The market will react to the hike in retail fuel prices by the government on Friday
The Indian market is likely to open lower on bleak global cues and as a reaction to the government’s hike in retail fuel prices on Friday evening. The expiry of the June futures and options contract later this week may also lead to some volatility.
In the global arena, US stocks closed lower on Friday as problems in the Eurozone continued with Italian banks falling on account of their capital positions after a threat by global rating agency Moody’s on Thursday to downgrade Italian banks. Markets in Asia were in the red in early trade as the Basel Committee on Banking Supervision raised capital adequacy requirements for the world’s biggest lenders and on concern Greece may not meet bailout conditions. The SGX Nifty was down 54.50 points to 5,429.50 compared to its previous close of 5,484.
Global events like the International Energy Agency releasing strategic crude stockpiles to overcome the supply disruptions from Libya and easing of the Greek debt crisis helped to offset the rise in weekly food inflation on the domestic front. The positive developments led the market 2% higher last week.
However, after the market closed on Friday the government announced a Rs3 per litre increase in diesel prices, Rs2 a litre hike in PDS kerosene prices and a steep Rs50 hike per domestic LPG cylinder. It also reduced customs and excise duties on petroleum products, sacrificing Rs49,000 crore a year. The under-recoveries which stood at Rs1,71,140 crore will now come down by Rs21,000 crore after Friday's decision.
Talks of the review of the double taxation avoidance agreement with Mauritius resulted in a huge sell-off on Monday, but the market bounced back and posted marginal gains the next day. The indices ended flat with a mixed bias on Wednesday in the absence of any domestic triggers.
The market showed strong resilience on Thursday as it shrugged off weak global cues and high food inflation to close with decent gains. The gains were extended on Friday on news that the IEA will release two million barrels a day for the next 30 days. India, which imports nearly 70% of its crude requirements, was upbeat on the news. The Sensex closed the week at 18,241, a gain of 370 points for the week, and the Nifty settled at 5,471, up 105 points. The market might see a small rally with the Nifty going up to 5,556.
US stocks fell sharply on Friday on weak earnings from technology companies and the continuing problems in Europe as Moody’s threatened to downgrade Italian banks on account of their capital positions. The slide came despite the government revising the gross domestic product (GDP) growth for the first quarter to 1.9%, marginally up from the earlier estimate of 1.8%.
This apart, orders for machinery, electronics products and airplanes rose in May. The pickup suggests manufacturing is rebounding after the Japan crises made parts scarce and slowed production of some factory goods temporarily.
The Dow declined 115.42 points (0.96%) to 11,934.58. The S&P 500 shed 15.05 points (1.17%) to 1,268.45 and the Nasdaq fell 33.86 points (1.26%) to 2,652.89.
Markets in Asia were lower in early trade on Monday following the Basel Committee on Banking Supervision raising capital adequacy requirements for the world’s biggest lenders. Concerns that Greece is likely to face opposition in getting support in parliament for its austerity measures later this week also weighed on investors. However, the Chinese market sported small gains after the recent sell-off which made stocks cheaper.
Meanwhile, the business survey index compiled by the Korea Chamber of Commerce and Industry fell to 103 for the July-September quarter against 108 for the second quarter, the lowest since hitting 66 in the second quarter of 2009.
The Hang Seng skidded 0.95%, the Jakarta Composite declined 0.59%, the KLSE Composite fell 0.18%, the Nikkei 225 declined 0.86%, the Straits Times was 0.73% lower, the Seoul Composite tanked 1.36% and the Taiwan Weighted fell 1%. On the other hand, the Shanghai Composite gained 0.36%.
Back home, the National Stock Exchange (NSE) will launch interest rate futures on the 91-day treasury bills from 4th July, which will help banks, corporates and mutual funds to hedge their exposure. The product comes as a huge bonus to the secondary market at a time, when interest rates are very volatile.
Interest rate futures (IRF) is a standardised interest rate derivative contract traded on a stock exchange to buy or sell an interest bearing instrument at a specified future date, at a price determined at the time of the contract.
Piramal, Godrej, Hiranandani chiefs say supply shortage, increasing development costs and delay in getting approvals are keeping real estate prices high. They insist that developers will not sell piled up inventory at a loss
Despite the stagnation in the realty sector and talks about a necessary price correction doing the rounds, the big city developers don't see a chance of prices coming down. At the CII real estate summit on Friday, Ajay Piramal, chairman, Piramal group, Adi Godrej, chairman, Godrej group, and Niranjan Hiranandani, managing director, Hiranandani group, suggested that prices could go up even further.
"I don't see any correction happening, because the government is not giving any approvals and supply is getting delayed," Mr Piramal said. "No builder wants to lose money and the costs have significantly gone up."
Mr Hiranandani said, "Whether it is real estate or any other industry, the prices go down when surpluses are created. Though demand is rising, no surplus is being created because of a delay in getting government approvals and archaic land laws, which make acquisition a difficult and lengthy process. Add to that the rising prices of items like steel, and we have inflated costs."
This view was reiterated by Mr Godrej, who said that prices will go up because the sector was facing a capital crisis and that developers would hold prices up to ensure profits.
However, there is no talk about meeting the huge housing demand with the present price structure. Mumbai may need some two million houses to accommodate its growing migrant population and people from slums, according to Liases Foras. Despite the staggering demand, as many as 92,000 units remain unsold in the city because prices are way past the affordability level.
"I will not comment on the piling up of unsold inventory," Mr Godrej said. "But I can say that with no new approvals, there is still a huge gap between demand and supply, especially in the metros. So it is unlikely that prices will go down. But people will not get rid of inventory at a loss."
However, many reports have been coming in about impending corrections. Crisil reported at the beginning of the year that by 2012 there is a chance of a 10-15% price correction. Other experts, too, believe that prices must come down or else the sector is in for a debacle.
"The ideal market velocity (rate of property off-take) must be 3-3.5% per month for Mumbai. But it is only 1.57% now, because sales have suffered due to price rise," said Pankaj Kapoor, managing director, Liases Foras. "This means that only 1.57% of a project is being sold in a month. At this rate, it will take 63 months to sell a project. The time taken will affect valuation, and the delay will result in further imbalance."
Mr Godrej said that he did not expect a slowdown like that in 2008. "In 2008, the costs were very low, which was reflected in the recession. That time, we saw a drop in property prices. The situation is not the same this time," he said. Godrej Properties was among the few developers who managed not to suffer massive losses, or incur debt as did some other giants like DLF or Unitech. Mr Godrej said that rising input costs have not affected margins because this has been passed on to the customer.
The developers will continue to hold back, to ensure that they don't have to sell their inventory at a loss. But if the customers are put off, the situation will only worsen for them, as the chances of softening the crisis through increased sales will be minimised further.
The concept of offering mediclaim to domestic workers is good on paper. The fulfilment, right from submission of identification certificates to securing the mediclaim smartcard and all the way to getting cashless benefit, will be a bumpy ride
At a time when the cashless benefit for mediclaim from government insurers has been marred by controversy, will it work for domestic workers? Working through a third party administrator (TPA) is often a hassle, and the rejection of claims by some insurers, if intimation is not made to them within 24 hours of hospitalisation, is a reality. Domestic workers getting cashless mediclaim by using smartcard after submission of not-so-simple identification proof may well remain grounded on paper unless the fulfilment process is done correctly.
What’s in it for domestic workers?
The government intends to pay an annual premium of Rs750 for a sum insured mediclaim of Rs30,000 under the Rashtriya Swasthya Bima Yojana (RSBY). There are specific limits for procedures, like cataract which will get only Rs3,500.
What identification certificate is needed?
Any two from four eligible institutions–employer certificate, residents welfare association, registered trade union and the local police. It will be a challenge even to get a certificate from an employer, but domestic workers should do whatever it takes to get on the scheme as there is nothing to loose, even with the flawed system.
With the government paying the annual premium, it may be difficult to control leakages at different levels. If the domestic worker quits and takes up employment with a private company, will he surrender the smartcard and opt out of the system? Will there be a system in place to check ‘active’ domestic workers?
We spoke to a couple of agents who do not even entertain underprivileged customers for individual mediclaim. Generally, the low sum insured (Rs50,000 or less, in most cases), which earns them low commission is a disincentive for agents, besides the hassles to help people with their paperwork for filing claims.
But, RSBY offered by government is a good option.
What’s in it for insurance companies?
There will be a huge premium collection of Rs300 crore in four years. The government will begin with a target to cover 10% of 47.5 lakh domestic workers in the first year and scale this up.
What is the risk for insurance companies?
According to some insurance companies whom we spoke to, the Rs750 annual premium is a decent amount for the Rs30,000 sum insured. RSBY, which is already in force for some other segments, has been found to be profitable in initial years when the awareness is low. The claims increase after a few years as the insured start taking benefits by undergoing surgeries or hospitalisation due to illness. It can lead to a claims ratio of over 100%, along with abetment from system fraud which is always a challenge in the insurance industry.
Dr Damien Marmion, chief executive officer, Max Bupa Health Insurance, told Moneylife recently, “RSBY is not very profitable. Star Health has shown that if done in a large enough way, it can be profitable.”
There are political risks with the change in state government. Star Health was successfully running the Kalaignar Health Insurance Scheme in Tamil Nadu. With the recent change in the state government, the Scheme has been scrapped and the plan is to adopt RSBY. Star Health had invested in enrolment and infrastructure to run the Scheme. The discontinuation will be an exit for Star Health with just a break-even in finances.
ICICI Lombard had to cancel its agreement with 24 hospitals in Uttar Pradesh, which were empanelled under the RSBY scheme after complaints of anomalies against the hospitals were found to be true. It can work the other way round too. Taking note of the large-scale complaints from hospitals in the implementation of RSBY, the Maharashtra government ended the monopoly of ICICI Lombard in providing insurance to the economically deprived sections. The reputation of an insurance company can take a hit due to complaints and claims denial.
Does RSBY really work?
It can work if properly implemented. There is a need for proper infrastructure and technology to run the scheme successfully. Star Health is running RSBY in Andhra Pradesh, while the Kalaignar scheme in Tamil Nadu is being wound up. The empanelled hospitals had biometric fingerprint readers to identify policyholders. Each hospital had doctors employed by Star Health to check the policyholder and medical needs. The doctors would take online approval from the in-house claims department, for hospitalisation for surgery or sickness. The policyholder was given cashless treatment. The hospitals benefitted with volumes of business and hence offered low-cost surgery packages. The entire system has to be streamlined with the hospitals. The in-house claims department can work better than having TPA whose image has taken a hit in recent times, with the TPAs unable to live up to the service standards that had been expected from them when they were introduced.