Dear Investor,

We are pleased to present “NRI Espresso”, a handy newsletter just for our esteemed NRI investors for the month of October 2008. It is our constant endeavour to serve your growing information, investment and servicing needs and the newsletter is created just for this purpose. This newsletter will be a collection of relevant articles of special interest to you. These include latest news, events, regulatory changes, and information on product offerings. 'NRI Corner', an exclusive section has also been created on our website for your mutual fund information and investment needs.

1. Economy News

Infrastructure output worsens

The August infrastructure sector output grew 2.3% y-o-y, compared with July’s 4.3% annual growth. Output rose an annual 9.5% in August 2007, and in the 2007/08 fiscal year it rose 5.6% from a year earlier.

Industrial output falls significantly

The industrial output rose at a rate of just 1.3% y-o-y in August, sharply below the previous month’s upwardly revised 7.4%. The figure was well below the general market consensus for growth of 6.1%.

Fiscal deficit eased

The April-September fiscal deficit was 1.03 trillion rupees, or 77% of the full-year target of 1.33 trillion rupees set earlier in February.

WPI inflation well below market forecast

WPI inflation rose 10.68% y-o-y, in the week to October 18, below the previous weeks annual rise of 11.07%. The rate was well-below a median forecast of 10.82%. However inflation for the week ended August 23 was revised up to 12.76% from 12.34%. The annual inflation was 3.11% during the corresponding week of the previous year.

2. Mutual Fund & NRI News

SEBI increases bond valuation band for mutual funds

The SEBI widened the band for valuation of bonds, which used to calculate net asset values (NAVs) of mutual funds. Funds could value a rated debt security with duration of up to 2 years between 150 basis points (bps) below and 500 bps above its value, up from a band of 50 bps below and 100 bps above. For securities with a maturity of more than two years, the range has been fixed at 100 bps below and 400 bps above its value, up from 25 bps below and 75 bps above the value.

RBI extends 14-days repo facility to relieve Mutual Funds

RBI extended special fixed rate 14-Day repo under Liquidity Adjustment Facility (LAF), which was announced and conducted on 14th October, 2008. RBI conducted a special 14 day repo at 9% per annum against eligible securities for amount of Rs.20,000 crore in order to enable the banks to meet the liquidity requirements of mutual funds.

RBI relaxes restrictions on lending and buy back through CDs
The RBI relaxed restrictions on lending and buy back of the CDs held by mutual funds for a period of 15 days.

RBI hiked NRI deposit rate ceilings by 50 bps

3. Market Overview

India’s benchmark indices were dragged into the global stampede of selling as financial market turmoil and poor economic data killed investor sentiment across the world. Most markets and market segments across the globe registered the worst monthly performances ever despite ending the month with a flourish. Sensex hit a 35-month low, falling through 8000 briefly before ending 23.89% lower at 9788 points. Nifty closed the month 26.41% lower at 2885.60. Realty (-43.62%) and Metals (-40.31) were among the biggest losers. IT (-7.53%) was the least hit sector.

The action packed month saw a series of measures taken the central banks and governments worldwide to ease liquidity pressures and trigger circulation of money in the banking system. Central banks including the US Fed Reserve, Bank of England, Bank of Japan and People’s Bank of China hacked interest rates and more cut were factored in by futures markets from the central banks. The US government started setting in motion the $700 billion plan earmarked to pull the US banking sector out of a hole. Large ‘bailout’ plans and nationalisation of banks was carried out in other nations as well.

The unprecedented size of policy actions appeared to have started helping market sentiment towards the end of the month – though several indices registered the biggest monthly losses ever, nearly all regions registered a weekly gain in the last week of October. LIBOR rates eased and commercial paper activity in the US also reflected easing conditions in the credit markets.

With the Indian markets seeing no relief from investment outflows, SEBI announced removal of restrictions on P-Notes and hike in FII investment limit in debt. FII net sales of Indian equities were $3.8 bln in October itself, taking the year’s tally to $12.9 bln. Mutual funds were net buyers worth Rs 1431.60 crore of equities while selling Rs 26,081.80 worth debt. The RBI provided liquidity support through special windows apart from hacking key policy rates ahead of the credit and monetary policy review. The policy itself triggered a sell-off in the markets as the RBI decided not to cut rates further with liquidity conditions having improved. However, better liquidity persisted for a very brief period and put pressure on the RBI to announce further rate cuts. The RBI later announced a hefty 100 bps cut in the CRR and also the repo by 50 bps, in addition to the 1% SLR cut on November 1st in an attempt to shore up liquidity in the system.

Together with the global developments, the month came to a close on a positive note as the badly battered market encouraged investors to gradually return despite earnings reports painting a mixed picture. Some corporates revealed better than expected results but overall, net earnings appeared to have been affected by the depreciating rupee, higher input costs and higher interest rates. The other major factor to boost sentiment through the month was the easing headline inflation rate.

4. Special Focus – SIP

diSIPline yourself… make money SIP by SIP!!             

There are very few things everyone in the world agrees upon. One of those is stock market unpredictability - the volatility dreaded especially by retail investors. The Newton’s third law of motion is an oft-repeated axiom used by bears & this year’s performance of the stock markets has proved it right.

Time it perfect: buy when stocks hit bottom

Buying units when the market is at a low is a simple tactic to gain amidst a healthy fundamental outlook. The tactic is however simplistic. Consistently timing the market right has been like a pursuit of El Dorado, as every seasoned investor will concur. Uncertainty is ingrained in the character of the stock markets & they could rise each time while you wait to decide on the likely bottom level. All should understand that nobody can find the right bottom to enter and highest top to exit. So why not instead, average out costs & lay the Newton inside you to rest?

Take a SIP and Relax.

A systematic investment plan is a disciplined way of investing one’s money in order to tone down the volatility in the markets and thus drawing maximum benefit out of the investments over a longer period of time.  SIP will allow you to invest regular amounts in a scheme at regular intervals. Picture this - in a certain month on the date of your SIP instalment, the NAV of the scheme was at Rs. X, getting you Rs1000/X number of units (assuming regular monthly amount chosen is Rs1000). On another instance, the NAV was lower, say Rs(X-1), thus buying you Rs1000/(X-1) number of units this time, i.e. higher than in the earlier month.
Over a period of time this will mean that your average price worked out lower than what could have been in case of a lump sum investment at a certain market level.

Take a look at the table.

The SIP investor above ended up with more units and at lesser average cost at the end of the twelve months, as compared with the investor who stacked Rs12000 in one go & owing to sporadic market volatility, ended up with lesser units. This explains the benefit of Rupee Cost averaging.

Secondly, it makes ‘timing the market’ irrelevant. Buy low and sell high is the philosophy of investing. However it is most difficult to find the lows and the highs or rather its time consuming and risky. Investing through SIP eliminates this risk because of its disciplined approach of investing.
Thirdly, it goes easy on your wallets as you can start with as little at Rs. 500 as against Rs. 5000 required for lump sum investing.

So SIP is the best way to stagger your investments over a period of time and build wealth.

SBI Mutual Fund’s top performing schemes like Magnum Sector Funds Umbrella -Contra Fund, Magnum Multiplier Plus Scheme, Magnum Taxgain Scheme and Magnum Balanced Fund have been giving consistent returns to its SIP investors over the years.

Illustration:

(Disclaimer: *It is assumed that the date of 1st installment of SIP was 15th November, 2003. Value of SIP is computed using accumulated units multiplied by NAV as on 15th October, 2008. The data assumes the investment of Rs. 1000/- on 15th of every month or the subsequent working day. Load and taxes are not considered for computation of returns. Past performance may or may not be sustained in future.)

5. Feature Article – RBI Measures & Beyond

Cutting the losses
There is this story about a civil servant, who was tired of his political master’s (a minister) continuous show of arrogance. He planned to hit back in a rather ingenuous way. The minister was delivering a speech, as usual written by this civil servant, to a large gathering: “Inflation, recession, globalization, markets – these are crying problems of the day. It is obviously not enough to point these out. The more important question is how do we address these issues?”  Here he reached the end of the page and turned the sheet over, and the only thing which was written on the other side was: “NOW YOU ARE ON YOUR OWN”.
Since the beginning of the bull-run in 2003 & till early 2008, it had been a glorious journey for the Investment Advising community. The Market was acting like this Civil Servant, obedient enough to write fantastic opportunities for us: we had to simply mesmerize our clients with these great investment ideas (sales pitches) and laugh all our way to the bank.
But in the process, we probably misjudged the raw power of the market, which has now left us proverbially– “ON OUR OWN”. This has thrown in a real challenge for all of us in the Financial Services profession and if we can take it head on, we will emerge more knowledgeable, more powerful and much better equipped to manage the overall financial health of our client.

This write-up takes a view as to what is happening to the Indian economy and the corrective measures adopted by the Regulators to overcome the bad times.   

The sub-prime crisis and India

By now most of you are aware of the nature of this crisis, in case you have any doubt please refer to my article in the October 2008 issue.

As per information available in the public domain, Indian Banks or Financial Institutions have not bought large quantity of these sub-prime loans and are safe.

However there is an indirect impact: since 2003, the FIIs (Foreign Institutional Investors) have brought in over $ 52 Billion (approx Rs. 2.08 Lakh Crore if you take 1 $ equivalent to Rs.40/-) in the Indian stock market. Now these FIIs back home are facing huge monetary crunch. They are selling of their Indian equity holding and in return getting Rupee.  With this rupee asset they are buying US dollars. As they are selling large amount of Indian Equity, the price of stocks are falling and as they are buying dollars, the demand of dollar is shooting up and making it more expensive (around Rs.50 to a $) vs. rupee.

Capital crisis 

As stock market is getting weaker, it is becoming increasingly difficult for the Indian companies to sell fresh equities to raise capital. This fresh capital would have otherwise been utilized for business expansion: hence if market remains negative it will be difficult for our companies to maintain the pace of growth, they were experiencing during the last five years.   
How are we supposed to counter these issues? RBI is playing a significant role to neutralize the negative impacts of the crisis. The newswire is buzzing with terms like rate cuts & line of credits: let’s look at some of the methods adopted by RBI and how they will help “to strike an optimal balance between preserving financial stability, maintaining price stability and sustaining the growth momentum”.

RBI cutting rates

The Repo rate

Repo (Repurchase) rate is the rate at which the RBI lends shot-term money to the banks. When RBI wants to make it more expensive for the banks to borrow money, it increases the repo rate; similarly to make it cheaper for banks to borrow money, it reduces the repo rate.
RBI has reduced this repo rate by 50 basis points to 7.5 % pa with effect from November 3, 2008 opening up a cheaper line of credit for the banks.

On the contrary, the reverse repo rate is the rate at which banks park their short-term excess liquidity with the RBI. The RBI uses this tool when it feels there is too much money floating in the banking system. An increase in the reverse repo rate means that the RBI will borrow money from the banks at a higher rate of interest. As a result, banks would prefer to keep their money with the RBI.  As RBI doesn’t wish to mop up money now, it has kept this rate unchanged at 6%.

Cash Reserve Ratio (CRR)

Banks in India are required to hold a certain proportion of their deposits in the form of cash. However, actually Banks don’t hold these as cash with themselves, but deposit it with Reserve Bank of India (RBI). This minimum ratio (that is the part of the total deposits to be held as cash) is stipulated by the RBI and is known as the CRR. Thus, Say a Bank ABC obtains an additional deposit of Rs 100, and the cash reserve ratio is 9%, the banks will have to deposit Rs 9 with RBI and Bank ABC will be able to use only Rs 91 for investments and lending purpose. Therefore, higher the CRR, the lower is the amount that banks will be able to use for lending and investment.

RBI has decreased the cash reserve ratio (CRR) of scheduled banks is reduced by 1% (1% = 100 basis points) from 6.5% pa to 5.5%. As banks combined Net Time & Demand Deposit stands at Rs. 40 Lakh Crore, this measure is expected to release around Rs.40,000 crore into the system.

Statutory Liquidity Ration (SLR)

This indicates the minimum percentage of deposits that the bank has to maintain in form of gold, cash or other approved securities. Thus if the Bank ABC, above is left with Rs. 91 and if the SLR rate is 25%, it will have to use another Rs. 25 in the approved securities. Thus post CRR & SLR, deduction Bank ABC is left with only Rs.66 for lending, for every additional Rs. 100 it collects.

RBI has decreased this SLR requirement from 25% to 24% commencing the fortnight beginning November 8, 2008. This will also increase the lendable amount in the hands of the banks.

Temporary measures by RBI

1. RBI has introduced a special refinance facility wherein all banks will be provided refinance from the Reserve Bank equivalent to up to 1% of each bank's Net Demand & Time Liability as on October 24, 2008 at the repo rate. This facility is extended for a maximum period of 90 days only.
2. RBI has also extended additional liquidity support exclusively for the purpose of meeting the liquidity requirements of mutual funds.
3. RBI has also decided to sell US dollar to increase the supply in the domestic foreign exchange market.

Conclusion

All economic news is relative, and right now the news is bad all over the world. However if you   see the other side of the story, we need to decide how bad the scenario is:

1. The Indian Financial system is not sitting on the sub-prime assets
2. The Indian market has corrected by almost 50% -60% from it’s peak
3. RBI is taking concerted effort to control the crisis and increase the cash flow in the system
4. The projected GDP growth rate of has been revised downward to 7% pa, even then the growth would be faster than most of developed and developing nation.

Though we should be cautious about our next course of action in this market, we need to go back to what the great master say about situation like this –

“When the world is greedy, I am fearful
When the world is fearful, I am greedy”
- Warren Buffet

Disclaimer: This Investment update is for information purpose only and is not an offer to sell or a solicitation to buy any mutual fund units/securities. These views alone are not sufficient and shouldn't be used for the development or implementation of an investment strategy. It should not be construed as investment advice to any party. All opinions and estimates included in this schemes guide constitute our view as of this date and are subject to change without notice. Neither SBI Funds Management Private Limited, nor any person connected with it, accepts any liability arising from the use of this information. The recipient of this material should rely on their investigations and take their own professional advice.

Risk Factors: Mutual Funds and Securities Investments are subject to market risks and there is no assurance or guarantee that the scheme's objectives will be achieved. As with any other investment in securities, the NAV of the Magnums/Units issued under the scheme(s) may go up or down depending upon the various factors and forces affecting the securities market. Past performance of the Sponsor/AMC/Mutual Fund/Scheme(s) and their affiliates do not indicate the future performance of the Scheme(s) of the Mutual Fund. The names of the scheme(s) do not, in any manner, indicate either the quality of the scheme(s) or their future prospects and returns. For scheme-specific risk factors please refer to the offer document of the scheme. Please read the offer document before investing. Investment Objectives: Magnum Balanced Fund: To provide investors long term capital appreciation along with the liquidity of an open-ended scheme by investing in a mix of debt and equity. The scheme will invest in a diversified portfolio of equities of high growth companies and balance the risk through investing the rest in a relatively safe portfolio of debt. Magnum Multiplier Plus Scheme 93: To provide investors long term capital appreciation along with the liquidity of an open-ended scheme. The scheme will invest in a diversified portfolio of equities of high growth companies. Magnum Taxgain Scheme: The prime objective of this scheme is to deliver the benefit of investment in a portfolio of equity shares, while offering deduction on such investments made in the scheme under Section 80 C of the Income-tax Act, 1961. It also seeks to distribute income periodically depending on distributable surplus. Magnum Sector Funds Umbrella - Contra: To provide the investors maximum growth opportunity through equity investments in stocks of growth oriented sectors of the economy. There are five sub-funds dedicated to specific investment themes viz. Information Technology, Pharmaceuticals, FMCG, Contrarian (investment in stocks currently out of favour) and Emerging Businesses. Statutory details: SBI Mutual Fund has been set up as a trust under the Indian Trusts Act, 1882. State Bank of India ('SBI'), the sponsor is not responsible or liable for any loss resulting from the operation of the schemes beyond the initial contribution made by it of an amount of Rs. 5 lakhs towards setting up of the mutual fund. Asset Management Company: SBI Funds Management Private Limited (A joint venture between SBI and Société Générale Asset Management) -191, Maker Tower 'E', 19th Floor, Cuffe Parade, Mumbai 400 005. Trustee Company: SBI Mutual Fund Trustee Company Pvt. Ltd. Mutual Fund investments are subject to market risks. Please read the Offer Document carefully before investing.