RBI raises short-term rates by 25bps to contain inflation

The central bank raised both the repo and reverse repo rates by 25 basis points to 5.50% and 4%, respectively. The move would raise the cost of funds for banks and temper demand for loans, and in turn, consumer spending

The Reserve Bank of India (RBI) today raised the short-term lending and borrowing rates by 25 basis points (bps) with immediate effect to contain inflation, reports PTI.

The move comes weeks ahead of the scheduled policy review by RBI on 27th July and a day after the government announced that food inflation dipped by about a quarter to about 12% cent. Overall wholesale prices-based inflation too is in double digits.

The central bank raised both, repo and reverse repo rates (the rates at which the RBI lends and borrows short-term funds from commercial banks), by 25 bps to 5.50% and 4%, respectively.

The move would raise the cost of funds for banks and temper demand for loans, and in turn, consumer spending.

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Auto sales in June remain strong despite a few constraints

Despite supply constraints and annual maintenance schedules, automakers reported growth in June. However, on a month-on-month basis, volumes have come down

Automobile sales in June recorded decent growth compared with the same month last year mainly because of strong demand environment and a low base and incremental volumes due to new launches in spite of supply constraints. However, compared to the previous month, sales volumes in June were lower mainly due to the higher sales recorded during the marriage season in May.

"The strong demand environment in the sector has led to a better pricing power for the automobile companies, which have not shied away from hiking product prices. After the excise duty rollback and sharp increase in commodity prices, automakers hiked the prices of their products by 4%-5% during the quarter to protect their margins. Thus, we expect the first quarter FY11 results to be good and (to) be driven by volume growth," said Sharekhan Ltd in a research note.

The passenger car segment has continued to put up a good show during the month, surprisingly led by Tata Motors Ltd, instead of Maruti Suzuki India Ltd or Hyundai Motor India Ltd. Tata Motors, the country's largest vehicle maker, recorded a 63% jump in passenger vehicle sales because of last year's low base as well as increase in volumes of the Indigo Manza and Tata Nano. During June, Tata Motors' total commercial and passenger car sales, including exports, rose 49% to 67,730 units compared with 45,440 units sold in June last year.

Despite a planned maintenance shutdown for a week during June, the country's largest carmaker, Maruti Suzuki, reported that sales grew 17.9% to 72,812 units, excluding exports. Similarly, Hyundai Motor, the second-largest carmaker, also recorded 18.9% growth in the domestic market. However, its total sales, including exports, declined 2% to 46,254 units. Hyundai India's exports fell by over 22% to 18,888 units from 24,250 units, in the same period last year.

India's largest utility vehicle maker Mahindra and Mahindra Ltd (M&M) said that during June, its auto sales rose 20% to 27,562 units, despite its annual shutdown in the first week of the month. In the three-wheeler segment, M&M recorded robust growth with its newly launched Gio and Maxximo range of vehicles. In June, its three-wheeler sales increased 125% to 7,559 units from 3,357 units a year ago.

General Motors India Pvt Ltd, a unit of the world's largest automaker, General Motors Corp, saw its sales climbing over two-fold to 9,539 units last month compared to 4,492 units in the year-ago month, mainly on account of good performance by its latest offering, Beat. SkodaAuto India, the unit of Czech Republic-based SkodaAuto, also reported a 43% growth in sales at 1,638 units as against 1,145 units in the same month last year. During June, Toyota Kirloskar Motor Pvt Ltd (TKM), a subsidiary of Japanese Toyota Motor Corp recorded 41.5% jump in auto sales to 6,180 units from 4,367 units.

However, Honda Siel Cars India Ltd's sales dipped by 9% at 4,595 units, down from 5,048 units last June. Similarly, Fiat India Automobiles Ltd (FIAL) a 50-50 joint venture between Fiat Group Automobiles SpA and Tata Motors reported a lower growth. During June, its sales fell 11.5% to 2,274 units from 2,568 units a year ago.

In the two-wheeler segment, market leader Hero Honda Motors Ltd reported modest growth, but Bajaj Auto Ltd and TVS Motor Co Ltd, the number two and three in the market, respectively, recorded robust growth in June. Hero Honda reported 16.6% increase in its sales at 4,26,454 units. It had sold 3,65,734 units in the corresponding month last year.

Bajaj Auto said that despite some production constraints, it recorded a 63% growth; its highest, during June. In the month, the company sold 2,82,808 units of motorcycles compared to 1,67,945 units, in the same period last year. Bajaj Auto's three-wheeler sales rose 32% to 32,614 units. In a release, the company said its production capacity is expected to go on stream to 3 lakh units per month from this month.

India's third largest two-wheeler maker, TVS Motor's sales also rose 35.7% in June to 1,56,685 units compared to 1,15,448 units in the corresponding month last year. Honda Motorcycle & Scooter India reported a 41.5% growth in sales at 1,46,073 units as against 1,03,209 units in the same month the previous year. India Yamaha Motor's sales increased 32% to 28,155 units. It had sold 21,278 units in the same month last year.

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Enhanced index: Enhanced returns?

Motilal Oswal Mutual Fund’s first product, the MOSt50, may actually deliver returns through its unique approach towards indexing, provided it doesn’t try to time the market

Motilal Oswal Mutual Fund has come out with its first offering as a fund house—an open-ended exchange traded fund (ETF) called MOSt 50. So how will this first product from the stables of Motilal Oswal Mutual Fund shape up?

Moneylife had earlier mentioned about this product when it had filed its offer document with the Securities and Exchange Board of India (SEBI). We had mentioned that, although it is an ETF product, the MOSt 50 fund is unique in its approach towards indexing. It is not a pure ETF in the broadest sense. As its underlying index, it will use a ‘fundamentally enhanced’ index called MOSt 50 index. While the constituents will be the same as those of the S&P CNX Nifty, the weights would be different. The fund will use a unique way of assigning weights to the constituents of the MOSt 50 index, based on the fundamental financial performance of the constituents and the price at which the constituents are trading.

This approach towards indexing may give the fund an edge over its underlying index. It is interesting to note that this enhanced index has been back-tested with the Nifty in terms of historical performance and has done better than the Nifty.

As an ETF-based offering, the fund has a lot going for it. Over most time periods, actively managed equity funds fail to outperform their respective benchmarks. As such, investors are not assured whether fund returns would at least match the broader index movements. ETFs and equity funds provide a good way out for investors as they mimic the returns provided by the indices.

While index funds have to be purchased directly from a mutual fund, ETFs are bought on a stock exchange and can be freely bought and sold on the exchange, just like a stock. ETFs offer the convenience of intraday purchase and sale, to take advantage of the prevailing price, whereas index funds can be redeemed only at the ‘end of day’ NAV (net asset value).

The NAV of an ETF is a fraction of the index value. If the Nifty is at 5,000, the NAV of one unit of a Nifty-based ETF is one-tenth of the value, that is, Rs500. So an investor buying one unit of an ETF is effectively able to buy the entire basket of Nifty stocks with a lot less money than what he would need to buy individual stocks or an index fund.

However, a drawback with ETFs is that these are not heavily traded and so the bid-ask spread is wide—which reduces gains and increases cost. Volumes in specialised ETFs like MOSt50 would probably be lower—unless, of course, the fund house is successful in drumming up volumes by taking advantage of its sizable broking franchise.

Also, ETFs are a low-cost option for investors, when compared to equity mutual funds and index funds. Normally, ETFs charge 0.50%-0.75%. For instance, the Nifty BeES ETF product, run by Benchmark Mutual Fund, has an expense ratio of 0.50%. However, MOSt50 will charge 1% for managing the fund, which is expensive in comparison.

Overall, the fund’s unique approach towards index investing may actually yield returns for the investor, provided it doesn’t try to time the market or indulge in active investing.

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