Repo & Reverse Repo Rates

The Reserve bank of India (RBI) governor, Dr. Raghu Ram Rajan in his mid term credit policy on October 29^th 2013 raised the repo & the reverse repo rates by 25 basis points (bps). Thus the existing repo rates & reverse repo rates are 7.75% & 6.75% respectively. The CRR (Cash-Reverse Ratio) was left unchanged at 4%.

Since the last two & a half years RBI has consistently increased the Repo & Reverse repo rates from 4.5% to the current 7.75%. The RBI is of the view that by increasing these rates, the scourge of inflation can be countered. Let’s see the logic of these increases.

Repo –rates are the rates at which RBI which is the central bank of India lends its money to commercial banks. Reverse-repo rate is the rate at which commercial banks park their money at RBI. The Repo-rate is always higher than the reverse repo rate. I.e. by logic, the RBI lends at the higher rate than it borrows. This is the basic rule in any business to make money. Thus it also gives an answer as to why lending rates are more than the deposit rates.

The RBI is of the opinion that the hike in repo rate, like the one on 29th October 2013, helps controlling the inflation. Hiking the repo-rate means the central bank i.e., the RBI will lend money to the commercial banks at higher rates. The commercial banks in turn will in turn lend the money at the higher rate to the corporate & individual investors. The home loan, car loan EMIs will be a more costly affair & the demand will reduce. Thus inflation will be tapped.

But there is another side to this logic. If the corporate entities & business houses are getting loans at a higher rate, this would directly lead to an increase in their cost of production & their working capital. Thus they would be forced to increase the prices of their products. Thus people would buy less & ultimately if people are buying less, the GDP (gross domestic product) of the country is reduced, which is not good for any economy.

Thus there has to be a clear cut balance between growth & inflation. Hiking the repo & reverse repo rates would tame inflation, but growth will be driven down. The current scenario is a double whammy. About, two & a half years back India’s GDP was above 8%, which is currently at sub 5% levels. We have sacrificed 8% growth levels by hiking the rates, but the inflation does not seem to come down.

The RBI governor will now have to tread very cautiously maintaining a balance between growth & inflation, & not to say use these rates (repo & reverse repo) to the country’s advantage.

PPF- Serving India through Decades

The Pubic Provident Fund (PPF) is one of the most popular schemes among Indian salaried & business class people. Public Provident Fund, popularly known as PPF, is a savings cum tax saving instrument. It also serves as a retirement planning tool for many of those who do not have any structured pension plan covering them. The product has been darling of Indian middle class investors from quite some time. The selling point of the product is its security: Being a government-guaranteed scheme, the investor’s money is completely secure in this product. The benefits of PPF are two-fold. Not only it enables the investor to save tax on the invested capital, but also the interest income from the scheme is tax-free.

•          Indians rely on PPF to achieve their long term goals.   The money received after the maturity of the product is generally used by the people to accomplish the goals they aspire for. In a span of 15 years people go through a lot of hardships to save a certain amount of money for their PPF account. This wealth, built over period of time, can serve multiple purposes such as catering to the education of children, retirement and even medical emergencies.
•       For instance, Mr. A saves about Rs.1 lakh/ annum in the PPF account. Considering the present rate of interest offered by the trust, which is 8.8%, if Mr. A deposits 1 lakh/annum for 15 years without withdrawing the money in this span, he will end up  with close to 31 lakhs after 15 years. The effective yield comes out to be 15%, which is able to beat the inflation in the longer run.

·           A Public Provident Fund (PPF) account is the most tax efficient vehicle launched by government of India. Not only can the investors reap the benefit of tax saving, but also considerable capital is built over a period of 15 years. An investment of 1 lakh rupees per annum turns out close to 39 lakhs after a time frame of 15 years. The product has been a cynosure of the eyes of Indian investors since quite some time. There is tremendous feeling of likeability for the product as far as the middle class population of the country is concerned
·         The products also allows the investors to withdraw the money after the sixth year, but it cannot exceed 50% of the balance at the end of fourth year, or the immediate preceding year, whichever is lower. The interest rate for the loan is charged at 2% till 36 months, and 6% for longer tenures. Till a loan is repaid, an investor cannot take more loans. Thus, the product serves as a cushion to investors by allowing them to withdraw money from their account which investors can avail of during exigencies.

Conclusion:

A Public Provident Fund (PPF) account is the most tax efficient vehicle launched by government of India. Not only can the investors reap the benefit of tax saving, but also considerable capital is built over a period of 15 years. An investment of 1 lakh rupees per annum turns out close to 39 lakhs after a time frame of 15 years. The product has been a cynosure of the eyes of Indian investors since quite some time. There is tremendous feeling of likeability for the product as far as the middle class population of the country is concerned. Indians investors have witnessed the year 2008 stock markets crash, where all the major Indian indices were at an all time low. This wiped off a huge savings of the people. PPF as a financial instrument provides aversion to such kinds of risks. It also provides the investors a vehicle to park their hard earned funds without any fears. The researcher is of the opinion that PPF will continue to bask in glory as one of the most preferred financial products for the Indian investors.

Chotta Bheem- A Thumping Success

The animated version of the mythological Bheem has captured the hearts of the kids across India. Clad in a dhoti, this nine year old character along with his friends Jaggu, Chutki & Raju come from the village of Dholakpur.

Since the days of Tom & Jerry, Mickey-mouse, there have been very few cartoons which kids can relate directly too. Bheem fills that void. Mickey-mouse born in 1928, Tom & Jerry started its journey from 1940 & the relatively newest of them Doremon is now 40 years old. Chotta Bheem, started in the year 2008 has been going great guns since its launch.

Chotta bheem & his group of friends effortlessly connect to the target audience. The children recognize the qualities of Chotta bheem, i.e. being protective towards his kingdom Dholakpur, a true friend for his mates Chutki, Raju & Jaggu & large-heartiness towards all other people as an instant hit.

Strategy for success — Two basic management strategies are followed by the makers of this animation series. 

The first one is Market Penetration. Chotta Bheem is played daily on the POGO channel for a duration of 3-4 hours. On Sundays & holidays it runs for about 8-9 hours. Kids are in love with this animated Bheem & they even watch repeat telecast of the show, watching the same episode again & again. The next one is the Product Development strategy. Green –gold animation, the makers of Chotta bheem series are aggressively pushing the Bheem merchandise. The company earns close to 40% revenue from this merchandise. Goodies like Bheem apparels, water bottles, Tiffin boxes, Chotta bheem watches easily catches our attention at any market place. Also, birthday goodies are being sold like hot cakes. Bheem is everywhere today. His face is at biscuits, umbrellas, watches, raincoats & even the band-aid. Also, the Chotta Bheem movie, as an extension of the animated series has proved to be a very successful.

The impact of this character can be felt, once you are watching POGO channel. The 10-12 minute advertisement slot is packed with advertisers, selling various brands to the kids. The advertisers are selling everything right from school bags to electric fans displaying the image of the nine year old native of Dholakpur.

Another reason why the animation series is so successful as the nine year old protagonist has the quality of a superhero & at the same time he comes across as a large hearted fun-loving character. The kids simply adore him. Rajiv Chilaka, the founder of animation series says, “India wasn’t ready to accept a completely new superhero. It had to be someone from mythology & someone who is secular.”

7 Reasons Why Maruti-Suzuki is the Market Leader in India....

Every second car in India comes from the stable of Maruti Suzuki. In event of a downturn, where for all the other car manufactures, growth seems to be problem; Maruti tends to show rapid growth year-on-year. In the month of September, the company has shown a 11.7% increase in Y-O-Y (year-on-year) growth & their exports market is also up 29% M-O-M (month-on-month) & an astonishing 181% Y-O-Y. Maruti Suzuki is the undisputed leader for the four wheeler category in India. (Financial data source- moneycontrol) 

How is Maruti Suzuki able to grow every year, whereas its competitors seem to be struggling? Maruti Suzuki has about 40% of four-wheeler market share in the country. There are a number of reasons for its growth. Through this article we have tried to uncover some of them.

Reasons for success

      1.      Efficient distribution— The first principle of economics is that is if you generate demand, you should have the availability of the product to cater to the demand. There are many distribution centres of Maruti within any city in India. Even in the remotest of corner, there will be a Maruti sales outlet. Coupled with the ever increasing service centres for the company, this company seems to have the structure to succeed. Maruti Suzuki has the highest number of service centres across the country. Maruti seems to have an edge over its competitors in this aspect.

2.      Product range- The Company has a large number of products under its basket. Right from the affordable Alto to the high end SX4, the company seems to have it all. The company through its cars like A-Star, wagon R, Swift, & Swift Dzire focuses on the middle class whose purchasing power is rising by the day. Also, the yet to be launched X-Alpha has generated a lot of interest among the auto lovers.

3.      Marketing strategy of cannibalization— In marketing, cannibalization refers to decrease in sales volume or market share of one of the product due to introduction of a new product by the same producer. Maruti-Suzuki believes in the concept of cannibalization. For instance, if the customer’s budget is on a lower side, he or she may purchase an Alto instead of a Wagon-R. Although the volumes of Wagon-R are hit, the sales still remain with Maruti. So Maruti ensures that the customer instead of going to a Tata motors or Hyundai Motors or any of its competitors stays with Maruti-Suzuki

4.      Shift of the co. towards diesel oriented cars— This has been a strategic decision taken by the company. 60% of the cars manufactured by the company are of diesel engines. The variants of Swift, Swift Dzire & SX4 diesel variants are very successful. Petrol in India is now de-controlled. That means that the OMCs like BPCL, IOC & HPCL are free to decide the rates of the petrol based on the rupee-dollar fluctuations. Diesel is not de-controlled as India is a diesel economy. Decontrolling diesel or no govt interference to vary diesel prices has again a direct link with inflation & probably govt vote banks for the 2014 Lok Sabha polls

5.      Focus on rural markets— Currently, about 26% of Maruti’s sales come from the rural India. After the 2009 economic meltdown, Maruti Suzuki started concentrating more on the rural markets. Campaigns like Ghar Ghar Mein Maruti’ and ‘Mera Sapna Meri Maruti’ targeted to the rural India have augured well for the company.

6.      Long Association with India— The company has been associated with the Indian population for more than 40 years. Right from the now defunct in terms of production, but ever popular Maruti 800 to high end vehicles the company seems to have established a strong bond with the Indian population. Younger India in their budding years has travelled a lot in this car with their parents. So they want to take the legacy forward.

7.      Excellent mileage, focussed advertisements concentrating on product features like k-series engine augur well for the company.  Maruti is one of the first companies in India to focus on advertising the engine specifications. i.e. the K-series engine. The advertisements of Maruti Suzuki focuses on Maruti being a value buy.

Why is Rajiv Gandhi Equity Savings Scheme not successful?

What is RGESS?

Rajiv Gandhi Equity Savings Scheme (RGESS) has been set rolling from the financial year 2012-2013. Under this tax saver scheme, Indian residents who have an income up to 10 lakhs & are first time investors in the stock markets are eligible to invest. The tax deduction will be under the Section 80CCG of income tax act. This is over & above the 1 lakh limit given under section 80 C.

But even after the attractive tax rebate (as per the government), people are shying away from the scheme. The data collected for the financial year term of 2012-2013 does not paint a pretty picture. According to the data, the investments in this scheme are a meagre 51.67 crores & only about 21,800 demat accounts have been opened which invest in this scheme.

Reasons for a no show....

One of the main reasons that the scheme has proved to be a dud, lies within the basic framework of the scheme. According to the scheme only new investors, i.e. those who have never invested in stock markets are eligible to invest in the scheme. Considering the volatile nature of the stock markets, which has seen constant fluctuations after 2008, the existing investors are treading with caution. Fiasco of the companies like Lehmann Brothers in the U.S.A & Satyam Computers in India has not helped to lift the investor sentiment either. The lock-in period for 3 years in the scheme proves to be a dampener.

The total investment limit in this scheme is Rs. 50000/ year. Out of this limit, only 50%, i.e. 25000 can be availed for tax benefit. This means that for an investor investing Rs. 50000, in the 10% tax bracket, the tax saving is only Rs. 2500.

These are uncertain times for the stock markets.  The economy which was booming a few years back has slowed down considerably. Analysts estimate a sub 5% growth for 2014. The environment is not seen conducive to equity investing. People prefer Public Provident Fund PPF, tax saving bonds, 5 year bank tax saving fixed deposits for tax saving purpose. This is also because these instruments promise a fixed return & capital appreciation happens. As far as RGESS is concerned, the scheme structure along with a very volatile capital market may be considered to be the reasons that it is under-performing.

Although the scheme has been launched recently, it is very difficult to pass a judgement whether it is working or not. The rationale of the government does not hold clarity. But one thing is sure. We believe that this kind of a scheme will only work out in the longer run, only if it is made more investor friendly. Also, investors need to be given confidence about the wealth creation ability of the equity market in the longer run.