Need to Enhance Liquidity and Funnel Savings into Equity

In FII-led euphoria, we should not forget the importance of domestic money for equities through individuals, mutual funds, insurance companies etc.

According to RBI data, flow of domestic savings into equity dwindled from 7.4% of GDP in 2007-08 to as low as 0.5% in 2013-14. Let us look at some more data points in the five years from March 2009 to March 2014. Shareholding of FIIs in Indian-listed companies has increased from 13.8% to 22.4% whereas domestic equity mutual fund has witnessed a net outflow of $6 billion. FII investment in Indian equity has averaged less than $20 billion per annum. Compare this with domestic savings averaging $373 billion, including financials savings of $144 billion. It’s obvious that domestic pool of savings is large enough to easily counterbalance the FII volatility.

Yet, our market is over-dependent on FII money. If FIIs flee for reasons purely external such as global liquidity squeeze, unviability of carry trades, crisis in their home countries, the impact will be disastrous on Indian markets. For a typical global fund, India is a small investment and can be dumped in crisis. It would cause havoc here by way of sudden losses immediately, but worse, loss of investor confidence for several years, thereby making it difficult for entrepreneurs to tap equity markets, slowing investment, employment and so on.

Nobody would disagree that we need growth and for growth, we need investment. And also that for investment, the foundation has to be of equity capital which can be leveraged by loans from banks and other sources. In contrast to FIIs’ penchant for large caps, domestic investors tend to invest more in small and mid-cap stocks. For inclusive growth, small and medium enterprises need impetus. To attract domestic investors, tax sops have little utility.

What they need is a liquid vibrant market, where an investor can enter and exit easily. Unlike investment in real estate or other assets classes such as gold, ownership and management are separated in equities. Therefore, liquidity is the most fundamental requirement for equity markets.

Many a time, our policy makers confuse speculation with manipulation.

They put too many restrictions that curb even healthy speculation. I have heard even comments like we should encourage genuine investors but not speculators. Genuine investors i.e. two sets of people who simultaneously get fundamentally bearish and bullish from a long-term perspective will be few and far between. Even in a stock like Reliance, they will meet once in a few months.

They will also not transact if the markets are not liquid. Without speculative trading, genuine investors will also not come to equities. Also, many a time, speculators moderate the event risk by building up positions in anticipation of events. For instance, this set of speculators starts expecting very good or very bad results, and the real impact of announcement of results will not be a spike or a crash but relatively moderate.

Our government and regulators can do the following to improve liquidity and encourage domestic investors to go for equities:

a) Remove STT and CTT completely: For any liquid market at any given point in time, spread between ‘buy’ and ‘sell’ price should be as narrow as possible. The incidence of STT and CTT increases this spread artificially, impacting liquidity, and therefore, attractiveness for genuine investors as well. STT contributes a minuscule amount to exchequer of less than $1 billion. The market will not mind even some increase in capital gains tax in lieu of removal of STT and CTT.

b) Encourage financing of equity investment: Sebi should simplify margin funding norms. The current reporting norms are too cumbersome to make the scheme popular. RBI should enhance banks’ limits for funding retail equity investors. There can be safeguards in terms of eligibility of scrips for funding and margin ratio.

c) Enhance EPFO and retirement funds limits for equity investment from the current 15% to 30%: Over long term, it’s well established that growth markets like India will offer equity investors much higher returns than fixed-income investors.

But there is risk in stock selection as well as timing of investment. Our regulators and market participants have done a great job of enhancing investor education and the effort continues.

Now, they should address the key issue hindering flow of domestic money into equities market. This will help domestic investors participate in wealth creation that equities typically allow when economic growth accelerates.

- See more at: http://www.indiainfoline.com/article/general-blog/need-to-enhance-liquidity-and-funnel-savings-into-equity-114072309684_1.html#sthash.f2sUH4ek.dpuf

India signs first ever Advance Pricing Agreement

In a significant move India has signed its first ever bilateral Advance Pricing Agreement (APA).

Central Board of Direct Taxes (CBDT) signed a bilateral Advance Pricing Agreement (APA) with a Japanese Company, an official statement said.

This is India’s first bilateral APA. The APA is for a period of five years. The APA has been finalized in a period of about one and a half years, which is shorter than time normally taken in finalizing APAs internationally.

The APA scheme has been introduced to bring about certainty and uniformity in transfer pricing matters of multi-national companies and reducing litigation. APAs will improve investment climate in the country.

In the context of growing economic ties between Japan and India, especially after the Prime Minister Narendra Modi’s visit to Japan, this APA is expected to generate positive sentiments among Japanese investors in India.

Gold prices fall amid weak demand, global cues

Gold prices dropped at the domestic bullion market in Mumbai on Friday due to a fresh bout of selling by stockists and jewellery traders amid a volatile global trend.

Standard gold of 99.5 per cent purity declined by Rs 125, to finish at Rs 26,855 per 10 grams from Thursday's closing level of Rs 26,980.

Pure gold of 99.9 per cent purity, also declined by the same margin to settle at Rs 27,005 per 10 grams, as against Rs 27,130 on Thursday.

In global trade, the yellow metal struggled to reclaim the psychological US $1200 an ounce-mark amid widespread volatility after the US Federal Reserve pledged to take apatient approach before raising key interest rates.

Elsewhere, silver also pulled back after a strong rally owing to hectic speculative unwinding.

Silver (.999 fineness) slumped by Rs 465 to conclude at Rs 37,025 per kg over Thursday's level of Rs 37,490.

Spot gold was substantially lower at US $1,195 an ounce in early European trade, while silver bid soft at US $15.83 an ounce.

Precious metals- a hedge against volatility in paper currency

The observation of modern finance through the lens of sound money requires an onion peeler. Each time I imagine onions, I think of my soft contact lens patients; the ones who abuse them. I think of the patients who wear them too long or through periods of mild irritation or redness and practice poor hygiene.

Soft contact lenses mask normal corneal sensitivity. They act like tiny onion goggles. With soft lenses in place, one can literally chop onions and not feel the normal irritating sensation at all. The problem is they tend to be the last to know about the trouble.

They can tolerate the underling problem before it becomes a bigger issue like an infection or inflammation - which can lead to permanent damage. But when the pain breaks through it’s never pretty. Everyone is miserable. People generally consider vision one of the more important senses.

Financial ignorance will be worse

Many are in a position to understand. They know better. They are either dependent on it muddling along or observers view the state of financial risk as an odd curiosity —a phenomenon too complex to grasp — and, therefore, outside of their control.

Something they saw or learned about in a documentary. Yet they should be hearing a voice inside blaring a warning.

When something tied directly to each and every part of modern civilization and personal survival has become unrecognizable and alien it is time to act. No one knows when the years of erosion and irritation will reach the collective ‘financial pain threshold’. Or how that final awakening will be triggered for the masses.

You’ve probably had these conversations many times. I count in the thousands — and often it’s same people who are also abusing their contact lenses. For me, it’s invariably that suspicious, sideways glance that says, "What’s with all the passion about this? So you recommend silver as an investment?"

That usually ends the discussion - politely for most. Of course, silver is not an investment in the conventional sense of the word. It is a store of value that can be used as a medium of exchange and as a unit of account.

Yes, silver contains multiple personalities. It’s an industrial metal - in a big way. With many thousands of uses, silver’s industrial ‘persona’ is just slightly less important to modern culture and civilization than oil.

Obviously, this puts a massive constraint on supply; especially compared with gold.

No government stockpiles of silver exist. The largest remaining 'official' storage is tied up and held in possession by a massively bloated financial system that literally controls nearly aspect of government, politics, and popular opinion.

Bloated with paper

At this moment…Silver and gold are a bet on the stupidity of the modern economists that frequent academic establishments. Although it isn’t even that personal. The metals are a cheap option against the money captured finance and money printing gone wild.

India foreign trade data shows improvement

 The foreign trade (export+import) has increased from $42 billion, in 1990-91 to $765 billion in the year 2013-14 with an annual average growth rate of 13.42% and has increased 18 folds during the period,according to Nirmala Sitharaman, Minister of State (Independent Charge) in the Ministry of Commerce & Industry.

The gap, between value of import and export, which is Trade deficit, has also increased during the said period. The trade deficit has increased from $6 billion in 1990-91 to 136 billion US $ in 2013-14. Foreign trade i.e. exports and imports are influenced by a number of macroeconomic factors of the country and the world, like demand and supply, exchange rates, economic conditions of different countries.

Top 10 countries, which have imported more from India than exported to India during 2013-14 are USA, Singapore, Bangladesh, Hong Kong, Netherlands, Sri Lanka, U.K., Kenya, Nepal, Vietnam etc. whereas during 1990-91 such countries were USSR, Hong Kong, Bangladesh, Thailand, Sri Lanka, Egypt, Mauritius, Spain, Afghanistan, Nigeria etc.

The details of country wise Exports and Imports and quantity are available in the DGCI&S publication in CD form namely ‘Monthly Statistics of Foreign Trade of India’ Vol. I (Exports) & Vol.II (Imports). Such CD’s are regularly sent to Parliament Library by DGCI&S, Kolkata.

GOLDEN TRADING RULES OF MCX TRADING

• DO NOT OVER TRADE
• NEVER FORGET TO PUT STOP LOSS.
• ALWAYS MODIFY STOP LOSS ON EVERY PRICE RISE.
• NEVER TRY TO RECOVER LOSSES ON THE SAME DAY
• ALWAYS BOOK PROFIT ON FIRST OPPORTUNITY.
• AVOID TRADING IN VOLATILE MARKET.
• MONEY CAN NOT BE MADE EVERYDAY FROM MARKETS.
• NEVER AVERAGE YOUR POSITIONS WHEN MARKETS ARE NOT FAVOURABLE.
• DO NOT EXECUTE SO MANY TRADES AT ONE TIME.
• ALWAYS FOLLOW THE INSTRUCTIONS.

MCX-SX tweaks transaction charges for currency futures trade

Faced with falling volumes and growing competition from rival BSE, MCX Stock Exchange has tweaked its transaction charges for futures contracts traded on its currency derivatives platform.

While there would be no change in a flat fee of Rs 1.05 per lakh of turnover in currency futures trade on both sides of transaction in contracts based on dollar-rupee currency pair, the exchange has decided to exempt 'passive side of transaction' from this charge in case of other currency pairs of rupee with euro, British pound and Japanese yen.

Accordingly, only 'active' side of transactions in non-dollar currency pairs now attract a transaction charge of Rs 1.05 per lakh of turnover. The revised charges have come into effect from November 5, 2014, as per a circular from MCX Stock Exchange (MCX-SX).

Earlier, a flat charge was applicable across all currency pairs.

"It has been decided to revise transaction charges of currency futures contracts traded in currency derivatives segment of the exchange to enhance liquidity and make the segment more attractive to participants in the market," MCX-SX said in its circular. The revision in charges by MCX-SX comes weeks ahead of rival BSE beginning to levy a fee for trading on its currency derivatives platform with effect from December 1. BSE has so exempted currency derivatives from any transaction charges.

BSE's market share has been rising consistently in the currency derivatives market over the recent months on the back of implementation of latest technology solutions, lower costs and faster trades. As per capital markets regulator Sebi's latest monthly bulletin, the turnover of currency derivatives at BSE increased by 22.6 per cent to Rs 1,41,170 crore in September this year from Rs 1,15,127 crore in the previous month.

This assumes significance as BSE began currency derivatives trade in November 2013 itself and it has overtaken MCX-SX as the second largest exchange in this segment with a market share of about 30 per cent currently.

According to Sebi, monthly turnover of currency derivatives at NSE increased by 9 per cent to Rs 2,85,236 crore in September, from Rs 2,61,636 crore in August 2014, while that of MCX-SX fell by 8.6 per cent to Rs 57,590 crore in the same month. The turnover at the fourth exchange USE in this segment also rose by 14.2 per cent to Rs 9,370 crore in September, over the previous month, making MCX-SX the only exchange to witness a decline.

While the turnover at BSE has almost doubled from Rs 72,000 crore in April this year, in case of MCX-SX it has marginally fallen from Rs 59,000 crore in the first month of 2014-15. In case of the largest bourse NSE also, the turnover has risen considerably from Rs 1,55,000 crore in April 2014.