What's your inflation

What’s your inflation 

Did you know that a 6% growth in inflation can hurt you more than an 8% growth rate? No, we are not hallucinating, nor have we got our numbers mixed up. It’s a matter of historical fact. Last year, consumer price inflation was close to the 8% mark, and there was widespread concern. The government moved swiftly to contain this rate, but even otherwise, your investments would not have suffered. That’s because the markets were on a roll and returns on investments were higher than the inflation rate.

Cut to the present. The consumer price inflation is 5.2%, but alarm bells ought to be ringing louder than they did when inflation was 8% last year. That’s because the stock prices have fallen by an average of 25% since January and investment losses (depending on what kind of investor you are) can be even greater than that figure. Even the inflation rate that’s affecting you can be greater than the headline rate of 6%. Your personal rate of inflation, which depends on your consumption basket, is not the same as the national rate of inflation.

“Markets have overreacted to global events. But, that doesn't mean they can't fall further” — Motilal Oswal, CMD, Motilal Oswal Securities “Is it the right time to buy? Yes...with caution.A stock, which was Rs 500 and is now Rs 200, is not to be confused as a value stock” — Parag Parikh, chairman, Parag Parikh Financial Advisory Services “The fall in the markets is sharper [than most corrections in the past five years] but shouldn’t be viewed as the beginning of a bear market” — Aditya Puri, managing director, HDFC Bank “It is safe to invest in equities.There couldn’t be a deeper fall than the one we are experiencing now” — Arun Kejriwal, director, KRIS Securities Source: Economic Times and Business Standard

So, if you spend, say, 20% of your income on your child’s education, the 4.56% weight given to education in the consumer price index for urban non-manual employees means little to you. It’s only when you understand the inflation rate of specific categories of goods and services that you directly or indirectly consume that you will understand its impact on your consumption.

Take the price of food items. According to the consumer price index for food, the inflation rate was above 6% in February. This inflation rate is based on the rising prices of wheat, rice and similar staples, which are proving to be in shortage across the globe. However, your personal inflation rate is likely to be far more affected by the price rise in milk, vegetables and fruit (see graphics). That’s because the proportion of food in the consumption basket of Indians across all income levels has fallen in the past decade.

This is a natural consequence of higher per capita income and better standard of living. Within the food basket, the consumption of cereals is falling, while greater space is given to fruits and vegetables, meat, milk and processed food.

Another reason to keep an eye on the inflation rate is to know the direction of interest rates. As long as the inflation rate is above the Reserve Bank of India’s comfort level of 5%, there’s little chance that the central bank will do anything to reduce interest rates. And that’s something that will have a direct impact on your personal rate of inflation, since the amount that goes every month from your income to pay off any loans you might have taken won’t fall anytime soon.

Or you will put off a purchase decision you were thinking of making in anticipation of interest rates going down.

In a few weeks, the weighting of all products in the wholesale and consumer price indices is set to be revised. Chances are that they will be made closer to the current consumption basket of the average Indian. It is difficult to predict the impact of this on the rate of inflation. But, as we have shown, that should really not affect you too much. All you have to do is to continue to look below the surface and identify the inflation that affects you.

— Kamya Jaiswal

Fuelling talk

Commodities	Inflation in Feb08/Feb07	Share in consumption*
		1993-4	2003-4
Cereals	5.83%	10.5	10
Egg, Fish and Meat	7.65%	2	2.9
Fruits and Vegetables	6.07%	11.5	15.2
Processed food	6.31%	0.8	2.2
Milk	10.48%	4.9	5.1
*Urban per capita consumption in kg and litres

Experts say that 40% of a domestic airline’s operating cost goes towards aviation turbine fuel (ATF). Every time the price of ATF or the tax on this fuel goes up, the hike is immediately passed on to passengers. However, the fuel surcharge has now crossed Rs 1,600 and airlines are reluctant to raise it again so close to peak season. This is despite the fact that ATF prices in Delhi have gone up from Rs 44,716 per kilolitre in February 2008 to Rs 47,049 in March. Does this mean that flying will inevitably get more expensive? Not if the state governments of Andhra Pradesh and Kerala have anything to say. The two southern states recently cut the tax on ATF from over 30% to just 4%.

“Standardising the ATF tax at 4% would lead to a 10% reduction in our overall operating costs, which is pretty substantial,” says a GoAir official. The advantage has so far been restricted to airlines, but ideally this benefit should be passed on to passengers flying from and to these two states.

An industry veteran says that it’s likely that other states will also cut the tax, if not so dramatically. With low-cost airlines set to woo travellers even more this season, chances are that any tax reduction will immediately translate into lower fares.

— Sushmita Choudhury

Sending money home

Flying into the country
Year	Remittance ($bn)	Purchasing power (including inflation) with 2004 as base ($bn)
2004	18	18
2007	27	21.2

India has beaten China when it comes to receiving remittances, says a World Bank report. In 2007, the report says, Indians sent a whopping $27 billion back home, easily topping China ($25.7 billion) and Mexico ($25 billion). Higher remittances should translate into higher purchasing power. However, while remittances increased by 44% between 2004 and 2007, the rupee appreciated by 15% against the dollar during this period. So, after accounting for appreciation, remittances increased by just 32%. Then factor in inflation, and the growth in remittances is just 13%. If, as the report mentions, purchasing power is measured by the price of crude oil instead of the CPI, there would have to be almost twice the increase in actual remittances between 2004 and 2007 to maintain the purchasing power of these remittances. This will also have a bearing on the destinations preferred by migrants. The depreciation of the US dollar might make Europe more attractive.

— Rakesh Rai

For everyone’s faaida

The What and Why • Financial products and services are converging • Distributers/agents sell multiple products • This has created gaps in regulation of distributors • Faaida is a new body that aims to bring distributors of all products under one roof • This will help reduce mis-selling

The Securities and Exchange Board of India (Sebi) looks into stock market related regulations, the Insurance Regulatory and Development Authority (Irda) covers insurance, the Reserve Bank of India (RBI) looks at banking and the Pension Funds Regulatory and Development Authority (PFRDA) looks into matters regarding pensions and pension funds. So who regulates the financial intermediaries?

The convergence of financial services and products is here. Banks offer wealth management services, insurance companies offer investment and retirement products and now mutual funds offer commodity-linked products. With so much convergence, there are naturally issues and concerns regarding regulation.

Independent financial advisers (IFA) do not have a common platform as of today. Some of them are fund distributors-cum-insurance agents, others offer tax filing and management services as well. A new industry body representing these IFAs called the Financial Advisers Association of India (Faaida) is now trying to ensure that these intermediaries become more professional. To this end, it has launched an initiative to unite, educate, train and empower financial advisers to not just sell, but also actually offer advice on financial products and match the services offered by large financial organisations.

While Faaida has not yet applied to Sebi to become a selfregulatory organisation (SRO), it plans to propose to Sebi to consider it as an SRO. In the guidelines, Sebi has asked IFAs to be a member of an SRO. This means any potential adviser and seller of financial products will have to be a member of an SRO. If the Faaida decides to apply for SRO status, financial intermediaries will have their own industry association to look out for their welfare. This will leave them free to provide better services to investors and prospective customers.

Health cover abroad

Policy Basics
Cover up to (age of policyholder)	85
Minimum cover (days)	1
Maximum cover available (days)	365 (renewable)
Plan options (on varying cover)	5
Plans for	Individual and family

You know that medical care is prohibitively expensive in most of the developed world. However, unless the visa requirements insist upon travel health insurance, most people conveniently ignore this cover. That’s because the claims process for such policies is notoriously complex, and the kind of services and benefits available are not really what the doctor ordered.

Now, ICICI Lombard has tied up with UnitedHealth International to offer a travel medical insurance that promises decent cover and an easy claims process for travellers from India to the US.

It works like this. Once you sign up for the policy, you are given a UnitedHealth card, which lets you access all the facilities and benefits that are available to United’s customers in the US. Says Sudhir Menon, head, travel insurance, ICICI Lombard: “This plan is good for those who are likely to stay in the US for long periods.”

It looks like an ideal plan for those senior citizens planning to visit their children in the US, particularly since it is available to anyone below the age of 85. It’s also a cheap option for Indian students in the US. University insurance costs anything above $1,000, while this cover (a one-year student policy) costs Rs 15,000.

Bonus Break The Securities and Exchange Board of India (Sebi) has finally cleared the air regarding entry and exit loads on bonus units of mutual fund schemes. The regulator has asked asset management companies to state in the draft offer documents that no fee will be charged on bonus units. The argument behing the move is that it is investors’ money which contributes to the earnings and that investors are not entering the scheme afresh. Hence charging an entry load does not make any sense. However, this really does not make a tangible difference to investors, as mutual funds have not been charging entry or exit loads on bonus units and on reinvested dividends. What this step does is to do away with the existing legal lacunae.

 

Telling figures Some figures that have immediate or long-term personal finance implications 138 tonnes is the demand for gold ETFs, as of December 2007.The huge leap from just 19.2 tonnes a year earlier proves that investors are finally taking over from jewellery buyers  4,547 crore rupees is the amount invested in equities by MFs between January and March this year despite a volatile market 50 is the number of propertyrelated IPOs expected in this year according to an Ernst & Young report 1,600 is the number of hot spots in India.The size of the wi-fi market is curently $137 million but is expected to mushroom to $891 million by 2011-12

Quiz: Financial Wisdom Do you know why you’ve invested and what you’re invested in? You can check your financial quotient here. More quizzes on our website. 1. You cannot convert a home loan from fixed to floating rate YES / NO 2. Just because you’re 40 now is no reason to change an investing strategy that gave great returns when you were 21 YES / NO 3. If you take a term insurance plan and survive the term, you get your premium amount back YES / NO 4. It makes sense to take consumer credit even when you have more than enough cash to pay for a product YES / NO Rate Yourself Give yourself 0 for every Yes and 1 for every No 0-1: Better luck next time (and do take the time to read this magazine. There’s plenty of information that could prove useful) 2-3: You’ll do—your grasp of your finances seems pretty good, though, of course, it could be better! 4: Obviously a know-it-all. Just make sure to keep reading and keeping your knowledge up-to-date