Post 8,700 breakout, Nifty poised to reach 9,000: Nomura Analyst

After attempting several times to break the key 8,700 resistance level, the Nifty managed to close above it yesterday.

For Tushar Mahajan, Head of Listed Futures & Options – India of Nomura, the breakout means the index is headed for the 9,000 mark.

Speaking to CNBC-TV18, Mahajan said that the leadership for this market will come from domestic-led segments like consumer discretionary, industrial engineering and oil & gas and not from global sectors like IT and pharmaceutical.

Banks too will lead the growth: Bank Nifty could touch 20,800-21,000 mark even before Nifty reaches the 9,000 mark, according to him.

The only point of worry, Mahajan said, is that the whole market is positioned on one side without too many hedges. “A reversal, if it happens, could be extremely sharp in such a scenario.”

Bajaj Finance shareholders approve stock split, bonus issue

Bajaj Finance   today said its shareholders have approved proposals to split its stock in the 1:5 ratio and also to issue bonus shares in 1:1 ratio.

Releasing postal ballot results in this regard, the company said an ordinary resolution has been passed for sub- division of equity shares.

Approval was given “for sub-dividing each equity share of the company having face value of Rs 10 into five equity shares having face value of Rs 2 each fully paid-up on such date as may be fixed by the Board of Directors.” “The sub-divided equity shares shall be credited to the beneficiary accounts of the members, in lieu of the existing credits representing the equity shares of the company before the sub-division,” it added.

The shareholders also approved the issuance of bonus shares, under which Bajaj Finance will make allotment in the ratio of 1:1.

In a separate regulatory filing, the company said September 10 has been fixed as the record date for determining shareholders eligible for receiving the shares pursuant to the sub-division and to the bonus issuance of shares.

These shareholders would get equity shares of face value of Rs 2 each upon sub-division of equity shares of face value of Rs 10 each, and fully paid up bonus equity shares of face value of Rs 2 each in the proportion of one bonus equity share for every one equity share of face value of Rs 2 (that is as adjusted for sub-division of equity shares).

The company further said it is authorised to make appropriate adjustments, due to the sub-division and the issue of bonus shares, to the 925,000 warrants issued by it to Bajaj Finserv Ltd.

Bajaj Finance stock closed 0.15 per cent up at Rs 10,772 on BSE.

The company shares have appreciated by over 25 per cent from Rs 8,592.10 on July 11, when it had first announced the stock split and bonus issue plans.

Tata Power Q1 profit tanks 76% on one-time loss, revenue down 5%

Tata Power   started off the financial year 2016-17 on a disappointing note as consolidated profit in April-June quarter fell sharply by 76.1 percent year-on-year to Rs 72.5 crore, impacted by one-time loss and lower other income.

Revenue also slipped 4.8 percent to Rs 6,838.3 crore during the quarter compared with Rs 7,183.7 crore in corresponding period of last fiscal.

Its revenue (including regulatory expenses) stood at Rs 6,566 crore compared with Rs 7,016 crore last year. “This is mainly because previous quarter had favorable ATE (Appellate Tribunal For Electricity) order impact in standalone for Rs 137 crore, whereas corresponding quarter has an adverse MERC order in Mumbai Transmission Business for standalone of Rs 62 crore and lower capacity revenue in CGPL,” the Tata Group company said.

The power company reported regulatory expenses of Rs 272.12 crore for the quarter against regulatory expenses of Rs 224.02 crore & income of Rs 56.59 crore in same period last year.

The Tata Group company has reported one-time loss of Rs 312 crore during the quarter.

“One-off items included Rs 120 crore in Coastal Gujarat Power (CGPL) & regulatory orders pertaining to previous years of Rs 62 crore and Indian accounting standards related adjustments of Rs 130 crore,” the company said in its filing.

It further said most operations other than CGPL have done better and reported strong performance. Tata Power’s Maithon Power, ItezhiTezhi Hydro Power Project(Zambia) and Coal & Infra companies reported higher profits of Rs 30 crore, Rs 69 crore and Rs 65 crore compared to corresponding quarter of last year, respectively.

The company achieved generation of 11,122 million units of power from all its plants in June quarter.

Earnings missed analysts’ expectations. Profit was estimated at Rs 328 crore on revenue of Rs 9,250 crore for the quarter, according to average of estimates of analysts polled by CNBC-TV18.

Earnings before interest, tax, depreciation and amortisation (EBITDA – operating profit) fell 11.3 percent year-on-year to Rs 1,635.5 crore and margin contracted by 180 basis points at 23.9 percent in the quarter ended June 2016.

Other income during the quarter declined 54.1 percent to Rs 112 crore on yearly basis. It reported forex loss of Rs 159.7 crore on consolidated basis in Q1 against loss of Rs 171 crore in corresponding period of last fiscal.

Tax expenses declined significantly to Rs 145 crore from Rs 226.7 crore on a YoY basis.

At 13:31 hours IST, the scrip of Tata Power Company was quoting at Rs 74.35, down Rs 2.90, or 3.75 percent amid high volumes on the BSE.

Unfair to put moral code of conduct on RBI chief: Subbarao

Former RBI governor Duvvuri Subbarao on Friday spoke out against the idea of having a ‘moral code of conduct’ for the

central bank head, strongly defending the right of public intellectuals like his successor Raghuram Rajan to use the gravitas of the office for public good.

“I don’t think there should be any code of conduct on what subjects the Governor can talk about,” he said at a special event at the RBI headquarters to launch his memoir ‘Who Moved My Interest Rate’. “I don’t think its advisable to compartmentalise that he talks about issues relating only to central banking…to say that the Governor should not go beyond central banking, I think is ill-advised. If the Governor is indeed a public intellectual as Governor Rajan is, I think it would be good, appropriate, advisable and desirable that he speaks about those issues,” he said.

“The Governor does enjoy a certain amount of recognition in the public and if he is able to communicate on some of those larger issues using the gravitas of his office, I think his contribution to the larger public will be great,” Subbarao said.

It can be noted that the academic-turned-central banker Rajan often spoke his mind on issues which critics termed as beyond his remit and were inferred as stances contrary to the government of the day’s stated positions.

This included invoking Hitler’s legacy to wonder if stronger governments are good for the people, pitching for tolerance in the face of lynching of a Muslim for allegedly storing beef near the national Capital last September and also questioning the government’s high-octane ‘Make in India’ initiative.

Rajan had defended his speeches last week, saying all the ‘controversial’ public speeches were “perfectly legitimate” ones within the remit of a central bank head and asserted that he was never critical of the government in any instance.

“These are perfectly legitimate speeches. You can interpret them any which ways you want,” Rajan had said.

“In none of those speeches that I have made has there been an explicit criticism or an implicit criticism of the government. There are people who read the interpretation of what is the speech I have given,” he had said.

After his decision to return to academia after his term ends on September 4, there have been voices suggesting that his candid public speeches were one of the aspects which made the government uncomfortable about reappointing Rajan for another term.

SC lifts ban on registration of luxury diesel cars in NCR

In a relief to automotive industry, the Supreme Court on Friday lifted the ban on registration of diesel cars in the National Capital Region, subject to a 1 percent cess paid at the time of registration.

The ban was imposed on diesel passenger vehicles with 2 litres plus engine capacity concerns that such vehicles are more polluting than other fuel options such as petrol or CNG.

Pravin Shah, President and Chief Executive – Automotive Division, M&M   , hailed the order as a sentimental positive for the industry though he said the financial impact of the ban was not much.

The NCR region contributes about 7 percent to the country’s auto sales, while diesel car sales are less than half that. (Large engine diesel vehicles even less still.) M&M, however, was still one of the most impacted by the ban, given that its popular SUVs were among those banned.

Shah added that the additional cess may impact diesel car sales in the region, which have anyway fallen from a peak of 50 percent countrywide market share to under 30 percent, as buyers may opt for cheaper petrol or CNG vehicles.

Maruti Suzuki   Chairman RC Bhargava said the court, in lifting the ban, had given weight to the government and auto industry’s views — as offering to pay an additional environmental cess was one of the suggestions made by automakers — and termed the decision as a “right step”.

Sonia: This is breaking news that we are getting on our screen, the diesel ban has been lifted. There are some more comments coming in as well in terms of a cess etc. But how much of a positive and how relieved would you be at M&M?

Shah: This was a long pending decision and I am very to say that the Supreme Court has come up with the decision and we welcome the decision. Since this ban was imposed from December 2015 I am sure there will be more understanding of this order as we go along but the lifting of the ban itself is a right thing to do and I am sure the Supreme Court would have evaluated the rationale and reason for the same and I on behalf of the industry and on behalf of Mahindra can surely say that this is something which is a right decision which has come though it has got delayed but we are happy to hear that the ban has been lifted.

Anuj: So, if you could give us some numbers in terms of volumes and the kind of impact it will have on a company like Mahindra and Mahindra?

Shah: Actually more than the volume I would say that the sentiments which were not for the right reason were spreading against diesel that will come to rest and that itself is a big relief. So far as Mahindra is concerned surely actually it had an impact in the past but as we know we have had a right product with which we had gone to the market including in Delhi NCR with the 1.99 diesel engine. So, the impact to Mahindra wasn\\’t that big but the indirect impact of the sentiment I am sure actually going forward with the lifting of this ban should help the industry and bring back the diesel to its right place.

Sonia: Since December 2015 up until now since the ban was imposed what has been the fall in diesel sales or for the industry as a whole and for Delhi NCR what chunk or what is the contribution of Delhi NCR to the overall market in terms of percent?

Shah: Actually the percents have changed and surely the diesel percent have fallen. The overall passenger vehicle the diesel percent which has gone through as high as 49 percent has slipped to somewhere below 30 percent. So, this is what was really has happened over a period of time. I am sure the customer will have now an opportunity to select and choose the fuel mode.

Anuj: The risk was that will this now spread to other states and all. Now that the Supreme Court itself has cleared this, that is a big headwind out of the way. Will we have more investments in newer models in this particular space? That of course has done well for M&M in the past.

Shah: We have not stopped anything as we sense today, but surely we also had plans for balancing our portfolio and we have sufficient investments, both on diesel as well as on gasoline going forward.

Sonia: This is a sigh of relief for the sector as a whole because the ban has now been lifted on the diesel vehicles in the Delhi NCR region. Maruti, in any case did not have too much of an impact, because most of its products are less than 2,000 cc. In fact all of it. But nevertheless, how much of a boost do you think this will give the industry as a whole?

Bhargava: What is important about the lifting of this ban is that A] the court has given weight to what the government said on this matter and what in the industry has been saying. But it would not have happened without government coming out with a very clear statement. And as far as the industry’s effect is concerned, the sentiment against diesel, that sentiment will again reverse and we will have a more balanced buying option with people relating to petrol and diesel.

Sonia: So, do you see an immediate recovery in sentiment because even before this ban, the percentage of diesel car sales has been falling if you look at the overall pie.

Bhargava: It will take some time for reversal to happen. But the reversal process will start now.

Anuj: So, do you think levying a cess is a better way and something on that effect will be done. So, do you think this is a problem better solved by levying a one-time cess when buying a vehicle? Would you support that?

Bhargava: These question on what kind of cess, government has already put a cess on diesel cars. These decisions are best left to the government.

Sonia: But how do you see the sentiment as a whole pan out from here on?

Bhargava: It will certainly have a positive impact on sentiment.

Sonia: So, what kind of a growth would you expect to see in diesel car sales?

Bhargava: I will not speculate on that.

Anuj: All your vehicles are below 2,000 cc capacity as Sonia also pointed out, but in the future, do you have any plans to get into the above 2,000 cc diesel vehicles as well?

Bhargava: No, nothing at the moment that I know of.

Anuj: No, not at the moment, but in maybe the foreseeable future or in say medium-term future.

Bhargava: Okay, let me change that ‘moment’ to the ‘foreseeable future’.

Seeking stocks that beat market returns? Apply these 2 filters

onsistent revenue growth combined with a consistent return on capital employed: if a company has been delivering on these two parameters for over ten years, then look no further. That, in effect, is the theme of Saurabh Mukherjea’s second book ‘The Unusual Billionaires’. The book says that a portfolio of companies which satisfies both these criteria will invariably beat the market over the next decade and more.

Mukherjea, whose day job is CEO, Institutional Equities at Ambit Capital, feels the buy-and-hold strategy for stock investing holds true even as volatile financial markets and disruptive changes across sectors are questioning its validity.

However, the two filters recommended by Mukherjea are not easy to get past; less than 20 companies have managed that over the past decade. Mukherjea feels the bar is not too high; it is just that most promoters lack the discipline that could have helped their firms go from being good companies to great companies. Through the journeys of seven companies which made the leap, Mukherjea narrates the qualities and strategies that helped them get there.

Edited excerpts from an interview:

Q: Your definition of a great company is one that has delivered a compounded revenue growth of 10 percent and an average return on capital employed of 15 percent over a decade. Your analysis shows that only 18 out of the couple of thousand traded companies on the bourses made the cut over the past decade. What does that tell you?

A: Growing a business at a steady pace (10 percent topline growth or better) whilst maintaining healthy levels of profitability (15 percent ROCE or better) over long periods of time is very very hard. I think most people don’t understand how difficult it is to pull this off. As a result companies which are able to achieve this rare feat -18 odd companies out of the 1500 largest companies in India – don’t get the recognition they deserve. That in turn opens up opportunities for the discerning investor who understand how challenging the 10 percent revenue growth plus 15 percent ROCE combination is.

If you ask me why is it so hard to pull off this combination? My answer is that most promoters struggle to find a balance between growth and profitability. Balance in business is just as hard to achieve as it is in other spheres of life. As Rama Bijapurkar says in the book, most companies tend to focus on short-term results and hence that makes them frequently do things that deviate away from their articulated strategy. The willingness to resist the temptation of short-term ‘off-strategy’ profits for long-term sustainable gain is not there in most Indian companies.

Q: You say that if an investor were to simply buy the stocks that met the two parameters over the last decade and stays put, he can beat the market over the next decade. Is that not making investing a bit too simplistic?

A: Buying high quality stocks and holding them for an extended period of time is a well-known mantra in the world of investing. Several legends including Buffett, Bolton and Peter Lynch have espoused such a strategy. What I have done is boil such a long term buy-and-hold strategy down to its very essentials – a simple formula of revenue growth and ROCE to identify high quality stocks – and quantified the market beating investment returns that such a strategy can generate. Just because such a strategy is simple does not mean it is easy. Why is such a strategy not easy to follow? Because it requires patience to buy and hold stocks for a decade. Effectively, the investor has to eschew excitement now for returns ten years from now.

Secondly, it requires character to hold on to those stocks whose share prices begin to slip in the second, third, fourth or fifth year of the ten year period. Thirdly, it requires a deeper of understanding of what exactly a great company is i.e. great companies are not those who are lionized by the media; they are the anonymous promoters who slog away quietly decade after decade persistently improving their franchises and delivering the 10 percent revenue growth and 15 percent ROCE combination. Great companies are the Rahul Dravids of the stockmarket (as opposed to the more exciting players like Yuvraj Singh or Sehwag).

Q: In a rapidly changing world where business models are getting disrupted frequently, does a buy and hold approach work over the long term?

A: It is fashionable for all of us to believe that “change is the only constant”. That may or may not be true but its relevance to the investment style espoused in the book is relatively limited for two reasons: (a) Most focused promoters are able to make technology work for them rather than being disrupted by technology eg. The extensive use of Enterprise Resource Planning tools and software is a trend that Asian Paints, Berger Paints, Marico and Astral Poly have capitalized on and the book explains how each of these companies use ERP to reduce their working capital cycle. (b) The biggest source of disruption for Indian promoters is neither technology, nor the external business environment; it is the promoter himself/herself.

99 percent of promoters that I meet struggle to focus on the same activity beyond 4 or 5 years. After that they tend to get bored and their attention drifts it to the next flavor-of-the-month idea. As a result, the ‘change’ that takes place is usually triggered by the promoter himself who uses the fig leaf of technological change and/or the external environment as reasons for his change in tack.

Q: To quote Buffet, it is important to buy good businesses at the right price. Even after you have identified the stocks with a consistent revenue growth and ROCE, you still need to buy it at a reasonable price. So how does an investor approach these stocks?

A: Over the past six years my colleagues at Ambit have shown repeatedly in the research for our clients that for horizons longer than a year valuations do not play a role in generating investment outperformance. I show in the book that over the long run the biggest driver of share prices is ROCE followed by revenue growth. There is zero correlation between valuation multiples and share price returns over long run time periods. In fact, our research shows that investors who try to buy cheaper stocks almost always end up with lower quality portfolio which generates inferior growth in cashflow and earnings. Secondly, Buffett over the past 20 years has brought great franchises at what look like expensive multiples eg. his recent acquisition of Apple shares; my reading is that he too is focused on the underlying drivers of ROCE and growth rather than valuations per se. Thirdly, most of us neither have the acumen nor the resources of a Buffett; hence we need simpler methods to identify outstanding companies.

Q: You have mentioned Asian Paints   , Page Industries   , HDFC Bank   , Astral Poly , Axis Bank   , Berger Paints   and Marico   as great companies. Do you see these stocks delivering market beating returns over the next decade?

A: One point I repeatedly make in the book is that we have to learn to think of investment in the context of portfolios rather than of stock picks. Even more specifically, the investment style that seems to work in all countries and in all eras is to buy 15-20 high quality companies and hold them for a long period of time, at least a decade. Harking back to the term coined by the late Rob Kirby, I call this style the Coffee Can Portfolio and I show using 16 separate Coffee Can Portfolios that in a typical portfolio you have 2-3 stars (who compound at 35 percent or more over ten years), 2-3 dogs (who go to zero over ten years) and around 8-10 stocks which deliver solid returns (around 15 percent). The blend of these 15 stocks typically gives you 20-30 percent per annum compounded over ten years which is significantly better than the 16 percent that the Sensex gives you on average. I highlight in the book that Peter Thiel, the founder of PayPal, has explained in his book Zero to One why such portfolio constructs are central to Silicon Valley’s success.

Q: If an investor were to take a shorter track record of a company, say five years, do the revenue and ROCE parameters still hold good. As in, what are the filters an investor could use to identify great companies in the making?

A: The shorter the track record that you use, the greater the scope for error. So, yes you can use a five year revenue growth and ROCE track record but I reckon that you will make more mistakes. In the book I have used a ten year track record and I find that even then 2-3 out of 15 stocks in a portfolio misfire. With a shorter track record, the error rate could be 6 out of 15. That will in turn drag down the return you get from the portfolio and reduce the outperformance that you get from the portfolio vis a vis the Sensex.

Q: At a time when valuations seem to be completely disconnected from fundamentals and the market is willing to pay an outsized premium for quality stocks, what is your advice to investors?

A: If you are short term trader then you should worry out valuations quite a lot. Valuations matter hugely for short term traders. For long term investors, today’s P/E or P/B multiple or tomorrow’s P/E or P/B multiple is of little relevance; their focus is the fundamental quality of the franchise. To use another cricketing analogy (which is very apt in the context of Rahul Dravid), ‘Form is temporary whereas class is permanent’.

Rate cut transmission to be gradual, says Keki Mistry

Governor Raghuram Rajan’s monetary policy has come pretty much as was expected said HDFC   Vice Chairman Keki Mistry reacting to the outgoing RBI Chief’s last policy move of keeping key rates unchanged.

On Rajan’s worry regarding the various stumbling blocks in transmission of previous rates cuts by banks, Mistry said one possible reason for the slow transmission could be that incremental funding with banks is coming largely from high-cost fixed deposits compared to low-cost current and saving account deposits.

Only when the incremental cost of funding reduces will banks have the opportunity to pass on benefit of lower interest rates to customers, Mistry says. If liquidity remains adequate transmission will happen gradually, he adds.

Commenting on reducing yields Mistry says HDFC looks more at the average cost of funds than marginal cost. When interest rates come down, it is only incremental rates that decline but not necessarily on the old rates and to the same extent. So, yields or spreads may not expand significantly, he says.

However, there has definitely been some reduction in incremental funding cost and the company will pass on benefit to customers as much as possible, he says.

Prashant: No change in rates, but I trust you have been listening into the press conference, Raghuram Rajan speaking there. Your first thought?

A: I did not hear the press conference honestly. I know the policy outcome and I guess what he has done is pretty much what was expected, that no change in interest rates, no change in cash reserve ratio (CRR), no change in statutory liquidity ratio (SLR) and pretty much reasonable amount of liquidity to continue in the system.

Prashant: Based on the liquidity point, he kind of alluded to the fact that it seems that there was always something, which act as a stumbling block in terms of banks being able to reduce rates. It was the argument about liquidity, now it is the Foreign Currency Non-Repatriable account deposit (FCNR), it could be something else in the future. Would you like to respond to that?

A: See, there is now a clear formula on how the rate transmission happens in the system, so the formula is well established. So as the incremental cost of funding of banks reduces, they will obviously be able to pass on the benefit of lower interest rates to customers, but what probably is being happening and we are not a bank so we can’t answer that with any certainty, but my sense is that the level of the current and savings accounts, which is low cost money that quantum is not increasing anymore.

So the incremental funding that is coming into the banking system is largely coming in the form of fixed deposits, which obviously carry a higher rate than the savings accounts and the current accounts, so maybe that is the reason why the incremental cost of funds of bank is not coming down as much as one could perhaps have expected, but my sense is it is a matter of timing and we have seen some rate cuts happening and my sense is with the passage of time, we will see more rate cuts coming through in the system as long as the liquidity remains adequate.

Reema: This provision for adequate liquidity is resulted in the yields coming down sharply, in fact, yields are now at 7.12 percent, prior to the policy it was at 7.16 percent already about 4-5 basis points reduction in bond yields have been seen on the back of hope that we are going to see abundant liquidity. That should only spell good news for an NBFC like HDFC Limited, what is your own assessment of cost of funds for HDFC Limited going forward?

A: For HDFC, we don’t look at marginal cost of funds, we look at average cost of funds, when we look at average cost of funds we don’t take maturity mismatches, so we have long term liabilities which support long term lending, when interest rate come down in the system, it is incremental rates that come down, not necessarily the old rates that come down at the same time or with to the same extent, so whatever benefits we have seen in terms of interest rates that have been passed on to customers is not as if our yields have expanded significantly or our spreads have expanded significantly.

We had our June results which came out couple of weeks ago and you have had seen that the spreads were pretty much what they were in the previous quarter. There is definitely incrementally some reduction in funding cost and whatever reduction we see on an overall basis, we pass the benefit back to our customer.

Reema: What could be the incremental reduction in cost of funds?

A: It depends on whether you are borrowing 1 year money, 3 year money, 5 year money, 10 year money difficult question to answer, but if you look at bond yields for example, I would say whatever funds we have raised in the last fortnight, maybe 25 bps lower or 30 bps lower or maybe even 35 bps lower than what it could have been a couple of weeks ago, but that is increment you need to understand that.

Latha: You must have heard what the governor said, he said that they are looking to completely bridge the system liquidity deficit and with this Rs 80,000 crore of open market purchases in the first 4 months, they are through with 40 percent, so it looks like every month Rs 20,000 crore is coming. Are you getting a sense that market yields are headed much lower?

A: At this point of time, it would indicate as if the market yields are getting lower, but what we must bear in mind is couple of things, one is that while the urban economy has been doing well, the last 2-3 years the rural economy has been a little weak because of the weakness in the rural economy caused perhaps by poor monsoons in the last two years, rural demand has been relatively low.

Now this year we have good monsoons, hopefully we will end the year well, plus there is a lot of spending by the government in rural areas. So that will result in more money in the hands of people in rural areas, which will lead to higher consumption.

Now when consumption and demand increases, capacity utilisation in India will also go higher. Today, we are looking at 73 percent capacity utilisation that can very easily go to 80 percent over the next 2-3 quarters. When that happens, you will start seeing demand for money picking up from industry for making investment in new projects. So that is perhaps the time so in the short term you would see yields falling lower but in the medium to long term — when I say medium I am saying maybe 3 quarters from now — you would start seeing demand for money from the corporate sector also picking up, which could then result in the excess liquidity getting used up.

Here is what experts have to say on Rajan’s hits & misses

RBI Governor Raghuram Rajan kept the key policy rate unchanged in his last policy meet — as expected, and brought down the curtains on what could said to be a stellar inning. Under him, inflation was curtailed, banks were told to reconise bad debt, and forex reserves were boosted.

CNBC-TV18 spoke to a wide spectrum of people from different walks of life to share their views on the outgoing governor. Jayesh Mehta Managing Director & Country Treasurer Bank of America said that Rajan’s thrust on liquidity has been consistent as he has re-emphasised it again and again.

Leo Puri Managing Director UTI Asset Management Co said Rajan has given India a push in the direction of digital revolution and financial inclusion.  “He has embraced change and this is in keeping with central banks everywhere.”

Regarding NPAs, Puri said Rajan has managed to get the banks to recognise bad debt and more importantly he has built a consensus within the government system.

Rajan has done his part of the job more than one would have hoped for, said Sanjay Nayar CEO and Country Head KKR India. “He has given a message that inflation targeting is critical,” Nayar said, adding that Rajan is trying to create capacity for credit.

“He has addressed the fact that there is a need for financial inclusion at a low operating cost.”

Nilesh Shah Managing Director of Kotak Mahindra Asset Management, said the rock-solid performance of the rupee is a testament to Rajan’s efforts at managing the currency.

For NPA, the biggest issue is timely recognition. The RBI in the last few years have done a remarkable job in recognising NPAs and creating a mechanism for resolving it, Shah said. He also added that asset sale isn’t happening as expected, but that is a result of the environment.

TV Mohandas Pai Chairman of Manipal Global Education said Rajan has opened up India to inflows of money because for start-ups he has created an environment for them to stay in India.

DK Joshi , Chief Economist, CRISIL, said that the system is in place which will ensure inflation stays grounded.

TV Mohandas Pai, Chairman, Manipal Global Education

Q: What is your sense about Rajan\\’s contribution. We have discussed the macro but from your vantage digital point is this a big contribution to the financial sector that he has made?

Pai: Let me start by saying being an outsider to the system having worked in a very large financial system outside India and United States at the International Monetary Fund (IMF), being the Chief Economic Advisor he had a very different viewpoint when he came to the Reserve Bank of India (RBI). He bought an outside in view and bought in global best practices. He was not afraid to take decisions, he was interested in improving the system, opening up the banking system, taking away the nanny state image that RBI had in handling the banks, making the banks more responsible and much more accountable and he did a lot of things to open up and set in place the proper process. We are following the wholesale price index (WPI) instead of consumer price index (CPI) for inflation targeting whereas inflation impacts consumer. It is a conceptual error of the procedure, he corrected that.

As far as the digital world is concerned we have met him four times and he has opened up India to inflows of money because for start ups he created an environment where he made it better for them to stay in India rather than re-domicile. Many companies are re-domiciling the trend of re-domiciling stopped because he intervened, opened up the foreign exchange area and removed some of the hassles. He has done a fantastic work and left his imprint. He will be among the top 20 percentile, best governors India has ever had.

Q: Payment bank licenses we assume in a month or in a quarter will lay the last mile to the Jan Dhan accounts. One assumes that we will see a lot more people paying each other even migrants sending money home to their villages through either the UPI or through the payment bank. Is this something which is going to create a major thrust of financial inclusion and perhaps even analytics based lending?

Pai: Let me say that the India stack which was created by a bunch of volunteers led by Nandan and Sharad Sharma and others was something that Dr. Rajan bought in very well and allowed them to penetrate the system and make it happen in the last three years. It is a very important thing because no central bank governor on the world is open to innovation on a scale that Dr Rajan did. So allowing the India stack to come which has UPI, which has Aadhaar, e-KYC, digital locker and e-privacy is a full stack and has allowed 250 million people to come into the digital era along with the payment bank it means that the banking system, the payment part of the banking system is now open, many more start ups can come in on a layer of API, it will make transaction cost cheaper, it does bring in competition into the banking system and has opened the genie up to everybody else. From a close system he has made it an open system and I can say very confidently what Dr. Rajan has allowed to happen and the India stack is a signal for 6 billion people on this planet for a new era of banking. The existing banking model is geared towards the 1 billion people in the Organisation for Economic Co-operation and Development (OECD) countries. The new model that India has in digital banking is for the 6 billion people who are probably outside, are not very familiar with the banking system. So, it is for them. So, we are going to lead this revolution in the next three or four years without too much of legacy. Since more banks are in core banking and if you put a layer of APIs on top of them this digital banking becomes easy to do. So, it will be extremely competitive. It is a fantastic thing that has happened in this country and it will revolutionise banking.

Leo Puri Managing Director UTI Asset Management Co

Q: What did you make of Rajan\\’s legacy in terms of monetary policy? He has put in a monetary policy framework, bound the country by law to a 4 percent inflation plus or minus and a monetary policy committee. That is a seminal institutnalisation of inflation you think, it will last?

Puri: I think it will and I think it is a very progressive step that he has taken. There has been a lot of debate as to whether or not India needs such a regime. However he has presented a very cogent case. He has built consensus around it and it will be one of the many significant contributions that he would have made as a governor.

Q: Is this a seminal step at all in financial inclusion that we are seeing under our eyes?

Puri: Absolutely. He has been a extremely modern and progressive governor in this regard who has embraced change and this is in keeping with the best central banks in the world who actually recognised the potential of financial technology to drive inclusion, drive efficiency, drive transparency and so he has really given us a big push and a positive nudge in that direction.

Nilesh Shah, Managing Director, Kotak Mahindra Asset Management

Q: Is India respected now as a country of strong macros, does it look like this country now will not very easily renege on inflation, on current account deficit and on commitment to this discipline?

Shah: I think today market and investors are definitely expecting that on the fiscal path government is following the commitment which they have promised in last year’s budget and year before that. Next year also we should be targeting fiscal deficit around 3 percent level, so that’s a building up of very strong macro and from a market point of view the way today rupee volatility is there, whether in terms of implied volatility in options or in terms of actual volatility in terms of behaviour, it’s one of the lowest we have witnessed in many years and especially in a era where other emerging market currencies have fallen like a stone, the rock solid performance of rupee is clear testimony to RBI’s credibility and managing currency.

Q: Is even recognition of non-performing asset (NPA) something which not all central bankers have had the courage to do, was that itself a great thing and then the way he went about it, your take on this?

Shah: I completely agree with Sanjay. Clearly for NPA the biggest issue is timely recognition and if you could recognise NPAs timely, probably the burden of NPA wouldn’t be so high, so clearly RBI in last few years have done remarkable job in terms of recognising NPAs in terms of creating mechanism for resolving it and then working within the environment to bring that issue on to the top priority.

In terms of results, probably one will be little bit disappointed because still there might be, but then that parts of the environmental problem rather than the domain of RBI, so I will give the AAA marks to RBI in terms of cleaning up the system.

Sanjay Nayar CEO and Country Head KKR India

Q: You have been a career banker and now a private equity investor. Do you think the attack on high inflation is now written into the law solidly enough that we will not transgress 6 percent inflation at least in the foreseeable future?

Nayar: I think so. I think he has done clearly his portion of the job much more than what I think one would have hoped for. In any kind of reform, he has got a role to play and so does the government. I think he has done ample amount of his role by clearly giving a message that inflation targeting is critical.

He is leaving enough room for growth which is not necessarily driven just by easy rates but he wants investment spending pickup; I think he said that repeatedly. I think he is trying to create capacity for credit by pushing the banks to lighten up on the non-performing assets (NPA). So, if you look at the banking sector reforms, I think he has played a solid more than 65-70 percent of his role here.

Q: I wanted to scratch that point a little more about the digital part with you. You also have a lot of international experience; you headed the Indian unit of Citi Bank for so long. Now with payment banks, with small banks and with the unified payment interface coming in, has he led us very nicely into a new era of digital accounting and therefore a huge area of analytics which might lend to financial inclusion of an unheard of level? Are we on the throes of some kind of a digital financial revolution what Nilekani called the WhatsApp moment in the financial sector?

Nayar: I don’t know how to classify this, as a WhatsApp moment or not, but clearly what he has done is he has tried to keep in tune using the infrastructure India has with the all kind of unique identification numbers and the kind of technology leap India is taking, he has kept in tune with that. I think he has addressed the fact that there is a dire need for financial inclusion at a low operating cost and the brick and mortar can only get you that far.

I think he is leveraging the mobile technology so he has enabled a lot by giving all these kind of new platforms for us to utilise. Now, I think the question is for the entrepreneurs and for the telecos and for the companies in the banks to utilise at the best. My worry in all these things is that there is a wave that comes in, everybody is now going completely euphoric about these things. Ultimately you have to have a model that works for the people who provide the service and those who get the service and I think we have a long way to go there.

However, he has given the enabling environment keeping in tune with technology and India’s huge fragmented widespread market. Now it is for the rest of the people to create the right business model quite frankly.

Jayesh Mehta Managing Director & Country Treasurer Bank of America

Q: We had this huge thrust on anti-inflation and therefore even liquidity deficit practised as part of not allowing aggregate demand to increase. Do you think Rajan has addressed the liquidity issue adequately now and you expect transmission to be more smooth in the months to come?

Mehta: I think the liquidity stance which was changed in April that has been followed through and it has been followed through little bit earlier than what it was projected to. He has followed that up with today\\’s reemphasis on liquidity. Just being neutral, like today\\’s announcement was more like we would rather err on the excess rather than trying to be neutral and err on the negative liquidity side.

So, that has given a quite a lot of assurance and that definitely has impacted a lot and therefore the first transmission which has happened is on the government bond yields. So, in last 4 months you can actually see as the liquidity came in the yields have really moved dramatically.

Q: What is your sense about the way things will pan out? You expect yields – I guess the new 10-year is on the anvil perhaps in some weeks do you see 7 percent for the 10-year very soon? Therefore do you see even bank lending rates falling?

Mehta: Now with liquidity and assurance of liquidity being there, it is not just there for a week and fortnight and going away. I think they are going to make sure that liquidity is going to be slightly on the surplus mode and if that remains it is just a question of time that we will see a 6 handle, definitely going below 7. So, it is just a question of time, unless something dramatically happens globally. However at this juncture the trajectory looks pretty good even without rate cut I am talking about going below 7 and that should be happening very soon.

DK Joshi Chief Economist of CRISIL

Q: What’s your take, are the upside risks to inflation genuinely there? Do you see rate cuts and more importantly do you see the cost of money falling for borrowers?

Joshi: Well, I think as far as the upside risks are concerned, obviously, there is a clearly visible I think inflation is inching towards the upper bound 2-6 percent and it’s the food and every third quarter policy the swing factor for the monetary policy is what happens to the rains and fortunately I think rains are proceeding well and particularly for items like pulses where the area under production has gone and also the unirrigated parts of under cultivation in pulses I think they have got good rains, so I am pretty certain that going by the past trends, which the pulses have a 3 year cycle and pulses inflation should actually come down sharply and even become negative.

I think for other food items there are many idiosyncratic factors, so it is very hard to predict what is going to happen to them, but the overall message from the good monsoon is that there will be general taming of food inflation and that is the only worry at this juncture, because other drivers of inflation are not firing from global perspective the crude prices have actually come down and even the wage hikes that are being given, they are being given in an environment of excess capacity in the system, so they are becoming generalised I think is less of a risk at this juncture, but I think as I said, you have to keep your fingers crossed. If you ask for our call, we believe inflation will settle at an average of 5 percent for this fiscal year and as Siddhartha was pointing out, the second half will see inflation nudged down definitely from the current levels.

As far as the transmission is concerned, the 2016-17 in fiscal year and beyond I think they will see two effects one is the monetary policy always has a lagged impact for whenever rate cuts are initiated last year and cut by the banks, I think their impact on GDP etc will now be felt and with focus on liquidity and probably possibility of excess liquidity scenario interest rates will come down across the board, but the issue right now is that is there enough credit demand from the industrial side, which is not there, so the credit will be expanding more towards the retail side and less towards the investment activities, because there is very little appetite for from private sector for reigniting their investment plans. So I think the transmission will be there, but it will be felt very mildly and I don’t think it will help in reviving the investment cycle at this juncture.

Q: Do you think the battle against inflation is now entrenched in the system, what marks would you give to the Rajan era for the anti-inflation fight?

Joshi: Well, I don’t think I will give him marks, but I will definitely say that as far as modernisation of monetary policy is concerned, via inflation targeting, via monetary policy framework, whether he is there or not the system is in place, which will ensure and even now the government has also ratified that, so there is a system in place which will ensure that that inflation stays within that ground and the central bank will be solely focussing on that now.

RBI Monetary Policy: Ahead of Rajan’s swansong, focus to be on his legacy than rates

eserve Bank of India Governor Raghuram Rajan holds his last monetary policy meeting Tuesday but observors say the focus during his final hurrah will extend far beyond interest rates, which, in all likelihood, he will leave unchanged.

The three-year stint of the outgoing Reserve Bank chief is largely viewed by economists as positive — some controversy about his high interest-rate stance notwithstanding — as growth picked up, reserves increased, currency stabilised, inflation cooled and a number of reforms were undertaken during his watch.

Rajan also took several steps to unfetter the growth of the banking industry. On one hand, he initiated a deep clean-up of non-performing assets by forcing banks to declare their stressed loans as such, on the other, he issued guidelines for new-age payments and small banks, apart from opening up the application window for universal bank licences forever.

Tomorrow, analysts will particularly look forward to a few measures he announced that remain a work-in-progress.

Earlier this year, in a major decision, the RBI said it would move shift its liquidity stance — it manages this with open market operations using overnight and term repo instruments – from deficit to neutral.

Analysts say more liquidity in the system helps in bringing yields down and may help bank cut interest interest rates even as an upcoming event threatens to reverse that position.

“The bond market will be looking at the liquidity picture,” Bank of America India MD and Treasurer Jayesh Mehta told CNBC-TV18, adding that the maturity of the three-year, USD 34-billion FCNR-B window Rajan opened in September 2013 to attract NRI deposits and stem the rupee fall may impact liquidity negatively.

“This may lead some liquidity imbalance even though [currently] there is Rs 20,000-25,000 crore of surplus, he added.

Rajan, however, has maintained that the Reserve Bank is better prepared to deal with the outflow situation this time.

The other important development markets will look forward will be whether there is any other development on the monetary policy committee (MPC) front.

Another of Rajan’s pet ideas, the government recently ratified formation of a six-member MPC, along with adopting a formal 4 percent inflation target.

“The idea behind the MPC is that a team of individuals will be responsible for interest rate decisions instead of the Governor alone,” Mehta said.

Most leading central banks around the world have MPCs and they help provide transparency and robustness in terms of monetary policy decisions, Marie Duron of Moody’s told CNBC-TV18.

In effect, what Rajan has not only institutionalised the process of interest rate decisions, but by putting out formal inflation targets, also semi-automated them.

Even as speculation continues on who would don the mantle of Governor next, Duron said she expects the incoming chief to continue on the path of moderate inflation laid out by the incumbent and continuation of reforms announced by him.

HDFC Life-Max Life merger a done deal

The boards of HDFC Life and Max Life on Monday approved a scheme to for the merger of the two entities. According to the contours of the deal, the life insurance business of Max Financial Services will be demerged into HDFC Life, reports CNBC-TV18’s Nisha Poddar.

The merger will soon make HDFC Life the country’s largest private sector insurance company by individual premium market share.

The total premium of the merged entity is expected to be nearly Rs 26,000 crore and assets under management (AUM) will swell to over Rs 1 lakh crore. In the private life insurance space, only ICICI Prudential Life Insurance had reported AUM of Rs 1 lakh crore.

“We wish to inform you that a committee of the board of directors of the corporation has at its meeting held today approved the entering into definitive agreements for amalgamation of business…through a composite scheme of arrangement,” Housing Development Finance Corporation (HDFC) said in a filing to the BSE.

“As part of the proposed transaction, the life insurance business of Max Financial, currently held through Max Life, would be finally amalgamated into Max India Ltd,” it added.

HDFC also said that post-merger its shareholding in HDFC Standard Life would be 42.5 per cent and consequently the insurance firm would cease to be a subsidiary.

Edinburgh-based Standard Life Plc holds 35 per cent stake in HDFC Life, in which HDFC owns 61.63 per cent.  The shares of HDFC Life are proposed to be listed on BSE and the National Stock Exchange of India as a consequence of the scheme, it said.

For HDFC, this will be the second merger announcement this month after HDFC Ergo General Insurance announced takeover of 100 per cent stake in L&T General Insurance.