Investing in India - 5 Minute WrapUp by Equitymaster
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Will interest rates come down? 

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In this issue:
» Mining to revive in Karnataka but under strict conditions
» Is the RTE Act a boon or a bane?
» No of cases for corporate debt restructuring in India shoot up
» Changing face of Indian car industry
» ...and more!


---------------------------- Yet Another Bailout... Speak out before it's too late! ---------------------------

When millions don't even have food to eat, our government is busy bailing out companies...

And this time, again, it's Air India.

This PSU gets a Rs 4,000 crore equity infusion... funded by the taxes we pay.

Not to mention the huge debt restructuring is basically a bailout in a different garb. And this runs into tens of thousands of crores.

Is this government really made up of our representatives or is it on the payroll of those corporate giants?

We at Equitymaster feel strongly about this cause, and thus have started an Urgent Poll where you can read all about this and cast your vote to make your voice be heard!

We strongly recommend every Indian, who wants to make a change, to take a look at this.

Click Here to read more and cast your Vote... Before it's too late!


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00:00
 
In the coming week, the Reserve Bank Of India (RBI) is scheduled to meet in order to announce the monetary policy. This is the annual monetary policy for the year 2012-2013 (FY13). This announcement is something that everyone is eagerly awaiting. The reason - they expect the central bank to cut the interest rates.

Rising food prices and subsequently high inflation rates had led the RBI to adopt a tight monetary policy since 2010. Consequently it increased interest rates by nearly 13 times in the period between March 2010 and October 2011. The result is that the benchmark interest rates in the country stand at 8.5% currently.

The higher interest rates have certainly helped in cooling down inflation to some extent. The inflation reported for February 2012 was 6.95%. Though it is higher than the 6.55% seen in January 2012, it is still lower than the 9.54% seen during the same period a year ago. Even though the news on the inflation front has started to turn positive, the monetary tightening has had a side effect. And that is in the form of slowing economic growth.

With cost of funds being so high, manufacturing companies have either postponed or cancelled their investment plans. This in turn has hurt the economic growth which has come down to below 7% levels. And this is a cause of worry for the RBI. Therefore, it has two choices in front of it. The first is to do nothing. This means it would leave the interest rates unchanged. This in turn would mean that investment plans would continue being pulled back and economic growth would continue to come down. Alternatively, it could bring down the interest rates and infuse the much needed liquidity in the system.

Taking a cue from the RBI's actions since January 2012, it seems to be adopting the second approach. It has already cut down the cash reserve ratio (CRR) and has infused nearly Rs 800 bn in the economy. But this has not been enough. As a result, unless inflation concerns surface again, we feel that the RBI would loosen the noose in its upcoming meeting and cut the benchmark interest rates. But will it actually do so? We'll have to wait and watch.

Do you think the RBI will cut interest rates? Share your comments with us or post your views on our Facebook page / Google+ page.

01:30  Chart of the day
 
Ever since the government banned iron ore mining in Karnataka, the steel industry has been left fretting and fuming. Therefore, the recent news that the apex court has accepted the recommendations to start iron ore mining in Karnataka has given a shot in the arm to steel companies. Today's chart of the day looks at the percentage share of states in mineral production in FY11 as estimated by the Ministry of Mining. Karnataka contributed only 3.57% in FY11 following the mining ban. Though the Supreme Court has lifted the ban, it still comes with a lot of conditions. This includes capping the iron ore production from Bellary. Implementing the reclamation and rehabilitation (R&R) work amongst several others.

Source: DNA Money


01:50
 
Starting tomorrow, all hospitals will provide free services to the poorest of the poor in the country. What more, even shopkeepers will stop charging any money for goods bought by them. In fact, let everything under the sun be offered for free to India's poor and needy. Shocked? Well, don't be because the way the decision makers are functioning right now, the scenarios outlined above may well become a reality. We are sure that the Honourable Supreme court does not have any sensible economist as its judge. For had that been the case, its recent decision to allow 25% of seats in private schools to be reserved for economically weaker sections may not have seen the light of the day.

We believe that this step is a retrograde one and does not take into account the cost of delivering educational services to society. The honourable court should have known that there is no free lunch and ultimately, the burden of sponsoring education for poor kids will fall on the other 75% students. Why can't the Government clean up its act and improve the education standards in the country instead. On one hand, it continues to tolerate massive inefficiency in India's public education system and on the other, chooses to put further pressure on the already overburdened middle class population of the country. Don't get us wrong. We are not against denying a right to education to the country's poor. But the mechanism could have been much, much better we believe.

02:25
 
Little wonder that all eyes are set on the RBI to offer some breather next week. After all, the coming monetary policy update could offer at least some relief to debt burdened India Inc. Especially the entities whose accounts are already on the verge of being 'restructured' due to non-payment issues. The corporate debt restricting (CDR) cell has seen a deluge of cases over the past fiscal. The number of cases referred to the CDR has witnessed an eight-fold increase since 2008. A total of 84 loan applications went to the cell against just 10 in 2008. Of the 84, 44 cases worth around Rs 390 bn were approved in FY12. What is more, loan applications of Rs 227 bn are coming up for restructuring approval in the April to June quarter. The Air India bailout itself may have come as a relief to many bankers. For that too would have dealt a heavy blow in the event of non restructuring. Having said that, even with interest rates cooling off a bit we do not see India Inc's debt woes going off in a hurry.

03:10
 
For a long time India was predominantly a small car market. Low disposable incomes as compared to other countries meant that consumers restricted their car purchases to smaller models. So you had Maruti 800s dotting Indian roads enabling the company to emerge as a market leader in this space. But the past few years have seen a considerable change in the Indian auto landscape. For one, competition in the passenger car segment has intensified. This is because more and more foreign players have entered with newer models. This has led to a drop in the average price of cars. Further, disposable income of the average Indian has also risen. As a result, consumers are now opting for bigger vehicles. This was very much evident last fiscal when sales of big cars also known as sedans jumped 24%. On the other hand, smaller cars or hatchbacks saw a 7% decline in sales.

The surge in demand has not only been attributed to a younger population having higher incomes but also to existing small car owners looking for an upgrade. Auto companies in the meanwhile have been grappling to meet this demand. This can be evinced from the longer waiting periods for various models. Furthermore, petrol prices have been rising. Thus, the differential between petrol and diesel has widened and so consumers have begun to prefer the latter. Since diesel engines options are available in almost 80% of the sedans as compared to over just 52% in small cars it is hardly a wonder that sedans sales are increasing. Thus, preference for larger cars as compared to smaller models certainly seems a scenario that will sustain for years to come.

04:00
 
World stock markets displayed mixed signals during the week. Most of the Asian stock markets closed the week in the green while the US and the European markets traded lower. The US markets were mostly down on disappointing Chinese economic data. The fact that the Asian country's economy grew at the slowest pace in last 3 years (GDP grew by 8.1% in the first quarter) coupled with concerns over rising borrowing costs in Spain resulted in the US markets falling by 1.6%.

The Indian stock markets were down this week on global cues regarding problems in Spain and lower than expected GDP growth in China. Also disappointing results (quarter ended March 31, 2012) from IT bellwether Infosys on Friday resulted in the BSE Sensex falling by 2.2% during the week.

Amongst the other world markets, most of the stock markets ended the week in the red. However, Asian stock markets (excluding Japan) managed some gains. China in fact was the top gainer up by 2.3%. Among the losers, France (down by 3.9%) and Germany (down by 2.8%) fell the most.

Source: Yahoo Finance, Kitco, Cnfm


04:55  Weeekend Investing mantra
"It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent." - Charlie Munger
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10 Responses to "Will interest rates come down?"
ajit
Apr 16, 2012
as read from news paper reports in rte judgement ,respected supreme court exampted minority run education institute.
any lawyer
pl. help me to understand if constitution gives fundamental right of equality under which right of education might have been passed
how this unequality is permitted???
Like 
ajit
Apr 16, 2012
the politicians have milked middle class beyond limit since they are not united.from education they will tell to spare a room in your house.if you dont unite this will happen as vote hungry politicians and children producing poor have resulted in this mess.

all govt benefits should not be given for more than 2
chidrens.

also i demand intelligent policy makers to let me know first how our population will come down to 100 crores or 80 crores .whats policy they are adopting.
and how india will have multiple increasde in ppercapita income???

else printing notes,small changes interest rates and india remaining third world country we dont need fake intelligent policy makers.


all middle class please raise your voice
ask in all forums your representative mp,mla etcwhat is his view on population and measure to control it.
let election 2014 be on population reduction and multiple in indian per capita income.
Like 
Aubrey Fonseca
Apr 16, 2012
I am responding to Dinesh`s claim that this new RTE Act
seems "more workable" than previous attempts. It has just been reported that only 5% of all govt. & BMC schools in Maharashtra are following the guidelines as
mentioned in the RTE act. So how will the remaining 95% of the schools fall in line Dinesh? This RTE act is draconian because it imposes harsh penalties on all except govt. & BMC schools! All said and done it will be
very very difficult to implement and only the privately aided schools will suffer.
Like 
lambodar borah
Apr 15, 2012
Definitely. Like 
SANJAY SUKHANI
Apr 15, 2012
No RR cut will be don, RBI can cut CRR but it will not help Equity market. Like 
Dinesh
Apr 15, 2012
Whats wrong in reservation in pvt for economically backward class, this will atleast bring more equality in education. This is not a very efficient solution and will increase burden on middle class but then at least it seems more workable solution in Indian context all previous attempt. Like 
RAMESH WANGNOO
Apr 15, 2012
NO RBI CANNOT REDUCE THE INTEREST RATE GIVEN THE POOR CONDITION OF ECONOMY,HIGH DEFICIT AND PROFLIGATE SPENDING BY GOVT WHICH IS UNCHECKED ANDDUE TO THIS GOVT IS EXCEEDING FRBM TARGETS Like (1)
Albert
Apr 15, 2012
No, RBI does not have the guts, just like our politicians, to take some hard, course-correcting decisions. We continue to live in a communist mobocracy pretending to be a democratic republic. It is neither a true democracy nor a true republic yet the ignorant public celebrates independence day and republic day with great gusto. What a joke India has become under UPA-2. Like (1)
Bosco
Apr 14, 2012
The Supreme Court judgement was regarding the "constitutional validity" of the RTE act, not the "commercial viability". Like (1)
P.V.Veeraraghavan
Apr 14, 2012
I cannot guess what RBI will do the interest rates. But this much I can say that these manufacturing companies mostly source their monetary requirements externally due to low interest rates as 3 to 5%(never so in India) or
by new Equity route. The lack or the abysmal economic growth is solely and only due to 1. poor infrastructure
as roads, rail & port 2. Electricity which is costly and
not available due to power cuts and 3. High cost of
fuels (petrol, diesel, furnace oil, aviation spirit)due
to the hihest in world taxation by GOI and State govts.
Headed by Singh and Pranab dada and State CMs the selling price of fuels is 200% or more of Ex Refinery price. Similarly the EBs increase Elecricity price on
annual basis instead of cutting down wasteful expenses ,
stopping electricity thefts. It is time Electricity is paid for equitably by all including Agriculturists. Furthermore it is high time Agriculture Income is taxed,we all know that black money or transborder so called donations are transfered to white by Agriculture route, by merely owning say 50 acres land and raising almost nothing! Recently one anti Koodangulam bearded
stated that their is supported from the agriculture income of his wife and he doesnot have to use the donations received in his NGO A/C! This route we all know is used by all professionals as doctors, advocates,
govt babus, industrialists, tradesmen, politicians etc, etc. But we also know that this, taxing Agri Income, is never going to happen!

We all know that several lakhs of crores are stashed in
Swiss and other overseas banks and Pranab dada is patting his back on finding 9200 crores! What a pity!!

Increase or decrease of interest rates is no matter for big industries or big sharks or for indian economy.

Interest rates do matter for Senior citizens and other
middle class small timers (the silent majority of wage earners)who stupidly save money for their later years and old age as there is no social net to take care of them in their old age!
Like (1)
  
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