A cautionary tale

Derivatives indicators may not be the last word, but they call for circumspection

Along with the rise in market indices since mid-May, some indicators in the derivatives market have also witnessed sharp increases. The 10-day moving average of the put-call ratio (on index options) is currently at 0.86, not much lower than the high of 1.03 in mid-December last year. It's interesting to note that the markets had peaked not much later, in mid-January. Does that mean that the put-call ratio should be watched closely, now that it's nearing those peaks again? Especially so, because even the open interest (outstanding positions) in the market have risen since May.

Not necessarily, as these indicators have not been reliable, in terms of predicting market movement, in the past. Although volumes in the derivatives market are considerably high, they are still concentrated in the futures segment (90 per cent of the market).

Unless the options market also develops, it doesn't make much sense to look at indicators like the put-call ratio. Nevertheless, the build-up in open interest and the relatively high number of put options being bought vis-...-vis call options does call for some caution on the part of investors.

Banking on government business

A distinctly unglamorous but very lucrative area that has been opened up for banks is government business. This ranges from collection of direct taxes at branches to disbursing government funds and salaries to handling the accounts of the Railways.

The business is huge, and bankers put the total at around Rs 15,00,000 crore annually, on which the government pays a commission of 1.11 paise per Rs 1000.

That works out to a total commission of the order of around Rs 1700 crore annually, of which it's estimated that half goes to the State Bank. Quite naturally, other banks are doing their level best to grab a share of this profitable business.

While direct tax collections have been opened up for all banks, the government is taking a more gradual approach towards opening up the indirect tax business, opening up the cities one by one.

The problem, say bankers with the new private banks, is that the indirect tax commissionerates have so far been used to working with a single bank, and they now need to change their systems to accommodate multiple banks.

A few ministries, such as the ministry of civil aviation and the ministry of urban development have been keen to change. The Railways too have been quick to grasp the opportunity, bargaining hard with banks to ensure maximum bang for their buck.

The bottomline is that more and more banks are providing online facilities to government departments. For example, while disbursal of funds took months, it can now be done immediately, thanks to online connectivity.

HDFC Bank has been the most pro-active among the private sector banks in this business. SBI is alive to the threat, which is why one of the bank's objectives is to implement the On Line Tax Accounting System (OLTAS) all the branches conducting Government Business, wherever feasible.

But although SBI's branch network will ensure that it continues to have an advantage, it's likely that its share in cost-effective areas like corporate tax collection will shrink considerably.

With contributions from Mobis Philipose and Amriteshwar Mathur