BUY NIFTY 8350 CALL

BUY NIFTY 8350 CALL 

@ 10

TARGET 

100

Fed eyes ability of asset managers to repay in a panic - NIFTY HEADING TOWARDS 7800

Fed eyes ability of asset managers to repay in a panic

WASHINGTON/NEW YORK | BY MICHAEL FLAHERTY AND JONATHAN SPICER

(Reuters) - Sections of the U.S. financial system that may be vulnerable to investor panic are raising concerns inside the Federal Reserve, as policymakers preparing for the first interest-rate hike in nearly a decade seek to ensure that the market is ready and able to handle it whenever it happens.

The Fed is particularly worried about whether the booming asset management industry can withstand a run of redemptions in a financial crisis.

Chief among the Fed's concerns, increasingly voiced in public remarks, is that certain funds held by individuals and institutions will not have the underlying assets sufficient to back investors cashing out in a panic. The lack of liquidity would expose investors and the economy to sharp price swings.

Bond inventories at primary dealers have plunged due to bank regulations. The amount of Treasury securities in circulation also has dropped after the Fed's three rounds of bond purchases.

The fall in liquidity across portions of the bond market comes amid a jump in volatility, making it more important for Fed officials to telegraph their tightening plans well ahead of time.

The Fed's nightmare scenario is in surprising markets, exposing investors to the liquidity risks it fears, and causing a spike in borrowing costs that hurts economic growth.

"Some open-ended mutual funds offer daily withdrawal privileges but invest in assets that take longer to sell and settle," Fed Vice Chair Stanley Fischer said in a speech last month. Fed Governor Daniel Tarullo and Atlanta Fed President Dennis Lockhart have offered similar warnings about liquidity in the last few months.

Asset managers have said they are systemically safe. But Fed officials have noted a surge in asset management inflows and concentration. One example is fixed income exchange-traded-fund assets, which reached $246 billion in 2013 from their inception in 2002, according to Greenwich Associates.

New York Fed President William Dudley has warned that investors are less inclined to hold liquid assets as memories of the 2008 crisis fade.

The Fed could slow or delay rate hikes "if financial conditions were to tighten a lot," Dudley said this week. Still, the Fed will be as clear as possible. "I'll be very surprised if, whenever normalization occurs, it will be a big surprise to anyone - if we're doing our job properly," he added.

   

TANTRUM WORRIES

The Fed has kept interest rates near zero since Dec. 2008 and embarked on three rounds of large scale bond purchases to stimulate the U.S. economic recovery following the 2007-9 financial crisis.

While the Fed could hike rates in June, the economy's weak winter performance has pushed expectations of a hike more toward September. Futures traders are betting on a move as late as December.

    That disconnect sets up a potential collision if the central bank hikes faster than expected, a collision that could send ripples across the asset management industry.

    "Part of what's going on is (investors are) not being convinced that we're going to raise interest rates," Loretta Mester, president of the Cleveland Fed, told economists last week.

Bond markets are still susceptible to another "taper tantrum" such as the one that happened in 2013 when then Fed Chairman Ben Bernanke caught investors off guard by suggesting the central bank could trim bond purchases earlier than the market expected.

Deutsche Bank pointed out in an April note that the volume of primary transactions in the Treasury market has dropped relative to the overall scale of the notes held by the public, though it also said the bank does not see "broad market impairment."

"But liquid markets could quickly turn illiquid in response to a shift in Fed policy or some other shock, which could amplify any adverse market response, as occurred during the taper tantrum," according to the note.

(Reporting by Michael Flaherty and Jonathan Spicer; Editing by David Gregorio)

India's rich temples may open gold vaults for Modi

MUMBAI/NEW DELHI | By Meenakshi Sharma and Krishna N. Das

 

 

 

(Reuters) - The two-century-old Shree Siddhivinayak temple in Mumbai devoted to the Hindu elephant-headed god Ganesha bristles with close circuit cameras and is guarded by 65 security officers.

It is one of India's richest temples, having amassed 158 kg of gold offerings, worth some $67 million, and its heavily guarded vaults are strictly off limits.

India is the world's biggest consumer of gold and its ancient temples have collected billions of dollars in jewellery, bars and coins over the centuries - all hidden securely in vaults, some ancient and some modern.
A few years ago a treasure of gold worth an estimated $20 billion was discovered in secret subterranean vaults in the Sree Padmanabha Swamy temple in Kerala.


Now, Prime Minister Narendra Modi wants to get his hands on this temple gold, estimated at about 3,000 tonnes, more than two thirds of the gold held in the U.S bullion depository at Fort Knox, Kentucky, to help tackle India's chronic trade imbalance.


Modi's government is planning to launch a scheme in May that would encourage temples to deposit their gold with banks in return for interest payments.


The government would melt the gold and loan it to jewellers to meet an insatiable appetite for gold and reduce economically-crippling gold imports, which accounted for 28 percent of India's trade deficit in the year ending March 2013.


India's annual gold imports of 800 to 1,000 tonnes could be cut by a quarter if temples decided to participate in the scheme, say government and industry sources.


"We would be happy to deposit our gold to nationalised banks if the policy is beneficial, safe and earns good interest," said Narendra Murari Rane, chairman of the trust for the Siddhivinayak temple, portions of which are gold-plated.


But some Hindu devotees are not happy with the idea that their offerings could be melted down.
A Mumbai-based gold merchant, who said he and his father had donated around 200 kg of gold to Siddhivinayak and other temples over the years, said it would be a sin for the temples to earn interest on the gold offered to the gods.


"I make donations to God; not to any temple trust," the 52-year-old merchant said.
Modi would also like to convince Indians to open their family vaults, which hold an estimated 17,000 tonnes of gold in jewellery and other heirlooms.


But it will be much harder to convince Indian families, who sometimes have little faith in financial institutions, to break tradition and hand over gold passed down the generations.

India's love affair with gold spans centuries and is rooted in the Hindu religion. One of the biggest annual buying seasons is the Diwali festival around October to November. Gold marriage dowries are widespread and with 70 percent of the population rural, gold is financial security.


INTEREST RATE KEY
Key to Modi's plan will be the interest rates offered for gold deposits.


A similar gold monetization plan launched in 1999 proved ineffective, in part because the interest rates offered on gold deposits were regarded by temple officials as too low.


Under that scheme India's top lender the State Bank of India (SBI.NS) offers 0.75 percent to 1 percent and only 15 tonnes of gold has been deposited so far.


Temple officials at Siddhivinayak and Shri Saibaba Sansthan in Shirdi, both in Maharashtra, say they expect interest rates in the new scheme to be much higher and so would consider participating.

The government plans to reveal rate details when it launches the new scheme. Siddhivinayak's Rane said he expected at least 5 percent interest on gold deposits.

Rajendra Jadhav, executive officer of the Shri Saibaba Sansthan temple trust, said rates will also be key to his temple's decision. He declined to say how much gold the temple, dedicated to a 19th century saint, had in its vaults.

A successful gold monetization programme could go a long way in helping India reduce its trade imbalance.
India raised the import duty on gold, the country's biggest non-essential import, and imposed other restrictions in 2013 after the current account deficit hit a record $190 billion.

If India can cut imports, that would pressure gold prices that fell to a four-month low last month before recovering. Lower gold prices will help India cut its import bill.However, a successful scheme could also expose the government to potential risks, if gold prices were to take off and depositors decided to withdraw at the same time.

"There is going to be a lock-in period under the new gold monetizing scheme," said Sudheesh Nambiath, an analyst at precious metals consultancy GFMS. "Banks will have to replenish the stocks with imports later (if temples withdraw gold)."


(Editing by Paritosh Bansal and Michael Perry) 

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