The one rise that isn't good

Safe Hands
Mani Bhai
Trend Spotting

Count all the worries you have as an investor. Stock market may slow its unprecedented journey of wealth creation. The real estate boom may lose steam, if not bust. Value of your precious metals may not rise as fast as it has in recent years. Interest rates on small savings or deposits may fall

Tanmoy Neog Print Edition: December 28, 2006

The one rise that isn't good
Count all the worries you have as an investor. Stock market may slow its unprecedented journey of wealth creation. The real estate boom may lose steam, if not bust. Value of your precious metals may not rise as fast as it has in recent years. Interest rates on small savings or deposits may fall

 Imagine if none of these fears ever came true and the value of your investments just kept rising. And then something happens that in one stroke turns your investments pretty much worthless. This all-powerful value snatcher is nothing but high inflation. A rising rate of inflation takes steam out of your investments as well as your consumption. For the first time in the past 10 years inflation in India is threatening to do exactly this.
 Already, costs of living have risen 60% since November 2005, measured by consumer price index for urban employees. This has dented purchasing power and real returns (nominal returns minus inflation).
 Factors inflating the price balloon are many. The first big push came from high crude prices, which seem under control now. That’s a small consolation because food prices have nearly doubled in a year. Worse, inflation in manufactured products is creeping up, after being negligible for years (see bar charts). Prices of services from telecom to finance, most of which do not show up in inflation data, are rising faster than ever, fuelled by the expanding service tax net and multiplicity of cess.
 Government claims food prices will be reigned in soon through a combina- Graphics: RAJ tion of more liberal imports and bettercrops in the rabi season. Keeping manufactured prices down will be trickier. That’s because they are driven by both cost-push (price hike due to higher costs) and demand-pull (price rise owing to excess demand). To control demand, especially credit-led demand, select interest rates have been raised. But doing so also raises capital cost for industry which must borrow and invest more to meet demand. Striking a right balance between tapering demand, without dampening it too much, and not letting costs push up is something the RBI is trying to do. The other costpush factor is insufficient and inefficient infrastructure. Here the government's record continues to be bleak despite all the record collections in taxes this year, some of which is actually done by stoking inflation.
 For most households, there is not reason to panic as long as rise in earnings outpaces inflation rates. So calculate the net impact of inflation on your budget. But remember, higher salaries are also another cause of higher inflation. For investors, an old but impractical advice during high inflation is to invest less in financial assets and more in physical ones. A better approach is to be more particular and disciplined in the choice of your savings by keeping in mind the real returns rather than just nominal returns.

Safe Hands

Sebi has launched a new Rs 22 crore IMSS-Integrated Market Surveillance System. Almost 5 million transactions happen on the stock exchanges daily and because of sheer volumes the audit trail is difficult to mark. Also, exchanges don’t share transaction data, allowing room for manipulation and malpractices. For example, if a broker gets a huge buy order which will move the price, he can buy that stock for himself first on NSE at a lower price and then service the institutional order on BSE, thereby pocketing the difference.

IMSS allows Sebi to capture and integrate market data from stock exchanges, clearing houses and depositories. This will enable it to detect unfair practices like front running, creation of artificial volumes, insider trading, wash sales and synchronised trading. The time taken for information- gathering will also be dramatically reduced from the current three months to almost real-time. But Sebi’s whole-time member G. Anatharaman says: “The primary responsibility for surveillance continues to vest with the stock exchanges."


Words Worth
"The surcharge is not right. If there is congestion, why don’t airlines fly at different times"-Praful Patel,
Civil Aviation Minister on the Rs 150 congestion surcharge on air fares

"We expect car and two-wheeler insurance premiums to come down by around 10-15% after de-tariffication"-V. Ramasaamy, chairman and managing director, National Insurance Company

"Mutual fund assets in India are so low because awareness among common people about investing is so low"- N. Mohan Raj, chief executive, LIC Mutual Fund, on why India’s MF assets are only 1.3% of its GDP

"We will conduct a countrywide programme in 2007 to educate small and retail investors"-M. Damodaran, Chairman, Sebi, announcing a plan to set up an Investor Protection Fund with penalties collected from companies for stock market violations.

 Tracking system
 Sebi to be a repository of transaction data
 Investigation time cut by about 3 months
 Will help detect stock market violations

Credit Push

With 25 million credit cards in circulation, life on credit seems to be a way of life with urban Indians. But the even the impressive 30% annual growth in credit cards could soon be overshadowed by a bigger figure with the RBI opening doors for non-banking financial companies (NBFCs) to enter the credit cards business with scheduled commercial banks. RBI has also allowed NBFCs to act as agents of asset management companies and sell mutual funds. "We can provide better credit appraisal because of our direct reach to the customer. For selling mutual funds, the marketing team needs to have the expertise to explain and monitor the schemes for the customers," says Srinivas Acharya, deputy managing director, Sundaram Finance.

The small-scale and retail sectors, small towns and even certain rural areas could soon see a surge in credit cards where banks have not been able to penetrate. For the NBFCs the guidelines spell good news but there is a catch. Only those NBFCs that have a minimum netowned fund of Rs 100 crore are allowed to take the plunge. They should also have been consistently netting profits for the past two years. All legal risks would be borne by the issuing banks that NBFCs joing hands with. Since credit card penetration in India is much below the international level, the challenge lies in being able to make credit accessible to people in smaller cities where NBFCs often have a better network than banks. How about some mutual funds to the prosperous farmer?

Hot on insurance


How do Indians compare with the rest of the world on matters of personal finance?
Here is a pick from Google Trends 

Indians are running for cover-that is, insurance cover. Thanks to massive campaigns, India seems to have woken up to the need to insure. With 80% of the population without any cover, it seems only natural that insurance should be the hottest Google search. While real estate comes in a poor second, mutual funds and stocks are way behind. Among cities, Dalal Street can hardly generate much interest in stocks for Mumbaites. Insurance is the primary concern; Delhi, Bangalore and Hyderabad alike. While a similar pattern is followed in Europe, the US and Canada real estate registers the maximum searches. The sector is looking up in India too and with the likes of MagicBricks and 99acres doing good business, these results might soon change.

 Power Savers

Here’s one more sticker to make better informed purchase decisions. In a move to standardise the energy efficiency of different genres of electrical appliances, the Ministry of Power plans to rate the energy efficiency of refrigerators, tube lights, televisions and the like. Least efficient products will have single star ratings and the highest efficiency ones will have five stars on their labels.

Energy efficiency has a different definition for each appliance. For instance, frost-free refrigerators of different storage capacities in various compartments will be rated according to units of electricity consumed in a year. On the other hand, tube lights will be rated according to their brightness after 100, 2,000 and 3,500 hours of use (see table).

The ratings will definitely aid the consumer in cutting consumption costs. For instance, by purchasing two tube lights of five-star ratings, we ensure greater brightness (92x2 lumens) than three double-star tube lights (61x3 lumens) at lower electricity consumption (assuming tube lights consume same electricity irrespective of ratings). However, the calculation models by the bureau do not consider some essential factors such as wear and tear and over usage of the appliances.


Star rating Units of electricity
consumed in a year 
* more than 626
**  625-549
***  550-474
**** 475-401



For a refrigerator of storage volume 213 litre. Figures
are approximate and for indicative purposes only
Energy efficiency parameter: Units of
electricity consumed in a year, in watts
Takeaway: Claims of greater energy efficiency
by different brands will have to be
supported by better ratings


 Star ratingLumens per watt
at 100 hour use 
*less than 61 
*** 67-86
**** 86-92
*****more than 92
Energy efficiency parameter: Brightness
per unit of power (lumen per watt) 
Takeaway: Fewer tube lights of higher rating
work better than more tubes with lower ratings.
The catch: it might be costlier 

Mani Bhai Tells you: What's your FD's worth

Multiply the amount you put in FD with the figure that matches with your FD’s tenure and interest rate.The answer you get is the current value of your FD. For instance Rs 10,000 invested in 8.5% FD for 4 years will be worth Rs 12,836 (10,000 x 1.28) at the end of 3 years

Interest 7%   7.50%8% 8.50%  9%
 1 1.07 1.08 1.081.09  1.09
 2 1.15 1.161.17 1.18  1.19
 3 1.23 1.25 1.27 1.28 1.30
 41.32  1.341.37  1.40  1.42
 5 1.411.45  1.48 1.521.55 



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