RBI Policy and reduction in repo rate

Reserve Bank of India (RBI) has cut the benchmark repo rate by 50 basis points to 6.75 percent, while keeping the CRR and SLR unchanged at 4 percent and 21.5 percent respectively. The Central bank has been able to reduce the repo rate because it believes that it is not inconsistent with the inflation target that it has set for itself under a written agreement with the Narendra Modi government, when it came to power.

Consumer inflation was at a record low of 3.66 percent in August and stable over the last few months and looks to undershoot the government’s projection of 6 percent by January 2016. The Central Bank has praised the government’s proactive management of food supplies to rein in inflation and also notes that food grain output is expected to be higher than last year despite poor monsoon because of timely advisories and regular monitoring of seed and fertilizer availability by the government.

RBI Governor, Raghuram Rajan has said that the rate cut should not be seen as a Diwali gift but was underpinned by changing ground realities where he expects the inflation to be under control in the coming days. It is pertinent to note that, he also thought it prudent to remind us of the fact that our economy has legacy problems from the past that needs to be dealt with first, to put it on a firm footing. This also points towards the fact that, UPA has lot to explain.

The rate cut is expected to provide significant support to the economy. The RBI and the Government have decided to work together to ensure that the cumulative rate cut of 125 basis points is transmitted to the wider participants to the maximum extent possible, something that is elusive to some segments.

The stance of RBI on rate cut has also done a lot of good to its credibility. By steadfastly refusing to cut rate under vociferous demand for it previously because it believed that the conditions were not right and now cutting it by an unexpectedly large 50 basis points because the threat of inflation reading its head again has considerably abated, the RBI has made it amply clear that it will apply its own mind when it comes to inflation targeting. This also makes its fight against inflation more credible and to the extent managing inflation is managing future expectations about price, the battle is already half won by the RBI. Managing future expectations about price is an important for managing inflation in economic parlays.

The steps reflect our movement towards low interest rate regime. The decision of relaxation in Foreign Portfolio Investment (FPI), will make about 1.2 lakh crores available with the Govt. for investment over the next 5 years. This will lead to demand creation for the private sector catalyzing economic growth. Similarly private sector can also go for External Commercial Borrowing (ECB) at low international interest rates.

Now is the right time for the Government to capitalize on the rate cut and work towards its transmission to boast economy and move quickly on other administrative and legislative reforms. It’s for us to lay down a strong foundation for future growth of the economy and realize the true potential of being a bright spot in global economic arena.

Gopal.agarwal@bjp.org

A big opportunity waiting to be tapped

 A big opportunity waiting to be tapped

By Gopal Krishna Agarwal,

With slightly over 20 million demat account and around 5 million retail investors, there is a humongous opportunity waiting to be tapped. This not only makes business sense, but is also in the interest of our country where investment needs are mind-boggling. It is time for the discount broking firms to join other industry players to work for increasing the size of the market.

DISCOUNT brokerage is only around five years old in India, while it has been around for over two decades in the more advanced financial markets like the US, where it continues to exist with the traditional broking firms. Although the emergence of discount broking has not rung the death knell for traditional brokerages or full-service broking firms yet, it has been causing a lot of anxiety to the market participants. Investors in every market are mostly swayed by the price and cost transaction, but there are also discerning buyers who don't mind paying a higher price, provided the value proposition is right As the term itself suggests. The USP of discount broking is its extremely low rates of commission. As far as services are concerned, it offers none, except trade execution. Full-service broking firms, on the other hand, offer an entire gamut of services, ranging from research reports and trading inputs to financial planning and wealth management. Therefore, both cater to two different segments of the market.

Discount broking is meant to attract day traders who, otherwise, end up paying high brokerage on their trades. It also attracts more enterprising investors who, like the day traders, do their own research before investing. With the explosion of mass media, multiple sources of information are available to investors, mostly free. So, they are no longer dependent on brokers for information to guide their buy and sell choices. Such investors, however, are few and far between.

Investors who cannot follow financial markets either due to lack of time or skill would continue to remain with the full-service broking firms, as they depend on their research, recommendations and trading tips, since they mostly follow the buy-and-hold philosophy. Traditional brokers also retain the advantage of human factor. Investment in equities is complex and a little handholding is always welcome. Hence, a large number of investors prefer investment advisers with whom they can talk and interact. The traditional broking firms will deal with the emerging competition with discount brokers by either moving up or down the value chain. One way to deal with it is to unbundle the services and offer them accord- ing to the prospective client's willingness to pay. Thus, within the same broking outfit, one can either opt for discount broking or a more premium service, where brokerage is bundled with research or market reports. We are already seeing this happening

Since the traditional firms will only be able to charge a higher brokerage for value-added services, their quality of research is likely to improve, which, in turn, will also upgrade the overall resilience and quality of information in the market. Some of the smaller brokerages whose research reports are not worth the paper on which they are printed would either have to improve their quality drastically or downgrade to discount broking. This might also lead to consolidation in the broking industry, as with falling margins and increasing compliance and regulatory cost, firms would try to achieve a certain size to reap the economies of scale. So, before discount broking and the accompanying cut-throat competition becomes a menace, market regulator Securities and Exchange Board of India (Sebi) should relax the norms governing the merger and acquisition of broking business to help the industry to consolidate. Even the exchanges need to do a lot with regard to fees, while the government must change the several tax laws to facilitate mergers and acquisitions

We believe that following Iite approach, Luddite think this matter is in nobody's interest. We work in the equities market where the investors reward enterprises that do well and penalise that don't So, to demand any kind of restriction on discount broking runs against the basic philosophy of the stockbroking business. So, no matter how much we insist on curbs, the desired results will not be achieved in a free market scenario.

It is for this reason that the Association of National Exchanges Members of India (ANMI) had reservations regarding the demand of a regulation on minimum broker age. It is likely that some of the traditional broking firms might perish in the face of this new challenge, but then, more efficient and innovative firms would replace them. This is the perennial gale of creative destruction that Joseph Schumpeter so eloquently talked about

It is pertinent to note that the cost of brokerage has never held back investors from the equity market, and to expect that discount broking will usher in equity culture in the country is completely misplaced.

With slightly over 20 million demat account and around 5 million retail investors, we have not even scratched the surface properly; there is a humongous opportunity waiting to be tapped. This not only makes business sense, but is also in the interest of our country, where investment needs are mind-boggling. It is time for the discount broking firms to join other industry players to work for spreading financial literacy and increase the size of the market.

The relentless march of technological advancement brings with it changes, some of which are disruptive in nature, but the human effort has always been to rise up to it. When the settled way of things change abruptly, there is fear of the unknown and even some overreaction, but then that is not wholly unexpected. This is not the first time that there has been a major shift in the way business is done in the stock market. We have covered a long journey from meeting under the banyan tree in Mumbai to hiding behind computer screens and executing trades at the speed of light.

Gopal K Agarwal is national convener of the BJP economic cell.