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Debt Funds-An Ideal Investment Among Fixed Income Products
By : Nimesh Shah
(The author is the MD and CEO of ICICI Prudential AMC)



The growth of mutual fund industry in India has been fuelled by equity and debt oriented schemes. These are the only two asset classes where a wide variety of products have been made available. The other asset classes are yet to play their part. Unlike equity products which thrive on the notion of long term, higher risk and commensurate returns; debt mutual fund product appeal to investors based on considerations such as safety, liquidity and reduced volatility of returns.

However, even after several years of introduction and innovation, investing in fixed income mutual fund products largely remains a bastion of institutional investors in India. Retail investor participation in this asset class through mutual funds is negligible given its potential. This is counter intuitive considering the vast amount of savings that the Indian investors have in bank fixed deposits. If one looks at the asset allocation pattern of Indian retail investors, it is evident that Indians are predominantly fixed income investors by nature and convention. This variance is clearly an opportunity for the mutual fund industry.

In terms of diversity of product offerings, the debt mutual fund offer products with different permutations of liquidity/tenors, credit quality and interest rate related volatility to address various investment requirements based on an investor's investment objective, risk appetite, and time horizon. The industry needs to invest in increasing the awareness among the retail investors so that they can take advantage of a wide array of relevant and beneficial products. The product offerings in debt space today are multi-fold and designed for retail as well as institutional investors. Right from avenues such as Gilt funds which typically provide returns in the form of capital appreciation and interest income by investing in to government securities of varying maturities, we have various short-term investment avenues such as Fixed Maturity Plans (FMPs) designed to lock in yields by buying and holding papers of similar maturity, Interval funds, short-term and ultra short-term funds which are more accrual based meant for short-term deployment of funds. At the same time, we have category of funds which seek to provide regular income through dividends in the form of Monthly Income Plans.

While mutual fund as an investment category cannot guarantee returns, the other aspects of investor's reservation can be dealt by creating awareness towards debt as an avenue towards safety, liquidity and returns. In this reference, I would like to draw reader's attention to the second half of 2008 which has been known more for the collapse of the global financial system. If one were to look at the returns generated by some of the debt mutual funds during this period, one would certainly be caught off guard. The point that I am attempting to make here is that at various points of time different asset classes have outperformed and with the ever changing investment environment each asset class will have some uniqueness to offer in an investor's portfolio.

To sum it up, each asset class has its pros and cons and its fitment would be a function of the prevailing market environment as well as investor's specific situation. It is imperative to increase awareness among retail investors on merits of considering debt as an investment proposition. I strongly believe that the onus lies on us and the entire investment fraternity to educate investors on the same.
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Currency Devaluation Hammers India


By : CA A.K.Jain

The year 2012 has begun with catastrophic affect for the rupee.  It was Rupees 43.96 against a dollar in the July 2011 and now for $1 it is Rupees 54.3. Rupee hits all time low in January 2012. This kind of decline will have the sweeping impact on the macro economy of the country, as we are heavily dependent on the import of oil, food items and other crucial raw materials.

The year 2012 has begun with catastrophic affect for the rupee.  It was Rupees 43.96 against a dollar in the July 2011 and now for $1 it is Rupees 54.3. Rupee hits all time low in January 2012. This kind of decline will have the sweeping impact on the macro economy of the country, as we are heavily dependent on the import of oil, food items and other crucial raw materials.

Devaluation means officially lowering the value of currency in terms of foreign currencies. There could be many motives of the devaluation. It stimulates exports of commodities. It restricts import demand for goods and services. It helps in creating a favourable balance of payments. Almost all the countries of the world have devalued their currencies at one time or the other with a view to achieving certain economic objectives. During the great depression of 1930 devaluation was carried by most countries of the world for the correcting their over-valuation.

Valuation History of Indian Rupee:

In early controlled exchange rate regime, the rupee exchange rate hovered around Rs 4.00 in the 1950s, Rs 5.00 in the 60s, Rs 7.00 in the 70s, and Rs 8.00 in the 80s. In the liberalised era of 90s, the rupee moved to Rs 20s and Rs 40 in the next decade of 2000.

During this period, the Government has declared two major devaluations. The rupee was devalued first in 1966 by 57% from Rs 4.76 to Rs 7.50 against the US dollar. In the 90s, the rupee was again devalued by 19.5% from Rs 20.5 to Rs 24.5 against the US dollar.

1966 - Devaluation:

Since 1951, despite government attempts to obtain a positive trade balance, India experienced a severe balance of payments deficits. Inflation caused Indian prices to go sky high. When the exchange rate is fixed and a country experiences high inflation relative to other countries, that country’s goods become more expensive and foreign goods become cheaper. Therefore, inflation tends to increase imports and decrease exports. Since 1950, Indian continuously faced trade deficits. Another reason, which played important role in the 1966 devaluation was war with Pakistan. The US and other countries withdrew their aid, which further necessitated devaluation. To improve fiscal position, Government of India devalued Rupee by whopping 57% against Dollar.

1991 - Devaluation:

In 1991, India still had a fixed exchange rate system, where the rupee was hooked to basket of currencies of major trading partner countries.  At the end of 1990, the Government of India found itself in serious economic trouble.  The government was close to financial default and its foreign exchange reserves had dried up to the point that India could barely finance three weeks of imports. In July of 1991 the Indian government devalued the rupee by 19.5%. The government also changed its trade policy from its highly restrictive form to a system which allowed exporters to import 30% of the value of their exports.



Chronology of India’s Rupee Valuations


Year

Exchange Rate

1947

£1.00

1952

$5.00

1970

$7.57

1975

$8.40

1980

$7.88

1985

$12.36

1990

$17.50

1995

$32.427

2000

$45.00

2006

$48.33

2007 (October)

$38.48

2008 (June) 

$42.51

2008 (October)

$48.88

2009 (October)

$46.37

2010 (January )

$46.21

2011 (April)

$44.17

2011 (September)

$48.24

2011 (November) 

$50.97

2011 (November)

$52.11

2011 (December)

$53.65

Impact of Inflation on Currency:
Inflation rates in India have risen about 8.50% amid concerns surrounding the devaluation of the rupee and the erosion of the purchasing power of savings.  In spite of Governmental interventions, the rupee is in a free-fall, having slipped by over 20%, making it one of the most awful performing currency globally. RBI made thirteen rate increases attempts to docile the inflation in last one year but hardly achieved any significant result. Inflation rate maintained upwards trend. This is now reflected through the currency depreciation. Inflation directly enhances prices and thereby affects the purchasing power of currency. Currency value and inflation have a direct co- relation and impact each other. The currency re-valuation is also essential with the change in domestic prices affected by inflationary forces. Currency is considered to be over valued if the suitable adjustment is not made with the price index fluctuations.




Impact on Gold:
India currency devaluation has also resulted in surge of import by over 200% of gold and silver. Statistics show that imports of gold and silver to India were $8.96 billion a growth of 222%.  The Reserve Bank of India purchased 200 tonnes of gold from the International Monetary Fund in 2009. From the start of 2011, some 30 banks in India have been granted permission to import gold and silver. Further gold purchases are expected in coming months, as the Reserve Bank has issued licenses to seven more banks to import gold and silver.  Indian banks are therefore contributing to the massive increase in demand for gold and silver. Chinese banks are also catering to the increased demand of Chinese people for gold bullion for investment and savings purposes. In fact, most of the world’s central banks are now diversifying from major currencies such as the dollar and euro into gold. In addition to India and China, these countries include Russia, Sri Lanka, Bangladesh, Mauritius, Mexico, Iran and Saudi Arabia. Financial experts believe, the increased demand for gold and silver from India and wider Asia is sustainable and that it will keep the precious metal market thriving.


Impact on Stock Market:
As a result of de- valuation, Indian stock markets will face new threats. The operators and participants were earlier concerned about domestic inflation rate and the Reserve Bank of India’s economic policies. But the fall in the value of Indian currency has taken aback all concerned. The investors are bound to suffer as there is always a positive correlation between stock index and corporate results.


Reason for Devaluation:

1. Inflation: Firstly, the descend, in the rupee was assumed to have taken place to adjust for the high inflation. But, as the rupee continued to go down, apprehensions of further increase in the inflation have appeared.

2. Strengthening of Dollars: Increase in global dollar value can also be attributed as one of the prime reason for the fall in the value of rupee. The demand of dollars due to economic crisis in other countries including Europe has also tremendously increased the dollar demand. The Euro-Zone crisis has weakened the Euro significantly against the US Dollar. In other words dollar is getting stronger in the world markets. Obviously the investors are considering US as safe place to invest in. There was also an increased demand for the dollar in the domestic currency markets due to a flight of foreign funds from the domestic stock markets.

3. Dollar Demand from Stock Markets:  Foreign institutional investor’s withdrawal from domestic economy is the one big reason for this depreciation. The Greece Crisis and its rescue package made investor to re-think about their investments. Certain political changes and civil movements are also the factors for foreign institutional investors to become net sellers recently.


4. Fiscal Deficit: The growing trade deficit and large fiscal deficit are also contributing to the fall in the rupee valuations.

Political View:

According to the Government, the reason for the current round of rupee depreciation is related more to current grim global economic environment. The currency of every other emerging economy (barring China that managed its currency peg against the US dollar) is falling. The currencies of Russia, Brazil, South Korea, and Indonesia have plunged by between 6% to 16%. So the 10% fall in the value of rupee against the US dollar is hardly out of context. The sovereign debt woes of European Union are shifting foreign investors from euro assets to dollar assets. There seems to be no other alternative to US dollar.


RBI Mechanics: 

RBI is concerned and keeping close watch on the situation. Apart from direct intervention in the currency markets, RBI has taken many other measures such as relaxing external commercial borrowing norms by raising the ceiling on interest rates. It has also increased the interest rate cap on foreign currency deposits. The RBI has removed the USD 100 million cap on net foreign exchange supply arising out of rupee swap transactions that banks undertake on behalf of customers. In order to attract more foreign currency deposits, the RBI has raised the interest rate ceiling. The spreads for NRE term deposits were increased from 1.75% to 2.75% while those on FCNR (B) deposits were increased from 1% to 1.25 %.


Market Forecast: 

The wide-ranging perception in the financial market is that until the global macroeconomic environment settles, the rupee will continue to be under pressure. "India's external position has become increasingly vulnerable to global risk appetite. Further weakness cannot be ruled out," Royal Bank of Scotland said in a research note.  The rupee is down 14.80% on the year, with the closest loser among other Asian units being the Thai baht, which has shed just 3.2%, followed by the Malaysian ringgit that is down 3%.


The rupee's slither may continue due to the decline in foreign exchange inflows and swelling outflows. The Euro zone, the world's largest trading block and India's biggest trading partner, is also in a deep crisis. In times to come, this zone has to stabilise to bring some semblance of order to the global currency markets. Numbers of Indian scams have also distracted government’s concentration away from economy. These scams make the bad image of India in the global market.

At the end of G-20 summit in Seoul recently,  world leaders declared (in the backdrop of the US demanding that Chinese currency Yuan should be appreciated to check the Asian giant from taking advantage in international trade) “We will move towards more market determined exchange rate system and enhance exchange rate flexibility to reflect underlying economic fundamentals and refrain from competitive devaluation of currencies. Advanced economies including those with reserve currencies will be vigilant against excess volatility and disorderly movement in exchange rates”.


Attending a meet in Seoul PM, Dr. Manmohan Singh agreed to refrain from "competitive devaluation" and bring in exchange rate flexibility to ensure that no country gets undue advantage.


What Indian Government Can do, to Bring back Positive Vibrations in Indian Economy?

1. Allow free flow of foreign investment for the development of infrastructure and manufacturing sector.


2. Restrain / discourage import of non essential and luxury items e.g. auto sector imports.


3. Interest rates may be increased further on NRE and FCNR accounts.


4. Restrain /discourage export of agricultural produce and basic minerals e.g. iron ore.


5. Promote aggressively exports of manufactured goods like China


6. Promote migration of skilled personnel / work force from India. We have them in plenty.


7. Facilitate the voluntary return of the funds parked outside India.


8. Reduce / cut unnecessarily expenditure of government institutions e.g. Indian Embassies. Ask them to repatriate their surplus fund instead of calling funds from India. Many foreign embassies in India are remitting their surplus to their home countries.


9. Government should observe restraint in offering financial aid to other countries. We are yet not so rich. Our people are still hungry and need night shelters.



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Tapuriah Jain & Associates
Chartered Accountants
21,. Skipper House, 9, Pusa Road, New Delhi - 110 005
Tele : 91-11-28754012 & 13, Mobile : 91-98-100-46108, E-Mail : caindia@hotmail.com 


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The Regulator Originally Wanted To Fine PWC A Penalty Running Into The Tens of Millions


PricewaterhouseCoopers faces a record fine of £1.4 million and has been severely reprimanded for failing to realise that client money had not been properly protected at JPMorgan Securities, a regulator said on Friday.
The regulator reduced the fine from £2 million to £1.4 million for cooperation and other mitigation, but the regulator originally wanted to hit PwC with a penalty running into tens of millions of pounds.

The case brought by the Accountancy and Actuarial Discipline Board (AADB) – part of the UK's governance watchdog the Financial Reporting Council – is viewed as a changing trend for regulators to clamp down harder on failures by auditors, considered by some politicians to have too cosy a relationship with clients, in particular banks, in the wake of the credit crunch.

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The AADB said PwC had accepted that its conduct had "fallen short of the standards reasonably to be expected" of auditors and that the firm "did not carry out its professional work in relation to these reports with due skill, care and diligence".

PwC, the world's largest auditor that checks the books of the majority of the top UK companies, admitted that it "failed to obtain sufficient appropriate evidence" in identifying that the US bank JPMSL "had not at all times held client money separate from the firm's money".

In the seven years in question, JP Morgan carried out daily "sweeps" of balances of segregated client money into consolidated overnight, interest-bearing accounts at the bank, the AADB said.
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This means that PwC's reports to the Financial Services Authority about the ringfencing of client money were "false".

As a result the FSA fined JP Morgan £33.32 million for failing to keep client assets separate at all times from the bank's money over a seven-year period. The fine represented 1 percent of the average amount of the client money allowed to be desegregated, the AADB said.

If the AADB had fined PwC in the same way – 1 percent of its profits – PwC would have faced a penalty of £44.3 million – a similar proportion of PwC's pre-tax profits for the year ended 30 June 2010.

PwC said: "We are pleased that this matter has now been concluded. We regret that one aspect of our work on the private client money report to the FSA fell beneath our usual high standards. When the issue was identified, and before any complaint had arisen, we took action to ensure that staff received additional training in the client monies area.

Source: Ramachandran Mahadevan : E-Mail : ramachandran.mahadevan@gmail.com

Russia Underperformed In Indian Economy: Moscow Professor

Singapore, Sept 24 (PTI) Economic relations between Russia and India have been slower than expected, given that the two powerhouses have very close diplomatic and military relations, a Russian professor has said.There were advantages for Russia to participate in India''s huge potential of developing business and investment relations, but Moscow''s focus has remained limited due to their investment policy restrictions, Dr Dmitri Trenin, chair of the Moscow''s Centre Foreign and Security Policy Programme said in Singapore today. Except for the joint "BrahMos" missile project, Russia seems to have missed on the opportunities in working in Indian business sectors, he told reporters on the sideline of the inaugural Singapore Global Dialogue. Nevertheless, Russia had favoured India as a preferred partner, providing the Indians with a advanced-technology SU 30s when compared with China, said Dr Trenin who spoke as an independent observer of the India-Russia relations. Touching on Russia and China relationship, he said Moscow value it and would not want to have any problem with the Chinese. "It wants the relationship to be stronger with the Chinese for it has a long border with Chinese. But in more sense, the Russians would want to sell its technology to India than to China," Dr Trenin stressed.

Elaborating on the underperforming Russia-India economic relations, he stressed that India "is a market growing at a fast pace" and Russian companies should had been in India as part of their International businesses development. With the exception of a few sectors, such as telecommunications, Russian businessmen should have been in the vibrant Indian markets, especially where the Indian entrepreneurs have business alliances with foreigners. "I think the Russians were complacent for a period of time, and at one time thinking that the Indian arms market was something forever was theirs. But they did not do well enough and provide the technology and services as the Indians were actually asking for," he stressed. "Though there were limits on what the Russians could do, there was not enough even within ''the possible efforts'' they could have made to participate in Indian market," said Dr Trenin. evertheless, the Russians had a unique situation with India, given that between the two major powers there were no problems, yet there was a shortfall in developing business, he pointed out.

"You cannot have such a strong relationship between the two major nuclear powers and yet they were underperforming economically in what India could have offered to the Russians," he said. Russia is still restucturing its economy .....their main draw have always been their arms exports and defense R&D.....economically there are few areas where any sort of cooperation is possible.....IT in Russia is more based on receiving outsourced project work like software design, micro E....etc areas where it is a competitor not a supplier to India and China......basically it is developing on the lines of India and hardly has any expertise in large scale manufacturing , biotech , etc the fields in which India is trying to garner increased investment.......

Study of Medicine though can be a potential area for collaboration....as it is loads of Indian students opt for Medicine as a course in Russian universities....

Source : www.defence.pk/forums/world-affairs/73973-russia-underperformed-indian-economy-moscow-professor.html

Finance Environment

By : Jeyarajan.R

Finance:
When we talk about finance whether it is limited to money or something more than money, to decide we have to consider the following points.

As many activities are associated with finance, like savings, paying, giving or getting credit, these activities can be done without the use of money just like what we done during barter system. Further money just like other goods or services can be bought and sold i.e., when we day a person earn a sum of money, means, he sold his service to buy a sum of money.

Hence finance can be defined as “the study of nature and use of payments not as nature of money”

Objective of Financial System:
when we consider some subject as a system it should contains various parts combined by common objective. For healthy financial system of a capitalistic economy should have the following objectives

1. Maximum employment  opportunities
2. Stable price level
3. Maximum sustainable growth
4. Satisfactory balance of international payments
5. Maximum scope for individual freedom and decision making.

Parts of Financial System:
The various parts through which financial system function are as follows

1. The central Bank, which creates reserves for banking system

2. The commercial Banks, which create working money through their loans and investments.

3. The Non-bank intermediaries, which assist in transfer of funds from savers to investors.

4. The money and capital market, which links savers and users of funds through sale and resale of securities.

5. The foreign exchange markets, which exchange and price one nation money against other s.

6. The users of financial system, users and suppliers of funds, who rely on the financial system for their economic activities.

Money:
Even though study of finance is not solely attributable to money, it is inevitable to study the role of money in financial system to understand finance, as money act as an intermediary for all kind off transaction like blood in human body. Money issued as a factor to measure the value of various goods produces and services provided by people with various skills and specialization.

Real Flow and Money Flow:
All economic activities can be represented by two matching flows.

I. R​eal Flow:
The flow of material, machine and labor service, its final output and the final flow of goods and services from producers to customers are known as Real flow. These flows accounts for the satisfaction of wants and needs, as utilities that use the end purpose of economic effort.


II. Money Flow:
This flow involves innumerable payments and receipts of currency or financial instruments that assist the production, exchange, consumption of real wealth moving.

Almost every economic transaction involves a double movement in parallel, one part in the movement of goods from seller to buyer and other is movement of money from buyer to seller.

Still money is only a facilitating agent as increase in supply of money without increase in real production of goods and services has no value instead it inflate the price of goods and services not matched to money flow. A million rupees in mid of desert can be taken away by a single glass of water.

Supply and Velocity:
How much economic activity money can support depend on both how much money available (supply) and how fast that money turnover (velocity). A small amount of money turning over rapidly can serve on economy as effectively as large amount of money turning over sluggishly.

Most of the new money is created in the banking system and finds its way into circulation by bank loans or investments. The part of the money that the bank lends to spenders will be invested by buying bonds and securities.



Classical Interest Rate Theory:
Classical interest rate theory brings as near the heart of wealth creation when people receive income, they can either spend for immediate enjoyment or differ spending by saving.

To the extent people save or differ spending, they release economic resources from having to produce for current needs. These resources then available for capital formation, investment in goods, which take time to build and which people will use up in future period. Capital goods are thus produced through saving and savings are thus identical to investments.

Fundamentals of interest rate depend upon two factors; they are Time preferences and Productivity. These two factors are interrelated while deciding the interest rate. Time preference represent the period for which the money invested, as people requires money immediately rather than later.

Money saved is money invested, while invested, user of funds (borrower) will earn profit either by way of investing in finished goods as inventory or purchase as raw material, convert into finished goods and selling the same as finished goods. The income earned on above process is the productivity of money.

The share for money lender/saver/investor is based on the productivity of the money saved/invested during a specific period is represented by interest.

Savings, Credit and Investment:
Credit adds much power to the power and flexibility of economic life. It makes possible new cycle of production and consumption, distribution and exchange by doing two things

1. It activates the idle money and by doing so
2. It activates the idle resources men, machine and materials.

The extension of credit by commercial banks plays particularly important part adding to the nation’s money supply and velocity.

The Financial Market:
A market is a set of facilities where goods are exchanged for money as money exchanged for goods. In financial market securities are the goods, exchanged on regular basis. The following are the functions of financial market

1. Shifting funds from suppliers to users
2. Pricing securities
3. Discounting the future
4. Liquefying securities
5. Allocating funds add economic resources.

The first task of financial market is to gather and mobilize perhaps from large number of individuals and separate financial institution to a large part of the vast sum of money needed for each day either in short term or on long term basis for government bodies, business and consumers.

It permits the owners of the money to exchange it for securities and enabling user of money to buy money by selling securities.

Non-bank Intermediaries:
In above points we discussed almost all the parts of financial system such as commercial banks, central bank, financial market, savings, credit and investment and users of financial system briefly except non-bank intermediaries, whose role is to make money available to the needs of the users of money where commercial bank not able to reach.

They act as intermediary between less qualified capitalist (savers) and users of money (borrowers), knowing better than the ordinary public which loans are better and which loans are worse, they borrow from him, and gain a profit by charging to the public more than they pay to him.

This blog is Created by CA Anil Kumar Jain.