Shortly after cutting the rate of interest on PPF, the government has also gone ahead and replaced the 8% RBI bonds with 7.75% bonds literally cutting rates by 25 basis points. This is one more indication that the government is keen to remove the distortions in tax saving instruments which is actually distorting the yield curve in India. Of course, it will come at the cost of pain to the large mass of middle class investors who invest in these instruments for safety of principal. The bonds will be taxable and there is not upper ceiling for the amount you can invest. The bonds will be available on tap round the year.
After the Manufacturing PMI came in at an impressive 54.7 for December, the PMI Services also came in higher at 50.9. In the month of November, the services PMI was at 48.5 indicating a clear deceleration in the services sector. The services sector in the last 1 year has borne the brunt of demonetization and the introduction of GST. The Services PMI of 50.9 indicates a mildly expansionary trend and the sustainability in the next few months will be very critical. The major growth in services came from software, communications, insurance and financial services.
Effective February 2018 all Indian mutual funds will have to report their returns in terms of Total returns index (TRI) rather than on the base of pure returns. While pure returns consider the point to point index returns, the TRI also considers the impact of dividends. The Nifty has a dividend yield of around 1.5% and that needs to be added to the index returns to get a clear picture of the actual returns generated by the specific fund. Most funds will show a reduction in relative outperformance as the Nifty returns will not be upgraded by around 1.5% to the extent of the dividend yield of the index.
In a bid to expand its overseas operations further, Hindalco is likely to be bidding for US aluminium manufacturers, Aleris. The value of the bid is estimated to be around $2.5 billion. The last big global acquisition made by Hindalco was Novellis in 2007. The bid for Aleris will be made through Novellis Inc in the US. There had been Chinese bids for the company but the US was wary of security issues with respect to selling out a US company to a Chinese acquirer. Novellis is currently enjoying a strong balance sheet and robust cash flows which gives the company the strength to go for acquisitions.
Government has sought parliamentary approval for its Rs.80,000 crore bank recapitalization program. This recapitalization will be done through the issue of bonds which will be subscribed to by banks. Effectively, the huge deposit base of banks will be used to by the recapitalization bonds issued by the government and it will help these banks also meet their Basel IV deadline. With total stressed assets of $207 billion, the Indian banking system is caught in a Catch 22 situation. The RBI has already identified weak banks for urgent remedial measures and is also applying the IBC Code to force companies to make good their loan liabilities. Meanwhile IOB, which has nearly 20% NPAs, will be using its share premium account to write off its entire accumulated losses of nearly Rs.7000 crore.
It looks like nothing is going to stop the Dow Jones Index as it surged past the 25,000 mark on Thursday. Heavyweights like Boeing and Wal-Mart were instrumental in lifting the Dow to a new high. In fact, during the year 2017 itself, the Dow has moved from below the 20,000 mark to above the 25,000 mark, leading to one of the best yearly returns in the Dow history. Better than expected manufacturing data and strong private payrolls data is keeping the interest in the US economy buoyant. The Fed commitment to hiking rates is also being seen as an affirmation of the US growth trajectory.
