RBI Annual Report 2017-2018

Tuesday, September 25th, 2018

The RBI Annual Report generally has a lot of interesting charts and data that give good insights into the state of the economy. In this first of a series of posts, we cover five charts that we found quite informative from the latest report.


1. Stalled Projects coming down

RBI Annual Report

The number and value of stalled projects, especially from the government side, has been coming down. Though new investments have not yet picked up meaningfully, we could start to see a return of pricing power for manufacturers and a revival of the capex cycle.


2. e-NAM accelerating

The e-NAM trading platform has grown exponentially since its launch in 2016. From the report:

The scheme has immense potential to transform the agricultural marketing structure through smoother inter-state movements, more efficient price discovery and removal of intermediaries. The adoption process, however, has been slow and gradual with a majority of traders/farmers still continuing with the manual auction method for selling their products. 


3. Food Inflation down structurally

From the report:

For 2017-18 as a whole, food and beverages (weight: 45.9 per cent in CPI) inflation moderated sharply, with its contribution to overall inflation dropping to 29 per cent from 46 per cent a year ago amidst significant intra- year variability. The softening in food prices, which began as early as in the second half of 2016-17 under the weight of a bumper crop and distress sales post-demonetisation, spilled into the first quarter of 2017-18, diving into deflation during May-June 2017 (Chart II.2.3). Two factors stand out in this plunge in food inflation: first, the unusually muted and delayed seasonal uptick in prices of vegetables ahead of the monsoon; second, a deepening of the deflation in prices of pulses since March 2017.

The last few years have seen good monsoons, low global food prices and excess supply which have led to a deflation in food prices.


4. Domestic vs. International Oil prices

Diesel deregulation coincided with the global fall in oil prices. The government smartly increased taxes to shore up public finances. This is seen very clearly in the expansion of the spread between the international crude basket and prices at the pump. With oil increasing sharply in the last few months, it will be interesting to see if the government will maintain the current tax rates or if the spread will normalise.


5. Private vs. Public Bank Credit growth

Private sector Banks are clearly dominating their public sector peers in incremental business. From the report:

Credit growth was largely driven by private sector banks, which were resilient in the face of these tectonic shifts, with their credit portfolio growing at 18.7 per cent during the year as compared to 5.3 per cent by public sector banks (PSBs) and 3.8 per cent by foreign banks. Among PSBs, those under prompt corrective action (PCA) turned out to be laggards, though signs of revival were evident in this category as well during 2018-19 so far (Chart II.3.8). During Q1:2018-19, non-food credit has maintained its momentum, with credit accelerating to 12.9 per cent as on June 22, 2018 as compared to a meagre 6.3 per cent a year ago.

Linkfest – 92

Monday, September 24th, 2018

Interesting commentary from across the web in the last few weeks:


The new breed of FMCG startups – Bloomberg Quint

The misleading narratives of our time – Urbanomics

Death of passive management? – Institutional Investor

Spot electricity spikes turning structural? – Livemint

A fix to the commission problem – ValueResearch

The US Tax reform gave a massive boost to US financial assets – Macro Tourist

The world is full of surprises – Morgan Housel

Asia is not immune to EM woes – The Economist

Analyst Buy/Sell Ratings are the worst – Innovate Wealth

Amazon’s Anti-trust paradox – Yale Law Journal

The recent correction put in perspective – The Calm Investor

The rise of private labels has transformed CPG companies – CBInsights


Adrian Mowat: Free trade increasing across the globe – YouTube

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Can NRI deposits be the saviour of the currency?

Thursday, September 20th, 2018

Interesting and pertinent observation by Jehangir Aziz of JP Morgan in an interview with Bloomberg Quint



Currently the narrative around the rupee is that if things “get really bad” then the RBI can step in, issue NRI bonds and that would keep the currency in check. Jehangir Aziz observes that if you look at what actually happened in 2013-2014, things were actually a lot more challenging.

To paraphrase: It started with a 300 bps rate hike, followed by a large fiscal tightening in a pre-election year and only then did the government go for the NRI deposits. And they did not come cheap; a massive subsidy was provided to Indian commercial banks to ensure it was lucrative enough to get the deposits.

If we were to try NRI deposits again this time around, things may be more costly and difficult than market participants believe.

Lower Mutual Fund costs

Wednesday, September 19th, 2018

In its board meeting on Monday cleared a number of proposals with regards to mutual funds that bode well for the long term health of the sector.

Firstly, SEBI has created new caps on the total expense ratio (TER) for most funds. However, it allowed an extra 30 basis points for selling in B-30 (beyond top 30) cities. The revised structure is as follows:

According to CLSA, the lowering of TER could lead to a 15-25 basis point reduction in fees. This will level the playing field between AMC’s and force the benefits of economies of scale to accrue to investors. Earlier we had a very odd situation where the largest AMC’s had the highest expense ratios, which is the reverse of what you would expect!

Secondly, Sebi said all mutual fund commissions and expenses must be paid from the scheme itself. This will go a long way to curb “”Marketing expenses” that fund-houses use to incentivise distributors. We could see a lot less “international distributor meets” arranged by asset management companies.

Finally, the regulator has said that the industry must adopt a full trail model of commission in all schemes without paying any upfront commission. This will reduce churn for investors and also result in the exit of distributors who churn portfolio constantly to earn their fees. The trail model aligns incentives correctly and would be very healthy for long term returns.

What are the possible negative impacts of this? AMC’s have already talked about how the cut in expense ratios would be majorly passed on to distributors. This would particularly hurt the smaller IFAs and could lead to some exiting the business. With the advent of an all-trail model, we may see banks and other intermediaries push more costly products such as AIF’s, PMS and ULIPs instead of mutual funds. Such products are far less transparent, command higher fees and have a mixed track record on returns. Unfortunately, this would not stop a lot of distributors, who would be motivated by the commission they would earn. Similarly, for an all-trail model, investments for smaller investors get less lucrative from the distributor point of view and therefore we can see less interest in mutual fund penetration at smaller ticket sizes.

Overall though, lower charges will boost returns for the end investor and the switch to all trail model will ensure that distributors’ incentives are more in line with the clients’ long term wealth creation.

Risky credit funds

Tuesday, September 18th, 2018

Last week there was a downgrade of the debt rating of IL&FS and its subsidiaries by several notches. This is having a ripple impact on the mutual fund industry. As per a report by Bloomberg Quint:

IL&FS has Rs 2,500 crore worth of rated commercial paper, of which Rs 2,020 crore was outstanding as of July end, subscribed mainly by mutual funds and companies, according to CARE Ratings. Around 12 asset management companies have exposure to various papers issued by the IL&FS group, Bloomberg data showed.

Such an event should not be viewed in isolation. The mutual fund credit risk category has seen a phenomenal growth over the last 5 years. The total assets managed by these funds today is over one lakh crore. This is the size of some of larger banks in our country. Yet, till before this IL&FS event, we had been looking at negligible NPAs. IDFC mutual fund came out with a nice chart last year that visually showed this.

With such a large asset size and exposure to risky corporates, such a situation is unlikely to continue. What’s worrying is that the nature of a mutual fund makes events such as a default hit the investors portfolio directly. This is due the the nature of the fund almost as a pass through vehicle. At least in the case of banks there is some mandated capital buffers to absorb the risk. And, if investors start redeeming funds, there is additional pressure on the schemes due to liquidity constraints.

And so these credit risk and medium duration funds seem to be facing a perfect storm with the macro environment providing strong headwinds:

  • Global factors are pushing our bond yields higher,
  • The rally in oil and the depreciation of the currency will create a drag on growth over the next few quarters,
  •  the government is unlikely to meet its fiscal deficit targets in the run up to elections, and
  •  the spread between government papers and more risky credits is still compressed.

It would be prudent then to reevaluate exposure to higher yield credit strategies and to instead look to higher AAA rated corporate and government papers.

Linkfest – 91

Monday, September 17th, 2018

Interesting commentary from across the web in the last few weeks:


EM rout is not made in America – FT Alphaville

Why your time horizon isn’t long enough – Of Dollars and Data

Amazon’s Antitrust Paradox and India – Capitalmind

Lessons from 2008 – Safal Niveshak

Making private public – Irrelevant Investor

What does it mean to be a financial expert – Irrelevant Investor


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Linkfest – 90

Wednesday, September 12th, 2018

Interesting commentary from across the web in the last few weeks:


The default by IL&FS and its impact on debt mutual funds – Bloomberg Quint

The dramatic shift in macros and its impact on the debt market – Suyash Choudhary

India: 10 years after Lehman Crisis – Jehangir Aziz

Heavy M&A activity underway in India – Bloomberg Quint

How Ritholtz Wealth built its business – Josh Brown


Bruce Flatt on Real Asset Investing – YouTube


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Rethinking Education

Tuesday, September 11th, 2018

The universal education that we use today has not changed much in over a century. But in the same period of time, technology has drastically changed our lives and the way we do things. What the point of rote memory when everything is always available anytime through internet or computing systems. If we had to rethink the education system, what would it look like?

Here is a video a TED Talk by Seth Godin that talks about how ridiculous the current system is and  eight things that could change for education systems in the future



From the talk, what could we do to have a better learning outcomes?

  1. Homework during the day and lectures at night. Its better to have one common lecture from the best teacher in the world and have homework/class room discussions to facilitate discussion, learning and engagement with the subject matter
  2. Open book all the time. There is zero value in memorisation in the age of the internet
  3. Access to any course anywhere in the world anytime. There is no need for chronology anymore
  4. The rise of focused education instead of mass batch systems
    • No more multiple choice – computers can evaluate better than that
    • Measuring experience instead of test scores – the end of compliance as an outcome
    • Cooperation instead of isolation – because thats how it works in the real world
  5. Teacher role transforming to that of a coach
  6. The rise of lifelong learning
  7. Work happening earlier in life
  8. The death of the “famous” branded college

Its an inspiring talk and gives lot of food for thought.


Monday, September 10th, 2018

Knight Frank has released its 2018 Wealth Report and its interesting to go through to look for trends in wealth management and how high net worth individuals are allocating their funds. One chart on philanthropy in particular caught my eye:


Globally there has been a trend of people wanting to give back to their community and to help philanthropic causes. From the chart above, over 68 per cent of advisors felt that their clients were increasing philanthropic activities. This is a trend across all regions and a bulk of the spending is going toward education, health, environmental issues among other causes. This is especially heartening in light of the fact that one of the biggest concerns today is about widening wealth inequality in societies globally. The rise of socially responsible investing through ESG funds globally is also a sign that investors are looking to change the status quo and take more interest in socially responsible and sustainable investments.

Five reasons to invest in International Equities

Friday, September 7th, 2018

Why invest in international equities? We would say, why would you not? Here are just a few reasons why it is prudent, for an investor with a longer time horizon and and more aggressive risk profile, to have an allocation to international funds:

  1. Globalisation: Since 1991 India has slowly but steadily opened up to foreign investment. Today the Indian consumer is a global consumer. Brands such as Amazon, Google, Samsung, Toyota, Zara, Cadbury’s etc have been used by many Indians and none of these companies are listed in India. And the same is true for B2B companies. Moreover, a number of the new Indian companies are getting listed abroad or have majority foreign ownership. Take the examples of Flipkart, PayTM and Ola which are all foreign owned. If the companies we do business with are global, why should our investments be restricted to local?
  2. Good Performance: The returns of international equities have been good over a longer time frame. In fact, mutual funds investing in US equities have been the amongst best performing portfolios because not only did US markets do well in local currency terms, but the rupee depreciation also added alpha in the last year. Similarly, broader emerging markets have given returns in line with Indian equities over much longer time frames.
  3. Little difference in taxation: Earlier it used to be the case that funds that invested in foreign equities were taxed as debt whilst domestic equity funds were tax free after a year. But since 2016, domestic equity funds are taxed on long term capital gains at 10 per cent as well. The difference in taxation is now relatively smaller
  4. Currency hedge: Gold is thought of as a good way to hedge against Rupee depreciation. However returns have been flat over the last several years. Foreign funds invest with dollar as a base currency and therefore can act as a natural hedge for the portfolio
  5. Prudent Risk Management: While India is structurally one of the best long term stories for equities globally, it is essential not to have all eggs in one basket. If things suddenly go bad in one market, you have the global diversification to keep your portfolio in check