India’s economic gloom lifting, says a bullish Credit Suisse

Credit Suisse sees a rosy future ahead—lower inflation, rate cuts, higher growth and so on. But then, how can the brokerage not be highly bullish after a six-month run in the Sensex from 16,000 to 20,000?

Credit Suisse analysts have asked the following questions about India:

  1. Is GDP growth bottoming?
  2. Are we at the start of a renewed downshift in inflation?
  3. Are policy interest rates set to be cut by a meaningful amount?
  4. Do the government’s reform measures mark an important policy shift?
  5. Do recent developments significantly reduce the chances of the rating agencies cutting India to sub-investment grade?

And have found themselves answering ‘yes’ to all of them.


According to Credit Suisse, the  economy  is  yet  to  feel  the  full  benefits  of  the  rupee’s  sizeable depreciation,  while  the  drop  in  market  interest  rates  (three-month  money  and commercial paper rates are down more than 100 basis points over the last 12 months), the prospect of further policy  rate  cuts  and  the  likely  confidence-boosting  effects  of  the government’s reforms, should  also  boost  economic and market activity. Its GDP growth estimates are 5.7% in 2012-13, 6.9% in 2013-14 and 7.5% in 2014-15.


There is a persistence of relatively high fuel and food price rises. However, Credit Suisse analysts point out that core inflation will drop below 4% by mid-2013, with the headline rate of inflation slipping to less than 6%.  This  in  turn  helps  to  explain the headline  wholesale  price  inflation  forecasts  of  7.3%  and  6% for 2012-13  and  2013-14 respectively.


Credit Suisse analysts are looking for a total of 125 bps of repo rate cuts  this  year,  with  50 bps  at  the  29th January  meeting, further  50 bps  in  April  2013 and  a  final 25 bps in July 2013. 


On policy matters, the key questions raised by Credit Suisse are: First, can the finance minister convince the market that his much-promised goal of limiting the  central  government  budget  deficit to  5.3%  of  GDP  in  2012-13  is  achievable  (most  are expecting  an  outturn  in  the  order  of  6%)?  Second, can he set  out  a programme  of  measures  to  credibly  achieve  reductions  in  the  deficit  GDP/ratio  in  the coming fiscal year and over the medium term?


The government clearly faces an uphill task but the minister’s record suggests “we shouldn’t dismiss the possibility out of hand” as many have done.


Finally, Credit Suisse analysts, bring up the question: Will  we  see rating  agencies  downgrade  India  to  sub-investment  grade  this year? The chances of two of the three main rating agencies moving India to junk status by end-2013 is small—in the order of 15-20%, perhaps.  Fitch appears to be close to pulling the trigger but will presumably wait until the budget announcement before deciding whether to do so.


Bull market: Where is the money coming from?

Much to our amazement, foreigners have poured in over $24 billion in 2012 to create a sharp rally in India. Since as much as $1.8 billion were pulled out of India-focused funds and ETFs, a Morningstar report gives an interesting take as to where the money came from in 2012 to create the sharp rally

Braving macro-economic negatives and policy paralysis last year, Foreign Institutional Investors (FIIs) poured over $24 billion into India in 2012. Indeed, India got its second largest inflow of funds in 2012. But since data about foreign investment is opaque and India is agnostic about sources of money, nobody knows which kind of funds have invested in India more. Where did the money come from? From hedge funds? From ETFs? From “India-focussed” funds (i.e. foreign banks and asset management companies set up funds with sole focus on investing in India for their investors)? Apparently none of these, if Morningstar, a fund rating company, is to be believed.

To make the Indian rally and the torrent of inflow even more mysterious, Morningstar, now shows that India-focused offshore funds and Exchange Traded Funds (ETFs) had registered a cumulative net outflow of $1.8 billion during 2012. A lot of sceptics believe that the money is being round-tripped into India. India money, (mostly ill-gotten), taken out of India, is coming back.

Since this cannot be proved or denied, here is the rationalization. According to Morningstar, the global economic situation last year prompted investors to switch from developed markets and look elsewhere. Two key events last year—the “Fiscal Cliff” and the possible break-up of the Euro Zone—prompted investors to look elsewhere. India was one of them, but money came here in a very different way—from “emerging market funds”. The quantitative easing in America and the sovereign bailouts in Europe prompted money to fly out of their domiciles and come into emerging and frontier markets funds as an alternative, as returns were better in India and similar markets. According to Dhruva Raj Chatterji, a senior research analyst with Morningstar, “One big contributor of flows into India in 2012 have been emerging market stock funds. These funds have a decent allocation to India in their portfolios, and have registered huge inflows from investors during 2012.”

According to Morningstar Asset Flow data, US Diversified Emerging Markets Funds and ETFs together registered the second highest ever annual inflows of almost $49 billion during the year 2012, with the highest inflow being $56 billion recorded in 2010. Similarly, funds and ETFs belonging to the Morningstar Global Emerging Markets Equity category in Europe registered a net inflow of €11.66 billion up to November 2012. One of the most prominent index funds—Vanguard Emerging Markets Stock Index Fund—which is an index fund with assets in excess of $75 billion at the end of 2012, saw its India allocation go up from 5.5% at the end of 2011 to 7.2% at the end of September 2012. Other prominent funds which featured India in their allocation were iShares MSCI Emerging Markets Index Fund, Oppenheimer Developing Markets Fund, Vontobel Emerging Markets Equities, and Aberdeen Global Emerging Markets Equity. “With a partial allocation to India in several of these fund’s portfolios, the country has been an indirect beneficiary of inflows into these funds,” said Chatterji in his Morningstar report.

With the perfect benefit of hindsight, Morningstar data suggests that FIIs preferred to diversify through emerging market funds rather than focus directly on India which was hampered by corruption, delayed policy making, coalition politics and mud-slinging apart from inflation.


What will SEBI’s Investment Advisor Regulations Achieve?

SEBI has finally come up with its Investment Advisor Regulations, but what will these regulations achieve with a long list of entities and products that are outside the scope of regulations?

The Securities and Exchange Board of India (SEBI) has finally announced its regulations to oversee financial advisors. From now on, anyone who wants to provide investment advice will have to register with SEBI and follow the rules contained in the new regulations. The regulations will not apply to the long list of products and entities:

a)  Any person who gives general comments where such comments do not specify any particular securities or investment product;

(b)    Any IRDA-registered insurance agent or broker

(c)    Any pension advisor registered with PFRDA

(d)   Registered distributors of mutual funds

(e)    Any  advocate,  solicitor  or  law  firm,  who  provides  investment  advice  to  their clients, incidental to their legal practise;

(f)     Any member of Institute of Chartered Accountants of India, Institute of Company Secretaries of India, Institute of Cost and Works Accountants of India, Actuarial Society of India or any such body

(g)    Any stock broker or sub-broker registered under SEBI, portfolio manager  registered  under SEBI or   merchant   banker   registered   under   SEBI

(h)    Any  fund  manager,  by  whatever  name  called  of  a  mutual  fund,  alternative investment fund or any other intermediary or entity registered with the Board;

(i)     Any person who provides investment advice exclusively to clients based outside India:

  (k)    Any other person as may be specified by the Board.

Interestingly the draft guidelines had proposed to exempt “investment advice given without any consideration through newspaper, magazines, any electronic medium, or broadcasting medium, which is widely available to the public”. Effectively the media was exempt from the proposed guidelines, but strangely this is absent in the final regulation. Does this mean that the media will have to stop writing about which funds or which stocks to buy? Or will it have to register with SEBI as an investment advisor? Has the media been dropped from the exempt list intentionally or is it another example of SEBI’s sloppiness?



Banks, finance companies other institutions that wish to enter into the advisory business need to create a separate department which would handle advisory and not be an agent. The idea is to prevent mis-selling and make banks and distributors accountable for their advice. How far is this workable? It is the small distributors who would be worst hit since the banks would always find a way around it. In fact, if SEBI is really serious about curbing mis-selling, it should have had a speedier grievance redressal system with stiff penalties. SEBI has been quite lenient in dealing with offenders as Moneylife (alone) has repeatedly pointed out. 

Read: SEBI’s draft regulation for investment advisors: Molehill out of a mountain?

Earlier, SEBI had issued a circular under which an agent will be able to sell for a commission (subject to a disclaimer that he has not done any due diligence) and won’t be able to advice. Considering the actual situation on the ground, a financial advisor asked, “How is an agent supposed to promote his product? Would he depend on the recommendation of the advisor?” Moneylife spoke to a smart and ethical distributor of financial products, who said, “I will not be a surprised if (these) so-called investment ‘advisors’ work closely with ‘agents’ wherein the agents would give a pass-back of the commissions they earn to advisors who recommend customers to them. This currently happens as well but it is more open as there is no restriction, where financial planners have tied up with agents of certain companies. Though the commissions are not disclosed, they earn enough for passing on a lead to an agent.” Expect this to increase, SEBI’s noble intentions notwithstanding.

Read: Will SEBI’s regulation on mis-selling of mutual funds work?

SEBI has also enshrined in the regulations that investors have to be profiled for risk including age, investment details, income details, risk tolerance, liability and others. Will risk profiling ensure that the lead will not be passed on to those agents who would share their commissions with the advisor friends?

Moneylife had analysed the proposed regulations and had suggested these regulations will be of little consequence and that they will mean little to investors and mis-selling may continue as before and with appropriate disclosures! 

Under the new regulations, “any graduate” with an experience of five years is eligible to become an investment advisor. Does that by any chance reduce chances of mis-selling knowing the fact that investors are as financially illiterate as have always been?

Another guideline talks about the arm’s length relationship that the advisor is ‘advised’ to maintain with his all other activities. How does SEBI ensure that would happen, and that the investor would stay protected? The disclosure norms laid down do not have any meaning if the investor does not understand what they means and how it could be harmful for him.

Read: SEBI: Regulating Investment Advisors

Chapter III of the guidelines deals with the “general obligations and responsibilities”, a vague string of guidelines that little to do with actually improving the way financial products are sold in our country. The investment advisor is required to disclose all “conflicts of interests” that would arise. Are advisors being expected to become ethically responsible to do that on their own? Without any framework on how that would be ensured, it remains vague and free to one’s will.

When the advisor is asked not to divulge client information, how does the client even find that out? What is the closed loop mechanism in practice here that ensures it would not happen?

Read: Investment Advisor Regulation I: SEBI’s ideas are, as usual, far from reality; may increase mis-selling!

Another guideline requires the “investment advisor not to enter into transactions on its own account which is contrary to its advice given to clients for a period of 15 days from the day of such advice”. Can he do this after 15 days? And what happens if he does that under those extraordinary circumstances that he has been allowed to do that even within 15 days? The buck, in that case, is clearly passed on to the investor, through mandatory information provided to him 24 hours before taking that action.

In any case, these moves would not be able to either curb mis-selling, or help investors about their grievances, since there are no changes on that front and the guideline remains “as applicable”. Second, the only mainline investment product that comes under SEBI is mutual funds. Issues related to other financial products will be dealt with the respective regulators. As such, there would be no single body regulating investment advisors. Is there mis-selling of mutual funds? Well, there has to be selling first! Mutual funds are struggling to add assets since SEBI’s August 2009 decision has ensured that interest in mutual funds has totally waned.



Dayananda Kamath k

4 years ago

the advertisement by sebi ' my dividend warrant not received' this is the true representation of sebi office and the way they treat the complaint. they will ask every mis informed questions or misinterprate your complaint. and give you only a registration number for your complaint. any reply how irrelevent it may be to your complaint will be accepted and you will be asked to explain or threaten to lodge your complaint. this is sebi. will be lodged

kapil bora

4 years ago

SEBI is giving Fatwas on every fortnight.Which will only ruin the industry.My many friends who now joined MLM or Ponzy schemes like PANCARD CLUB,PACL,Samrudhha Jeevan etc.They clearly say that they very well know that these companies will vanish one day.But these schemes are easy to sell as it was totally unregulated.So SEBI should focus on these scheme instead of coming with new regulation every fortnight for a sector wich was already well(over) regulated.otherwise people will loose all their money in these ponzy schemes.

jaideep shirali

4 years ago

SEBI should concentrate on getting equity investors to the markets through the mutual funds or direct equity investment routes. This plethora of regulation and fear created over mis-selling of mutual funds will in fact push investors back into bank deposits. We are seeing a lot of mistrust between investors and the advisors due to SEBI, which would result in both investors & advisors slowly leaving the mutual fund markets.

Madhusudan Thakkar

4 years ago

Muhammad Bin Tughlaq is alive & kicking.......Long live Muhammad Bin Tuglaq


4 years ago

These regulations will most certainly achieve the following:

1) Meaningless half an hour interviews on business channels;

2) A large photograph with hand on the chair in some leading business publications and some more meaningless interviews.

3) Few newspaper columns by fellows who make 'Pavlovian' noises for personal gains.

4) Ganging up of few interested parties to hail such regulations as a resounding success and a step in the right direction.

- But there aren't straight answers to the two most direct questions:
what will these regulations do for investor protection? and how will they develop the Indian investment market?

It is Team Moneylife which keeps on pointing towards the emperor's missing clothes.

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