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Transcript of August 2014
1 THE FINANCIAL BULLETIN | AUGUST 2014 | moneymattersclub.weebly.com
2 THE FINANCIAL BULLETIN | AUGUST 2014 | moneymattersclub.weebly.com
The Financial Bulletin
Money Matters Club IBS, Hyderabad Estd.—2005
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FROM THE EDITOR
Dear Readers,
It gives me the immense pleasure to come up with the August 2014 issue successfully. We are happy to announce the winner of “Article of the Month” award , Mayank Mehre from IIM Kozhikode for his outstanding write up on “Canvassing the Picture of New India”
This issue reflects the ideologies of New India
and the effects of Middle East problems on it.
The sudden ups and downs of share markets and
the people’s behavior towards it. The Buyback of
shares by INFOSYS and the effect of GST on
business and economy.
Brics issue still moves on with the India’s position
in it and the effect on global economy.
Happy reading!!!
Swarnendu Chakravartty
Editor
3 THE FINANCIAL BULLETIN | AUGUST 2014 | moneymattersclub.weebly.com
Canvassing the Picture of New India
By Mayank Mehre, IIM Kozhikode A painting is a canvas endorsed by combination of great
colours conflated in perfect harmony but the secret of any
great painting is the touch of Artist. India for a long time
has been blessed with all the right “colours” in its
pallet - diverse demography, huge base of natural
resources, sprawling economy, democratic parliamentary
system. But still India is not able to rocket itself out of
restricting orbit of economic stagnation. In the last
decade had a homerun of near double digit growth rate.
But as its old masters became incompetent to drive
growth, nation felt the need of new artist to canvas the
new India growth story. This finally convoluted to
emergence of Modi-fied India on 16th May 2014.
The new government has promised to take all the
measures to bring India on right tracks, but important
questions linger: Can the new
Modi-fied India breakout of its
economic shackles? How should
we re-emerge has as “shining”
example to world?
Propelling Indian
economic scenario:
The top priority for the new government is to get India
back on its near double digit growth rate. For that on a
short term perspective India needs to yoke off all the
roadblocks on its way to achieve this growth rate. India
also needs to learn to engineer this growth rate for next
couple of decades. India has to learn from its other Asian
rivals who aggressively pushed their economy through
rapid industrialization and rise of manufacturing and
maintained a steady growth over the last decades
To promote growth India needs to push manufacturing.
According to planning commissioning report over the
next decade India needs to create job for 15 million
young Indian every year. India should adopt model of
creating industry clusters similar to China. Such
clusters become engines of self-sustaining growth. The
NMIZ (National Investment and manufacturing zone)
program should be agenda of prime importance.
Emphasis should be to distribute growth over the newer
urban centres and move people from farmlands to the
jobs with higher social security. This would not only
push the growth of complementary infrastructure like
new roads, educational institutes across the country but
also would lead to rise of exports and foreign exchange
reserve for the economy.
Encouraging
entrepreneurship:
Government alone cannot create jobs for
entire country when demand is so high. The
planning commission report states that
many large businesses, public sector
companies have failed to create job
opportunities. Given entrepreneurial nature of Indians,
positive business environment in terms of ease of doing
business, regulatory measures, capital flows will help to
solve employment problem of nation.
Today very few Indian companies have been able to
compete like Flipkart against global giants like
Amazon. Flipkart is example of how if incubation done
right, Indian companies can compete against global
giants. Technology oriented businesses today require
small initial capital requirement as compared to
traditional companies.
FB
Fig1: China’s industry cluster (Mckinsey)
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One such example is Kochi start-up village which was
launched with funding of 2 million USD (10 crores INR)
has till now supported than more than 650 companies. If
similar entrepreneurship initiatives are taken these
ecosystem will become bedrock of technological revolu-
tion in India and we would hopefully see many more
Infosys, Flipkarts making a dent in global space.
Reducing corruption and Red tape:
Corruption is one of the major factor that has plagued the
‘shining’ image of the economy. Ideally corruption
should reduce as countries progress but India’s rank fell
to 94 from 72 in terms of transparency ratings in 2012.
Also India’s rating also fell to 132 in terms of ease of
doing business. The rising number of Indian companies
like Tatas, Birlas have attributed the shift in focus to
foreign markets instead of capturing the value of
domestic markets because of the same reason.
Government needs to take steps to clear up major
investment projects, make bureaucratic systems more
transparent with use of technology, speed up the
clearance procedures for the businesses.
Addressing Indian poverty:
According to Mckinsey study, there are currently more
than 500 million people in India who live life of
desperation and are deprived of modest necessities for
living. Every year government spends major chunk of its
budget to make life better for this section of population
by providing subsidies in food, fuel and basic amenities.
But according to research conducted by World Bank
economists, only 20% these subsidies actually reach
poor. To solve this problem, for the first time in 2009
government initiated Aadhar program, to provide identity
to this permanently neglected population. Though
currently this scheme has many inconsistencies, they
need to yoked off and efforts should be made for
nationwide coverage of this initiative.
Brazil has demonstrated the benefits of how direct
cash transfer has helped to addressed the needs of poor
and also provide facilities like health and education to
them. Such technology based initiatives are the only
solution to our sickened distribution system.
Government has to make efforts to make Aadhar its
priority over the next few years, to reduce systemic
leakages and for efficient utilization of government
resources.
The Leadership crisis in India:
India has great ideas but the main challenge is to make
all these proposed initiatives work in harmony. Polio
eradication program, Delhi metro program, Aadhar
scheme are some of the most efficiently run and
effective mega scale projects carried out in this country.
The major reasons behind the success of these
programs is single minded focus and efficient
leadership. The managers like E Sreedharan, Nandan
Nilekani should be nominated to lead projects of prime
importance. If there are 20-30 people to carry out
important projects for Government many of the
hampered projects will see light of day very soon.
India does not lack resources to solve its problem but
only hindrance lies in governance and execution. The
ideas proposed would push India’s growth momentum
and bring it on right track. After all there are more than
one billion reasons for India to do better.
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Is BRICS still the growth driver of the world?
By Mufaddal Dahodwala, JBIMS BRICS - Brazil, Russia, India, China and South Africa
has been amongst the fastest growing economies since
last 15 years. But, recent economic crisis and various
internal issues have marred the growth in these emerging
nations. Emerging markets account for more than half of
global GDP growth as the BRICS economies didn’t
succumb on the growth parameters and have shown dou-
ble digit progress. But this year the growth regime of
BRICS countries is seen a bit jittery due to global
downturn that has left world economy in lurch. The high
volatility in markets and investor sentiments along with
the flat commodity prices has shown the other way.
In terms of net foreign exchange outflows from India's
debt and equity markets, an important concern is the
extent to which US growth recovers and the Federal
Reserve's purchases of longer-term Treasuries and
mortgage securities start "tapering" down. The UK
economy and the euro zone has started to do better and
the unemployment rate is decreasing. To sum up, there is
little that India can immediately do to reduce oil or gold
imports, or to directly address risks arising from the G7
economies that are continuing to recover.
Emerging economies have a higher growth rate than the
developed ones but recently this trend is getting re-
versed. According to IMF estimates, China is estimated
to grow at just 7.8% while India at 5.6% and Brazil at
2.5%.
Now, whether the developing countries have this poor
performance for a temporary period or it will continue
haunting most of the Indian companies is a matter of
time. Many are confident about the sustainable growth
in emerging markets as the fundamental forces are
strong here. China and India’s demographic dividend
unlike most developed countries like US and Japan is
still young which enhances the availability of skilled
workforce and increased levels of domestic
consumption. There was a time when success of Asian
countries like Singapore and South Korea was seen as
an aberration however today’s times have changed and
we can see that their combined GDP is more as
compared to UK also.
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BRICS has a vital role to play in developing the economy
together and improving the overall dampening condition
in terms of economic as well as environment concerns.
The intellectual property rights issue has also to be dealt
in a way that all the concerns regarding social and
political stability are maintained. The interests of the
people should be legislated in a proper way by enforcing
reasonably good law.
BRICS countries is moving to BIITS as China and Russia
are replaced by Indonesia, Turkey, Mexico, etc. and India
has to now also tackle with funds from international
banks and institutions
It has been reported that India will invest about $4.5
billion in International Bank for Reconstruction and
Development bonds to be able to borrow exactly the
same amount from the IBRD, since we have reached the
country risk limit for borrowings from that
institution. IBRD bonds are issued at yields of about
six-month dollar Libor, or London interbank offered rate,
minus 20 basis points; and IBRD loans carry interest
rates of around six-month dollar Libor plus 80 basis
points.
If the information that India will invest in IBRD bonds is
correct, it is surprising that we are prepared to bear an
additional interest cost of one per cent to borrow an
equivalent amount from IBRD along with delays related
to project clearances. Economic cycles work according to
what is hot in one decade and what is not and so the shift
in BRICS economies is taking place. But this phase
can have drastic effects considering the
unprecedented scope of expansion. By 2007-08,
more than 100 economies had growth rates of 5%
and more which was a global boom and brought
these spectacular results.
China has heavily invested in infrastructure
projects which will serve them good in long term.
India too has seen recent reforms in economic policies
and new prudent RBI governor along with the entire
finance ministry which has led to the radical tax
system to get more robust and help to solve most
bank’s issues.
Specifically for India, it is the individual state
performance that matters and proper coordination with
the centre will ensure drive the economy. The
agricultural output remains robust with a strong pickup
in rabi sowing. Trade deficit of India has narrowed and
CAD falling to 2.5% in year 2014 from 4.8% last year
also boosts investor’s confidence and we can see that
foreign exchange reserves have grown since August.
For many countries around the world, China has
become an important trade partner. Even as China is
among the world's leading recipient of foreign direct
investment, Chinese companies make significant
overseas investments as they expand into newer
markets.
With the growing prominence of China in global trade
and investment, will the Chinese Renminbi replace the
US dollar as the primary reserve currency of the world?
The Chinese Government has identified urbanization to
play a key part in China's future development and
growth plans. The household registration or 'Hukou'
practice is a key constraint in policy makers
achieving and ensuring holistic percolation of the
benefits from increased urbanisation. What are the steps
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that there is bullishness on the prospects for
emerging markets compared to those of mature
economies over the coming decades. I am definitely
optimistic for Brazil’s economic future. It’s easy to forget
that Brazil, with a population of slightly under 200
million, is Latin America’s largest economy, and will
continue to be the engine of the region’s growth. For
investors, structural changes in Brazil’s economy are a
necessity. The country’s economy needs to change from
one dependent on exports and infrastructure spending, to
an increased consumer economy.
Many Brazilian small and medium sized enterprises are
being challenged by the country’s low growth rate,
inflation, and the difficulty in obtaining equity or debt
financing from within the country. It’s increasingly clear
to many long-term investors that Brazil and many other
emerging markets will outperform most mature
economies over the coming decades. But, it continues to
be a challenge to convince management of Brazil’s
smaller companies that now there is global equity capital
available from global investors with a long-
term investment horizon. Future outflows from the debt
market by foreign institutional investors (FIIs) would be
limited since residual foreign investment in government
debt stands at about $20 billion. FII equity outflows too
should have an upper bound. If there are net equity
outflows of, say, $15 billion, this would cause market
levels and the rupee to plunge and it would be
counterproductive for FIIs to sell more. However, if
India's credit rating is downgraded, as per FII investment
norms, they would have to reduce exposure to India.
Another source of risk is that the last four years of
extremely low interest rates in the larger G7 economies
have created several asset bubbles. As US interest rates
inevitably rise, bond market bubbles would be among the
first to be pricked. Further, although real interest rates are
low in India, investment decisions are based on nominal
rates. We did have examples of the Asian crisis in 1990’s
which wreaked the economies of South Korea,
Malaysia, Indonesia, etc. but since then the perception
has changed and the emerging market led global growth
in history.
Although the economies of India and Brazil have
squandered the opportunity by not going in for the
second generation of reforms and as a result having to
do with lesser growth rates than one may have
imagined. Also commodities prices have fallen due to
increase in supply and decreased demand from
developed economies. The rich countries are not in the
mood to import more and more which has led to
disastrous performance of BRICS exports. They are
instead trying to improve the employment rate ad
competitiveness amongst their own resources
BRICS position in climate changes:-
The BRICS’ position traditionally has been that global
climate change mitigation must be addressed
principally by wealthy industrial nations, which have
not only the wealth and technology to provide
solutions, but also the moral responsibility to do so
because they have produced perhaps as much as 80% of
the GHG emissions to date. However, some developing
countries seem to be accepting they have to contribute
to climate change mitigation, e.g., China. Other BRICS
are also making efforts. The more vulnerable they are
to climate change, the greater incentive there is for the
BRICS to accept binding GHG emissions cuts. If the
Kyoto commitment is not enough to solve the problem,
developed countries should do more about GHG
emissions reductions before they ask developing
nations for commitment. Large developing countries
such as China, India, and Brazil will not commit
internationally to material reductions in their GHG
emissions in the absence of some comparable
commitment by, say, the US. Conversely, the US has
not participated in the Kyoto Protocol, and will not
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agree to mandatory GHG emissions reductions targets
due to concerns about a loss of competitive advantage,
relative to developing countries that are not subject to the
same obligations. Rich countries generally favour the
idea of placing more responsibility on key developing
country emitters such as China and India, whereas
developing countries continue to favour an approach that
would implement a second phase of the Kyoto Protocol,
which allows them to opt out of GHG emissions
reductions if these pose a threat to development. In fact,
authorities from the BRICS have emphasized that the key
to success in climate negotiations lies in commitments
by rich countries to slash GHG emissions and boost
funding to .
policy makers must adopt to reform the Hukou system
while ensuring that any such steps are financially and
socially sustainable? Even in the context of the impact of
the Federal Reserve’s tapering of quantitative easing on
all emerging markets. Recent economic news from Brazil
has been disappointing. It was glad to see good news
from Brazil with the Brazilian Institute of Geography
and Statistics announcement that unemployment in six of
the country’s largest metropolitan areas decreased to
an average of 5.4 percent last year, from 5.5 percent
in.2012. When viewed in the context of unemployment
in the U.S. or the euro zone, this is a very low
unemployment rate. But short-term growth in Brazil is
another matter. The country likely finished 2013 with
growth around 2.1 percent, the third consecutive year of
growth below 3 percent. Inflation in Brazil is also an is-
sue. Inflation likely ran close to 6 percent last year, high-
er than the government had targeted. It wasn’t sup-
posed to be this way. At the beginning of last year,
Brazil’s government optimistically projected 2013
growth of 4.5 percent, citing an expectation for an overall
improvement in the global economy. It doesn’t look like
there will be a turnaround in Brazil’s economy anytime
soon. Growth for this year is likely to be around 2 ,
Percent and will be impacted by Brazil’s central bank’s
indication that it will raise rates to try to rein in
above-targeted inflation. Developing countries in the
form of aid and the promotion of clean technology .
Conclusion:-
In spite of having diverse histories, the BRIC
economies are receiving roughly similar treatment from
the wealthiest nations. Either through coercion or
negotiation, the BRICs are being pressured to adopt a
Western concept of intellectual property protection.
That means formal titling of inventive works,
enforcement through statutory regimes, and the
inevitable demand for even greater protection as the
diffusion of technology enables cheaper and more
effective methods of pirating products.
The average dip in growth rates of emerging economies
is about 4% which means except China, it is 2.5%.The
dominant BRICS economies have bore the brunt of this
slowdown the most and with China’s debt burden
becoming more than 200% of its GDP. According to
IMF data, only 35 out of 185 countries can be termed as
“developed” as no other country can sustain the growth
for more than a decade. Only 6 countries have managed
a growth rate of more than 5% over a period of four
decades. The average income gap of advanced and
emerging economies has not changed over half a
century and people in emerging economies are bound
for a dismal quality of living. The global economy is
going through rough and turbulent times and lower
sales and investments in emerging markets is a big
worry. The recent splurge in innovation and new ideas
that are patented in BRICS countries can be washed
away if the global economy is under threat. The
performance of emerging markets matters a lot to the
developed economies and the future impact to the
recovery of markets cannot be ruled out.
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INFOSYS and its share buyback demand.
By Kishorekumar, IBS Hyderabad The Management Change in the company is inevitable
but its lack of consistency raised concerns in stakeholders
minds. The "abrupt nature" of management change at
Infosys had initially raised "serious concerns, not only in
our minds but among many stakeholders". In an analysis
made from April to July 2011 BSE IT index gave 47.9%
returns out of which TCS share price rose to 119.2% but
Infosys shares grow only by 4%. In general Infosys
holds cash and cash equivalents of around 30,000 crore
and generates operating cash flow 12,000 crore a year but
there is no clear strategy on effective use of cash. The
Infosys Return on capital em-
ployed has fallen to 36% from
41% in two years due to which
Company has not made any big
acquisition for many years. As of
now Infosys is perhaps the most
overcapitalised company in Indian
corporate history.
The former executives V.Balakrishnan,
T.P. Mohandas Pai and former senior vice-president
Prahlad want Infosys to Immediately go for a share buy-
back of Rs 11,200 crore, roughly 40% of the existing
cash and cash equivalents. Pai was Infosys' CFO before
becoming its executive director responsible for human
resources, administration and training. Balakrishnan, who
quit the company last year, had long been the CFO and a
board member at the company. Prahlad was among the
first few employees of the company. Interestingly,
neither Pai nor Balakrishnan had favoured shareholders'
demands for share buybacks during their respective stints
as CFO. This buyback should be at the 52-week-high
price of Rs 3,850 a share. The Company should announce
an ongoing buyback programme to the extent of 40% of
the previous year's net profit on a consistent basis. They
believe the company must do so because there is a
"dramatic valuation disconnect" between the shares
of Infosys and its peers, and this needs correction.
The Infosys board and the management receives
requests on a variety of subjects from shareholders and
investors, on an ongoing basis. These are addressed by
the board and the management in due course."
Now, with the management exuding confidence and the
Infosys' share price still depressed, there is a need for
the Board to announce a large and consistent buyback
programme to show confidence in the management and
the business model, going forward.
The demand comes at a time when Infosys is in the
middle of biggest leadership transistion in its history.
On 1st August, former SAP AG
executive Vishal Sikka took
charge as the first non-founder
CEO at the company, while all
founders led by N. R .Narayana
Murthy either retired or took up
non-executive roles with the
board. After a series of top level
exits, Infosys top management has undergone a change
recently, with Vishal Sikka assuming charge of its CEO
and MD replacing S D Shibulal who retired. Sikka is
the first non-founder to head the company. The Infosys
first non-founder chief executive Vishal Sikka has
already started experiencing the first signs of pressure -
from some minority shareholders who were once key
executives of the information technology services
firm.
Infosys shares have consistently under-performed those
of its peers in the past few years as growth slowed
down at the company once vaunted as the Indian IT.
During the same time, rival TCS increased the gulf
between the two companies valuation (Now, TCS is
valued at Rs 4.85 lakh crore compared to Rs 2 lakh
crore for Infosys) on account of superior sales and
profit growth. But in the Financial column, the former
top executives dismissed analyst concerns that
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buybacks will not do the company any good – that
such measures are merely temporary props and stock
price movement is ultimately decided by actual financial
performance – and cited the examples of Accenture and
Apple who executed buybacks in order to boost
shareholder wealth. “Accenture, a company in the same
business, has single-digit growth rates and has doubled
its market cap using buybacks”. “Tragedy forced a
change of leadership at Apple. The incoming CEO was
reminded of cash reserves by shareholders and they start-
ed a buyback and dividend programme which has met
with shareholder approval. Nothing bad has happened
to Apple either except becoming the most valued
company.” The executives also added that even if Infosys
were to buy back shares worth about Rs 11,000 crore,
acquisition is a flawed argument.
purchase a large-scale company. “Big acquisitions
are very risky at best. (HP and Autonomy is a good
recent example). Assuming that Infosys will not bet all of
its cash pile on the big ones,
there is adequate money for
small ones and hence this
‘hoarding’ for an acquisi-
tion is a flawed argument.
Besides, one can always use
stock instead of cash”.
Finally, the trio added that the reason they did not want
to “vote with our feet” – a term used to describe exiting a
stock - if they were unhappy with the company’s
performance was because, having worked for the firm,
they were “emotionally attached” to Infosys. “It is indeed
painful to see Infosys lose it position of eminence and
play catch up.”
On August 20, 2014, Infosys closed at Rs 3552.50, up
Rs 1.40, or 0.04 percent. The 52-week high of the share
was Rs 3847.20 and the 52-week low was Rs 2894.00.
The company's trailing 12-month (TTM) EPS was at
Rs 185.71 per share as per the quarter ended June 2014.
The stock's price-to-earnings (P/E) ratio was 19.13. The
latest book value of the company is Rs 733.03 per
share. At current value, the price-to-book value of the
company is 4.85.
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Is the rise of Sensex justified…?? By Avishek Somani and Mr. Daga, IMT Ghaziabad
One of the funny things about the stock market is that
every time one person buys, another sells, and both
think they are astute…
In the first half of 2014, the BSE-Sensex gained close to
5,000 points. Rallying over 24 per cent so far in the year,
the Indian stock markets are now taking a relief and
setting new standards. The indices rose sharply after
hitting their lifetime high on 25th July, 2014. The BSE
Sensex hit a fresh lifetime high of 26,300.17 and the
Nifty rose to a record high of 7840.95 in trade.
In the past the Indian markets has been crumpled with
slowdown and sluggish growth in the market decision
making by the coalition government of Congress having
been the key worry for investors including FIIs. Now
with the present Government of BJP having a clear focus
on economic turnaround and
taking pro-business proposals in
a faster and more transparent
approval processes, it is no
surprise that the markets have
reflected the sentiments of the
people.
The overseas investor is betting
big on the government's reforms
agenda. They have poured in
more than $5 billion in the
Indian market in the month of
July 2014 taking the total inflow
to over $25 billion since the
beginning of this year. The
investment has been in the debt market for $3 billion (Rs
17,829 crore) and $2.2 billion (Rs 13,166 crore) in the
equity market.
If we recall, before the Budget there were concerns that
FIIs would switch from purchasing equity to
purchasing debt, but that has clearly not been the case,
with FIIs investing in equity as well. Even for the FIIs,
from a rational perspective, India makes sense to pump
their funds into. Out of the BRIC nations, India's
indices have performed the best year to date (12.56% in
Brazil -7% in Russia, 24.3% in India (Sensex), and -4%
in China).
Apart from this, as per the budget the Cabinet has given
go-ahead to hiking the foreign direct investment (FDI)
cap in insurance to 49 per cent, which will pave the
way for inflow of as much as Rs. 25,000 Crore foreign
funds thus boosting the sector. There has also been
discussion in the government where they may soon take
a decision on easing FDI in railways and defence
sectors. Besides, the FII
limit for investment in
government securities
has been hiked by $5
billion, within the total
cap of $30 billion.
Government of India is
also in talks with rating
agency to improve their
rating but the agencies
are going for wait and
watch policy.
According to most ana-
lysts, the hope-based
rally is largely over and the markets are likely to
consolidate in the near term, but the broader
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trend for the market largely remains on the upside. The
rise in volatility was expected in the last week of July as
many traders would be closing on their position on
account of F&O expiry. They would also be looking at
the numbers for Consumer Price Index (CPI) for
industrial workers which wasn’t very impressive either.
What stocks to look for??
Investors should look at Large Cap companies which is
offering dividend yield in the range of 3-4%, so that they
can clear junk in the stock market. Dividend payout is
also an important factor that investors should not be
ignoring. In FY2013-14, these payout rose to 30.8% of
net profits from 23.2% of net profits in a span of five
years.
Some of the most common stocks to look
out for according to big players like
Goldman Sachs, Bank of America,
Deutsche Bank, etc includes ICICI Bank,
Power Grid, L&T, Maruti Suzuki. The
reason for the same accrues to the fact
that there has been an increase in
economic activity which is clearly evident
from the recent release of IIP numbers, where there has
been a better performance in manufacturing sector
growth and passenger vehicles sales, adding to that there
has also been increase in cement and power production.
The Cabinet Committee on Investments (CCI), with the
push of the Project Monitoring Group, has been clearing
a lot of stuck capex projects -- 159 projects, out of the
446 accepted for consideration, have been cleared.
Future Outlook –Some of the analyst believes that the
Sensex has the
potential to reach 31,000 but to reach that number the
price to earnings ratio has to be 20 times and the earn-
ings of the corporate has to grow by around 18-20%
which doesn’t seem that difficult. The problem lies
with the fact that Sensex also comprises of commodi-
ties companies and for them to grow the GDP growth
also has to take off. So if GDP growth fails to take off,
chances of higher Sensex won’t be justified.
So a better approach for the investors would be to
follow a bottom up approach in picking the stocks.
Bottom up approach is a concept which focuses on the
company’s individual stock rather than focusing on the
overall market or industry.
The bottom line is that the markets in
India are looking bullish and rising
but awareness towards corrections
and minor pits and loop holes have to
be watched and accordingly the
investors of all kinds from intraday
players to long term investors; from
local biggies to FII; all have a lot to
regain from the markets after a
sluggish market of 2013 and take their
money back from the market by reinvesting it in the
potentially right areas as mentioned above.
So all in all I would like to just say the famous quote of
Warren Buffet:
Rule No.1: Never lose money.
Rule No.2: Never forget rule No.1.
Happy Investing…!!
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Is India’s stand on the food security at WTO justified? YES!
By Rahul Gogawat, SIMSR Introduction (What is the buzz about?):
The WTO meeting held at Bali to discuss the
long pending issue of trade facilitation, agriculture and
interests of the least developed countries (LDCs)
concluded successfully on 7th December 2013. This was
seen as a big step forward for improvement of world
economy and shed the image WTO had for not being
able to come at a consensus and finalise agreements.
There was an uphill task for the WTO secretary Roberto
Azvevedo to again smoothly conclude the next general
meeting. The second round of meeting which recently
concluded at Geneva could not meet the same fate, as
India vetoed that the Bali package should be sealed on
31st December, 2014, citing reasons that agricultural
subsidy should be modified in the
interests of developing nations. This
was not extolled by most of the
nations and regarded India as
impervious to trade facilitation.
India’s stand:
The meeting concluded at Bali was
based on the three pillars of discussion, which were:
A) Trade facilitation agreement: which allowed
developing nations to open their markets for developed
nations, cut red tape and provide quick customs
clearance. B) Agriculture. C) Interests of Least developed
countries. After the Bali meeting, there were 20 more
meetings conducted out of which only 2 were earmarked
for agriculture. This shows that the entire Bali package is
contorted in the interests of the developed nations and if
only the Trade Facilitation Agreement (TFA) is taken
forward, there is a high probability that the developed
nations will not be interested in coming back to the table
to talk about other clauses.
According to the provisions of WTO, the agricultural
subsidy provided by a developing country cannot
exceed 10% of the total agricultural output. If a country
violates the clauses of WTO, other nations have the
right to challenge them in the international disputes
court of WTO, which will call for penalty and
restrictions on future trade. The agricultural output is
calculated based on the international price of 1986-88
(known as “External Reference Prices ERP). This
causes the subsidy to further dilute to a very low level
which is tough to maintain with increasing inflation.
India wants this clause to be modified and that subsidy
prices be calculated on a more recent year or should be
indexed to inflation. This proposal was only supported
by Bolivia, Venezuela and Cuba while the other BRICS
nation were opposed to this and
wanted TFA to be sealed as soon
as possible.
The US Secretary of
State, John Kerry said, “India’s
stand on TFA does not send
good signal to the world about
India’s view”. USA should be
the last nation to lecture about protectionist policy and
low subsidy for agriculture in developing countries
like India. United States itself adopted the protectionist
policy in its developing phase. John Kennedy described
the cause of Great depression as the prevalent
protectionism adopted by the last government. Both
Europe and United States criticised India for
proposing lower tariffs and high subsidy for its
agricultural produce, while they themselves have
protected their farm sector composed of high prices and
non-tariff barriers by subsidizing it heavily. This clearly
illustrates that the farm sector is highly skewed in the
interests of the developed nations which have
reclassified these subsidies as green-box subsidy.
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This mechanism of subsidy calculation is quite
discriminatory.
The USA is backing the idea of open markets, improved
customs regulations and protection of Intellectual
property rights (IPR). The IPR issue has been giving
sleepless nights for US pharmaceutical industry as the
Indian law only provides patent on the process of
manufacturing drugs rather than on the life saving drug
itself. On the other hand in the 1980s, America itself
imposed restrictions on exports from the rapidly growing
Japan. Today, due to the increasing dominance of China
in world trade, USA is entering into two huge trade
treaties with other nations, namely The Trans Pacific
Partnership and Trans-Atlantic Trade, which do not
include any of the BRICS nation. These pacts will be
governed by its own trade agreements and will garner a
large share of world trade. This is in sharp contrast to the
FTA stand of America, if it wants WTO to succeed why
is it entering in other trade agreements?
Knowing the fact that The Trade Facilitation
agreement will induce a fresh $1trillion of GDP in the
world economy and provide 21 million new jobs, India
cannot ignore its 50% population which depends on
agricultural produce and more than 300 million of its
population which is below the poverty line. Taking a
stand to protect the interests of its masses is the least a
State can do and that’s what India has done. It should not
be bullied to sacrifice its own self-interest against that of
the developed nations.
Conclusion:
India is not of the view of opposing trade facilitation
between nations but to clear the entire Bali package
along with the food security issue critical for
developing nations in one shot. As the developed
nations would not be interested in it after the TFA has
been signed. India is open to discuss the issue in the
next meeting of WTO to be held in September, 2014
and if other economies are willing to negotiate about
the curbs on Indian farm sector then it can pave the way
for a smooth conclusion of the entire package. It is a
challenge to bring all 160 nations to the deal’s table
again but it should not be concluded that WTO has
collapsed as there is still time till 31st July, 2015 before
which, constructive discussions can clear the Trade
Facilitation Agreement for betterment of the world
economy.
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Finance and Economy.
By Mukul Sinha, IBS Hyderabad The Indian economy is the ninth largest economy of the
world and also one of the fastest growing world
economies. This growth is attributed to various Indian
industries which have grown tremendously post
independence to increase national income, to generate
employment and to generate foreign earnings. India was
initially an agriculture based economy but after
liberalization norms of 1991 particularly, the services
sector has taken a lead contributing the most to the gross
domestic product. Presently the agricultural,
manufacturing and service sector account for 16, 27, 57
percent of GDP respectively.
DIFFERENT SECTORS CONTRIB-
UTING IN INDIA’S ECONOMY
1. Banking and Insurance
2. Real Estate
3.It and ites
4.Manufacturing sector
1. BANKING AND INSURANCE
Banking industry has contributed in Indian economy.
Insurance sector is the main cause of growth in
industrial sector. There are four different sectors in
a public sector bank.
1. Public sector bank
2. Private sector bank
3. Cooperative sector bank
Over the years, the reach of banking has widened
significantly to include relatively under-banked
regions, particularly in rural areas. Commercial bank
credit as per cent of GDP picked up steadily from 5.8
per cent in 1951 to 56.5 per cent by 2012. Post
nationalization
several NBFC and the nationalized banks are opened in
the rural region. Many new reforms have been
established by the RBI for the upliftment of rural
women. RBI has introduced a new scheme of provid-
ing business loan of 3 lakhs to the rural woman at 7%
interest. This is promote the rural business in India.
The three game changers to India economy are
1.Goods and services tax(GST)
2.The insurance laws amendments bill
3.Uniform financial code recommended by FSLRC
GOODS AND SERVICE TAX:
1. GST is a comprehensive tax
applicable on
manufacture, sale and consumption of
goods and services at national level.
2. It brings down all the taxes at a
common level platform by breaking
tax barriers between states.
3. It will boost the economy in each
and every sale and purchase of goods
in supply chain.
4. It is estimated that India will gain $15 billion a year
by implementing the Goods and Services Tax as it
would promote exports, raise employment and boost
growth.
The insurance laws amendments bill
1. The capital required for a health insurance
company is now reduced to 50 cr instead of
100 cr because of encouraging health insurance
schemes in India.
2. This will also attract foreign companies in India
to invest in health insurance sector.
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3. Introduction of FDI upto 49% in insurance sector
will also be considered a boom for the
country’s economy.
4. It will result in better product design and
management, better risk management, and
higher investment.
Uniform financial code recommended by
FSLRC
FSLRC was headed by Justice BN
Shrikrishna. It helped the consumer in
several ways like protection of the consumer
from fraud in financial market.
It also helps to keep the financial market in
future.
It and Ites:
1. IT industry contributes a huge
share in Indian GDP.
2. The IT and IT enabled services
industry in India has
recorded a growth rate of
22.4% in the last fiscal year.
The total revenue from this
sector was valued at 2.46
trillion Indian rupees in the fiscal year 2007.
3.Most of the outsourcing for the giant MNCs happens
from India which again generates revenue in the
market.
4. Several Indian IT firms are involved in both
outsourcing and development and production which
contributes a major chunk to the economy of India.
Real Estate:
1. The contribution of the real estate sector to
India's GDP has been estimated at 6.3 per cent in
2013, and the segment is expected to generate 7.6
million jobs in the same period, according to a
report.
2. Due to large population size real estate firms share
has increased a lot in the past few years.
3. Migration of the people from rural areas to urban
areas (inter- state migration) has boost the industry
in a large area.
4. Migration of NRIs to some cities (Mumbai, Delhi,
etc) in India is also contributing a lot in the rise of
Real Estate sector in the near future.
Manufacturing industry :
1. Manufacturing industry has
the slowest growth in recent
past.
2. In order to increase the
economic growth of the country
manufacturing industry can play
a key role.
3. In recent future manufacturing
industry can increase the employment of many poor
farmers and rural people.
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Inflation protected securities
By Aditya Singh, IIM Ranchi
As students of finance have often been introduced to
many different financial instruments being used in today`s
market. These instruments cater to the needs of different
investors mitigating some form of risk and ensuring
returns. In December 2013, RBI introduced Inflation
Indexed National Savings Securities to protect investors
from inflation risk. These are inflation-linked bonds a.k.a
Inflation protected securities, where the government
ensures an interest of 1.5% per year above the rate of
inflation as measured by the Consumer Price Index (CPI).
What are Inflation Protected Securities & Why use them?
Before the introduction of Inflation-indexed bonds,
investors in conventional fixed income securities had
constantly faced the risks associated with the nominal
interest rate. The risk of a decline in fixed income
portfolios caused by a rise in nominal interest rate has
been a major concern for most investors. Inflation risk is
the risk that returns which are earned across the investor’s
time horizon fall short of actual inflation i.e. when actual
inflation exceeds the “expected rate” of inflation that was
built into market interest rates at the time the investor
purchased the bond. This results in decline in the bond
portfolio’s “real” (inflation-adjusted) value. However,
with the advent of IPS and similar securities, which
provide for inflation-adjusted increases in both principal
value and interest payments. This helps investors manage
the extent to which their fixed income portfolios are
subject to inflation risk.
.How do they work?
Consider a hypothetical IPS bond which pays 9%
coupon for 5 years.
The below table gives a pretty easy depiction of how an
Inflation protected security (IPS) works. As we can see,
that unlike a conventional bond which pays a fixed
interest every period. An IPS pays interest over and
above the standard coupon and accounts for the
additional interest, which is derived from the CPI.
Comparing TIPS and Conventional Treasury Bonds:
To compare the two, we must understand the
differences arising in their respective yields.
Treasury Nominal Yield = Real yield + Expected
Inflation rate + Inflation Risk Premium
TIPS Nominal Yield = Real yield + lagged actual
inflation rate
From the above, we can clearly see that the differences
between expected inflation and lagged actual inflation
and Inflation risk premium give rise to the difference in
yields of the securities.
FB
Year
Coupon
(%)
Inflation
(CPI) Principal($)
Adjusted Princi-
pal
Standard Cou-
pon
Inflation por-
tion
Total Pay-
ment
Yr1 9 0 1000 0 90 0 90
Yr 2 9 3 1030 30 90 2.7 92.7
Yr 3 9 5 1081.5 51.5 90 4.635 94.635
Yr 4 9 6 1146.39 64.89 90 5.8401 95.8401
Yr 5 9 8 1238.1012 91.7112 90 8.254008 98.254008
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Monetary Policy and Inflation:
When actual inflation is greater than expected inflation
hurt conventional Treasuries and benefit TIPS, causing
TIPS to perform better and reducing correlations of
returns for the two types of bonds. This often prompts the
Central Bank (RBI) to tighten the money supply by
substantially raising short-term real rates.
In periods, when actual inflation is lower than expected
inflation (deflation). The inflation risk premium that had
been priced into the conventional bond turns out to be
excessive. The prices of conventional bonds rise as
inflation expectations decline and result in lower nominal
rates. Deflation likely would reduce real
interest rates as well, this effect would probably be more
than offset by the downward inflation adjustment to IPS
principal. The result could be a fall in the market price of
IPS. This often prompts the Central Bank (RBI) to loosen
the money supply by lowering short-term real interest
rates.
Whereas, when in periods when actual inflation is close
to inflation expectations, the total returns of IPS and
conventional Treasuries will be closely correlated.
The performance of both types of bonds will be driven by
changes in real interest rates. RBI is not likely to take any
action in such a case.
Who should invest in IPS?
In India, IPS might not be as attractive as they sound for
the Higher-income investors (those who have an annual
income of more than one million rupees per year) and
have sufficient capital to invest in the long-term. These
investors should be buying tax-free bonds issued by
infrastructure companies such as Power Finance
Corporation Ltd and IDFC Ltd. Since the interest on
these bonds is not subject to tax.
Financial advisers are of the opinion that the inflation
protected securities make are a viable option for the
lower-income investors (having an annual income of less
than 500,000 rupees) and have a lower tax rate. These bonds
are suitable for savings that is not needed for many years.
Market Growth of Inflation-linked government
bonds:
As of April 2012, the global market value of
inflation-linked government bonds was approximately
$2.0 trillion. The United States is the largest issuer with
$866 billion, followed by the United Kingdom with
$549 billion, France with $235 billion.
Inflation-Indexed Bonds across the globe:
By the data given below we can compare
inflation-linked bonds offered by governments around
the globe and see that there are different methods used
for measuring these bonds. These methods are
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categorized by the Inflation- index used and whether the government provides floor protection to the investors or not.
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NDB - alternative to the World Bank and IMF?
By Sourav Roy Choudhury, IIFT Delhi
Proponents of the new BRICS bank hope that it
will be a strong alternative to the World Bank
and IMF
BRICS was a term coined by an investment banking
analyst, Jim O’Neill, comprising of 5 emerging countries
with approximately 40% of the world’s population and
20% of the world’s gross domestic product (GDP) Brazil,
Russia, India, China and South Africa. It became a reality
when 4 out of the 5 countries’ leaders first met in
New York in 2006. Further down the timeline, they
constituted a formal group at a summit of 4 of the current
5 members in Yekaterinburg in 2009 and later joined by
South Africa. BRICS now has a National Development
Bank with authorized capital of $100 billion and equity
share capital of $50 billion and has been welcomed by
the World Bank. NDB is being purported as a challenge
to the global financial order created by the currently
dominant economies in the Organization for Economic
Co-operation and Development (OECD) after World War
Two, which revolved around the International Monetary
Fund and the World Bank. India gets the first chair of a
rotating president ship, China gets to host the bank’s
headquarters in Shanghai, South Africa gets to host the
first regional office, the first chair of the board of
governors is from Russia and the first chair of the board
of directors from Brazil.
The establishment of the New Development Bank is a
significant development which could have some impact
on multilateral lending for infrastructure in the
developing and the underdeveloped countries. It is
estimated that in around 20 years, the NDB could reach a
stock of loans of up to US$350 billion exceeding World
Bank finance. Though, there are large development
banks, which focus on long term financing, and
provide credit to more capital-intensive projects,
especially of an infrastructural kind, unlike their
conventional counterparts, in some of the BRICS
countries such as the China Development Bank and
Brazil’s Brazilian Development Bank (BNDES) and
they have been expanding their international lending
operations, especially in other developing countries,
in recent years. But, the case of NDB is different from
the financial architecture point of view. NDB relatively
has a large authorized capital base of $100 billion and
the paid-up capital commitment of $50 billion which is
more or less along the lines of the capital base of the
International Bank for Reconstruction and
Development (IBRD) (the core lending arm of the
World Bank) - $190 billion of which only $36.7 billion
is available as actual equity and the rest is the capital
that countries have committed to provide when called
upon to do. But, the NDB should serve better the
interests of capitalist development in the underdevel-
oped and developing countries than would multilateral
banks that are dominated by and serve as instruments of
the developed countries.
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Today in the modern world, there are enhanced
possibilities of mobilization of private resources in debt
and equity markets but the developing and the least
developed countries are discriminated against and are
kept out of such markets and hence very little capital
infusion in those countries. Since the NDB is owned and
backed by governments of emerging economies, it is
more likely to mobilize substantial resources at
reasonable cost from private markets and channel them to
those countries. The NDB’s lending is to be focused on
large infrastructural projects. Both cash-strapped
developing country governments and the private sector
are unable or unwilling to fully fund those large projects,
making the role of development financing institutions
like NDB crucial to development. The NDB is also more
likely to respect the sovereignty of the borrowing
countries by framing appropriate lending rules. However,
being a bank, though a development one, it as to ensure
its own commercial viability. Thereby, the bank must not
undertake any form of socially concerned lending that
does not yield a return adequate to cover costs.
Nevertheless, the NDB poses some political and policy
challenges. If we go back to the past, in 2009 there were
over 550 development banks worldwide, of which 32
were in the nature of international, regional or sub
regional (as opposed to national) development banks.
Also, NDB reminds of Banco Del Sur which resulted
from the similar efforts by the regime of South
American countries that eventually was a failure.
While the common opinion is of keeping NDB different
to west controlled IMF and World Bank, the NDB has a
policy flaw quite contrary to what is expected. Coming
to the parties to the NDB, China runs surpluses with all
its BRICS partners and is a manufacturing superpower
amongst the 5 countries. Russia and Brazil are
commodity- and energy-rich exporters and South
Africa is mineral- rich exporter. But India lacks in
natural resources as well as manufacturing depth. It has
manufacturing-gross domestic product ratio among
emerging economies at 16 per cent which is abysmal as
compared to other countries in BRICS. In addition to
that, India’s financial and structural health is not so
strong.
Another factor is foreign policy of the member
countries of BRICS. China has never come out in the
open on friendship with Pakistan while agreeing to
signing projects worth Rs.3,400 crore in Pakistan
occupied Kashmir. This policy towards Pakistan
worries India. For Russia and China, their foreign
policy interest is seen to as anti-Americanism. NDB
standing opposite to US and other western giants means
India taking an anti-American policy. Russia and China
are authoritarian regimes with economic and political
might to stand up to the US. India has neither. Also,
after the MH-17 incident the Indian government took a
stand against Russia.
What needs to be observed that how the BRICS
countries stay united and gain synergy by going against
the west in the aspect of operating the NDB and wheth-
er it stands as an alternative to IMF and World Bank.
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IMPACT OF REGULATION AND POLITICS ON INDIAN FINANCIAL MARKETS
By BhargavPadullaparthi ,Sovit, Wellingkar Institute, Mumbai
The financial market always increases or decreases due
to some information. At present, financial markets have
been showing extremely unpredictable movement,
which is only due to new pieces of information, and
news or events. The economy of any country is
evaluated by the on factors such as, politics, inflation,
interest rate, exchange rate, GDP, GNP, changes in
ruling parties, elections, etc. Now, what are the factors
that ultimately lead to market fluctuations is a big
question? Thus, questions arise that whether the market
movements are affected due to politics? Due to
inflation? Due to interest rate? Due to exchange rate?
Due to GDP? or Due to GNP?
A key reason why India’s economic growth has halved
from 9% to 4.5% per year is that, in search of inclusive
growth, the courts and legislatures have increasingly
made legitimate business difficult. Indian economy is
described as a economy which is tenth largest in world
by nominal GDP and third largest in terms of
purchasing power parity. This economy was growing at
a fast pace in recent past has been plagued by such a
slowdown that our currency
is on a freefall and it is not able to ascertain its lower
limit.
Economy of a country depends on number of factors
which are divided in three general categories like
Primary, Secondary and tertiary. Independence-era
Indian economy till 1991 was based on a mixed
economy which combines the features of capitalism
and socialism resulting in interventionist policies and
import substituting economy. This economy has
always given much emphasis on agriculture which is
called as backbone of the nation as the percentage of
people dependent on it is approximately 60% of the
total population. But the misery is that its contribution
in total GDP of the nation is less than 10%.
Looking on the various sectors that contribute to make
the Indian economy like agriculture, trade, services
etc. In context of Indian economy, the most important
one is the trade aspect that consists of import,
export and various business processes. Trade aspect
alternately tells us about the industrial growth of a
nation and its dependence on other nation. Recent
slowdown of economy is attributed to the fact that
import has exceeded the level of export that lead to
heavy deficit of balance of trade.
The most important factor in the slowdown of Indian
economy is the poor infrastructure, low growth in
agriculture production and industrial activities. After
the independence there were many changes that have
taken place in almost all sectors of the Indian
economy, especially in the liberalized period of the
Indian economy.
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With the liberalization in the licensing policy many of
the Indian firms entered into business with individual
or with joint ventures to do export and imports
business. Many of the foreign countries which were
members of the trading blocks like SAARC, WTO
entered into India to do export and imports
business. Our country is rich in number of metallic and
non-metallic minerals which has given a strong base for
the rapid industrialization. But there are few types of
natural resources which are present in scarce amount
like petroleum, natural gas, gold, silver etc. So to fulfil
the gap created by this scarcity India has to buy a heavy
amount of this resource from foreign players who are
also in the arena of global power fight. Also the global
currency is now provided with the base of gold reserves
of a country. These factors have made the India, a
nation heavily dependent on import from different
countries. This heavy import always exceeds the margin
created by our exports which are mainly concentrated in
the field of raw material. So to have a control on the
issue of petroleum, it has to explore alternatives like
LNG and other alternatives. Economic condition of a
country is also decided by the physiographical, social
and political condition existing in that nation. Looking
from the perspective of India one can easily ascertain
the upheaval condition existing due to its distorted
relation with its neighbours, dangerous internal
condition due to rampant corruption, narrow minded
politics involving communal forces etc.
Politicians involved in making the framework for Indian
economy are not ready to understand the seriousness of
the situation due to their vote bank politics.
Still the various policies in this economy are formed
on the influence of certain groups which have political
ground. Throughout India, if we consider the scenario,
failure to keep a check on the NPAs resulted in the
results as follows: Bad loans have currently increased
to Rs 33,486 crore in 2014 which when compared to
Rs 19,832 crore in 2013 and Rs 17,272 crore in
2012.Excerpt from “The Statesmen”
India, a nation with vast manpower, sufficient amount
of natural resources, suitable natural location for
global trade has good amount of potential which can
make it a superpower. But to achieve the top slot, it
has to look at various loopholes present in its planning
section as well as implementation section. But if a
nation has to exist and maintain itself as a leader in
economies, it has to keep his pace with global
standards.
There are certain other aspects that it can adopt to
reduce its dependence on global economy such as
increasing its R&D share, establishing good relations
with its neighbours so that it can reduce its heavy
expenditure on defence sectors, planning
economic- centric schemes which try to maximize the
capital part along with social responsibility.
Politicians have to understand the fact that time has
come when they have to realize the importance of the
moment and resolve their differences on economic
issue and bring out a plan that can boost the factors
responsible for growth of domestic industries. These
policies must be freed from the local influences and
have a global outlook.
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Domestic Systematically Important Banks (D-SIBs) : An analysis of long term benefits
By Anshu Kumar, XIME Bangalore
Taking lessons from global credit meltdown, Reserve
Bank of India came up with “Frame work for dealing
with Domestic Systemically Important Banks (D-SIBs)”
and soon it became a common topic of discussion among
Indian Bankers.
D-SIBs are banks of national economic importance
whose failure can severely strain the entire banking
system. These banks would be subjected to differentiated
supervisory requirements and higher intensity of
supervision based on the risks they pose to financial
system.
These measures are
part of Basel III
norms on Risk Su-
pervision, to be im-
plemented in phases,
during 2016-2019.
The ultimate aim of
this categorization is
to minimize the
possibility of financial crisis and instill financial
discipline among top Indian banks. In 2008 crisis, it was
observed that a handful of large, highly interconnected
banks, when subjected to financial distress, end up
with system wide collapse and may need public money to
rescue the financial system.
The main sources of funds for any bank are equity and
deposits. As a bank expands and grows, its deposits also
grow, but share capital remains the same, resulting in
abnormal equity to deposit ratio. Banks also see it as
inflow of cheap credit as equity is costlier due to risks
associated with it. So, depositors start playing a dual role
of fund supplier as well as risk taker, though
unknowingly. But, in case of any loss of confidence, it
may lead to a situation of Bank Run, and the bank is
unable to cope up with the demands made by depositors
as advances made to customers can’t be reclaimed in
such a small time. These series of events lead to busting
of the bank and engulfing the whole economy, if it is
large and interconnected with financial system of that
country.
The present frame work asks for additional common
equity tier (CET 1) requirement ranging from 0.2% to
0.8% of risk weighted assets (RWA). Selection of such
banks would be done in a 2 stage screening process.
Firstly, Indian and foreign banks having assets beyond
2% of Indian GDP would be taken as sample.
Secondly, based on following parameters and
associated weightage, their systematic importance shall
be calculated:-
1.Size-40%,
2.Interconnectedness- 20%,
3.Availability of Substitute -20%,
4.Complexity- 20%
Accordingly, a level 1 to 4, systematically lower to
higher systematic importance will be created
and applicable norms will be implemented.
Apart from capital adequacy, norms like li-
quidity surcharges, tighter large exposure re-
strictions, will also be incorporated in the
frame work.
The first list of such banks is expected to be
declared by RBI in August, 2015 and the frame
work will be implemented and monitored in a
phased manner, starting in April, 2016. It would be
an annual calculation exercise, done on basis of
annual financial statements of selected banks.
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From recent banking developments, we know, In-
dian public sector banks are sound in terms of capi-
talization, but need capital injection from govern-
ment to meet additional capital requirement.
But, they are poorly capitalised, when compared to banks
of other emerging economies. Analysts believe 9%
would be comfortable level for any Indian bank. But,
India’ largest lender SBI and 2nd largest public lender
Bank of Baroda, just touch this magical numbers, with
9.5% and 10.1% respectively. On the other hand private
banks enjoy a better position, as their range is 12-14%.
Merits
The main merit of following these frame works would be
- enhanced ability to withstand stress situations, a bank’s
financial fighting strengths and competitiveness.
However, it will lead to higher lending rates and lower
deposit rates. Thus, loans would be available only for
safe customers. Meeting capital requirements of public
sector banks, which would be in tune of Rs. 2.4-2.8
trillion, will be a huge challenge for banking industry and
government. However, private banks will benefit as they
enjoy better current capitalization and internal accruals.
The prime motto of this move is to reduce the frequency
and severity of banking crisis.
Analysts and bank experts are in opinion that following
banks would make it into the final list- State Bank of
India, Punjab National Bank, Citi Bank, Standard
Chartered Bank, ICICI Bank, HDFC Bank and Bank of
Baroda.
These guidelines should not prove to be a problem for
banks profitability, as most of Indian banks have capital
which is well above the proposed regulatory level.
Banks would be in a better position to absorb severe
losses, with more equity, thus ensuring financial stabil-
ity in economy. Also, these measures will act as a buff-
er for government as banks will not depend on it to mit-
igate losses and would discourage banks to take irra-
tional risks.
Higher capital requirements are an essential instrument
in strengthening the financial stability of the banking
sector. They ensure that banks are in a better position to
absorb risks and compel banks to improve their risk
control, as they bear the costs of those risks themselves.
The result will be that banks will reduce their risks and
will control them more effectively. This will strengthen
the banking sector. Banks with a healthy business
model will be able to keep up their lending and remain
competitive.
The Financial Stability Board has studied how banks
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practically respond to increased capital requirements in reality. And, it has found two key things. Firstly, they reduce
their risk-adjusted balance sheets (lending less risky business) and secondly by raising equity. Both these measures
make a bank, more efficient and safe in functioning.
Testimony of the benefits of increased capital adequacy is the two papers released by the Financial Stability Board and
the Basel Committee on Banking Supervision. Both papers conclude that stronger capital and liquidity require-
ments bring significant benefits for banks- and doesn’t affect much adversely, as perceived. These researches emphasize
that such measures will help to insulate efficient banks from problems faced by weaker ones. These measures would
result in reduced frequency, severity, and public costs of financial crises.
So, the decision of Reserve Bank of India (RBI) to categorise important banks as Domestic Systematically Important
Banks (DSIBs) would help Indian banking industry in a long run and ensure a robust financial system for longer times.
It is a justified reform made to make Indian banks more competitive and safe.
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Behavioral Finance
By Utkarsh Bisen, TAPMI
In finance the first thing which we hear is that people are
rational “wealth maximizer” who seek to increase their
own well being. According to conventional economics
emotion has no part to play in the financial decision a
person makes. But reality is not so simple. Humans as we
know are the most irrational animal. I can say this
because from purely logical point of view the odds of
winning a lottery is very slim for a ticket holder
approximately 1 in 146 million. But still we thousands of
people buying tickets. These anomalies prompted
academics to look to cognitive psychology to account for
the irrational illogical behavior which the modern finance
has failed to explain.
Behavioral scientists in finance combine economic
theory and psychology to find why people make
decisions which they do and what
makes them deviate from the
rational thinking as stated in
books. They specifically look
into the investment decisions of
people and mark out the various
biases which prevent them to
follow the capital market theory.
In practical terms, people should
keep aside their emotions and instincts while investing.
Here we will talk of few behavioral traps that plague the
investors. They are: Choosing by not choosing, Looking
at trees and ignoring the forest and Focusing on the
familiar.
Choosing by not choosing
One of the main challenges for investors is choice
overload. Large numbers of choices have two main ef-
fects on the investment decision making. First, people
tend to rely more on default option.
FB
too many choices lead to decision paralysis.
Behavioral Solution: The design of a default option is
critical for overcoming decision paralysis. Many studies
show that the low participation rates in company pension
plans in USA can be increased by changing the default
option. Normally, employees in USA have to make an
active and conscious choice to join a pension plan: They
have to tick a box if they wish to join unlike in India
where it is a default option. This makes people to join as
not joining will require conscious effort from their side.
As a result the same can be implemented in USA as well.
Focusing on trees and ignoring the forest
According to economic theory, investors should not worry
about the single securities in their portfolio but should
look at the whole portfolio performance. However, in the
real world, that is not how stock
investors usually handle their
investments. What happens in the
investor’s mind is something called
mental accounting. By doing mental
accounting investor tends to measure
the success of each investment
against the initial price of each
investment. So while selling a good
performing stock, they feel happiness, selling
underperforming ones bring them mental suffering. As a
result investors cling on to a single stock and create strong
psychological barriers to losses. Thus in order to recover
their initial investment they tend to hold on to loss making
stocks way too long. In other words, they do not consider
the future earnings of their investments, compare them
with other investment options in their portfolio, and buy
and sell accordingly. Instead, they keep holding on to the
stocks hoping for a miraculous change in their fortunes.
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Behavioural Solution: An effective way to get around this investment trap is to make a conscious and dis-
ciplined effort to shift the perspective away from mental accounting. In other words, avoid caring about individual
securities, and look at the portfolio as a whole. In short risk measures and return expectations should be at portfolio
level.
Sticking with the Familiar
People have a habit of focusing on what they know, and they tend to rely on information that is available or remem-
bered easily. The same tendency affects international investing. While the conventional wisdom of capital mar-
ket is to diversify your portfolio as much as you can, investors largely invest in their known or familiar sectors. As
per IMF, the share of domestic equities in US portfolios in 2005 was 87 percent; for German portfolios, 72 percent.
This points to the fact that they are under-diversified, implying that they are over exposed to risk for a given level of
returns, or they are letting go of higher returns by investing in perceived lower risk known sector.
Behavioural solution: From the point of view of investment, the familiar ity bias can be countered by making
conscious efforts to diversify one’s portfolio as widely as possible in terms of countries, asset class etc. Another way is
to educate and make oneself aware of all the various aspects of investing rather than focusing only on few known infor-
mation. Since this is difficult for private investors, financial advisers and the mutual fund industry emerged to deliver
decision support and easy-to-use tools.
The rise of behavioural finance demonstrates that taking into consideration cognitive biases into account one can help
investors improve the performance of their investments, and may be help remove the irrationality in the market.
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Financial Sector Legislative Reforms Commission
By Pratik Mishra, IIFT
Introduction
In the aftermath of the 2008 economic crisis, coun-
tries all over the world were faced with the challenge of
understanding what went wrong. Even with scores of
regulating institutions overseeing every aspect of the fi-
nancial system, the combined wealth of the world was
cut down by $15trillion. How this could happen was the
central question that grappled countries. The Financial
Crisis Inquiry Commission was constituted in America
and the Financial Policy Committee in the UK with the
mandate to examine the causes of the crisis and suggest
measures to correct them. Among the key recommen-
dations was the overhaul of the financial regulatory
framework in these countries. And thus came into being
the Financial Policy Committee in UK and major
overhaul of the financial system in America. Also most
of the acts and regulations governing the financial sector
in India are archaic and date back to the Stone Age. For
example- Indian monetary policy’s pillars rest on the
Reserve bank of India Act, 1934. Similarly, the Insurance
Act of 1938 governs the Insurance sector in India
It was in this backdrop that the Financial Sector Legis-
lative Reforms Commission (FSLRC) was constituted
under the Chairmanship of Supreme Court Justice BN
Srikrishna in March 2011 with the mandate to review
the existing financial-legal system and suggest
measures to correct weaknesses in the current scheme
of regulation
KEY RECOMMENDATIONS AND IMPACT ON
FINANCIAL SECTOR
UFRA
The FSLRC submitted its report in October 2012 and
recommended a complete overhaul of the regulations
governing the Indian Financial sector. Among its key
recommendations was the creation of a draft “Indian
Financial Code” which will eliminate more than 20 of
the current 60 odd laws governing financial markets
in India and will merge some of the most powerful
Indian Financial Regulatory bodies into one “Unified
Financial Regulatory Agency” body.
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In effect, UFRA would subsume the functions of
Insurance Regulatory and Development Authority
(IRDA), Securities and Exchange Board of India
(SEBI), Forward Markets Commission (FMC) and
Pension Fund Regulatory and Development Authority
(PFRDA). In addition, there would be 6 other agencies
including three new ones which the FSLRC has
proposed.
UFRA and RBI would have to present a cost-benefit
analysis for any proposed regulation. Once
implemented, the regulation would have to undergo
performance reviews every three years by an external
agency and a call would be made on the efficacy of
the regulation.
ROLE OF RBI
The monetary policy of India is under the exclusive
control of the Governor of RBI. The Deputy
Governors provide their inputs but it is up to the
Governor to either reject or accept their views. An
example of this is when the RBI sets interest rates
bimonthly. These rates are released by the Governor
after taking the ‘unbinding’ advice of the deputy
governors. The FSLRC proposes that formulation of
monetary policy be moved from the top-down
approach currently followed to a board-driven
approach where a Monetary Policy Committee (MPC)
would be responsible for making decisions. This
Committee, however, would comprise of members
nominated by the Government. Simply put, this would
give the Government a say in the formulation of
monetary policy. The underlying principle here is that
of accountability. Since the Government alone is
responsible to the Parliament, it should have a greater
say, on what the monetary policy encompasses.
However, it should be pointed out that the FSLRC
does leave room for the Governor in the form of a
veto against any decision of the MPC.
CONSUMER PROTECTION
Consumer interest protection is one of the key
concerns of the Committee. India’s current laws do
not provide for compensation to buyers of financial
products even if they have been fraudulently enticed
into buying these products. The FSLRC
recommends the disgorgement of proceeds from
such misleading sellers and recommends the
creation of the Financial Redressal Agency (FRA)
to attend to consumer complaints in the financial
sector (except the banking sector) across the nation.
All financial service providers are required to set up
internal mechanisms for consumer grievance
redressal and to educate the consumer of their right
to seek redressal. If the consumer is unsatisfied with
the appropriate handling of their issues by the firm,
they can approach the FRA and will be eligible for
compensation in case the seller of a financial
product has adopted unethical means and violated
regulation
CHALLENGES
Justice Srikrishna points out that transition from
multiple agencies to a unified authority would re-
quire induction of talent on a large scale. He further
adds that streamlining would be the next issue.
There would be regulators who are opposed to the
existence of a unified agency. Bringing them on
board would be a challenge.
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Market Market Size(in $ billions) Regulator
Securities Market 1068 SEBI
Insurance 66.4 IRDA
Pension 33 PFRDA
Forwards Market 264* FMC
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While it may be too soon to tell whether all recommendations of the FSLRC will see the light of day, one thing is
certain. The FSLRC has highlighted some noteworthy issues about the current financial institutional structure.
However, whether the Government is successful in bringing all stakeholders on-board and execute reforms is some-
thing only time will tell.
ANALYSIS & CONCLUSION
.In trying to amalgamate various regulators into one body, it has tried creating the much-needed synergy in regula-
tion. By proposing to make RBI and other regulators responsible to the parliament, it has tried to make them answer-
able to the people of this country. In increasing the weight of the government in formulating India’s monetary poli-
cy, it has tried to bridge the gap between the country’s monetary and fiscal policies and has made the government
further answerable to the people of India. In the words of Dr. Raghuram Rajan, though he himself is one of the
biggest critic of the committee’s recommendations, “FSLRC report is one of the most important, well researched as
well as well-publicized re-ports in Indian Financial History. The report’s influence will be felt for many years to
come”. Enough said and done.
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Middle East Crisis Threatening India's Growth Story
By Sainath Zunjurwad, SIMSREE
Once upon a time the Middle East was the channel
through which the knowledge of Asia flowed into
Europe. The Arabs had a flourishing culture and they
had built an empire that stretched from the Indus in
the east to the Mediterranean Sea in the West. They
were well versed in Warcraft, arts, and science. They
had almost every element needed to brew the cauldron
into a great culture. But somewhere along the lines,
the Arabs faltered. The promise that they had
dissipated into internal strife, extremism and
dissipation of scientific thought. Thus, the Arab world
plunged into the blackness that has been its hallmark
for the past several centuries. And this people would
have been forgotten and become a mere footnote in
history books, but for the miraculous discovery of that
potent liquid-Oil, which Arabia had in abundance.
With the discovery of this oil,
the world’s interest in the af-
fairs of this land was reinvigor-
ated. Americans and Europeans
set up gigantic companies that
came about to dwarf nations in
terms of their monetary and
economic power. The Americans needed oil in
plentifuls to grow their economy. The Americans
came in and propped up tin pot dictators, and made
sure they had tight control over the oil fields. Where
troublemaking rulers came to power, they had them
deposed or assassinated. Where the locals rebelled,
they were put down with cruelty. There have been
popular uprisings. The Middle East continues to be a
hot cauldron with many unknowns, and treacher-
ous paths. It is a very unstable region, to put it mildly.
Like the Middle Eastern peoples, another nation had
risen from the ashes of colonialism. India. But unlike
the Middle East, it chose the path of democracy,
secularism, and development. For many years, it grew
at snail’s pace, derisively called the ‘Hindu rate of
growth’. However the nineties ushered in reforms
and liberalization, and our economy took off. And
with it, the country’s thirst for oil increased
multifold. It has a ravenous appetite now and it is
increasing at a greater rate than its GDP.
It has come to be accepted that the fate of this nation
is tied to that of the Middle East. Something
happens in far off Iraq, and its tremors are felt in
Mumbai’s Dalal Street. The Indian economy’s
engine is run on the fuel of oil supplied by the
Middle East. The government has to consider all the
permutations and combinations before taking a
decision that can have a bearing on the political
situation in the Middle East. It has had a passive
strategy, but needs to actively
pursue its foreign policy in
the deserts of Arabia, if for
nothing else than to safeguard
its interests.
At the heart of the matter is
India’s need for a stable
source of oil. It has achieved
much in the past 20 years, since the economic
reforms. Its economic growth took off in the previ-
ous decade, the middle class expanded and so did its
income levels and living standard. The country had
been able to bring a lot of people out of poverty on
the back of these structural reforms, which trickled
down to the poorest of the poor. Our economy is
booming. Defense, IT, retail all sectors are in the
fast paced growth phase. Our financial systems,
capital markets, regulators are becoming more and
more efficient. In terms of purchasing power parity
our economy is the third largest and would become
the second largest by 2030. The world believes that
we might well be the next superpower.
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The common man is just learning to dare to dream,
we have a multitude of opportunities. India can
become the growth driver for the world. We are on
the way to prosperity.
However, all this could come crashing down because
of a single linchpin-petrol. Our nation has not yet
stabilized to the extent that the European countries
have. We haven’t yet developed the buffers
necessary to protect us from the external shocks. With
the recent turbulences seen in Iraq, the tussle between
Iran and the USA, unending clashes among the
Israelis and the various broken splinter groups, and
Palestine factions. With a single flare up, the whole
region will go up in flames.
Our oil supply will be hit. Oil
prices will go sky high. Its
demand will far outstrip its
supply. The railways, aero
planes, buses trucks would shut
down. Common commodities
like food items, vegetables,
toothpaste would become scarc-
er. India will enter into a hyperinflationary
period. Riots would start all over the country. With
decreasing petrol supply, VALUABLE petrol would
have to be used by the security forces to quell civilian
PROTESTS. The nation might become vulnerable to
external attacks.
This is indeed a nightmarish situation. One
linchpin-petrol. We ensure its steady supply and we
are safe. This has been the ‘guiding principle’ behind
the West’s active interference in the Middle East
affairs. They simply could not leave it to the nomads
to ensure smooth supply. They colluded with the
sheikhs and sultans, paid hefty bribes and
systematically looted those countries. That’s what is
behind the anger felt in Arabia against America. Not
only did they take over those oil fields, they also
dictated the prices.
China is going the same way as the west. It is
cautiously exploring in the region for its own
constant supply. India, if it is to survive in these
turbulent times, must get its act together. Find its
own constant supply, make deals with ‘sober’
nations, and actively promote its interests. It needs
to take a hawkish stand when it comes to its energy
requirements. It need not go down the same path as
the west, it can enter into a fruitful relationship with
one of the stable players. Rather than being
antagonistic, it could be collaborative. Be it any
way, by hook or crook, by negotiation or
coercion, it must get its supply lines in place.
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