RBI Financial Stability report: Lessons in financial planning

There is a lot that needs to be done in financial education and financial planning. Volatility and undesirable speculation in the equity market needs to be reined in so that investors could have more faith in equity market. Also, investors need to be moved to investments like Gold ETFs in order to reduce the import bill of gold

The Reserve Bank of India ( RBI) has come out with its Financial Stability report. The report talks in details about the risks which the financial system in India and also gives an overview of the way things have been shaping up in the Indian economy in general. However, the most interesting aspect of the report is that it provides a good insight into Indian household’s saving and investment behavior which can be used as a tool by financial planners. Let us look at some such interesting aspects:

Gold has been the most reliable asset for Indian household: This may be disappointing news for those who suggest equity as an investment option for long-term wealth creation (including me). However, the reality is that gold has become the most preferred investment option in the post crisis period for investors. The RBI report says that post 2008 crisis, gold has been one asset which has consistently giving returns that has beaten inflation comprehensively.

The RBI report says, “Gold prices have increased the most in comparison with other assets and are significantly above the movement in the WPI (wholesale price index) as at end September 2012. Residential house prices have also beaten the upward movement in the WPI. The movement in the BSE Sensex was only slightly higher than the WPI during June 2008 and September 2012. On a year-on-year basis, gold offered the highest returns among asset classes for majority of the years after the global financial crisis”.

The chart below shows that gold return has been the best among asset classes which are real estate, Sensex, gold and bank deposits.

The RBI report also shows that the attempt to rein gold import has failed in spite of the increase in the government duty. The report says, “Earlier this year, the government duties on the import of gold were hiked. This measure, inter alia, appears to have significantly dampened demand for gold in the June 2012 quarter. However, demand in the September 2012 quarter picked up significantly and was higher than the average of the last five years (September 2007 to June 2012)’.

Indian household preference for physical savings increasing over financial savings:  Post 2008, there has been a general shift from financial savings to physical savings. The RBI report says, “Financial savings of the household sector declined to a two decade low of 7.8% of the GDP (gross domestic product) in 2011-12 from 9.3% in 2010-11 and 12.2% in 2009-10.Even in absolute terms, financial savings fell from Rs7.9 trillion in 2009-10 to RS6.9 trillion in 2011- 12”. This is reflected in the chart below, as well.

The RBI report also provides an explanation for this shift in the saving behavior when it says, “A number of possibilities could explain the fall in financial savings. Inflation has been high during the past few years. Consequently, real return on financial assets has been very low. Households seem to have shifted their savings from assets earning low real rates to assets perceived as inflation-proof.”

Lessons Learnt: There is a lot that needs to be done in the financial education and financial planning space. In place of physical gold, investors need to move to investments like Gold ETFs (exchange traded funds). This will reduce burden on the import bill of gold. Additionally, volatility and undesirable speculation in the equity market needs to be reined in so that investors could have more faith in equity market. The Securities and Exchange Board of India needs to put stricter control for companies in equity market and need to have a re-look at pricing of equity shares during an IPO (initial public offer).

(Vivek Sharma has worked for 17 years in the stock market, debt market and banking. He is a post graduate in Economics and MBA in Finance. He writes on personal finance and economics and is invited as an expert on personal finance shows.)

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    Nilesh KAMERKAR

    7 years ago

    Gold prices have been appreciating in the past 10 years; and they have doubled in past 3 years. It has become fashionable to include some gold in the portfolio. This inclusion of ‘some gold’ is mostly because of the Financial Planner’s desire to look knowledgeable / intelligent in the eyes of his client.

    There is no methodology to determine whether gold is undervalued or overvalued at current prices as an asset; it gets included purely because of the fallacy to extrapolate past returns into the future. When the advice to invest in gold is expressed as asset allocation it gives it a guise of scientific approach towards financial planning. – But it still remains a speculation on gold prices.

    Similarly, if prices of sand, stone and pebbles keep on rising for the next 10 years at a faster pace, then rest assured, financial planners would recommend some allocation to sand, stone and pebbles too.

    For an average investor, cash, debt and equity would suffice for asset allocation and would work well from financial planning standpoint. But, it is the craving of individuals to try and benefit from current fads which sets them up for disappointing results. The financial planner’s / advisor’s role must be limited to discouraging clients from allocating money to gold rather than conveniently adding fuel to fire.

    SEBI rejects 149 consent pleas; 16 from Reliance group

    These include applications of RIL itself, as also various group companies and that of RIL Chairman Mukesh Ambani's close aide Manoj Modi, India Infoline and HSBC Investdirect Securities

    Mumbai: Indian Market regulator Securities and Exchange Board of India (SEBI) has rejected as many as 149 consent applications, finding them unsuitable for settlement through payment of charges, including 16 from various entities related to Reliance Industries group, reports PTI.


    These include applications of Reliance Industries Ltd (RIL) itself, as also various group companies and that of RIL Chairman Mukesh Ambani's close aide Manoj Modi.


    The other applications include those from brokerage firms India Infoline and HSBC Investdirect Securities and from entities in a case involving Bank of Rajasthan.


    Under SEBI's consent mechanism, companies can seek to settle cases with the market regulator after payment of certain charges and disgorgement of any ill-gotten gains.


    However, in May 2012 SEBI tightened the regulations for settlement through consent framework. Following that, many cases including some of those related to insider trading, can't be settled through this mechanism.


    In a status report, SEBI has said that 149 consent applications have been rejected as they are not found to be in consonance with the revised guidelines and the proceedings in these cases will continue in accordance with law.


    These include 13 applications from various entities in a case involving alleged violation of SEBI regulations for 'Prohibition of fraudulent and unfair trade practices' in a matter of RIL's erstwhile subsidiary Reliance Petroleum Ltd.


    Besides, there are three applications related to alleged violation of 'Prohibition of Insider Trading Regulations' in the matter of another erstwhile RIL group company - Indian Petrochemicals Corp Ltd (IPCL) - which used to be a government-owned company and was later acquired by Mukesh Ambani-led group as part of a disinvestment exercise.


    Both the companies, Reliance Petroleum and IPCL, used to be separately listed entities, but were later acquired by RIL and got delisted from the stock exchanges.


    SEBI has also rejected consent applications of entities such as GMR Holdings Pvt Ltd, Edserve Softsystems Ltd, PMJ Properties, Garuda Plant Products Ltd and EPC Industries Ltd.

    Others included Splash Media & Infra Ltd, Transglobal Securities, JMD Telefilms Industries Ltd, Chemo Pharma & Laboratories Ltd and Shree Consultations & Services Pvt Ltd, Chemo Pharma & Laboratories Ltd.

    The market regulator said these rejected applications are related to alleged violations of 'Prohibition of Insider Trading Regulations', 'Substantial Acquisition of Shares and Takeovers' and 'Stock brokers and Sub-brokers' norms.

    SEBI said HSBC Investdirect Securities's application is related to alleged violation of 'Prohibition of Insider Trading Regulations' in the matter of Adani Exports Ltd, while that of GMR Holdings is related to alleged violation of 'Substantial Acquisition of Shares and Takeovers'.

    Besides, it has rejected consent application of India Infoline Ltd for alleged violation of clauses related to 'Stock Brokers and Sub-Brokers' in the matter of Pyramid Saimira Theatre Ltd.

    SEBI has also rejected consent pleas of Saurabh Tayal, Sanjay Kumar Tayal, Navin Kumar Tayal, Pravin Kumar Tayal and Sovotex Textiles for alleged violation of 'Prohibition of Fraudulent and Unfair Trade Practices' in the matter of erstwhile Bank of Rajasthan.

    The regulator said pending proceedings in these cases will continue in accordance with law.

    "The rejection of consent application, however, shall not prejudice the pending proceedings in any manner," SEBI noted.

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    Companies must disclose price-sensitive info to bourses first: SEBI

    The market regulator said it noticed certain listed companies giving monthly disclosure of their sales,  turnover and production figures to their respective trade bodies and the same is not disclosed to the bourses

    Mumbai: Listed companies will now have to necessarily disclose all price-sensitive information, including monthly sales figures, to bourses first, market regulator Securities and Exchange Board of India (SEBI) said, reports PTI.


    "...all the events or material information which will have a bearing on the performance/ operations of the company as well as price sensitive information shall be first disseminated to the bourse as required under Clause 36 of the Listing Agreement," SEBI said in a circular.


    The regulator said it has noticed certain listed companies giving monthly disclosure of their sales / turnover / production figures to their respective trade bodies and the same is not disclosed to the bourses.


    The information considered to be 'price sensitive' as per the guidelines include, any change in nature of business, disruptions due to natural calamity, commencement of commercial operations, developments arising out of change in regulatory framework, litigation or disputes having a material impact and revision in credit ratings.


    SEBI also advised stock exchanges to take into account the requirements of the circular and bring the same to the notice of the listed companies.


    As per the clause 36 of the Agreement, listed firms are required to the concerned bourses immediately of events such as strikes, lock outs, closure on account of power cuts and all events which would have a bearing on the performance as well as prices. This has to be done both at the time of occurrence of the event and subsequently after the cessation of the event.


    The announcements are necessary in order to enable the security holders and the public to "appraise the position of the the company and to avoid the establishment of a false market in its securities."


    "In addition, the issuer will furnish to exchange on request such information concerning the Issuer as the exchange may reasonably require," the Listing Agreement said.

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