SBI offers up to 9.5% in planned 1,000 crore bonds

India’s largest lender SBI is selling bonds worth Rs 500 crore to retail and institutional investors with an option to retain oversubscription for another Rs 500 crore. The Rs 1,000 crore proposed to be raised will be part of the bank’s lower Tier-II bonds, which will help it enhance its capital adequacy ratio (CAR).

The issue offers investors two options – Series 1, having a maturity of 10 years with a coupon of 9.25% paid annually. It will have a call option after five years and one day with 0.5% additional step-up after five years, in case the call option is not exercised by SBI. Similarly, in case of Series 2, which will have a maturity of 15 years, it will provide a coupon of 9.5% annually .

It will have a call option after 10 years and one day with 0.5% additional step-up after 10 years if the call option is not exercised. This means that in case the call option is not exercised by SBI, the coupon on bonds shall be increased by 0.50% for the balance tenor of the bonds. The minimum investment in these bonds is Rs 10,000.

According to Arvind Konar, head of fixed income, Almondz Global Securities , “SBI is offering the bonds at very attractive rates to investors. We expect an oversubscription , considering the attractive rate at which it has priced the issue” He added that SBI was offering a higher return to retail investors as given its triple A rating, it can raise funds at around 8.6-8 .65%.

Investment bankers are also optimistic after the success of bond issues by earlier issuers , including Tata Capital, which is quoting at a premium in the secondary market .

The issue will be opening from October 18 to October 25, 2010, with an option to close earlier and /or to extend up to a period as may be determined by ECCB. There will not be any TDS since the bonds are listed on NSE and will be compulsorily issued in dematerialised form, so investors without demat a/c will not be eligible.

The interest received on these bonds will be treated as income from other sources and shall form a part of the total income of the assessee in that financial year in which they are received. There are no tax benefits for investing in these bonds.

Resident Indian individuals, HUF, partnership firms, corporates, banks, financial institutions, insurance companies, mutual funds, provident/superannuation/ gratuity/ pension fund, private/public religious / charitable trust, co-operative society can invest in these bonds.

Analysts feel that the interest rate is very attractive and due to adequate safety of the issue, it is expected to get good response . “Investors should allocate some portion of their investment portfolio in these bonds as the returns are much better than any other similar instrument. Also, it comes with high safety and has chances of higher interest rates in case of non-exercise of call option by the bank.

Since these bonds have a call option after five years and 10 years, if the bank fails to exercise the call option, the investor gains further as the interest rate will go up by 0.5%,” says Bajaj Capital chief operating officer Harish Sabharwal.

RBI TO INCREASE REPO & REVERSE REPO RATES TO FIGHT INFLATION

Equity investors in India will keep their eyes on the central bank for direction this week, with the possibility of aggressive monetary tightening being a big concern for the market.

Quarterly earnings from big companies will also set the trend.

The Reserve Bank of India (RBI) is widely expected to raise its benchmark lending and borrowing rates by a quarter of a percentage point on Tuesday when it announces policy to dampen inflationary pressures that are spreading from food to manufacturing.

It would be the second increase in two months after the RBI lifted rates unexpectedly in March, citing rising prices and stronger economic growth, after keeping them at record lows for more than a year.

"The market has discounted a 25 basis point rise," said equity trader Rajesh Shah. "Anything more could upset the apple cart."

The blue-chip 30-share Sensex, which is a barometer of the stock market, posted its first weekly fall in 10 when it shed 1.9 per cent last week to 17,591.18, its lowest close in April.

The widely tracked index had risen 11 per cent over the previous nine weeks in its longest run of gains in almost a year.

Like all central banks, the RBI is wary of inflation and the consequences it could cause while the government is focused on growth.

Some economists have predicted the RBI may raise rates by 50 basis points and increase the percentage of deposits that banks must keep with the central bank in reserve, or CRR, by a quarter point.

The RBI had hiked the CRR by 25 basis points in March.

On Friday, after RBI Governor D. Subbarao met Finance Minister Pranab Mukherjee ahead of the policy review, government officials indicated only a small rate rise was needed as inflation was set to start cooling.

"I think actually we've peaked. Inflation's still got to remain high for a while but on a downward trajectory from now on," Kaushik Basu, the chief economic adviser to the finance ministry, told reporters.

Annual wholesale price inflation in March was 9.9 per cent, the strongest since October 2008, but below economists' estimates of above 10 per cent. The data seemed to back Basu's point that inflation was likely to moderate in the coming months.

Samiran Chakraborty and Anubhuti Sahay, economists at Standard Chartered Bank, said the RBI would likely adopt a gradual and calibrated tightening as the economy was still too early in the recovery cycle.

They predicted the RBI would raise the repo and reverse repo rate by 25 basis points each and the CRR by 50 basis points. "We believe that would be appropriate to demonstrate the RBI's resolve to counter inflation," they wrote in a report.

The bank expects wholesale price inflation to average 6.75 per cent in 2010-11 and ease to five per cent in 2011-12. There is also an opinion the central bank should hold its fire for the time being, especially because of the action in March.

"As the RBI moved barely a few weeks ago, the best policy would be to wait and watch," the Indian Express wrote in an editorial yesterday.

"The difficulties in the transmission mechanism of monetary policy mean that it's not clear how much and how long it would take for higher policy rates to get transmitted to higher bank lending rates."

So, will the RBI tone down its aggressive stance?

"While these developments are unlikely to stop the RBI from hiking rates again at next Tuesday's quarterly policy meeting, they increase the chances the move will be 25 bps rather than 50 bps," said Robert Prior-Wandesforde, senior Asian economist at HSBC.

Investors will also be watching quarterly earnings from companies. Some of the top results due this week include: Reliance Industries, Tata Consultancy Services, Wipro, Hero Honda Motors, ACC, Ambuja Cements and UltraTech.

Crisis is no hurdle for India

Crisis? What crisis? Indian policymakers are not asking such a complacent question. But India has had a "good crisis". Now its task is to unwind the exceptional support given to the economy and push through the reforms needed to sustain fast and inclusive growth.

When Pranab Mukherjee, the finance minister, presented his budget recently he noted that a year ago, India confronted a double challenge: the global crisis and a poor monsoon. Now, "I can say with confidence that we have weathered these crises well". As the Indian government's Economic Survey put it: "A variety of stimulus packages were put in place in the second half of 2008-09, in the Interim Budget 2009-2010 and, again, three months later, in the main Budget 2009-2010. By the second quarter the economy showed signs of turning; and now, close to the end of the year, India seems to be rapidly returning to the buoyant years preceding 2008." This year it is forecast to grow by 7.2 per cent. If the Indian economy has succeeded in surviving this test with so little damage, even cautious analysts must be more optimistic about the future.

Stimulus has its costs. The central government's fiscal deficit expanded from 2.6 per cent of GDP in 2007-08 to a provisional figure of 5.9 per cent in 2009-09 and an estimate of 6.5 per cent for this year. If one includes the states, the deficit jumped from 4 per cent of GDP in 2007-08, to 8.5 per cent in 2008-09 and a forecast of 9.7 per cent this year. India's nominal GDP grew at an average rate of 14 per cent between 2004-05 and 2009-10. That makes deficits of 10 per cent of GDP quite sustainable. I wish that were equally true of the UK.

Nevertheless, continuation of such deficits is undesirable. Second, the public sector's savings collapsed from 5 per cent of GDP in 2007-08 to 1.4 per cent in 2008-09. This needs to be reversed.

Before the crisis the country's gross savings rate had hit 36 per cent of GDP. Given the country's attractions to long-term foreign capital, that would allow an investment rate of close to 40 per cent of GDP. Such a high rate of investment could deliver 10 per cent growth. It might deliver even more: since India's per capita output (at purchasing power parity) is roughly one-15th of that of the US, the potential for fast growth is huge.

The extent of the optimism became evident during a week spent in India last month. Among the highlights was a conference on a book of essays in honour of Montek Singh Ahluwalia, deputy chairman of the planning commission and, after Prime Minister Manmohan Singh, India's most influential economic policymaker of the last two decades (and a friend of mine for 39 years).

Upbeat tone

I was struck by the upbeat tone of the essay on "macroeconomic performance and policies, 2000-8" by Dr Shankar Acharya, a former chief economic adviser to the Indian government. Acharya is the most sober of competent analysts of the Indian economy. Indeed, the book gives a strong sense of the confidence of the technocratic elite in India's performance and prospects.

Similar confidence is palpable among the business elite. This confidence makes this a radically different India from the one I knew when I was the senior divisional economist for India, at the World Bank, in the mid-1970s. The emergence of an elite consensus on where the country is going is clear to any regular visitor. When entering the Commerce Ministry, bastion of opponents of open markets in the 1970s, I was struck by a poster describing India as the "world's largest free-market democracy".

Another feature is the belief that the pragmatism of India's policies, particularly over global finance and the balance of payments, had proved correct. This was the theme of an essay by Rakesh Mohan, former deputy governor of the Reserve Bank of India.

Fortunately, a country as big as India could sustain fast growth even if the external environment remained less friendly than before. But that would make lifting internal obstacles to growth even more urgent. The external environment also matters, in at least three respects. First, India has followed China in becoming far more open to trade. Indeed, India's ratio of trade in goods and non-factor services to GDP in 2008 was where China's was in 2003. Second, India depends on access to foreign raw materials, particularly energy. So energy price shocks would be very destabilising. Finally, India needs peace.

As a chapter in the Economic Survey on the "Micro-foundations of Growth" argues, even "India's unpardonably large bureaucratic costs are like a valuable resource buried under the ground".

I have little difficulty in imagining that India can sustain growth of close to 10 per cent a year for a long time. Under conservative assumptions, the Indian economy would be bigger than the UK's, in market prices, in a decade and bigger than Japan's in two. I argue in a chapter on "India in the World" that India is following China as a "premature superpower", by which I mean a country with low living standards, but a huge economy.

Exhausted by the burden of its pretensions, the UK should soon offer its seat on the Security Council of the United Nations to its former colony. Its condition would be that France does the same in favour of the European Union. Whether or not such enlightened statesmanship is forthcoming (presumably not), we are moving into the age of continental superpowers. Asia will be home to not one, but two of them.

Time to think for Indians to save on taxes back home

Residents in Dubai and the UAE do not have to pay income tax. There’s an all round good feeling about this that attracts people from all over. When it comes to non-resident Indians (NRIs), the feeling is doubly good. They don’t have to pay tax back home for income earned abroad. But those earning an income from investments made in India have to be attentive to taxes that accrue on them.

What attracts tax is the non-residents’ investments in shares, debentures, deposits and properties in India. The exemption limit is Rs. 160,000.
The deadline for filing taxes is months away but it is not too early to think about it. Those who have to file tax, the deadline is July 31.

However there are ways to save taxes provided you know the ways to go about it.
On the tax issue, to start with, it’s important to understand one’s status clearly.


Income tax

Under the Income Tax Act, an NRI is a person who has stayed outside India for 182 days or more in a financial year (from April 1 to March 31). If you have come back after being an NRI for nine consecutive years, then you are an R-NOR (Resident but not ordinarily resident), and can still obtain some of the benefits for two consecutive financial years.
You can also obtain NRI benefits if you have been in India for not more than 729 days during the preceding seven financial years.

NRIs don’t need to think about income earned outside the country, until and unless the organisation the individual is employed with is Indian. Neither does the person have to think twice before parking money in a Non-resident External (NRE) account. However, interest accrued on a non-resident ordinary account (NRO) is taxed at the rate of 30.9 per cent is deducted by the bank at source.

Also, once income is earned on money (convertible foreign exchange) invested in India, the question of tax arises. These are called the Foreign Exchange Assets (FEA) and the categories are:

•a. Shares in Indian company
•b. Debentures issued by a public limited company
•c. Deposits in a Public Limited Company
•d. Securities of the Central (federal) Government
•e. Any other notified asset
The interests gained from these investments are taxed at a flat rate of 20 per cent.
And profit out of long-term capital gains, that is, selling a capital asset such as a property, gold after holding it for 36 months, attract a flat tax of 10 per cent. Similar gains from equity shares and equity mutual funds are tax exempt if held for more than 12 months. But if sold before 12 months, there is a short-term capital gains tax of 10 per cent.

Capital gains are determined at the rate of exchange on the date of sale. But there is a catch here.

The sale of these investments is tax-exempt if the sale proceeds are reinvested in similar investments within six months. If the sale proceeds of these assets are partially re-invested, then the exemption is proportionate to the amount re-invested.

Filing returns

But, if the income from foreign exchange assets and long-term capital gains is the only income of an NRI, then there is no need to file a return. In calculating the total income on any foreign exchange asset, no deduction is allowed in respect of any expenditure or allowance under any provision of the Act.

Tax returns need to be filed only if your Indian income including the rent is more than Rs. 160,000. One may also file for tax refunds if the NRI had his taxes deducted at source and his income was less than the exemption limit of Rs. 160,000.

Moreover, as Rajesh Singla, a New Delhi-based chartered accountant specialising on tax issues, says: “A non-resident Indian may also elect not to be governed by these provisions for any assessment year by furnishing to the assessing officer the return of income for that assessment year and declaring therein that these provisions shall not apply to him for that assessment year. If he does so, then his total income and tax will be computed in accordance with the normal provisions of the Act.”

In others words, an NRI may choose to be assessed as either an NRI or as an ordinary Indian resident. This is particularly beneficial for low-income group NRIs, who will pay less tax for the chosen assessment year, if he chooses to be taxed as an ordinary Indian. In such a case, the non-resident has to file a declaration with his return of income, that these provisions would not be applicable to him. The normal provisions of the Income Tax Act would be applicable with respect to the mentioned investment incomes.

There are more ways of saving taxes on long-term capital gains. That is, by investing in the following products, though it’s important to note that all are foreign exchange assets, that is, bought with convertible foreign exchange.

•Certain Mutual Funds such as those of UTI (Unit Trust of India).
•Some notified savings certificates for NRIs, such as, National Saving Certificate VI and VII issues are notified.
•NRI Bonds 1988 and NRI Bonds (Second Series).
•NRIs residing in countries with a Double Taxation Avoidance Agreement with India (UAE is one of them) may also obtain tax benefits by providing proof of residency from the country of residence while opening a bank account in India.
Pension

There still remains the question of saving the pension income. Tax consultant R.N. Lakhotia recommends taking advantage of the deduction up to Rs100,000 (Dh8,072) under section 80C. In other words, a tax payer can invest this amount in Public Provident Fund, Employees Provident Fund, pension plan, National Savings Certificate, repayment of home loans and payment of children’s school fees.

But what really dampens the spirit of the NRIs are the procedural complexities in the system. The process of taxation cannot take place without acquiring a PAN (Permanent Account Number) Card, which is issued by the Income Tax Department. Often an NRI who has been living outside India for a considerable period of time finds it difficult to furnish a local address that is required for any tax filing purpose.

Additionally, claiming tax refunds is a complex process. Even the process of scrutiny of information furnished by an NRI is also very cumbersome. Many NRIs feel disadvantaged by the situation.

“Since NRI’s are contributing a considerable part of foreign exchange to the Indian economy and are participating directly in the growth process of the country, what I feel, they should at least continue to get the advantage of a No Taxation,” says E.G. Varghese, a former NRI who stayed in Dubai for more than a decade and is presently an R-NOR. “Please remember, at present, they are even deprived of the basic right of an Indian citizen — their voting rights”. But Singla disagrees.

“Tax incentives need to be rationalised keeping in view the phasing out of deductions and exemptions,” he says. However, deductions on taxes on several grounds have been on the decline.

Many like him insist on more taxation on NRIs to fund infrastructure growth in the country. There have been some noises to that effect recently. But until any such thing happens, the NRI will generally tax his mind a little lesser than his resident friends

Market tips for financially sound '09

The year 2008 has been quite turbulent for investors. From an all-time peak of 21,206 in January, the BSE Sensex plummeted by more than 50% to 9000 levels in December.

Networth of equity investors has halved. The global slowdown has also had its impact on the job sector, which has added to investors’ woes. Let’s take the example of a cloth merchant.

He bought a stock when it was just priced at Rs 3. Subsequently, the scrip rose to Rs 120 when his financial advisor asked him to sell the stock as it had no intrinsic value.

The artificial rise in the price, however, made him stick to the stock. Now, it’s trading at Rs 12. The biggest lesson the businessman learnt was every asset has a real value.
Kartik Jhaveri, a certified financial planner, says, “Whether it is real estate or stocks, there is a fair value. Some exuberance would have propped up the value of a stock worth Rs 100 to Rs 400 but that doesn’t mean the stock will touch Rs 800 for you to book profits in the future. Similarly, real estate prices move in line with inflation. If you have booked a flat worth Rs 10 lakh, you can expect an appreciation of 8% in a year. Anything in excess would be artificial, which would eventually crash.”

The year also taught you that things that look rosy can actually turn ugly in a short span.

“If you have a steady income, ensure you at least save 30% at all times. If the times are good, you can easily save up to 50% of your disposable income, which can be of help during a contingency,” Mr Jhaveri adds.

Another lesson learnt is to avoid over leveraging. This simply means if you can afford only a 2 BHK, stick to it. Till 2004-05, some banks were willing to finance 90% of the property value.
Now, it’s the borrowers’ headache to foot that expensive EMI at such turbulent times when their investments are underperforming.

At any point in time, a borrower should not borrow in excess of 70% of the house value. If you are planning to buy a house now, the loan-to-value ratio should be still lower at 60:40. That will give you additional flexibility to deal with your finances.

Also, it’s a bad idea to borrow for investing in stocks.

“Restrict your stock exposure to the personal funds you can use as no asset class can appreciate forever. Investors particularly borrowed to invest in IPOs. But investing in IPOs turned out to be the biggest joke in 2008,” says Amar Pandit, a certified financial planner.

Finally, remember what suits your best pal isn’t exactly what you need. If he entered the market around 10,000 and exited near the 15,000 mark after booking profits, you don’t have to adopt the same strategy.

You can build up your reserves now and capitalise on many more bull runs to come. However, the underlying assumption here is that you should stay invested up to at least 5 years to withstand the highs and lows.

Moreover, at such times, you should lock your money in instruments that have the least exit penalty. This flexibility is essential to encash for upcoming lucrative opportunities.

Indian investors braced for sharply lower earnings

Indian shares will face strong headwinds this week as investors brace for sharply lower quarterly earnings, which will start flowing in January and an uncertain global environment for capital flows.

The outlook for corporate earnings took a knock on Friday when the government said advance tax collections from companies for the December quarter fell 22 per cent from the same period last year. It was the latest in a series of data that pointed towards a deepening economic gloom.

"This should redouble efforts to tackle the problem more vigorously, but the government's responses have been painstakingly slow and too little," said equity analyst Mehul Patel.

"Neither are companies willing to go the extra mile to lure buyers back."

For more than two weeks it has become evident the government would have to further slash interest rates, cut taxes and increase spending to halt a rapidly slowing economy and revive growth.

The central bank has lowered its main short-term lending rate by 250 basis points since mid-October to 6.5 per cent, but this is still relatively high compared to US rates at 0-0.25 per cent, or Japanese at 0.1 per cent.

"An aggressive monetary policy may be necessary if the global economic dep-ression continues to adversely affect manufacturing," the finance ministry said in a mid-year review report released last week.

"Having run a tight monetary policy during first half 2008-09, there is considerable scope for monetary policy easing over the next six to 12 months to offset the global increase in demand for money that is being transmitted to India," it said.

Foolhardy

The report intensified expectations the central bank would reduce rates by at least 100 basis points, but the Reserve Bank of India (RBI) has given no hint when it would do it.

The RBI is scheduled to review policy only on January 27, but it can intervene early.

"It is desirable to cut the repo and the reverse repo rate, I think, by 100 basis points in my judgement," said Suresh Tendulkar, chairman of the prime minister's Economic Advisory Council.

Patel said falling inflation should give the RBI more reason to cut rates.

Annual inflation dropped to a nine-month low of 6.61 per cent in mid-December, well off a high of 12.9 per cent in early August and analysts are forecasting it will decline to less than three per cent by March.

The top-30 Sensex fell 7.6 per cent last week, its biggest weekly drop in two months, to 9,328.92 as foreign funds turned net sellers of more than $150 million (Dh550.98 million) after buying $365 million earlier in the month.

The fall picked up steam after the government said advance corporate taxes for the December quarter fell to Rs426 billion (Dh32.30 billion) from Rs549 billion in the same period last year.

The Sensex is on course to post a fall of more than 50 per cent in 2008, largely on foreign portfolio outflows of $13.3 billion. In comparison, the index had gained 47 per cent on the back of record foreign investment of $17.4 billion.

Patel said the outlook for 2009 was dismal. "There will be more pain for company earnings," he said.

Part of the problem was because companies such as developers were reluctant to cut prices.

"It's foolhardy to expect falling borrowing costs alone to bring buyers back," Patel said. "Apartment prices had more than quadrupled during the boom over the past three to four years; they will have to come down."

The finance ministry said GDP growth in 2008-09 would slow to about seven per cent from nine per cent in 2007-08, and its adviser Arvind Virmani said the RBI should put more emphasis on growth.

The expectation matches private forecasts but many economists believe expansion will fall to about six per cent in 2009 to 10. The government has announced plans for extra spending of $9 billion to prevent a sharper slowdown, but it knows this will not suffice to undo the damage and another economic stimulus package is needed.

However, Tendulkar said the government needed to see the impact of its first stimulus package announced early in December, before it could consider more.

"We are seeing some teething problems in the implementation of the first package," he said. "The second stimulus package will depend on the response to the first one."

Securities firm Macquarie said in a report last month that unlike China, India had little scope for significantly boosting fiscal spending and so policy reliance would be on aggressive monetary easing.

"India's investment spending will be a serious casualty of the current global crisis, despite the economy's relatively low export-to-GDP ratio."

Global crisis to hit India economy more in 2009

The global downturn will pressurise the Indian economy more next year and the government has to speed up reforms and boost investment to 2008: Year of global financial crisis sustain high growth rates, a report said on Friday.

The report jointly prepared by World Economic Forum and Confederation of Indian Industry also said India could see a sharp outflow of capital, and a fall in share and asset prices due to the global financial crisis.

The report was released ahead of the annual India Economic Summit starting Nov. 16 in New Delhi, where top government officials are expected to interact with heads of global firms.

"India's dependence on capital flows to finance its current account deficit is a macroeconomic risk and the global crisis could generate a sharp increase in capital outflows and a reduction in the availability of finance," it said.

"Clearly, the global economic picture will be harsher next year and there will be greater pressures on Indian economy."

The global credit crisis has rattled Indian markets as foreign investors sold shares worth more than $12.5 billion so far this year while the rupee fell by more than 20 percent.
"It (global crisis) could also weaken the balance sheets of the financial institutions, cause a further fall in share and asset prices, and challenge the macroeconomic situation due to shrinking global growth," WEF said.

Indian policymakers expect a moderation in economic growth to less than 8 percent in the year to March 2009, compared with 9 percent recorded in 2007/08 fiscal year.

Earlier this month, Prime Minister Manmohan Singh cautioned that the global financial crisis could be more severe and prolonged, and the government would take all necessary steps -- monetary and fiscal -- to protect growth.

"A tighter environment may also help speed reforms and encourage greater efficiency," WEF said, adding a great deal of political will and dialogue with different stakeholders would be required to take reforms forward.

"...India's growth is still strong relative to other economies and its growth story will continue to be one that will unfold over decades rather than years," it added.

India should reduce rates further

India needs to cut interest rates further as two reductions in less than a month haven't been enough to make loans affordable for companies and consumers, Bimal Jalan a former central bank governor said.

Policy makers should lower benchmark rates further "if necessary" to enable banks to cut their loan rates, Bimal Jalan, the top official at the Reserve Bank of India from 1997 to 2003, said in an interview in New Delhi.

Measures taken by the central bank and the government in the past month have helped bring the crisis "under relative control."

The global financial crisis has led to a shortage of money in India's banking system, affecting lenders' ability to extend loans to companies and individuals.

That's eroding consumer demand and has prompted production cuts at companies including Ashok Leyland, the nation's second-biggest maker of commercial vehicles, and JSW Steel Ltd.

Demand for domestic loans increased after funds dried up overseas following the seizure in credit markets and the collapse of Lehman Brothers Holdings Inc. on September 15. State Bank of India, the country's largest, cut the rate it charges its best clients to 13 per cent last week from 13.75 per cent, the highest in a decade. ICICI Bank Ltd., the second biggest, hasn't reduced its 17.25 percent charge.

"We need to create conditions so that loans are available at interest rates at pre-crisis levels, as other sources of finances have dried up," said Jalan, 67. "I am in favour of further reducing the cash-reserve ratio and the repurchase rate, if necessary."

Slower growth
India's $1.2 trillion (Dh4.4 trillion) economy may expand at the slowest pace in four years, the central bank estimates, as the credit crisis tips the world's industrialised nations into a recession.

Larsen & Toubro Ltd., the country's biggest engineering firm, said its borrowing costs will climb in the next six months and DLF Ltd., India's largest developer, last week said its hotel venture with Hilton Hotels Corp. may be delayed by up to 18 months as it tries to secure funds.

The benchmark Bombay Stock Exchange Sensitive Index has declined almost 50 per cent this year on concern slowing demand will hurt companies' profits.

India's central bank cut its benchmark repurchase rate by 1.5 percentage points in two stages starting October 20 to 7.5 per cent from a seven-year high of 9 per cent. It also lowered the amount lenders must set aside as reserves to cover deposits by 3.5 percentage points in a month, freeing up as much as $29.5 billion in cash to ease lending.

"The action taken by the Reserve Bank seems to be absolutely appropriate," Jalan said.

Be prudent in fixed income investments

As stock markets world-over witnessed declines, Indian investors while focusing on their equity portfolio should also take a re-look at their fixed income investments and restructure it according to the changes.

The income tax rate slabs for the current financial year have been revised thoroughly for individuals. The marginal rate of 30% of income is applicable only for individuals with income above Rs 5 lakh, while the basic exemption limit has been raised substantially upwards for male, female and senior citizen assesses.

If this year’s income was the same as the last financial year, then the tax payable will be substantially lower—mainly because the rate of tax at lower levels of income has been reduced drastically.
Secondly, the interest rates on options like bank fixed deposits , fixed maturity plans (FMPs) of mutual funds, corporate fixed deposits among others have gone up by more than 2-3 % per annum.

But the interest rate on schemes like PPF, National Savings Certificates , Kisan Vikas Patra, Post Office Monthly Income Scheme as well as taxable government bonds and Senior Citizen Savings Scheme, has remained static at 8-9 %.

Thirdly, inflation, which has risen lately, has started showing signs of tapering off. It may come down over the next few months, which will mean that the interest rates too will start falling. If interest rates fall, it makes sense to commit to fixed income schemes offering higher rates of interest for a longer term.

Premature exit options and withdrawals before maturity are not available in National Savings Schemes and 8% taxable government of India (GOI) bonds. In respect of all other fixed income options, an investor can withdraw or close prematurely the lower yielding investments and invest at current high rates.

We should find out whether it would be beneficial to withdraw from these options and invest in higher yielding options available. The important factor that would influence this decision is the rate of taxation on one’s income. We will bifurcate the investors as those who are required to pay tax at the rate of 10% or lower and others at the rate of 20% or more.

Withdraw the maximum amount from your PPF account and invest in bank FDs and FMPs of longer maturities of two years or more. If you can close the account and withdraw the entire amount, then it’s recommended.

Before maturity, withdraw your investments from the Senior Citizen Savings Scheme, even if you need to pay a penalty of 1%, and invest the amount in bank FDs offering 10% or more. Tax deduction at source (TDS) on a Senior Citizen Scheme, besides the interest rate of just 9% per annum, is a big irritant for senior people.

Hence, avoid this hassle and invest in different branches of banks. If you ensure that the interest on your FDs with a bank does not exceed Rs 10,000 in a financial year per branch, then TDS on interest can be avoided.

Consider premature renewal of your old bank FDs earning a lower rate of interest . Banks consider this without any penalty and roll over your FDs with them at the current interest rate. Long-term deposits of say three years or more are preferable.

FMPs are the best option for this category of investors. With draw your money from FDs postal schemes among others before maturity and invest in FMPs. The expected yields are even higher than the interest rates on FDs. The tax adjusted yields on FMPs of more than one year is much higher compared to FDs.

The difference between the amount received and the amount invested is considered as long-term capital gains and it is taxed at a rate of 10% without indexation of cost of acquisition or 20% with indexation benefit—under the growth option. As inflation is ruling high, the application of double indexation benefit to a 19-month FMP which will mature after March 31, 2010, will mean a taxfree income at the rate of more than 10% per annum.

Investors who will pay tax at 20% or more
Long-term FMPs should be preferred to short-term ones as the interest rates are likely to go down after a few months. The growth option would be a better one compared to the dividend pay-out option as the fund will be required to pay a Dividend Distribution Tax which is currently 12.5% plus a surcharge and education cess among others (effectively 14.1625%).

For investors parking funds in monthly and quarterly interval FMPs, the dividend pay out option will be better. FMPs do not guarantee a fixed rate of return and there is a risk of getting lower yields compared to indicated yields.

RBI cuts CRR by 100 basis points

The Reserve Bank of India on 15/10/2008 Wednesday cut the Cash Reserve Ratio (CRR) further by 100 basis points to 6.5 per cent of NDTL with effect from the current reporting fortnight that began on October 11, 2008. This measure will release additional liquidity into the system of the order of Rs.40,000 crore.

On Tuesday, October 14, 2008, the RBI decided to conduct a special 14 day Repo at 9 per cent per annum for a notified amount of Rs 20,000 crore with a view to enabling banks to meet the liquidity requirements of mutual funds. Rs 3,500 crore of this facility was utilised by banks yesterday.

Further, the Reserve Bank announced this morning that this 14 day repo facility will now be conducted every day until further notice upto a cumulative amount of Rs 20,000 crore for the same purpose. Banks obtain liquidity from the Reserve Bank under the Liquidity Adjustment Facility (LAF) against the collateral of eligible securities that are in excess of their prescribed Statutory Liquidity Ratio (SLR).

It has been decided, purely as a temporary measure, that banks may avail of additional liquidity support exclusively for the purpose of meeting the liquidity requirements of mutual funds to the extent of up to 0.5 per cent of their NDTL. This additional liquidity support will terminate 14 days from the closure of this special term repo facility announced on October 14, 2008. This accommodation will be in addition to the temporary measure announced on September 16, 2008 permitting banks to avail of additional liquidity support to the extent of up to 1 per cent of their NDTL.

Interest Rates on FCNR (B) Deposits

Currently, the interest rate ceiling on FCNR(B) deposits of all maturities has been fixed at Libor/Euribor/Swap rates for the corresponding maturities minus 25 basis points for the respective foreign currencies. In view of the prevailing market conditions, RBI has decided to increase, with immediate effect, the interest rate ceiling on FCNR (B) deposits by 50 basis points, i.e., to Libor/Euribor/Swap rates plus 25 basis points.

Interest Rate on NR(E) RA Deposits

Currently, the interest rate ceiling on NR(E) RA for one to three years maturity should not exceed the Libor/Euribor/Swap rates plus 50 basis points for US dollar of corresponding maturity. In view of the prevailing market conditions, RBI has decided to increase, with immediate effect, the interest rate ceiling on NR(E)RA deposits by 50 basis points, i.e., to Libor/Euribor/Swap rates plus 100 basis points.

Banks will be allowed to borrow funds from their overseas branches and correspondent banks up to a limit of 50 per cent of their unimpaired Tier I capital as at the close of the previous quarter or $10 million, whichever is higher, as against the existing limit of 25 per cent.

The above measures will be reviewed on a continuous basis in the light of the evolving liquidity conditions.

The Reserve Bank is monitoring developments in the financial markets closely and continuously and would respond swiftly and even pre-emptively to any adverse external developments impinging on domestic financial stability, price stability and inflation expectations. The Reserve Bank is committed to maintaining financial stability and active, and flexible liquidity management using all policy instruments is an integral part of this objective.