. The Nifty index
could remain in the range of 7,200
and 7,500. However, the markets
look good from investment and
trading perspectives.
The stocks that can be considered
are Tech Mahindra Ltd (LTP:
`1,915.35), Reliance Power Ltd
(LTP: `94.80), IRB Infrastructure
Developers Ltd (LTP: `197.50),
Selan Exploration Technology Ltd
(LTP: `613.35), Aban Offshore Ltd
(LTP: `706.15) and TVS Srichakra
Ltd (LTP: `516.90).
In the coming fortnight the
announcement of the monetary
policy review by the Reserve Bank
The Indian stock markets
are likely to remain
range-bound in the
coming fortnight.
Sensex: 24,217.34
Nifty: 7,229.95
(As on 30th May 14)
DAWN OF A NEW ERA
By winning the first
parliamentary majority
after decades of coalition
governments, the ruling
party is hoped to usher in
economic growth and end
policy paralysis
he Lok Sabha election
2014 is finally over and
thankfully, the people have
given a decisive verdict.
The result was indeed unexpected and
stunning. But it is very, very welcome
for a country crying for a stable and
performance-oriented government to
lift it out of the morass, both
economic and political, that it has
sunk into in the last five years.
The Bharatiya Janata Party (BJP)
T
under Narendra Modis stewardship
has won 282-seats on its own as
against the required 272- seats for an
absolute majority in the 543-member
Lok Sabha. This is the first time in
three decades that any single party
has won an absolute majority on its
own. The last time this happened was
in 1984 when the Congress party won
over 400 seats under the leadership of
Rajiv Gandhi.
The BJP-led grouping National
Democratic Alliance (NDA) has
won 336 seats, a strong enough
majority in the Lower House of the
Parliament to provide a strong, stable
and performing government.
The Congress party has been
decimated. It has managed to win
only 44 seats and its grouping, the
United Progressive Alliance (UPA) a
total of just 59 seats.
The point to be highlighted here is
robust and muscular foreign policy. A
clear signal would be sent to China
not to indulge in border incursions
while a zero-tolerance to cross-border
terrorism will mark its relationship
with Pakistan.
On Indias eastern border, infiltration
from the Bangladeshi side will be
frowned upon. A high priority will be
accorded to eradicating Maoist
(Naxalite) violence now plaguing
certain parts of central and east India.
On the economic front, positive
reverberations are already being
noticed following the BJPs
sensational triumph. The
stock-market is on a roll with the
Sensex even crossing the
25,000-mark for the first time in its
history. Since then, it has stabilized
above the 24,200-mark.
The Indian rupee, which depreciated
steeply during the Congress tenure,
has started recovering and now
stabilized at just a tad above `58
vis--vis the US dollar. The body
language of corporate India has also
changed. Business leaders have
almost as one welcomed Modis
victory. There is presently new-found
buoyancy in the corporate sector and
this augurs well, both for the
economy and the country in general.
An important task of the new
government will be to rein-in
inflation, especially in food items and
from indications available, this will
be accorded the highest priority and
equally importantly, food will not be
allowed to rot in store-houses as in the
last regime.
A more robust supply and distribution
system will go a long way in
alleviating shortages and this is
expected to be a prime focus area for
the NDA government.
A conducive environment for
investment and instilling confidence
that both the tallies are significantly
lower than the number of seats that
the BJP has won from just one state -
Uttar Pradesh - where it has bagged a
whopping 71 seats; add the two seats
won by its ally Apna Dal and this
figure rises to 73.
The massive extent of the BJP win
can be gauged from the fact that the
UPAs seat tally has fallen from 262 in
2009 to 59 in 2014 while that of NDA
has catapulted from 159 (BJP alone
116) to 336, with the BJP alone
garnering 282 of this.
This decisive verdict bestows upon
the ruling party the capability to
function without the constraints of
coalition politics. This is exactly what
the country needs now after a decade
of Congress rule characterized by
policy paralysis, which saw the
economy dip and unemployment and
inflation rise sharply.
GDP growth which was at an enviable
7%-8% a few years ago has now
declined to a sub-5% level,
investments have dried up and
infrastructure projects, so vital for
propelling the Indian economy, have
not taken off.
Foreign and domestic investments
have almost stagnated and there has
virtually been no movement forward
on the policy front. Add to this,
certain ill-advised government
actions such as retrospective taxation,
which scared away investors and the
reasons for Indias poor economic
health become starkly apparent.
It is not just the countrys economy
that has been in a tailspin. Terrorism
has inflicted severe wounds on the
country and incidents such as the
beheading of an Indian soldier by
terrorists a few months ago, constant
violation of the cease-fire agreement
on the Indo-Pak border, support to
Kashmiri insurgents by Pakistan and
Maoist violence in central and east
India have had a corroding effect on
Indias confidence and contributed
significantly to the BJP-NDA victory.
A series of financial scams relating to
various ministries such as
telecommunications, coal and
railways and the Congress
governments impotence in punishing
those allegedly responsible for them,
angered the electorate, which totally
rejected the Congress and replaced it
with the Narendra Modi-led NDA.
What do the election results augur for
the country? And what can the
country expect from the BJP-led
government with Narendra Modi as
Prime Minister?
On the political front, a stable
government seems a given. Without
the pulls and pressures of coalition
politics, Modi can pursue policies
independent of the whims of coalition
partners. Tough and sometimes even
unpopular decisions can be taken
more easily. This was one area where
the previous UPA government found
itself hamstrung. This is where a
decisive government under Modi got
a chance to score.
On the international front, one can
expect Modi to pursue friendly
relations with the West, the US and
Israel. A look East policy involving
a strong relationship with Asian giant
Japan is likely on the cards.
Establishing trade relations, which
will boost business prospects, will
acquire prominence in the
government under Modi. But while
pursuing friendly relations with
foreign countries, the new
government will not compromise on
issues, which it perceives as being in
national interest.
On Pakistan and China, the BJP-led
government could adopt a more
in foreign investors is the need of the
hour and Modi has already spoken of
this. A tax policy, which will not scare
away foreign investors will be
pursued and tax terrorism will be
eradicated. Swift clearances for
projects, especially mega ones in the
power and manufacturing sector will
be accorded priority with a view to
spur infrastructure development.
There will also be continuity in
policies and no witch hunts. BJP
leaders statements that there is no
move to change the Reserve Bank of
Indias Governor Raghuram Rajan at
this juncture is thus welcome.
Modis preference for technocrats and
experts is well-known and it should
come as no surprise if a few are
indeed inducted into the government
there would be no discrimination
against them in his regime.
The BJP has triumphed against all
odds in this election. Even as late as
September last year, no one gave the
BJP over 160-seats and the NDA over
230-seats.
That the BJP has not only breached
the 200-mark but has marched ahead
to record an absolute majority on its
own with 282-seats is testimony to
the fact the electorate has clearly
visualized BJP as the right alternative
to the Congress and, hence, given it a
positive mandate.
This is a golden opportunity for the
BJP and its allies to prove their mettle
by providing a clean, efficient and
performing governmenT.
or brought in in an advisory capacity.
The names of Jagdish Bhagwati and
Arvind Panagriya are being
mentioned in this connection, apart
from KV Kamath and Deepak Parekh,
among others.
Happily, the BJP has not been
triumphalist in its moment of victory,
even though it is celebrating its
historic victory with gusto. The
partys leadership is making the right
noises and this is indeed reassuring.
Despite the BJP enjoying an absolute
majority in the Lok Sabha, Modi has
made it clear to his allies that he
would not like to do it alone but
would instead prefer to work with
them in the government. Modi and his
party colleagues have also gone out of
their way to reassure minorities that
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Coming
Circle
Full
The bull run is likely to
make a comeback in the
markets after a bear run
prevailed for the past
couple of years
n market terminology there is a
saying that history repeats
itself. Market cycles are
common across markets and
regions. India is no different. After a
strong bull market starting 2004 till
2008, and a bear market starting 2009
I
till about 2013, the markets have
completed one full cycle and may be
now is the turn for the beginning of
the next cycle in the markets which is
a bull market.
Though markets are not precise
science, evidence indicates a new
beginning and stock market pundits
have started anticipating that well in
advance. Are there enough seeds for
the next cycle or is it just a mirage?
One of the most celebrated and
successful investors John Templeton
to historical lows.
Economists started worrying about
Indias CAD (current account deficit)
and fiscal situation. It had a huge
impact on corporate profitability
because of rupee volatility. This was
the time when the markets made a low
as sentiments of both investors and
corporate India dipped to a new low.
The results were seen in the later
months as industrial production
numbers and GDP numbers came to
dismal levels.
However, after the new RBI governor
Raghuram Rajan took charge and
announced a slew of corrective
measures to arrest foreign money
outflow, stability started returning to
the markets and the rupee
strengthened again. Also, the duty on
gold imports helped contain the
deteriorating current account deficit
situation in the country.
Additionally, with the stability in the
rupee rate, the inflationary pressure
on imported goods has eased. This led
to some hope that the monetary
tightening cycle is near its end and in
fact it could actually reverse in the
coming months.
To some extent over the last few
months things are not getting worse.
In fact certain data points suggest that
there is a slight pick up or stability in
the economy. Though some recovery
has already been seen, real change is
yet to come, which will be the key to
earnings growth in the coming years
and how these earnings are valued by
investors in the coming months.
Thankfully the global economic
recovery, especially in the US and
Europe, too is supporting the markets
to some extent. Though people are
still worried about the fragility of
these economies, near-term concerns
about global growth, financial and
geopolitical risks have, however,
had once said, Bull markets are born
on pessimism, grow on skepticism,
mature on optimism, and die on
euphoria.
When John Templeton said that bull
markets are born on pessimism and
grow on skepticism, he actually
meant that before a bull market could
actually form there is general gloom
about the equity, and investor
behaviour is characterized by
excessive pessimism.
But slowly and gradually as things
start picking up, investors begin to
doubt and skepticism is seen all
around. But as curiosity increases
more and more people begin
investing and start to think in the
same manner, leading to further rise
in the stock markets.
The last bull market, which started
around 2004 and peaked in 2008 was
actually borne out of pessimism,
which took the Sensex from about
4,000 points in year 2004 to 21,000
points in the year 2008, a strong gain
of over 500% in a span of 5 years.
The Street was clueless in 2003-2004
and wondered if there would be a big
bull rally, which would take the
markets up five-fold and turn many of
these stocks into multibaggers.
Like today, GDP growth had fallen to
around 4% in 2004. Only a handful of
domestic and foreign investors were
interested in the markets and no one
was keen on investing in it despite
attractive valuations. The general
feeling was of puzzlement as to
whether we will witness economic
recovery and corporate profitability
and if the markets will continue to
trade at lower levels.
Until some time back, the feeling was
still the same. After a long bear
market during the year 2009 and 2014
for a period of about 5 years, the
Sensex fell from 21,000 points to a
low of about 8,500. However, today
the markets have recovered and are at
their pre-crisis levels and many
investors are actually regretting the
fact that they could not make any
money in the last five years.
Those who had invested during this
period are still staying away from the
markets as they believe this is a place
for speculators. But that is a typical
behaviour. Owing to the same reason,
retail participation has been low since
some time now unlike in 2008s bull
market when retail investors came at
the peak of the markets because of
which valuations reached crazy levels
and greed of many seasoned
promoters got fulfilled.
However, this did not happen only on
the basis of liquidity and market
sentiments. As the pace of GDP
growth improved, which was largely
helped by the initial policy push of the
government, coupled with the upturn
in the global economy and higher
commodity prices, most sectors of the
economy started performing well and
the economic machine began giving
huge dividends, leading to a spurt in
corporate earnings.
By the end of financial year 2003,
Sensex earnings per share was at
around `272, which expanded to
around `833 in financial year 2008.
The earnings in the five-year period
from financial year 2003 to 2008
grew at a whopping 25% annually,
which was far ahead of investor
expectations and understanding.
Today, the Street is not even
optimistic about a 10% growth in
earnings over the next couple of
years. The sentiments are very low.
At one time around the second half of
2013, most things were looking
terribly bad, with the rupee taking a
nose dive and foreign flows shirking
eased, which is good for supporting
sentiments and growth here in India.
Importantly when the economy starts
recovering from the low base and
sentiments are low, the ensuing
pickup in economic growth could be
far higher than estimates and out of
ones imagination.
Notably India has managed to grow in
excess of 9% in the past, which means
recovery from the current growth of
mere 4%-5% is quite achievable and
in fact could be higher if things move
in the right direction.
Like during the bull market of 2008, a
similar spurt in earnings could be a
huge game changer for the markets
and if sentiments and liquidity too
turn out to be as desired, this could
lead to a huge impact on the stock
markets in the long run.
Market sentiments and liquidity
typically influence perception and
valuations which generally take place
around peak levels of a bull market.
For instance, at the peak of the last
bull market, the Sensex was trading at
about 21-22 times one year forward
earnings, which was higher than the
historical average of 14-15 times.
SO WHERE ARE WE HEADING?
There is certainly reason to be
cautious because part of the rally
which we have already seen in the last
month or so is built on expectations
from the new government and also
the fact that change in government
has attracted short-term money,
which could be a cause of worry.
However, this unlike popular belief
that the markets are currently trading
at all-time highs and there is a lot of
irrationality and exuberance, seems to
be distant. Today valuations are at 15
times, that too on low expectations
because of poor economic
Indian equity markets. Those who
have come back to the markets have
come because of hope.
Investors are not as gung-ho about
equity markets as they were in 2008.
We have not heard or seen so far
investors borrowing to buy stocks or
investment in markets through
borrowed money. There are few, but
not many initial public offerings
(IPOs) in the market, which is again a
good sign.
On the contrary, promoters of many
listed companies are currently
engaged in buy-backs, which again is
a sign of hope as against greed.
Even if one reads some of the
headlines in the newspapers they are
not very scary. In 2008 the words like
bulls on the rise, bulls defying the
gravity, etc used to make front page
headlines in newspapers. Off-late mid
and small-cap illiquid and low quality
stocks have started moving up, but
they are still far away from their
levels of 2008.
The author of Irrational
Exuberance, Robert Shiller, a
renowned personality known for
identifying bubbles and irrational
exuberance, once said: Irrational
exuberance is the psychological basis
of a speculative bubble. I define a
speculative bubble as a situation in
which the news of price increases
spurs investor enthusiasm, which
spreads by psychological contagion
from person to person, in the process
amplifying stories that might justify
the price increases and bringing in a
larger and larger class of investors,
who, despite doubts about the real
value of an investment, are drawn to it
partly through envy of others
successes and partly through a
gamblers excitement.
There is some irrational behavior
today because most investors are
environment and single digit growth
in earnings.
So, if you are looking to use this rally
to exit after waiting for almost five
years there is more to understand.
This could be a mistake; indices
making new highs do not mean they
cannot go up further.
If the fundamentals of the markets are
intact, there is nothing that can stop
the markets from going up because in
the long run or may be after a year or
two earnings will start reflecting in
share prices.
To give more perspective, take the
year 2004. Once the bull market
started in 2004, the Sensex first
crossed its earlier all-time high of
about 6,000 and at that point in time
investors were worried if the markets
would remain high because of the
psychological bias towards the earlier
high or an all-time high.

Despite apprehensions, the Sensex
kept on surging and making new
highs till the level 21,000 it made in
the year 2008. The key point is that
the levels of the markets have no real
meaning because if the earnings are
on the rise, the markets will start to
weigh on these things more often.
So, assuming that that the markets are
quoting at all-time highs and there is
greed in the market or irrationality,
making it is a good case for selling,
seems to be a little less rational.
In the words of Benjamin Graham,
father of value investing, this
situation looks more like hope which
mediates between fear and greed. To
qualify this, unlike at the peak of the
last bull market in 2008, today we
have not seen much of retail
investors participation.
In fact, institutional investors too
have not infused large money into the
focused on the near-term change in
Indias political environment.
However, it will be worth taking a
view beyond the elections and the
change in the government. Because as
things settle down and the formation
of the government takes place, the
markets will start looking for better
market earnings.
WHAT MOVES IN AN UP
CYCLE?
Historically, it has been seen that in a
rising market, sectors and companies
that are stressed and are looking for
better days ahead or are hoping for
recovery from low base, tend to move
up the highest.
The recovery in fundamentals,
coupled with valuation rerating, could
create a huge run in share prices.
During the last bull market between
2004 and 2008, the highest returns
were made by high beta sectors and
companies from sectors like capital
goods, banks, metal and utilities,
which outperformed the Sensex by
2-4 times.
Similarly, it has been seen that in a
down cycle like the one we have seen
during 2009-2014, mostly defensives
and high-quality sectors do well
because of investors risk aversion
during the crisis period.
During an upturn, the risk will return
in the stock markets and the valuation
gap, which is very high in case of high
beta and low beta stocks, will
gradually shrink because of additional
demand for high beta stocks or
sectors from investors.
Also, a lot of tactical money in this
situation tends to shift to high beta
sectors and companies.
In a growing economy or when an
economy is expected to recover, the
participation of these high beta
sectors has historically been high
because of pick-up investment cycle
and consumer confidence, leading to
higher demanD.

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his June, NR Narayana
Murthy will complete one
year of his second innings
at Infosys, the company he
co-founded in the early-1980s and
took to dizzying heights in the
mid-1990s and early-2000s.
His second innings has not only been
spectacular but has also been steady
and inspiring a quiet confidence.
There are areas where his touch is
evident as in his initiatives to
T
optimize costs and enhance
employee-efficiency.
Murthy is also endeavouring to shed
the image of a conservative company
by injecting aggression into it in an
attempt to take head-on its
competitors in the marketplace.
In the last 11 months under Narayana
Murthy, the company has generally
managed to meet street estimates but
it still needs to get more
nimble-footed. Marketing is getting
aggressive but a lot still needs to be
done on this front, while client
acquisition, especially of big ones,
needs to be accorded high priority.
On the human resources front, there is
cause for concern as attrition is at an
abnormal high. Narayana Murthy
needs to accord priority to employee
retention, a fact that he and the
companys senior management have
acknowledged time and again.
Steadily
Catching Up
Infosys earnings results
have not been
spectacular, but they are
steady nonetheless
suggesting that
Narayana Murthys
Midas touch is reviving
fortunes of the company
The next two to three years will be
crucial for the company. It should be
helped by the fact that the world is
now recovering healthily from the
debilitating economic meltdown of
2008-09.
Discretionary spends have shown an
uptick in the American and European
markets and an aggressive marketing
approach by Infosys should help it
obtain big-ticket business. Large
deals are crucial for Infosys
return-to-the-top strategy. This was
one area of weakness for the company
in the past and had cost it dearly.
Narayana Murthy is aware of this and
since his return to the company last
June, has made this a high-priority
focus area for the company.
While it added 50 new clients in Q4
FY14, it lost two clients in the
USD100-million category and one in
the USD 200-million category.
The company has as many as 890
active clients as on end-Q4 FY14, up
by two from the 888 in the previous
quarter. Its number of USD
200-million clients now stands at
three while the number of USD
100-million clients stands at 13.
Infosys has, however, fared well in
the USD 5-million clients bracket,
which has witnessed an increase from
226 to 232. There is, thus, a need to
aggressively scout for large deals - a
crucial aspect which Narayana
Murthy needs to pay attention to,
going forward.
Narayana Murthys initiatives to
optimize costs are beginning to bear
fruit - margins have risen marginally,
fuelling optimism that things would
be much brighter for the company in
about one-and-a-half-years time.
One area of alarm is, however, high
attrition afflicting the company.
When Narayana Murthy quit active
management of the company in 2006
to become its Chief Mentor and later
Chairman Emeritus, the company
under his successors started losing
ground to its competitors and soon
lost its premier position in the Indian
IT industry to more aggressive rivals
such as Tata Consultancy Services
(TCS), a Tata group company, which
has delivered strong earnings results
in recent years.
Doubts began to be expressed about
Infosys long-term future. With
revenues and profits coming under
pressure and competitors beginning to
nibble at its market share, Infosys
business strategies came under sharp
scrutiny, employee morale began to
slide and investors began to get
increasingly concerned about the
companys prospects. It was in these
circumstances that a clamour began to
build up for recalling Narayana
Murthy as the companys helmsman
once more.
The iconic IT czar, who put India on
the world IT map, returned to Infosys
in June last (2013). Since then, the
companys performance has been
reasonably healthy. Its revenues and
profits have been more or less
according to expectations and
Narayana Murthy has made a
conscious effort to inject greater
aggression into the company. He has
also focused on managing costs and
enhancing employee efficiency.

Infosys is now more focused and
Narayana Murthy is busy fine-tuning
a long-term strategy to be put into
action. On his return to the company,
Narayana Murthy had said that a
three-year time-frame was necessary
to get the company back on track and
to have what he described as a
desirable Infosys.
This time-frame to turn things around
is reasonable as he will have to
formulate, and in some cases
re-formulate strategies and focus
areas, enhance existing strengths and
build up new ones.
In the last 11 months, he seems to be
bringing things under control as the
companys performance indicates,
though there is still a long way to go
before the company regains its
bellwether status, if it does that at all.
Narayana Murthy did not deliver a
spectacular result in FY14 but he can
be reasonably satisfied with the way
things have proceeded so far. The IT
giants net profit increased 13% to
`10,648 crore while its revenues
expanded 24.2% to `50,133 crore as
compared to the previous year.
Net profit in dollar terms rose 1.5% to
USD 1,751 million and revenues
jumped 11.5% to USD 8,249 million
in the fiscal ended 31st Mar 14.
An important booster during FY14
has been the doubling of its revenue
in USD terms as compared to the
previous fiscal (FY13), a fact
highlighted by the companys CEO
and Managing Director SD Shibulal.
Its net profit in dollar terms increased
5.2% q-o-q (up 9.7% y-o-y) to USD
487 million in Q4 FY14. However,
revenues in rupee terms declined
1.15% sequentially though it moved
northward by 23.2% on a yearly basis
to `12,875 crore. Its dollar revenues
slipped 0.4% to USD 2,092 million,
both reportedly coming in lower than
analysts expectations.
Shibulal said of FY15: We have
guided for a revenue growth of 7-9%
next year and remain firmly focused
on building the growth momentum by
making all the necessary investments
in our business. This projection
seems to be on the lower side but it is
in line with Infosys old and common
trait of being cautious.
Several senior-level exits combined
with some employees at the middle-
level have got tongues wagging that
things are not all that hunky-dory
within this IT company.
Attrition at 18.7% as against 16.3% in
the year-ago period is definitely on
the higher side and has already started
to engage Narayana Murthys
immediate attention.
He has a difficult balancing act to
enact here. On the one hand, he has to
take steps to retain talent; on the
other, he has to eliminate flab,
meaning those employees who do not
add value to the company.
The latter move could see more exits
and, hence, Murthy will have to move
carefully. He has, however, stated
clearly that those who do not add
significant value to the company will
have to leave.
People with high salaries who were
not performing would be given the
tools and opportunity to perform and
if they still did not, then they would
have to leave the company, Murthy
said recently.
Our costs have ballooned very
rapidly in the last 2-3-years. For
example, on-site compensation was
36% of the overall revenue in
2010-11 and it went up to 46.3% in
customers, which in turn, will
dampen Infosys growth prospects.
Aware of all this as also the need to
bolster morale, the company recently
gave an increment in April and plans
to undertake other measures such as
providing more opportunities for
promotion, including fast-tracking
promotion for deserving staff.
The management has also held quite a
few informal interactive sessions with
the employees through what are
called `town hall meetings. Infosys is
now hiring aggressively in sales and
the management expects attrition
rates to return to an acceptable level,
going forward.
The last 11 months have seen Murthy
buckle down to the tough task ahead
of him. He is aware of the challenges
ahead, a reminder. It will certainly not
be smooth sailing for Murthy and
Infosys over the next two-three-years.
Murthy has, however, taken upon
himself the challenge and set in
motion a series of initiatives designed
to lift Infosys out of the woods and
transform it into a stronger and more
nimble-footed player in todays
highly-competitive marketplace.
Results of Murthys efforts should
start kicking-in around 2016 - the
jury will be out till theN.
2012-13.
A part of it was because we hired
people at high salaries outside India
and these people did not add value to
the company, he told analysts
recently. His organizational
restructuring has already seen more
than half a dozen high-level exits in
the last few months.
However, the point to note here is that
Murthy has sent a message that he
will not hesitate to take tough
decisions if necessary.
Simultaneously, he has sent another
message - that the company now has
the confidence to reinvest in its
employees and high-performance
employees would be rewarded.
This is critical, for in the last few
years as Infosys growth slipped,
increments and career growth
opportunities are reported to have not
kept pace with employee
expectations, an important reason for
the high attrition rate.
A high attrition rate could also put-off
customers as they like stability,
especially at senior levels. Exits mean
that the company will have to
redeploy its existing employees,
which could adversely impact client
relationships. Frequent exits of
employees could thus lead to loss of
Flight To Liquidity
It is a situation where investors attempt to liquidate positions in inactive or illiquid assets and purchase positions in more
liquid assets. A flight to liquidity would typically take place during times of economic or market uncertainty. As investors
fear that the markets may tumble they choose to seek positions in more liquid securities in order to increase their abilities
to sell their positions in the case where they wish to leave the market.
During a flight to liquidity, investors view illiquid assets as uncertain and those illiquid assets will typically fall in their
implied value due to discounts for lack of liquidity. Investors then enter into positions in more liquid assets, such as
treasuries or blue-chip stocks in order to gain flexibility and limit their overall portfolio risk. Flights to liquidity are not
uncommon and may occur on a small scale on a day-to-day basis.
A
CLEAN-UP
ACT
Te trend of
selling NPAs to
ARCs is on the
rise among
banks to clean
their books
sset reconstruction
companies (ARCs) have
been in the news of late.
In its 10 years of
existence, ARCs in India have never
witnessed such huge sale of bad debts
by banks.
It is reported that bad assets worth
`450 billion came up for sale to
ARCs in FY14 as against `120 billion
in FY13. Experts peg the figure to
reach `500 billion in FY15. Actual
sales, via auctions or bilateral deals
A
between banks and ARCs have also
increased. In FY14, sale of
non-performing assets (NPAs) to
ARCs jumped to `270 billion from
`80 billion in FY13 and is expected to
double further in FY15.
Many PSU banks have sold NPAs
equivalent to 5%-33% of their gross
NPAs during FY14, thus showing a
sharp reduction in reported NPAs on
their books.
While the trend of selling NPAs to
ARCs is on the rise, this was not the
case a few years back. In fact, two
years ago, little or no sale
materialized between these parties.
Back then, the opaque and
complicated pricing offered by ARCs
kept banks away from such deals.
Also, banks tried their own resources
to recover bad assets. The ARC route
was the last resort for banks.
Of various alternatives, banks tried
debt restructuring, lok adalat, debt
of the loan and the value at which it
was sold to the ARC.
Earlier, the loss on sale of bad assets
had to be booked upfront. Now, the
Reserve Bank allows banks to
distribute the losses over a period of
two years.
In the past, the gain on sale of bad
assets was not allowed to be booked.
It could only be used to set-off losses
incurred when bad assets were sold
off. However, now the central bank
has allowed the gains to be booked
upfront.
BANKS AND INVESTORS
Banking stocks are quick to react to
any news on NPAs. The logic behind
this is that higher provisioning locks
banks capital, thereby limiting
growth. Therefore, the sale of NPAs
to ARCs may fetch immediate cash
inflow for banks and to that extent
will boost profit.
Many PSU banks also do not have
enough bandwidth or the ability to
employ adequate resources for
recovery. As ARCs are specialist
players to deal with NPA resolution,
banks can continue to focus on their
core business of lending.
Since involving ARCs means taking a
haircut, it can be a costly affair for
banks. Thus, ARCs are used sparingly
by the banks, and especially after
banks are exhausted of options to
recover money.
However, the ARC instrument can
prove to be very effective with respect
to written off loans and for loans
where chances of recovery are
extremely bleak.
To sum up, the use of ARC is an
effective vehicle to clean up the
banking system. However, there is
one catch. Since, there is no wide
recovery tribunals (DRT) and
SARFASEI, in that order to recover
assets gone bad.
The Securitization and
Reconstruction of Financial Assets
and Enforcement of Security Interest
Act allow banks and financial
institutions to auction properties
when borrowers fail to repay their
loans. However, the success rate of
these alternatives was lower.
Therefore, even as ARC route was the
last resort, what prompted banks to
change their stance and make a
beeline in front of ARCs?
HIGH STRESS ASSETS
Around this time last year, the RBI
tightened norms for loan
restructuring. Provisioning for
restructured assets from 1st Jun 13
onwards was increased from 2% to
5%. And for old restructured
accounts, the RBI mandated an
increase in provisioning in a phased
manner till April 15. Further, earlier
an account after restructuring was not
classified as an NPA.
However, as per the new regulations,
from April 15, all restructured
accounts would be treated as NPAs,
thus requiring higher provisioning by
the banks.
Further, the restructuring pipeline of
banks is far from peaking, creating
risks of further slippages. Thus,
before the rule comes into effect,
banks are showing urgency to offload
bad loans now.
A case to clean up books also arises
due to existing stress in the banking
system. Impaired assets (gross NPAs
and restructured) more than doubled
from 3.8% of advances in FY09 to
over 10% in FY14.
A majority of stress assets belong to
public sector banks (PSBs). With
higher provisioning requirements for
bad assets, capital was getting locked
and banks were not able to lend,
thereby hurting banks profitability
and GDP growth.
With fewer capitalization options
available to them, there was a dire
need to clean up books of banks.
Higher capital requirement under
Basel III was also looming.
Banks were also getting exhausted of
their current means of recovery, and a
need was felt by banks to engage
experts to recover bad loans. All these
factors warranted a re-look at the
ARC model of NPA resolution. (See
adjoining page for the ARC model.)
REGULATORY SUPPORT
Another reason for banks eagerness
to sell bad debts to ARCs is the
change in regulatory stance by the
RBI over the past few months. Late
last year, the RBI changed the way
assets were categorized.
Now, banks can even sell standard
assets to ARCs that are overdue for 61
to 90 days and are on the verge of
being classified as NPAs (technically
it is called special mention account
(SMA 2)).
Earlier banks were not allowed to sell
standard assets to ARCs. Earlier, they
were not even allowed to sell NPAs
before two years of aging of that
NPA. (NPAs are loans more than 90
days overdue.) With this shift, some
banks have tried to resolve bad debts
at an early stage.
Further, with a view to incentivize
early disposal of stressed assets to
ARCs, the RBI has tweaked
accounting requirements.
Remember, if banks sell distressed
assets to ARC, it has to provide for
the difference between the book value
ASSET RECONSTRUCTION COMPANIES (ARCS)
Business
ARCs are specialized agencies, which facilitate bad loan resolution of the banking system. They buy
bad loans with the intention to extract maximum money out of it. There are 14 RBI-registered ARCs in
India. Depending on the nature of the NPA, ARCs adopt different resolution strategies.
ARCs have been used worldwide [in international parlance it is referred to as asset management
companies (AMCs)] to resolve bad loan problems and have had a significant degree of success in both
the developed and emerging economies.
Model
ARCs usually buy bad assets at a deep discount from seller banks. The discount varies according to the
realizable collateral value of the bad debt. ARCs either pay in cash or security receipts (SRs). ARCs
typically follow a 5:95 structure for payment to banks for bad loan: 5% cash is paid upfront and for the
remaining 95%, SRs are issued. SRs are securities that promise to pay money to the seller bank when
ARCs recover money from bad asset.
SRs can offer both upside and downside risk for the SR holder. SRs are not bonds and they do not carry
any fixed coupon. These SRs are valued from second year onwards and rated by rating agencies. SRs
are marked to market on banks book.
ARCs manage assets by forming trusts. Thus, they do not own the bad asset but they only manage the
asset held by the trust for a fee. The ARCs earn a management fee of 2% on the AUM. Further, in case
the eventual redemption of SRs is of a value higher than the face value, then the ARC takes 20% of the
gains and the balance is given to the owner of SRs.
Resolution of bad assets takes considerable time. The average recovery period has been 3-4 years,
depending on the complexity of the account. The RBI permits up to 8 yrs for recovery of bad cases.
Challenges For ARCs
The balance sheet size of ARCs has gone up 4 times in the last 5 years. However, the biggest challenge
for ARCs is getting money from investors to pay upfront for buying bad assets. Remember even if they
pay 95% in SRs, they still need to pay 5% upfront. To that extent, even if they want to buy more bad
assets, they have limitations.
Current Trend
Historically, ARCs have acquired assets at a discount of around 25%. However, over the past 12
months, the average discount has been around 50% of the book value of the NPA. Most of the
transactions are on SR basis and very few on cash basis. Upfront payment has varied from 5%-8% of
the discounted value of the bad debt; rest is paid on SR basis.
acceptance of security receipts (SRs)
from the QIB community, banks end
up buying SRs.
While banks can benefit from any
upside from SRs, there is no complete
risk transfer. NPA risk moves from
loan book to investment book of the
bank. As SRs get revalued based on
ratings from the 2nd year of issuance,
the true value of these holdings gets
reflected in bank financials only with
a lag.
For investors, true measure of
impaired assets will be gauged only
by aggregating gross NPA, SRs and
restructured assetS.
A
Huge
Relief
onsider this. You have
borrowed some money
from a friend and
promised him that you
will return the sum to him within a
time span of six months. And in about
three months you get a promotion and
C
a salary hike as a result you return the
money you borrowed from your
friend well ahead of time.
You would be happy to have gotten
the burden of loan off your back and
your friend would be happier because
he has received his money well ahead
of time!
Thats common wisdom right? But,
that has not been so with commercial
banks in India. Every time a customer
wanted to pre-pay his loan, the bank
The RBI has directed
banks not to levy
any penalty on
individual borrowers
for pre-paying
floating loans,
offering a huge
respite to them
some larger banks had proactively
abolished the system of levying
penalties for pre-payment of loans,
however, some banks continued with
such charges.
Early last month the apex bank also
made a suggestion that the Indian
Banks Association (IBA) come up
with a benchmark for products to be
given on a floating rate of interest that
is to be called the Indian Banks Base
Rate (IBBR). If collated and
published by the IBA on a periodic
basis, this data can be a blessing for
home loan borrowers.
According to RBI proposal, the IBBR
will be an average of the base rates of
14 of the top public sector banks, 7
private and 3 foreign banks. To be
reset every month, this is a move that
will benefit existing home loan
borrowers. It is expected that the
IBBR will bring in greater
transparency in the process of loan
pricing and will ensure that there is a
better transmission of policy changes.

BETTER PRICING OF
PRODUCTS
Currently there seems to be a lot of
discrepancies in the banking system
because banks have a tendency not to
change their base rates but tweak the
spread over the base rate when
interest rates fall.
What happens as a result is that while
new borrowers get the benefits,
existing borrowers continue to pay
their EMIs at a higher rate of interest.
The IBBR will remove this
distinction and bring all customers on
the same plane of benefits.
This, in addition to the new RBI
directive of abolishing pre-payment
charges on loans across the board,
will bring about a sense of uniformity
in the banking system in India.
Whats more exciting from the
would charge him a penalty. The logic
they stated was that the moment they
get the money back from the
borrower they must lend it out again.
But this does not happen overnight.
As a result, they lose interest on the
money that is sitting idle. In banking
parlance, they call it the asset-liability
mismatch. This has been their
argument in passing on the cost to the
borrowers as a foreclosure penalty.
RBI ABOLISHES PRE-
PAYMENT PENALTY ON
RETAIL LOANS
Up until now, people shied away from
making pre-payments on retail loans
because the lenders used to charge
anything between 2%-3% of the
outstanding balance as a pre-payment
penalty, almost coercing borrowers to
continue making payments till the end
of their stipulated tenure.
But that is now a thing of the past. In
a circular issued on 7th May, the
Reserve Bank of India directed all
commercial banks not to levy any
penalty on the foreclosure of floating
rate loans such as home, personal,
auto and education loans.
While this is applicable to all retail
loans, the point to be noted is that this
facility is being provided only for
individual borrowers and not
corporate clients, and to those who
have availed of such loans from the
banks. At the moment, non-banking
finance companies or NBFCs are not
allowed to offer a similar loan facility
to their borrowers.
This move comes as a major relief to
retail borrowers, who earlier found
themselves in a bind because they
were made to pay a pre-payment
penalty on the outstanding amount of
their loans if they wanted to move to
another lender or just close their loan
account for good.
Those who will benefit the most from
the latest directive of the RBI are
borrowers of public sector banks at
large who have availed of loans in the
categories of auto, gold, education,
two-wheeler and personal.
The largest names in the public sector
banks offer floating rate loans in all
these categories and thus borrowers
can maximize their savings by
pre-paying loans when they have a
chunk of money in hand. This may
lower their loan tenure considerably.
Borrowers of private sector banks and
foreign banks will only benefit if they
have borrowed home loans because
most other retail loans, such as
personal, auto or gold loans are
borrowed at a fixed rate of interest.
FURTHER BENEFITS FOR
HOME LOAN BORROWERS
Two years ago, the RBI had suggested
that banks should not levy any
pre-payment penalties or foreclosure
charges on home loans borrowed on
floating rates of interest. This step
was the result of the observations
made by the Committee for Customer
Service in Banks.
This committee is headed by former
SEBI Chairman M Damodaran. The
committee had pointed out back then
that foreclosure charges and pre-
payment penalties were restrictive in
nature, because it stopped the home
loan borrower from a balance transfer
or refinance, even if they had access
to a cheaper source of capital.
The other grouse that existing home
loan customers had against floating
rate loans was that banks always
seemed hesitant in passing on the
benefits of lowering interest rates to
existing borrowers. This, they argued,
was fostering discrimination against
existing borrowers and new
borrowers. After these observations,
borrowers point of view is that there
will be a change in the dynamics of
the marketplace as lenders will now
be keen on having the cheapest
lender tag and they will thus be
offering loan products at appropriate
rate of interest.
The RBI is concerned about the
welfare of customers at large, which
hoarse about.

On several occasions the irrationality
of charges such as collection of a
processing fee even when a loan is not
sanctioned or charges levied on a
customer for making no transaction in
a quarter have irked customers. It
seems the RBI is finally addressing
these concerns one step at a timE.
is clear from the fact that it has barred
banks from levying pre-payment
penalties on retail loans and asked
banks not to penalize customers for
not maintaining a minimum balance
in any inoperative account.

The RBI seems to have taken into
cognizance what customer protection
organizations have been screaming
A
GROWING
CHASM
The luxury housing segment is facing increasing sluggishness
but it is still doing better than other sections on the whole
he Indian industry has been
facing economic
turbulence since the
beginning of 2013. It was
the year when Indias Gross Domestic
Product (GDP) touched a nine-year
low of 4.5%.
Sentiments of gloom can be seen
across sectors, especially the Indian
real estate market, which has been in
a logjam for quite sometime now.
This sector is not particularly seeing
growth it used to witness right from
2008 when the global economic crisis
hit the sector.
T
The problem could have been
manageable if the slowdown was only
a side effect of the economic
condition in the country.
But there are several other factors,
which have slowed down the growth
in the real estate sector.
High property costs and interest rates
have weakened the demand for
housing, whereas high vacancy levels
and rise in construction costs have
slowed down construction activity,
which has resulted in a delay in new
launches and a further delay in project
completion timelines.
This slowdown in the sector across
the country has badly hit developers,
some of whom are facing fund
crunch. In the hope of recovering
their investment, large and small
developers are relying on the luxury
housing market.
According to Lalit Kumar Jain,
President of Confederation of Real
Estate Developers Associations of
India (CREDAI), more and more
developers are gravitating towards
high-end projects because the profit
margin in this segment continues to
be quite attractive. The profit margin
of luxury housing is 50%-100%
in hand with property appreciation.
Earlier, we saw a trend where HNIs
and investors booked luxury homes
during the pre-launch period only to
sell the homes for a profit, when the
project was nearing completion. But,
now due to high reselling price, these
flats are not finding buyers giving rise
to bad loans.
It is little wonder then that
affordability is playing a key role
even in luxury unit sales. According
to India Ratings and Research
(Ind-Ra), real estate companies have
been facing falling unit sales, flat
revenue EBITDA margins and
continued deterioration in credit
metrics and cash flows.
The agency further added that sale of
fresh residential units has seen a
downward trend in the first half of
2013-14 due to weak consumer
sentiments and low real estate
affordability due to high prices.
Instead of reducing home prices,
developers have introduced several
offers such as EMI schemes and
freebies to lure customers.
For example, Raheja Builders is
offering special payment plans and
two years of rental assurance for the
buyer. Under this plan, the buyer has
to pay 10% upfront, 15% in 60 days
and rest 75% in EMIs after
possession. In Mumbai, Runwal
Group is offering a 10% discount on
pre-booking for buyers of their luxury
project Runwal Forest.
Branded homes is another trend,
which can be seen in recent launches.
Real estate developers are tying up
with international designers such as
Tonino Lamborghini, Casa and
Armani for residential projects.
Branded homes are being launched in
major cities like Delhi NCR,
Mumbai, Bengaluru and Pune.
compared to only 5% in the
affordable housing segment.
Developers justify their move to
luxury housing by claiming that this
segment is recession-proof. In the
first half of 2013, developers
launched several luxury projects.
According to real estate consultancy
firm, Cushman & Wakefield (C&W),
in the first half of 2013, the number of
launches in the high-end residential
segment grew by 142% as compared
to the corresponding period last year.
But in the second half of the year,
these launches started to taper down.
While luxury housing segment is
seeing growth in some micro markets
of the country, the demand for such
homes is restricted to certain areas of
the city.
Take for example the case of
Mumbai. The overall luxury housing
market in Mumbai has been
segmentalized. The city recently saw
prominent launches such as Full
Moon and Lodha Enchante by Lodha
Developers, Ajmera Treon by Ajmera
Group and Runwal Petal by Runwal
Group. There has been a steady
demand for luxury housing in Bandra
Kurla Complex, owing to close
proximity to trading companies,
commercial establishments and
foreign embassies.
However, luxury hotspots such as
Lower Parel, where most of the new
launches have taken place are seeing
sluggish sales. As a result, inventories
have piled up and launches of new
projects have come to a standstill.
It is the same story with Pune luxury
housing market. The luxury home
market in Pune is sluggish and there
have been very few launches in the
city owing to low sales, piling up
inventory and rising construction
cost. The only micro-markets, which
witnessed some demand and new
launches are Balewai and Bavdhan in
Western region and Keshav Nagar in
Eastern region because of close
proximity of these regions to
commercial establishments and the
presence of efficient infrastructure
such as Mumbai-Pune Expressway
and Pune-Bengaluru Expressway.
A similar slowdown can be seen in
Delhi NCR market as well. Weak
economy, coupled with the general
elections has put consumers in a
wait-and-watch mode. Inventories are
piling up in places such as Gurgaon
and Greater Noida.
A few projects have been deferred
because of the delay in obtaining
permissions. Launches have been
subdued as well. The only launches
that are happening are of subsequent
phases of existing projects that are
already under construction.
Even though the target group for
luxury homes is high net-worth
individuals (HNIs), industry analysts
believe that given the global
economic condition, affordability is
one of the key factors in buying.
Luxury home prices start anywhere
from `60 - `70 lakhs and go up to
`100 crore.
Considering the premium amount
charged, even HNIs take some time in
completing the transaction resulting
in slow sales velocity. The buyers are
in a position to negotiate the property
deal by delaying the payments
resulting in negative sentiments for
the industry.
According to Rajiv Piramal,
Vice-Chairman and Managing
Director of Peninsula Land, and
Co-Chair, FICCI Real Estate
Committee, Pessimism in the
industry means the negotiation power
is stronger with the buyer and an
improvement in sentiment goes hand
However, these branded homes come
with their own set of challenges.
Anuj Puri, Chairman & Country
Head, Jones Lang LaSalle India says,
The challenges will include a limited
buyer segment, finding the right land
parcels within high-prestige
locations, providing the required
infrastructure to adequately
supplement the overall luxury
experience - and, of course, the right
brands to come on board.
Furthermore, industry analysts
believe the concept of branded homes
is relatively new for Indian
consumers and it may take time to
become popular.
When there is so much gloom and
negative sentiments in the sector,
Bengaluru luxury housing market
comes as a silver lining in the cloud.
According to a recent report by Jones
As far as the rest of the countrys
market is concerned, many
developers are optimistic that post
general elections, the economy will
improve and this sector will again see
a revival.
However, Samanthak Das, Chief
Economist and Director at Knight
Frank feels that political compulsions
will supersede any economic urgency
leading to a delayed economic
expansion. If an analogy is drawn to
the 2009 elections, the determinants
of housing demand are different.
He maintains, Property prices have
risen faster than growth in household
income or general inflation during
this period. Interest rates are much
higher today. Lack of any meaningful
housing demand implies prices will
not see any appreciation in the next
six monthS.
Lang LaSalle, Bengaluru has become
the number one market for luxury
homes. The reason for this edge is
prices of high-end residences are 20%
to 30% more affordable than Mumbai
and Delhi.
When compared to these cities, on a
quarterly basis Bengaluru reported
sales of close to 100 luxury units,
which include villas, whereas
Mumbai and NCR saw only around
dozen such sales.
Since the depreciation of the rupee,
Bengaluru has been seeing interest
from NRIs especially IT professionals
and foreign investors, who are
looking to invest in Indian real estate.
Moreover, another report by LJ
Hooker, a consultancy firm, suggests
that about 5,400 luxury homes will be
added to Bengalurus high-end
housing market.
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Tiding
Tough
Times
The FMCG
sector is doing
fairly well despite
the ongoing
slowdown in the
economy
Over
Enterprises Ltd (MaKE) has been
accounted by the company by
recording the transfer of the relevant
assets and liabilities of Kaya Business
at their book values as of the
appointed date. The excess of book
value of assets over liabilities has
been adjusted against Securities
Premium Reserve.
Accordingly, the financial results of
the Kaya Business do not form part of
the unaudited financial results for the
quarter ended 31st Mar 14 and 31st
Dec 13 and audited financial results
for the year ended 31st Mar 14.
However, the results of all other
previous periods/ year include the
results of Kaya business and
accordingly, to that extent, are not
comparable with the results for the
quarter and year ended 31st Mar 14,
the company said in a statement.
Hindustan Unilever (HUL), the
Indian subsidiary of multinational
consumer goods giant Unilever, also
reported 11% profit growth in the
quarter. However, the maker of soaps
such as Lux and Dove witnessed a
tepid 3% growth in sales volume, due
to the overall slowdown in economy.
High inflation, low consumer
sentiment and high raw material costs
have singed the industry for many
months now.
The slowdown in growth across
categories in both value and volume
terms continues, R Sridhar, CFO of
HUL, said at a conference. There is
definitely pressure in the premium
and discretionary categories.
HUL said the operating environment
remained challenging through the
quarter, with slower market growth
and high competitive intensity. Input
costs were managed through a mix of
judicious pricing and cost savings.
CFO Sridhar said the demand
situation should improve soon.
ast Moving Consumer
Goods (FMCG) companies
have managed to tide the
ongoing slowdown in the
economy through judicious pricing
and cost savings. Steep competition
and slowdown in the economy
continued to put pressure on the
performance of FMCG companies in
the quarter despite this companies
have reported moderate profits.
Further with the arrival of the new
government the FMCG companies
are bullish that they would witness
strong demand as consumer
sentiment has already started
improving and there would be more
jobs across the country.
Companies said that apart from
judicious pricing and cost savings,
strong focus on key categories like
foods and home care have helped
companies to stay afloat with
improvement in their profits despite
the challenging environment as sales
came under pressure.
Strong volume-led growth across key
categories like health supplements,
digestives, shampoos, toothpastes,
foods and home care helped Dabur
India Ltd mitigate the impact of a
challenging business environment
and macro headwinds to end the
fourth quarter of FY13-14 with a
15.5% surge in consolidated net sales
to `1,769.02 crore. Consolidated net
sales stood at `1,531.09 crore in the
same quarter last year.
Dabur India Ltds net profit for the
fourth quarter of 2013-14 marked a
17.3% growth to `235.29 crore as
against `200.55 crore a year earlier.
The business has performed well on
all operating parameters. Our strong
performance reflects the robustness
of our business model and our ability
to efficiently manage the emerging
challenges. Dabur has been reporting
F
strong and consistent performance
despite intensifying competitive
pressures and the challenging market
environment being witnessed for
some quarters now. Going forward
too, our focus will be on pursuing an
aggressive and profitable growth
strategy, Dabur India Ltd chief
executive officer Sunil Duggal said in
a statement.
Dabur India Ltd ended the 2013-14
fiscal with a 15.1% growth in net
sales to end the year at `7,073.21
crore, up from `6,146.38 crore a year
earlier. Net profit for the 2013-14
fiscal marked a 19.7% surge to
`913.92 crore, up from `763.42 crore
a year earlier.
CATEGORY GROWTHS
The digestives category posted a
23.3% growth during the fourth
quarter of 2013-14, while the foods
business - riding on strong demand
for its packaged juices - ended the
period with a 20.6% growth.
The toothpaste business for Dabur -
led by Dabur Red Paste - reported a
20.7% growth, while the shampoo
business grew by 19%. The health
supplements business saw a 17.6%
growth during the quarter, while the
home care category grew by 13%.
Marico Ltd posted around 6%
increase in its consolidated net profit
to `88.7 crore for the quarter ended
31st Mar 14, whereas the same was
at `83.86 crore for the quarter ended
31st Mar 13. The total income is
`4,744.41 crore for the year ended
31st Mar 14, while it was `4,633.7
crore for the year ended 31st Mar 13.
Kaya Business, earlier a part of
Marico, has been demerged effective
17th Oct 13, with 1st Apr 13 as the
appointed date. Pursuant to the
de-merger scheme, the transfer of
Kaya business to Marico Kaya
The company pegged its consolidated
March quarter profit at `870 crore on
an 8.9% year-on-year (y-o-y) growth
in revenues, which stood at `6,935.82
crore. There was also an increase in
the sale of small price point packs.
The soaps and detergents division
posted a growth of 9.6% y-o-y, aided
by healthy growth in the skin
cleansing segment.
Growth in skin care was led by brands
such as Pears, Dove, Breeze and
Lifebuoy. The laundry segment too
posted a healthy growth, supported by
brands such as Surf Excel Easy Wash
and Rin. The personal products
division grew by 8.3% y-o-y during
the quarter. The relaunch of Fair &
Lovely aided growth in the skin care
segment. Ponds and Lakme too
sustained robust growth.
However, the oral care segment
posted a weak performance as high
promotional intensity in the market
impacted the sales of Pepsodent.
Healthy growth in the hair care
segment was led by brands such as
Dove and Clinic Plus.
The beverages division posted a
growth of 7.5% y-o-y, aided by a
healthy volume growth. The
packaged foods division posted a
12.7% y-o-y growth, with brands
such as Kissan, Knorr and Kwality
Walls posting healthy growth.
Earnings before interest taxes
depreciation and amortization
(EBITDA) of HUL has been ahead of
expectations mainly on the back of a
lower-than-expected input expenses
and lower advertising and promotions
spend, experts said.
HUL said brand investments were
sustained at competitive levels with
higher advertising spend being offset
by lower promotional activities.
Net profit growth was impacted by
companys international business
posted an EBITDA growth of 30%.
The company, however, in a
statement said that figures for the
current periods are not comparable
with those of the corresponding
periods of the previous year because
of acquisitions/ amalgamations made
since then. The figures of the previous
period have been regrouped and
reclassified wherever necessary.
While FMCG companies witnessed
stress in revenue growth in the fourth
quarter, experts believe going forward
the sector is likely to witness a strong
revival in sales as the economy is
likely to see a boost with the arrival of
the new government.
Consumer sentiment is upbeat and
everybody is hoping for better days to
arrive soon as the governments key
focus would be on economic growth.
Already the stock market has rallied
exponentially with the arrival of the
new government and is expected to
rally further.
The sentiment at the moment is very
positive and everybody is pinning
hopes on manufacturing, retail, real
estate, fast moving consumer goods,
IT, hospitality and infrastructure
sectors among others and expecting
them to witness strong growth after a
slack of almost two years, which
would lead to a lot of job creation in
the country.
However, some experts have
cautioned that the projection could be
tampered by forecasts of a weak
monsoon that can potentially hurt
rural demand for consumer goods.
HULs and GCPLs volume growth
needs to be monitored in the ensuing
quarters, as El Nino risk may have a
bearing on rural consumption. HULs
rural exposure could be at relative
risk, experts saiD.
significant property sale in the
previous year. Cash generated from
operations at over `5,000 crore for the
year was up `462 crore over last
year, it said.
In the fourth quarter, Godrej
Consumer Products Ltd (GCPL)
reported 13.4% year ago growth in its
adjusted profit, aided by
improvement in profits of
international business.
However, the company posted a
disappointing performance on the
top-line front, impacted by slowdown
in the domestic market and a flat
revenue performance by the
Indonesian business.
Key highlights for the fourth quarter
are the companys lower-than-
estimated 12.2% y-o-y growth in
top-line to `1,924 crore. The
companys domestic business posted
a revenue growth of 12% y-o-y.
The soaps segment posted a weak
top-line growth of 1% y-o-y. Volumes
de-grew by 4% y-o-y in the segment.
Growth in the hair colour segment
decelerated and stood at 16% from a
year ago.
Household insecticides recovered
from the modest performance in the
fourth quarter and posted a 17%
growth for the quarter compared to a
year ago. While the Indonesian
business posted a flat performance on
the top-line front, Africa, Europe and
Latin America posted a growth of
39%, 16% and 5%, respectively.
The operating profit margin came in
higher than estimated at 17.4%, aided
by price hikes carried out by the
company in the Indonesian business.
The companys Africa and Latin
America businesses too posted
margin expansion of 850 bps and
1,040 bps, respectively. The
SMART
MOVES
Experts, including renowned investors
like Warren Buffett, contend rationality is
more important than high intelligence
quotient when investing in the markets
A number of professionally managed
firms have lost huge sums of money
in the market despite having a large
pool of professionals, including
investment scientists.
Here is one more story of a scientist.
Great physicist Sir Isaac Newton,
back in the year 1970, bought shares
of South Sea Company, which was
considered to be one of the hottest
stocks at that time in England. Soon
Newton sold his stocks pocketing
about 100% profit.
However, about a month later he
repurchased the stock and lost more
than twice the amount he gained
during his first purchase. He said he
could calculate the motion of
heavenly bodies, but not the madness
of people.
It is said that for the rest of his life he
forbade anyone from speaking the
words South Sea in his presence.
So, the moral of the story is that even
Newton, the worlds greatest scientist,
acted like a complete fool when the
crowd was roaring.
This brings us to the next and the
most important point here that if most
people have failed in the past or if
they fail in the future at investing, that
would not be because of their
stupidity but because they have not
developed the emotional discipline,
which is required for maintaining
investment success.
If you are still wondering if we really
require high IQ or how much IQ is
required, here is what Buffett has to
say: Success in investing does not
correlate with IQ once you are above
the level of 25. Once you have
ordinary intelligence, what you need
is the temperament to control the
urges that get other people into
trouble in investing.
Estimates suggest that approximately
nlike conventional belief
successful investing has
very little to do with the
intelligence of investors.
Celebrated investor Warren Buffett
has in several interviews said
temperament is more important than
IQ. He reiterated the same in a speech
he gave with Bill Gates in 1998.
Buffett had said, How I got here is
pretty simple in my case. Its not IQ,
I'm sure you will be glad to hear. The
big thing is rationality. I always look
at IQ and talent as representing the
horsepower of the motor, but that the
output - the efficiency with which that
motor works - depends on rationality.
A lot of people start out with
400-horsepower motors but only get a
hundred horsepower of output. Its
way better to have a 200-horsepower
motor and get it all into output.
Warren Buffetts mentor and, father
of value investing Benjamin Graham,
echoed the same sentiments. Graham
said investors do not need high IQ to
be successful investors.
In his famous book The Intelligent
Investor Benjamin Graham said,
We have seen much more money
made and kept by ordinary people
who are temperamentally well-suited
for the investment process than by
those who lacked this quality, even
though they had an extensive
knowledge of finance, accounting
and stock market lore.
But why is it that Graham named his
most famous classic investment book
as The Intelligent Investor?
While explaining this he actually
cleared the confusion and helped
investors to understand that it takes
more than intelligence to be a
successful investor.
In the first edition of the book The
U
Intelligent Investor, Graham guided
his followers and explained that by
the term intelligent investor he
means being patient, disciplined and
eager to learn. He said one should
also be able to think independently
and harness his own emotions.
This kind of behaviour or a trait
Graham considered as more of a
character and not a product of human
brain. There are several studies which
have proved that even highest
education and best IQ cannot assure
you success in investing.
Taking his view forward Grahams
favourite disciple Warren Buffett
once said, You dont need to be a
rocket scientist. Investing is not a
game where the guy with 160 IQ
beats the guy with 130 IQ.
Although there are very few
explanations available on the points
made by Graham and Buffett, there is
one explanation offered by Jason
Zweig in the subsequent issues of
Intelligent Investor, which makes a
lot of sense.
In the year 1998, long term capital
management (LTCM) crisis, hedge
fund run by a battalion of
mathematicians, computer scientist
and two Nobel prize winning
economists, lost more than $2 billion
in a matter of weeks based on a huge
bet that the bond markets would
return to normal.
However, the bond market kept
becoming more and more abnormal
and LTCM had borrowed so much
money that its collapse nearly
capsized the global financial services.
This is not alone. There are several
organizations and investment firms
who have employed scientists to
understand and profit from the gravity
of the stock markets. However, none
of them have actually done this.
95% of the population scores an IQ
between 70 and 130. Most senior
scientists typically have an IQ of
about 120-130. Compared to this,
Buffett is only saying that above 25
will be enough.
If It Not IQ, Then What Is It?
Once again Graham has said an
investors chief problem - and even
his worst enemy - is likely to be
himself. As an investor our
temperament, rationality and how we
think are considered to be most
important and critical to our
investment success.
Rolf Dobelli in his most famous book
The Art of Thinking Clearly
mentioned Lets be honest. We do
not know for sure what makes us
successful. We cannot pinpoint
exactly what makes us happy. But we
know with certainty what destroys
success or happiness. This realization,
as simple as it is, is fundamental:
Negative knowledge is much more
potent than positive knowledge.
Charlie Munger, partner of Warren
Buffett, has elaborated on the same
point. Munger says, All I want to
know is where I am going to die. So I
will never go there.
This simple realization and
understanding can keep you focused
so that your prime focus will be on
avoiding investment mistakes.
Knowing what we want from an
investment like safety and returns,
which are reasonable enough to
justify the cost of living, will help to
that extent to decide on the course of
things not to do like expecting stocks
to make money for you every day,
expecting bull and bear markets to
continue for forever, buying at the
highest point of greed and selling at
the highest point of fear in the market,
depending on tips and buying without
Reflective thinking on the other hand
is slightly tougher and requires much
more effort. We all know what 2 + 2 is
equal to. But when we are asked, what
39x59 is equal to, reflective thinking
kicks in. Investing in a stock after a
thorough analysis and own
understanding of the risk requires
reflective thinking.
In his book Kahneman said system 2
or reflective thinking is the effortful
one. It depends on the allocation of
attention. It is what we are paying
attention to, mostly. It is involved in
calculations. It is involved in difficult
decisions. It is involved in controlling
yourself and not telling somebody to
go to hell. That demands system 2. It
is all a part of an effortful system.
System 2 thinking is much more
rational and logical compared to
system 1 thinking. Most investment
decisions which are taken through
system 2 or reflective thinking have
been generated by effortless
conclusions and rationality, which is
the most important as worlds most
celebrated investors Benjamin
Graham, Warren Buffett and Charlie
Munger have emphasized over the
last several years.
This is the most important aspect of
investing but unfortunately it is the
least talked about because we all fear
to practice and learn to make best
decisions, which sometimes requires
much more effort and critical
thinking. Not making best decisions
and rational decisions do not require a
very high IQ, but only a simple
rational thinking and control over
temperament like jumping between
greed and fear, dreaming of stocks to
make you rich, etc.
Meanwhile, after reading so much on
behavioural decisions if you too feel
this has nothing to do with the
investing, then probably your system
1 thinking has started kicking iN.
knowing what you are buying.
More than intelligence these things
cause a lot of damage and our
thinking becomes our prime enemy.
Because of our mind which most of
the time looks for short cuts and
easier ways and things to do in life
and investing, we tend to believe that
we are acting smart. However, in
reality this level of thinking only
leads to several mistakes.
How We Think Is Important
In his wonderful book Thinking Fast
and Slow famous psychologist
Daniel Kahneman tells that we
broadly follow two systems of
thinking. System 1 is more about
reflexive thinking and system 2 is
reflective thinking.
In reflexive thinking, the brain
function is automatic, fast and
effortless. Like if we say we are going
out on 31st. Most of us will believe it
is going to be 31st December. If
someone says to the merchant that he
or she will pay the dues on 2nd or 3rd
of the coming month, the merchant
will assume that is because the
individual gets his or her salary on 1st
of the said month.
Several times when stocks start going
up just before the results, we tend to
assume that the results are going to be
good and insiders are accumulating
the stock.
On many occasions companies
change their names to reflect the
booming sector. For example, many
companies in 2007-08 fooled
investors by turning their names with
infrastructure without having
anything to do with the sector or its
activities. Power, education, real
estate, etc are all examples of how
companies have fooled investors who
just believed in the name. This is
typical of reflexive thinking.
Shrikant Shrivastava is
responsible for driving the
evolution of IMGCs risk
philosophy from identification and
control to management of risk to
help create a competitive edge and
work effectively with businesses to
create additional product, revenue
and operational opportunities and
efficiencies.
Shrivastava comes with more than
18 years of experience and
extensive domain expertise in the
Indian mortgage industry. Prior to
joining IMGC, he worked with
PNB Housing Finance as Chief
Risk Officer. He has also worked
with organizations such as ABN
AMRO Bank N.V., RBS, Genworth
and HDFC in various leadership
positions. Shrivastava is a Law
Graduate from Delhi University by
qualification.
past couple of years.
One such move, which has been rather silent is the
introduction of mortgage guarantee in India.
Simply put, mortgage guarantee is a sort of an
insurance policy that is aimed at compensating
lenders for losses that they may harbour in case of
defaults by borrowers.
In developed nations such as the US the lenders
mortgage insurance has been around for several
decades making dreams of prospective home
owners come true.
When a mortgage insurance company lends its
arm in support to a lender, the lender allows the
homeowner to put in a much smaller down
payment for his dream home, thus allowing him to
choose a better location or a larger house
T
he Indian banking
regulator, the Reserve
Bank of India (RBI) has
slowly and silently taken several
measures towards strengthening
and bringing in more transparency
in the mortgage market over the
The product enables release
of capital for the lending
institution, the benefit of
which, over time can be
passed on to the consumer.
Shrikant Shrivastava,
Chief Risk Officer at IMGC
lenders to provide home loans with
better terms to borrowers that will
support early home ownership. The
benefits in India are similar to
other global markets primarily that
of risk transfer, capital efficiency
and support to early home
ownership.
Q. Can you explain how does a
mortgage guarantee mitigate
risks for lenders?
Mortgage Guarantee (MG) protects
lenders from credit default of its
residential home loan borrowers.
Credit default includes both
intentional and unintentional
non-payment of contracted
obligation (EMI) by borrowers.
In India, MG makes good the
unpaid installment (principal and
interest) of the individual
borrowers up to the maximum
contracted liability (MG cover).
Simply put, it covers both the
propensity to default and the
severity of loss in case the
underlying property does not fetch
the necessary value of outstanding
loan at that point of time.
However, MG must be used for a
larger risk mitigation objective, viz
general price correction/ decline in
an economy and the resultant loss
arising from it to the Banks /HFC.
To put it simply, banks will
experience losses in home loan
extended, which is secured by
mortgage of the property of the
borrower as there may be an
impact of decline of property
value.
This may look to be a very
improbable situation in India
currently since we have seen
property prices moving
unidirectional/ upwards in the last
10 years or so.
depending upon his requirement.
Thanks to mortgage insurance in
the US, home buyers can apply for
a mortgage with a down payment
capability of as less as 5% of the
purchase price of the property.
Although such drastic alternations
may not be made in the Indian
context just as yet, mortgage
guarantee is expected to benefit
both Indian lenders and home
buyers in the long run.
India Mortgage Guarantee
Corporation (IMGC) is the first
Mortgage Guarantee Company in
India. IMGC is a joint venture that
combines the developmental
mandate of National Housing Bank
(NHB), the technical expertise of
Genworth Financial, and the
resources of International Finance
Corporation (IFC) and Asian
Development Bank (ADB).
In April this year, IMGC concluded
its first mortgage guarantee deal
with DHFL on a pool of priority
sector loans.
Shrikant Shrivastava, Chief Risk
Officer at IMGC explains more
about mortgage guarantee and its
need in India.
Q. Can you please tell us about
your genesis - when and why was
IMGC founded?
Several institutions have come
together to form IMGC. NHB has
shareholding of 38%, Genworth
with 36% along with IFC and ADB
at 13% each.
The JV was funded on 29th Jun
12. It has been registered with
RBI guidelines under the Mortgage
Guarantee Company. IMGC was
founded with a vision to make
early home ownership a real
possibility through the provision of
mortgage guarantee.
The company provides mortgage
guarantees against borrower
defaults on housing loans financed
by leading banks and housing
finance companies.

This kind of risk mitigation
partnership provides support to
lenders in making housing not only
affordable but also easily
accessible to every Indian at an
earlier life stage than possible
otherwise.
Additionally, the product enables
release of capital for the lending
institution, the benefit of which,
over time can be passed on to the
consumer. The relief has a direct
impact on the leveraging capacity
of the lender, and has longer-term
impact on the ROE of the
institution.
Q. A mortgage guarantee
product is an important
component of the global
mortgage market, what impact is
the product expected to have in
India?
India Mortgage Guarantee
Corporations (IMGC) Mortgage
Guarantee (MG) products provide
loss protection to Indian mortgage
lending institutions or residential
mortgage backed securities to
investors against borrower default
caused by inability to service their
home loan.
IMGC strives to provide housing
finance lenders the security and
certainty of an expert risk
mitigation partner and the benefit
of capital relief that affords
incremental earnings without
incremental risk.
In the long term this will enable
Based on long-term observation of
global home loan markets,
situation of large-scale property
price decline or regional issues
impacting borrower repayments
and losses arising out of such
situation happen at regular
interval.
MG works as a long-term risk
mitigant when HFC/Banks have
the requisite cover protecting them
and helping them tide over this
risk.
Another facet is that of MG
providing additional housing
finance flexibility to lenders and
consumers by expanding the
underwriting envelope/ inclusion
of borrower segment that are
currently not included by the
banks mortgage guarantee could
help them test such segments.
The global expertise of selecting
borrowers based on right credit
sectors could help test controlled
lending as well as open the lending
market to this segment longer term.
Q. Do you think this will give a
shot in the arm to borrowers who
have been sitting on the fence
and have been unable to make a
purchase decision?
As of now, the regulators have not
permitted a higher LTV
(loan-to-value) if loans are backed
by mortgage guarantee. However,
if any HFC or bank is currently
lending at a LTV lower than the
regulatory cap and the institution
has the appetite to raise the LTV up
to the regulatory cap once IMGC
steps in to share the risk, then this
product will definitely enable early
home ownership for certain
borrower segments.
However, the lender will have to
follow guidelines in terms of the
borrower qualifying for higher
LTV as well as qualifying for other
norms as specified to evaluate the
borrowers eligibility.
Q. How does a mortgage
guarantee impact the balance
sheet of lenders?
There is a possibility that lenders
increase the LTV offered on loans
with mortgage guarantee while
remaining within the regulatory
limits resulting in higher interest,
earning loan asset on the books
without any incremental risk.
Lenders may also consider
expanding to new markets or
customer segments with mortgage
guarantee as long as it qualifies as
per the mortgage guarantee
companys underwriting criteria.
Mortgage guarantee qualifies as a
credit risk mitigant as per RBI
guidelines on capital adequacy. A
lenders mortgage loan exposure to
the extent guaranteed by a
mortgage guarantee company
attracts lower risk weights than
normal, resulting in capital relief.
Even rating agencies are of the
view that economic capital
requirement on the guaranteed
mortgage portfolio should be far
lower than currently envisaged for
a given rating.
Capital relief provides lenders an
opportunity to further leverage the
existing capital and increase the
book size resulting in higher
Return on Equity.
Banks as originators in a
securitization deal are required to
keep capital equivalent to the
credit enhancement as per RBI
guidelines.
Since availability of mortgage
guarantee on a loan improves its
credit profile, a portfolio of such
loans can be securitized with lower
credit enhancement than otherwise
required releasing scarce capital.
Q. Do you think that in the
current format that mortgage
guarantees are being offered to
lenders, there are some
informational advantages that
you can get from National
Housing Bank?

Data collected by NHB from
HFCs/ Banks under its supervisory
powers is not shared with IMGC as
per its guidelines. IMGC does not
have any informational advantage
over any other entity in the
mortgage industry or public at
large.
Q. Now that mortgage
guarantees are on offer, do you
think lenders may dilute their
pre-loan approval procedures
and bank on mortgage
guarantees instead?
Mortgage guarantees do not cover
the incidence of fraud by borrower,
lender or an agent of the lender.
The product covers the risk of
credit defaults only. Hence, lenders
are not likely to dilute their
underwriting due diligence.
Further, mortgage guarantee covers
only a certain contracted
percentage (usually ~ 10%-50% of
top loss or pro-rata loss basis) and
the mortgage guarantee company
also underwrites loans as per its
own credit standards.
Therefore, lenders are still exposed
to the borrower for the amount
above the MG cover and are
unlikely to take on additional risk
or dilute their underwriting
standards because of a partial
mortage guarantee coveR.
A JUDICIOUS
DECISION
It would be wise for
investors to chalk out
investment options to
save taxes at the start
of a new financial year
instead of the end
hy wait for the month
of March every year
to invest in tax-
saving instruments,
when investors can start investing
from the beginning of every financial
year? It is a known fact that Indians
love planning for investments in
tax-saving instruments at the end of
every financial year and take hasty
decisions, which might harm their
yearly savings.
However, it is always believed that
the beginning of a financial year is a
W
very good time to start planning for
tax saving as it can give enough time
to understand various financial
products and earn more returns.
Investors can consider investments in
tax-saving instruments like Public
Provident Fund (PPF), National
Savings Schemes (NSC) or
equity-linked savings scheme (ELSS)
and many more.
But instead of blindly putting their
money in such instruments to save
tax, investors need to plan for their
future and invest accordingly. This
article attempts to explain investors
where to invest and how they can
benefit by investing at the right time.
Bank Fixed Deposits (FDs) and
National Savings Certificates (NSCs)
Not many investors know that
five-year bank fixed deposits can give
them a rebate under section 80C of
the Income-tax Act. Risk-averse
investors can consider this option as it
is one of the simplest tax-saving
investment avenues. Fixed deposits
offered by various banks have a
loan against the PPF, but it cannot
exceed 25% of the balance in the
preceding year. Invest before the 5th
of the month if you want your
contribution to earn interest for that
month as well.
National Pension Scheme (NPS) on
the other hand is one of the low-cost
products in the entire investment
universe, which charges 0.0009% as
fund management charges (mutual
fund charges between 1.5% to 3%).
There are no guarantees on
investment as the NPS is a defined
contribution plan and the benefits
would depend on the amount invested
and the investment growth up to the
point of exit from the NPS. Being a
market-linked product, it does not
guarantee returns or inflation
protection. An investor can invest in a
government security (up to 100%) or
corporate bonds (up to 100%) and
equity up to 50% (Nifty or Sensex).
As it is a pure retirement product,
investors cannot access funds before
they turn 60. On maturity, at least
40% of the corpus must be used to
buy an annuity. For many investors
this is a positive feature that prevents
premature withdrawals, while some
investors do not invest due to the long
investment tenure.
Tax Saving With Exposure To
Equities: Equity Linked Savings
Scheme (ELSS) And Rajiv Gandhi
Equity Savings Scheme (RGESS)
One of the few investment avenues,
which give 100% equity exposure
along with tax savings option under
section 80C of the IT Act is the Equity
Linked Savings Scheme (ELSS).
ELSS has the shortest lock-in period
of three years among all tax-saving
options under section 80C.
Being equity funds, these schemes
can generate good returns for
lock-in period of 5 years and the
interest is taxable.

Different banks offer different interest
rates on tax-saving FDs. Currently a
number of private banks in the
country offer around 8% to 9%
interest on five-year bank FDs. The
main draw for such deposits is the
guaranteed higher interest. Moreover,
it is better than the 4% to 5% interest
they earn from a savings account.
Investors must, however, bear in mind
that whenever inflation is above
deposit interest rates, there will be no
real return. But investors benefit from
such a product when inflation is
below the rates offered by banks.
The interest rate is fixed and
guaranteed for the duration of the
deposit at the commencement of the
deposit. The bank deposit is liquid,
despite the lock-in during the tenure
of the deposit. The liquidity is offered
in the form of loans and withdrawals
subject to conditions. In case of an
emergency, investors can close their
FDs prematurely, albeit at the cost of
losing the interest it earns.
Similarly, National Savings
Certificate (NSC) is a popular and a
safe savings instrument that combines
tax savings with guaranteed returns.
This scheme is backed by the
government, and is one of the safest
investment options available at post
offices. Savings in this product is
risk-free because of government
backing. Certificates can be bought
from any head post office or general
post office. The NSC is liquid, despite
the 5- and 10-year stipulated lock-in
period. Liquidity is offered in the
form of loans and withdrawals are
subject to conditions. The amount and
rate at which the loan is permitted
depends on the lending institution.
National Savings Certificates (NSCs)
offered by post offices give an interest
rate of 8.5% per annum compounded
half-yearly. The interest is paid at
maturity but it is taxable annually.
Investment up to `1 lakh per annum
qualifies for IT rebate under section
80C of the Income-tax Act. However,
the interest that accrues every year is
included in your taxable income and
is liable for tax payment.
Long Term Conservative Products:
Public Provident Fund (PPF) And
National Pension Scheme (NPS)
Considered among the best schemes
for tax saving for Indian investors, the
Public Provident Fund (PPF) remains
the top choice for tax savers since
many years. PPF is completely risk-
free in nature as it is backed by the
government of India.
All individuals can open a PPF
account. They can even open an
account on behalf of a minor. A
person cannot open more than one
account in his or her name or even
have a joint account. The minimum
amount of investment in a PPF
account is `500 per annum and the
maximum amount of investment in a
year is `1,00,000.
In case of a minors account, the
investment in the minors and
guardians account together cannot
exceed `1,00,000 per annum.
Deposits can be made in a maximum
of 12 installments in a year. Currently
investors can earn interest of 8.7%
and it comes with a lock-in period of
15 years, which makes it a long-term
investment option.
PPF also offers liquidity to the
investor. If you need money, you can
withdraw after the fifth year, but
withdrawals cannot exceed 50% of
the balance at the end of the fourth
year, or the immediate preceding
year, whichever is lower. Also, only
one withdrawal is allowed in a
financial year. You can also take a
investors over the long term. If they
invest regularly through systematic
investment plans (SIPs) they can earn
better returns compared to other
tax-saving products.
In the past five years, this category
has created wealth for investors with
average returns of over 15%. While
there are many schemes, which gave
returns of around 20% to 25%
compounded annually for the last 10
years, investors have to understand
that this potential to earn high returns
comes with a higher risk.
There is no guarantee that your
investment will generate positive
returns after the 3-year lock-in period.
During the crises of 2008-09 many
funds were giving negative returns as
this fund mirrors the performance of
the stock markets.
Therefore, only investors who have
the patience to stay invested for a
longer duration with volatility should
consider this option. Once an investor
selects a scheme, it is up to the
investor to pick dividend or growth
option. There is no difference in the
tax treatment of the two options.
The decision should be based on the
cash flow requirements of the
investor. Investors should avoid the
dividend reinvestment option for
ELSS because the lock-in period will
prevent them from exiting fully. The
best option is to take the SIP route
since the start of the year.
RGESS too aims to encourage
first-time investors to invest in the
equity markets. This scheme would
give tax benefit to new investors
whose annual income is below `12
lakh. This benefit is available for
three successive years and above the
existing one lakh exemption under
section 80C.
Investments in RGESS are capped at
insurance. Investors should always
calculate sum assured by listing their
liabilities (loans, household expenses,
etc) and assets (income received).
Then the investor needs to deduct his
assets from liabilities and goals, the
amount derived is the amount of
insurance he needs. But the investor
needs to have a term policy (which
comes with low premium) but it does
not give any money at the maturity.
ULIPs are a category of goal-based
financial solutions that combine the
safety of insurance protection with
wealth creation opportunities. In
ULIPs, a part of the investment goes
towards providing you a life cover.
The residual portion of the ULIP is
invested in a fund, which in turn
invests in stocks or bonds; the value
of investments alters with the
performance of the chosen fund.
Simply put, ULIPs are structured
such that the protection element and
the savings element are
distinguishable, and, hence, managed
according to your specific needs. This
way, ULIP offers unprecedented
flexibility and transparency.
Having said that insurance plans have
their advantages and shortcomings,
too. Therefore, investors need to do a
thorough research before investing in
insurance policies and not jump only
to save tax in such products.
Investors should ascertain whether
the plan meets their goals. Also, they
should evaluate the performance of
the previous ULIPs. They should also
check whether they are single or
regular premium ULIPs. Consider
choosing a policy with a tenure of at
least 15 years, which can give
investors a good amount of money. It
is always seen that many investors
disband their insurance policies and
not complete their full-term which
impacts their savingS.
`50,000 per individual, with a tax
deduction of 50% on the amount
invested. The scheme allows
investments only from fresh investors
who have never traded in equities
through a demat account. Investors in
equity funds and those holding
physical share certificates are also
eligible. RGESS investments have a
lock-in period of three years.
RGESS permits investments in the
BSE-100 or CNX 100 shares, shares
of Maharatna, Navratna or Miniratna
PSUs, or in designated equity mutual
funds and exchange-traded funds
(ETFs). There are many ETFs that
qualify under the Rajiv Gandhi
Equity Savings Scheme.
Insurance: Life Insurance Policies
And United Linked Insurance Plan
(ULIPs)
When you invest in a term insurance,
endowment or a retirement plan, the
government deducts the premium
amount you pay towards insurance
from your taxable amount. And you
end up saving tax on a maximum
taxable income of `1 lakh per year.

We all are aware that life insurance
still remains the most preferred
tax-saving instrument for Indian
investors. In a way many investors
think that by paying insurance
premium they save tax and also save
money for their retirement. But
investors should invest only if they
are sure of what they will get.
Investors should always invest in life
insurance policies to get life benefits
and not to save taxes. The main aim of
an insurance product is to ensure a
financially secured future for your
family members.
Before buying any investment
product, be it ULIPs, endowment or
money back policy, investors should
always calculate their need for
he Indian market contin-
ued its positive momentum
in the month of May as
well, scaling to a new
all-time high of 7,563 on 16th May
14. The Nifty started its rally from
the 6,100 level in the month of Febru-
ary and since then it has given sensa-
tional returns of over 20% in the last
four months.
The June series rollover for the Nifty
futures stood at 59.7%, which is
below its three-month average of
63%. The cost at which the rollovers
are taking place is seen at 0.4% as
compared to its three-month average
of 0.55%.
Hence, Nifty rollovers are hinting at a
consolidation to negative outlook for
Nifty for the month of June.
On the contrary, Bank Nifty, which is
one of the most volatile counters,
might also see some profit booking
especially on PSU banking stocks as
there are a lot of fresh shorts being
initiated at every higher level of Bank
Nifty between 15,300 and 15,500.
On the Nifty Options front, the
highest OI build up for the June series
is witnessed near 7,000 Put followed
by 6,800 Put, whereas on the Call
side, it is observed at the 7,500 level.
We believe the markets will not
sustain higher levels between 7,400-
7,500 and, hence, a sell-on-rise
strategy should be adopted for the
month of June. Selling open calls of
7,500 and 7,600 can also be initiated
with a strict stop loss of 7,500 on a
closing basis.

India VIX, which measures the
immediate 30-day volatility in the
market, has seen a sharp decline post
the election outcome from levels as
T
TECHNICAL OUTLOOK FOR THE FORTNIGHT
high as 39.3 to levels as low as 13.97.
The current India VIX is trading
between 16-17. But going forward, it
is recommend to always remain long
on volatility as it has formed a very
strong base near 15-17 levels for a
long-term basis.
The Put Call Ratio-Open Interest
(PCR-OI) for Nifty Options has been
in the range of 0.7-0.9 for the month
of May. Going forward, we believe
that the PCR-OI may remain in the
same range, which is hinting that
some selling pressure may remain in
the market.
Technically, bulls kept ruling the
Dalal Street since the last three weeks
as the Sensex and the Nifty are
trading near their highest levels. The
stock market has undergone a sharp
rally in the past three consecutive
weeks and the important event - the
elections - has already unfolded.
So, a Time-wise Correction, which
is currently being witnessed, is essen-
tial for the market from a longer-term
perspective. However, individual
stocks may continue to outperform
the benchmark Nifty. Technical
Outlook: Weekly chart indicates that
the Nifty has given a breakout of the
upward rising channel and trading
above the upper trend line of the
channel indicates a bullish trend.
As per the Retracement Theory
(High-7,563/Low-6,638), the Nifty
has a strong support level of 7,210,
which is supported by the Golden
ratio (61.8%).
We broadly maintain our view that the
Nifty index has entered a strong
bull-run and is likely to make new
highs over the next few months
considering the breakout of the
Bullish Ascending Triangle.

Going forward, we expect the Nifty to
continue its upward momentum and
test the 161.8% Price Extension
level of 7,750. However, it is difficult
to predict the precise time frame for
the Nifty to reach this target.
We reiterate that this market has now
become a buy-on-dips market and
advise traders to use any meaningful
correction to accumulate stocks with
a value-buying proposition. On the
downside, the strong base for the
Nifty has now shifted to 7,210 and
then 6,800 levels.
The Bank Nifty faces strong resist-
ance around the 15,500 level on the
upside. On a decisive close above,
expect it to rise to 15,750/15,800
levels. As per the Retracement Theory
(High-15,742.05/Low-12,738), the
Bank Nifty has a strong support level
of 14,590, which is supported by the
Golden ratio (61.8%). There is an
immediate support at 14,600/14,340
levels on the downside.
OPTIONS STRATEGY
BEAR PUT RATIO SPREAD
BANK NIFTY
It can be initiated by buying
15000PE and selling two 14000PE of
the June series. The net combined
premium outflow comes around `145
- `150, which is also the maximum
loss (that is, if the Bank Nifty June
series expires above the 15,000 level).
The break-even stands at the 14,850
level, beyond which there is a profit
of maximum 850 points. Market
participants are advisable to square
off the strategy when the combined
premium goes above 400.
Divergence is an important
tool, which shows
disagreement between the
price of a security and its
indicator
very investor who follows
technical analysis on a
regular basis has his or her
own favourite indicator or
oscillator. For some it could be RSI,
while for others it could be stochastic
or rate of change (ROC), MACD,
E
money flow index and CCI, among
others. To each his own! Whatever
works for you is your perfect
indicator. Whichever indicator one
might use, there is a commonality
between all technical traders and that
is their quest for finding divergences.
Normally when a stock price is
making newer highs or newer lows,
common sense dictates that the
indicator should also be making
higher highs or higher lows. If this is
not so, the price and the indicator are
said to differ or diverge from each
Hidden Bearish Divergence
A hidden bearish divergence is said to
have occurred when the price makes a
lower high, but the indicator is
making a higher high. It occurs in a
downtrend and indicates that the price
Regular Bearish Divergence
A regular bearish divergence occurs
when the price of a security makes a
new high, while the indicator fails to
do so and closes lower than the
previous high or makes lower highs.
This pattern occurs during the last leg
of an uptrend. It indicates that the
bulls are losing their grip on the
markets and the bears are ready to
push the prices down.
Price = Higher High
HIDDEN DIVERGENCE
Divergence does always signal a
reversal. It can also be used to spot
trend continuation. Hidden
divergences usually signal towards a
trend continuation.
Hidden Bullish Divergence
A hidden bullish divergence is said to
have occurred when the price of a
stock makes a higher low, but the
indicator is making a lower low. It
occurs during an uptrend and
indicates that the trend is likely to
continue its upward trajectory.
Price = Higher Low
Indicator = Lower Low
Trend Continuation = Uptrend Intact
Indicator = Lower Highs
Trend Reversal = Uptrend To
Downtrend
other and this is known as divergence.
Basically, divergence is disagreement
between the price of a security and its
indicator. For example, in an uptrend
a divergence is said to have occurred
when the price makes a higher high
but the indicator does not make a
higher high; in a downtrend a
divergence is said to have occurred
when the price makes a lower low but
the indicator, however, does not make
a lower low.
A divergence signals a high
probability of retracement or trend
reversal. Divergence indicates the
momentum is slowing down and the
current trend is weakening or coming
to an end. Many traders consider
divergence of an indicator to be more
reliable than the signal generated by
the indicators itself.
divergence. It is a sign that prices may
move up.
Divergences are basically of two
types: Regular and Hidden. These are
further subdivided into bullish and
bearish divergences.
REGULAR DIVERGENCES
Regular Bullish Divergences
A regular bullish divergence usually
signals a trend reversal. It occurs
when the price of a security makes
new lows, while the indicator fails to
make a new low or makes a higher
low. This usually occurs near the end
of a downtrend. It is an indication that
bears are losing steam and the bulls
are getting ready to lead the next leg
of the rally.
Price = Lower Low
Indicator = Higher Low
Trend Reversal = Downtrend To
Uptrend
RSI Divergence
Price Makes Higher Highs
RSI High 80
RSI High 55
Corresponding RSI
Makes Lower Highs
Giving Rise To Divergence
70
30
In the diagram above, you see that
while the price makes a higher high
(the line chart above), the RSI is
making a lower high. This is a
divergence, indicating that the
uptrend is nearing an end and a
change of trend is anticipated.
When the price of a security is in an
uptrend, but the major indicator is
moving in the opposite direction, that
is, downwards, it is known as a
negative divergence. It is a sign that
the prices may move down.
When the price of a security is in a
downtrend, but the major indicator is
moving in the opposite direction, that
is, upwards, it is known as a positive
PRICE
INDICATOR
Regular Bullish Divergence
Lower Lows
Higher Lows
Regular Bearish Divergence
Higher Highs
Lower Highs
INDICATOR
PRICE
Price
Higher Lows
Lower Lows
Indicator
Hidden Bullish Divergence
4. Divergence signals are generally
more accurate on longer time frames.
This means that false signals are less.
On shorter time frames, even though
the investor may get more divergence
signals, the chances of false signals
are much more.
5. Use fractionally-sized trades.
Divide your trade size into smaller
parts; that is, if you want to buy 1,000
shares, start by buying 250 and then if
the divergence does play out and the
trade becomes favourable, you can
scale in until your intended trade size
is reached. If it does not play out, you
escape with minor injuries.
6. If a divergence has already
reversed (that is, prices have
reversed) and moved in one direction
for some time, do not run after it to
play catch up. The opportunity is
gone. Wait for the next divergence
signal to appear.
PROS OF DIVERGENCES
Divergence is a leading indicator,
which is primarily used to help
predict a trend reversal or
retracement. It is also used by many
analysts to confirm a continuation in a
trend.
It helps identify the tops and
bottoms.
It provides early signs of a trend
weakness.
It alerts a trader that something is
not right. Consequently, traders can
can move further down.
Price = Lower High
Indicator = Higher High
Trend Continuation = Downtrend
Intact
you can avoid getting caught in case
of a false divergence signal.
is the best strategy that one can
employ. Wait for the actual reversal to
take place before initiating any trade.
IMPORTANT POINTS TO
CONSIDER WHEN TRADING
DIVERGENCES
Once a divergence is spotted, do not
be in a hurry to enter a trade since
there may be false signals generated
by divergences and the trend may
continue in its original direction
instead of reversing.
Here are some of the ways by which
an individual can trade divergences so
as to skew the risk-reward ratio in
his/her favour.
1. Remember stock prices have to
form either higher highs or lower
lows or double tops or double
bottoms before even considering
using divergence trading.
2. Divergences are meaningful if they
occur in the overbought or oversold
zones. For example, the overbought
zone in RSI is above 70 and the
oversold zone in RSI is below 30.
This is because when prices are in
these zones, there is an established
trend from where the prices can
reverse. The fact that the indicator is
in the overbought or oversold zone
indicates that the stock has risen or
fallen substantially and is due for a
move in the opposite direction. Thus a
bullish divergence occurring in an
oversold zone or a bearish divergence
occurring in an overbought zone, is
quite significant.
3. Once a divergence is spotted in the
overbought or the oversold zone of an
indicator, wait for the indicator to
move below the overbought line from
above or for the indicator to move
above the oversold line from below.
When this happens, it means that a
top or bottom has formed. This
confirms your divergence signals and
Hidden Bearish Divergence
Divergence Signal
Price
Lower Highs
Higher Highs
Indicator
Lower High
Price
Indicator RSI
70 Overbought
Indicator Moves Back Below
The Overbought Zone.
30 Oversold
Note: Regular Divergences are more
commonly followed by technical
analysts since divergences are most
famous for their trend reversal
forecasting ability.
TRADING DIVERGENCES
Remember, divergence indicates that
something is changing; it does not
mean that the trend will definitely
reverse. Also, even if there is a
reversal, it may take a long time
between the appearance of the
divergence signal and the actual
reversal in prices. So the best ways to
trade divergences are:
a. Initiate buy or sell positions, but
with strict stop losses. Place your stop
losses slightly above the higher high
or below the lower low whichever the
case. Thus, if the divergence turns out
to be false and the trend does not
reverse and continues forward, you
will escape with minor losses as
opposed to huge losses.
b. Protecting your profits by taking
partial profits or keeping tighter stop
losses.
c. Buying option puts or calls to
mitigate your risk in case a trade goes
wrong.
d. Holding. Sometimes doing nothing
exercise caution by keeping stricter
stop losses or booking profits or
losses.
Divergence is fairly easy to spot on
a chart since the price chart is above
and the indicator chart is placed right
below it. Hence, comparing the highs
and lows becomes very easy even
without the use of any sophisticated
charting techniques.
It can be used with almost all
oscillators or indicators.
CONS OF DIVERGENCES
Divergence only acts as a pointer
and not as a signal to enter a trade.
Divergences need to be used in
conjunction with other confirmation
tools because there may be false
signals generated by divergences.
Divergences are not very useful in
timing the markets. Divergence
signals may appear and persist for
some time before the trend change
actually happens.
Does not indicate the degree or level
of trend reversal.
DIVERGENCE DIRECTOR
DEALING STRATEGY
This is completely unrelated to the
above technical divergence analysis,
but is still worth a mention and
deserves a look.
The directors or promoters of a
company are expected to behave in
the same way as the general investing
population. That is, buy the shares of
their company when the prices are
rising and sell the stock when the
prices are falling.
But when the directors/promoters act
contrary to public perception, that is,
buy when the stock nears the bottom
or sell when the stock nears the top, it
is a divergence from the expected
behaviour. Divergence director
dealing strategy suggests when this
divergence is seen, a trend reversal
signal may be developing.
Directors/promoters buying shares in
a downtrend indicates a new uptrend.
Directors/promoters selling shares in
an uptrend indicates a new
downtrend. This is because who
would know the business better than
the promoters themselves.
It is just that they understand the
business environment, the industry
and affairs of the business better than
the general public. A buying by them
near the bottom suggests that they
have faith in the recovery of the stock
or a selling by them near the top
suggests that they have lost faith in
the performance of the stock.
Investors can follow in the footsteps
of directors/promoters and initiate
their trades accordinglY.
Now, Commodity Trading Is No More A Puzzle.
Commodity trading can be confusing
especially if one is inexperienced and lacks the
necessary skills to trade successfully. At Nirmal
Bang, our team of seasoned analysts with years
of experience and in-depth knowledge can
help you spot the underlying clues and create
the investment strategies that best suit your
commodity trading requirements.
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^
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REGD. OFFICE: Sonawala Building, 25 Bank Street, Fort, Mumbai - 400 001. Tel: 022 - 39267500 / 7501; Fax: 022 - 39267510 CORPORATE OFFICE: B-2, 301/302, Marathon Innova, Of Ganpatrao Kadam Marg, Lower Parel (W), Mumbai - 400 013. Tel: 022 - 39268000 / 8001; Fax: 022 - 39268010
Disclaimer: Insurance is a subject matter of solicitation. Mutual Fund investments are subject to market risk. Please read the scheme related document carefully before investing. Please read the Dos and Donts prescribed by Commodity Exchange before trading. The PMS Service is not ofering for commodity segment. *Through Nirmal Bang Securities Pvt. Ltd. ^Distributors #Prepared by Research Analyst of Nirmal Bang Commodities Pvt. Ltd.
On 21st May, the Reserve Bank of India (RBI) partially
relaxed gold import norms. The central bank announced
two things. One, it allowed large private gold importers (or
star and premier trading houses as they are called) to
import gold. This is in addition to already permitted banks
that import gold. Second, the RBI allowed banks to lease
gold to domestic jewellery manufacturers. A jeweller
usually leases gold from gold-importing banks and pays an
interest rate, rather than upright purchase of the yellow
metal and maintaining inventory.
What Is The Context
The above mentioned move is the reversal of steps taken
by the central bank since 13th May to control the
deteriorating current account deficit (CAD) post the rupee
plunge against the US dollar. Back then, the government of
India (GOI) raised import duty on gold from 6% to 10%.
Even the RBI was quick to introduce a new scheme called
80:20, whereby for every 100 kg of gold import, 20 kg of
gold had to be compulsorily exported. Thus, imports got
tied with exports. This facility was available to select
banks only and other entities were barred from importing
the metal.
Last year, the RBI further prohibited import of gold coins.
Supply of gold to domestic users was permitted only
against full upfront payment (100% margin). The RBI
disallowed gold on lease. Now, the Reserve Bank has
reversed those steps.
Why The Reversal
Following the import curbs, gold imports fell from US$ 55
billon level in FY12 and FY13 to US$ 29 billion in FY14.
Gold smuggling into the country increased sharply. The
amount of seized smuggled gold jumped from `99 crore in
IMPORTANT JARGON
FOR THE FORTNIGHT
FY13 to `564.8 crore in FY14. Further, availability of the
yellow metal became a problem. Supply squeeze led to
increase in gold prices. Due to lending curbs, cost of funds
also increased for jewellers. The GOI and RBI started
receiving representations from jewellers, bullion dealers,
banks, and trade bodies to rationalize guidelines for the
import of gold.
Is That The Only Reason
The rupee has been appreciating of late. This has been an
issue for policymakers. Further, now with a stable
government at the centre, adequate capital flows are highly
likely. Even balance of payment (BOP) position is
relatively comfortable as compared to last year. All these
reasons prompted the RBI to reverse its stance.
What Will Be The Impact
Impact is at few levels. One, as more entities are now
allowed to import gold, gold prices will correct due to
increased supply. Second, jewellery manufacturers will
enjoy lower procurement cost. They will also witness
reduction in interest cost on borrowed funds as ban on gold
loans is now lifted. The move is a big positive for the
jewellery sector as a whole. The relaxation would also
improve legal supply of the yellow metal in the system.
What Happens To CAD
For FY13-14, current account deficit narrowed to USD
32.4 billion, (1.7% of GDP) from USD 87.8 billion (4.7%
of GDP) in FY12-13, a reduction of 63% in deficit in one
year. The decline in the deficit continues to be driven by
lower gold imports. Relaxation of gold import curbs could
lead to light widening of the current account deficit.
Currently, average gold import a month is about 25 tonnes
- 30 tonnes; now this could rise to 60 tonnes post the
reversal of curbs. With this, it is estimated that gold
imports will rise to USD 38 billion-USD 40 billion in
RBI RELAXES GOLD IMPORT NORMS
FY15 from around USD 29 billion in FY14.
However, while imports would increase, better growth in
advanced economies would mean higher exports,
balancing out the impact of higher gold imports. Thus,
CAD is expected to remain at sustainable levels.
What Next
The continuation of the 80:20 schemes is still a dampener
for the jewellery sector. Even the import duty is still high.
Given the relatively comfortable BOP position and
expectations that capital inflows would continue at same
levels, rationalization of import duty on gold and jewellery
is highly likely in the upcoming budget in the month of
July. Additional measures such as easing of external
commercial borrowings and export refinance guidelines
are also on the cards.
sessions. It also gives confidence that India would fulfill
its external obligations. RBI and GOI need to keep rupee at
such a level that it does not impact exports and at the same
time it should not hurt the economy, due to expensive
import items like crude.
Pros And Cons Of High FX Reserve
While a currency war chest and stable external sector are
pros of a higher FX reserve, the disadvantage of higher FX
reserve is that it remains idle. If the currency in which the
reserves are held depreciates, it has a negative impact on
the reserve.
Also, India with infrastructure deficiency, idle capital is
least desired. Experts have proposed forming a sovereign
wealth fund (SWF) out of the reserve, akin to that of
China, and acquire assets abroad with that surplus reserve.
What Is The Current Context
The rupee has become very volatile of late. A volatile
rupee is neither good for importers nor exporters. After a
sharp fall in the value of rupee in 2013, the rupee has once
again started to appreciate on the back of foreign capital
flows on hopes of better prospects of the economy post the
election mandate.
Thus, in order to keep the rupee lower and to trim the
volatility, the RBI has been buying dollars from the
market, thereby creating a demand for the dollar and
pushing the Indian rupee lower. In the process the RBI is
building dollar reserves.
Till When Can The RBI Continue To Buy Dollars
Typically, a preferred level of FX reserve is that which can
meet a countrys short term external debt. While the RBI
does not target any fixed level for rupee, it has time and
again said that it will intervene in the market to curb
volatility. Since capital flows are volatile, the RBI needs to
ensure that a contagion does not lead to a mass pull out of
dollars from the Indian market.
How Much More The RBI Needs To Buy From The
Markets
Currently with the existing FX reserves, India can cover its
imports for slightly over 8 months. It is estimated that the
RBI needs to buy about US$ 75 billion - US$ 80 billion
from the market in the next few years to maintain the
current 8-month import cover. A decent import cover helps
the external sector look welL.
FOREX RESERVES JUMP BY $15.5 BN
IN FY14
The RBI has been steadily increasing its foreign exchange
(FX) reserves. Recent data show that FX reserves have
jumped by $15.5 billion in FY14 as against an increase of
only $3.8 billion in FY13. As on 16th May, total FX
reserves stood at US$ 314.9 billion, an import cover of
over 8 months. With the rupee appreciating to a 9-month
high at around `58 per dollar, FX reserve have once again
hogged the limelight.
What Are FX Reserves And Its Importance
It is the surplus on the balance of payment account. That is,
the difference between current account (trade balance,
indivisible) and capital account (FII, FDI). The RBI in
consultation with the government of India manages FX
reserve. It is also referred to as assets (foreign bonds,
T-bills, deposits with other central banks, gold, and reserve
position with international monetary fund) held by the RBI
in various foreign currencies.
Typically, the US dollar is the most preferred currency. In
1990, gold was the main component of FX reserves. Now
over 90% of the reserve consists of foreign currency like
the US dollar, Euro and yen. The RBI publishes data on FX
reserve every week on Friday.
What Is The Ideal Level Of Reserves
FX reserve is an essential element in an economys
external position. High FX reserve gives the RBI a leeway
to intervene in the currency market during volatile market

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