October 20, 2013

Volume 13

Exam Time

Thank You so much for the wonderful feedback on FinGyan. It is and

always will be our constant endeavor to assist you with any academic

difficulty in finance.

Books covering being peeled off, students constantly running after

professors, endless queues at the photocopy shop, WhatsApp and

Facebook facing a temporary shutdown, library overflowing with

students and frequent all nighters. Amidst all this frenzy, we bring to

you yet another edition of FinXpress.

The economic situation of the country has started showing signs of

recovery. The rupee has gained value and reached sustainable levels

since its draconian decline a month back. Inflation however continues

to paralyze the monetary system. The week saw markets rising

primarily because of investors betting on the Fed extending its

stimulus policy well into 2014. Do read the opinion section on "Who

Saved the Rupee" to understand the writer's view on RBI's policy

measures and Government's reforms. The in focus section this week

delves into the strategic jewelers cartel and how they are affecting the

prices of precious metals.

We hope you enjoy reading the articles this week too. Your opinions

are most welcome. We are open for your suggestions, comments and

acknowledgement regarding our online magazine.

Happy Reading!!

Regards

Team FinNiche

From The Editorial FinXpress Volume 13

Oct 20, 2013

FinXpress

Disclaimer: FinXpress takes no responsibility for the opinions expressed in the magazine.

FinNiche

October 2013 Page 1

CONTENTS

From The Editorial

In Focus: The

Jewellers’ Cartel

Opinion: Who

Saved the Rupee ?

Term of The Week:

Infrastructure Debt

Funds

Market This Week

News

Fun Corner

Page 2

IN FOCUS

Go to any jewellery shop anywhere in a city in India, you would invariably get the same quotation at a given time of the day for the gold embedded in the jewellery you buy. Economists say in a perfectly competitive market for a commodity, in the long run every seller would be selling at the same price. And if you think the market for jewellery is perfectly competitive and ergo witnesses the sameness on the rate front, perish the thought. The sameness of price in the jewellery market, on the contrary, is due to collusive price fixing by the regional cartels. There is to be sure a small price differential among the markets in Kolkata, Chennai, Kochi, Hyderabad, Mumbai and Delhi and so on but not substantial as to give enough arbitrage opportunities to the intrepid trader or big ticket investor. Within the city, however, the quotes at a given point of time would be the same. There is no government price fixation. It is all done by the jewellers’ associations of respective cities formally or informally, but definitely in cahoots with the apex association at the national level. To be sure, come festival and marriage seasons, big jewellers offer a slight discount with reference to the day’s prevailing rate and also at times condescend to waive making charges and wastage – euphemisms for fleecing customers. By and large the jewellery trade in India is in the vice-like grip of cartels with their ears glued to the London market from where they take cues for an apparent alibi for increase or decrease in the metal price. To the London quotations, they also factor in the movements in the dollar-rupee market. This is because production of the yellow metal in India has all but dried up and we are entirely dependent on imports. The forex rate has a bearing on the prices of imported goods. So, even if the London prices fall, there are chances of an increase in the Indian prices, which jewellers glibly explained away as the impact of the fall in the rupee value vis-a-vis the greenback.

Perhaps no other trade sells its wares to the customers at such a volatile price, so much so that customers often rue that if only they had purchased just a day later when the price fell sharply. And no other trade affords as much leeway for jacking up the price as jewellery. The chain you buy may weigh 25 grams but you would be charged for 27.5 grams–the rationale given for the extra 2.5 grams is that it is wastage while making the piece. This quantity is then multiplied by the day’s quotation, for good measure displayed prominently, to give you the price you have to play in an apparent show of transparency. The jeweller might even empathise with you when you hark

back to the good old days but would unctuously express helplessness what with the metal price being fixed by the market on which he has no control whatsoever. The truth is there is no back-to-back relationship between the ruling market price of the yellow metal and the gold used in making the jewellery just sold. Like any other manufacturer, jewellers too stock up the raw material—in their case bullion—so much so that in a rising market they always make a profit. Value addition in any case is relatively insignificant. In the event, the huge difference between the cost of gold embedded in an item of jewellery and its selling price smacks of a rip-off. In India, jewellery accounts for about 75 percent of gold used, with investments in gold bars and biscuits accounting for just 20 percent. The remaining 5 percent is for industrial use.

FinNiche

The Jewellers’ Cartel By Ashish Aggarwal

October 2013

Page 3

IN FOCUS

With jewellery figuring on top of the pecking order, jewellers have been enjoying a field day. In no other country people are so crazy about gold jewellery and in no other trade, the seller continuously readjusts the input cost to accord with the latest market price. The Competition Commission has the power to initiate suo motu enquiry against cartelisation. One wonders why it has not used this power for the larger public good by busting the jewellery cartel. Proof won’t be difficult to obtain given the fact that the product jewellers are pushing is homogeneous and the price is invariably the same. When proved, the jewellers can be made to cough up three times their profits or 10 percent of their sales whichever is higher. To be sure, there are a lot of unreported sale given the free flow of black money into jewellery. Yet, the penalty is deterrent enough so much so that the whip has to be cracked just a couple of times. It would have a salutary effect. Incidentally, the then finance minister Pranab Mukherjee’s newly minted mandate asking jewellers to collect a 1 percent tax from those who dare to pay more than Rs 5 lakh in cash has had no effect because jewellers have always been partners in the crime. They rather lap up such cash with glee taking smug comfort from the fact that when such sales do not enter their sales register in the first place, where is the need to collect the tax. But despite a huge chunk of transactions with jewellers bypassing accounting, the penalty would be stiff and deterrent enough. Should the competition watchdog crack the whip, jewellers can be counted upon to become genuinely competitive, beckoning customers the way the American petrol bunks do—flashing a neon sign quoting their price per gallon of fuel so that a motorist can take a call on filling his tank there or some other bunk selling cheaper. A jeweller who has made advance purchases with prescience in anticipation of price increase would in such a scenario be in a position to quote a competitive price without compromising hugely on his overall

profits. For consumers, the price put on an item would not be as transient as it is today. One can understand the sameness in price in the bullion market or in the paper gold market represented by ETF (exchange traded funds) but jewellery is a different kettle of fish. Being a value added product though admittedly with a very low value addition it ought to break free of the ruling price of the base metal. But then even a marginal difference in rate per gm would make a substantial difference to consumers’ fortunes given the high price of the jewellery today. A customer is mulcted not on the rate front alone but on quality and quantity fronts as well. There is no way a customer can tell between a 22-carat and 18-carat gold. Incidentally, the RBI once toyed with the idea of mandating use of only 14-carat gold for jewellery purposes in order to conserve gold and foreign exchange but somehow did not go ahead. The quantity and quality issues come within the remit of consumer courts in the country but cartelisation i.e. collusive price fixing can be put an end to only by the C o m p e t i t i o n C o m m i s s i o n .

FinNiche

October 2013

Page 4

OPINION

What happened to the rupee between May and October? What helped? What hindered? How it gained? How is it able to maintain consistency? The various factors responsible for rupee stability are as follows: Raghuram Rajan turned the rupee around The popular view is that leadership change at the Reserve Bank of India (RBI) changed the fortune of the rupee. And there is truth to this. There was a big upward move in the rupee the day after Raghuram Rajan formally took charge as governor of the RBI. It that has been further strengthened by his policy announcements and actions. External events, not domestic actions, played the decisive role The rupee like any many other currencies was a victim to the US Federal Reserve's announcement that it might soon taper down its quantitative easing policy. The rupee witnessed a sharp decline after the Fed's May announcement. With that, all the major currencies around the world depreciated at the same time. The rupee declined the most among all the emerging Asian economies. Thus, one could easily conclude that the rupee depreciation was broadly shaped by external events rather than by the domestic factors. Conventional defence of the rupee through monetary tightening failed On July 15, as the rupee started tumbling, the government announced its own peculiar version of monetary policy tightening to defend the rupee. It tightened short-term interest rates (the marginal standing facility) by two percentage points without changing the repo rate. This action had no permanent impact on the rupee. It rose marginally only to free fall till end of August. It is true that this policy tightening was half-hearted because officials in the RBI and the ministry of finance sent mixed signals about its desirability and durability. Unconventional defense by lending foreign exchange to public sector oil companies worked The rupee bottomed out at 68.8 per dollar

on August 28, even before the new governor of the RBI took charge. On that day, the government in collaboration with the RBI announced that it would provide dollar loans to the oil companies. Thereafter, the rupee climbed upwards, aided by the fact that the balance-of-payments picture started to change significantly in September as gold imports were squeezed and as the economic slowdown took its toll on imports. But why did the provision of loans to the oil companies’ worked? Firstly, it essentially took the big demand for dollars from these oil companies out of the foreign exchange market, which immediately lifted rupee pressures.

Secondly, the action was not to sell but to loan dollars to these companies. What can we conclude from all of this? An India-centered perspective on the recent rupee crisis offers two strong lessons. Half-hearted and partial policy tightening in defense of the rupee was an unmitigated failure. Second, a very peculiar Indian case of sterilized intervention - which failed in other crises and is generally prescribed - actually worked.

FinNiche

Who Saved the Rupee??? —- By Jagriti Kalra

October 2013

Page 5

FINANCIAL KNOWLEDGE

Infrastructure Debt Funds Infrastructure Debt Funds (IDF) in layman’s terms is the bonds issued by a government to generate funds which would you be used for Infrastructure in Real Estate Development. IDFs came into the news after it’s announcement in the Budget session of the Parliament in 2011-12. IDFs are investment vehicles which can be sponsored by commercial banks and NBFCs, wherein the domestic and offshore institutional investors can invest through bonds issued by the IDFs. IDF in essence would act as vehicle for refinancing the existing debt of infrastructure companies. This in turn would lead to creation of headroom for banks to lend to new infrastructure projects. Need for IDFs The Eleventh Five Year Plan recognised infrastructure as a key priority, and set a target of scaling investments from about 9 lac crore in the tenth plan to about 20 lac crore for the eleventh. It also foresaw that there would be a need for approximately 36% of this investment to be mobilised from the private sector. The debt required for this investment coupled with the debt required for public sector projects, gives a projection of a need of approximately 10 lac crore as debt. This would create a gap of about 2 lac crore in funds considering the projections of debt resources. Furthermore, infrastructure funding is difficult from other fundings because of the following reasons It needs huge amount of money The gestation period is very high The repayments are made very late,

which necessitates a long term debt Types of IDFs IDFs can be set up as either a trust or as a company. If the IDF is set up as a trust it would

have to be a mutual fund, known as IDF-MF. This mutual fund would be regulated by SEBI and can issue

rupee-denominated units of five years’ maturity to raise funds for infrastructure projects. If the IDF is set up as a company it

would be an NBFC known as, IDF-NBFC. This would be regulated by the RBI, under the IDF guidelines of the RBI which came into being in September 2011.

The guidelines for IDFs require a tripartite agreement between the lender, the project authority and the IDF. IDF-NBFCs are further constrained into investing only PPP and post commercial operation dated infrastructure projects which have completed at least one year of satisfactory commercial operation. The RBI has allowed both Indian as well as foreign investors to invest in IDF. The foreign investors allowed include the HNIs and the sub-accounts of HNIs registered with SEBI. Non-residents who fall under the foreign exchange management regulations are also eligible. The debt instrument for the IDF bonds would include both foreign currency and rupee bonds. The first IDF in India was launched in february, as Infra Debt Limited, under the NBFC structure, promoted by ICICI Bank, Bank of Baroda, Citibank and LIC. The Employees’ Provident Fund Organization (EPFO) is investing a portion of it’s $100bn corpus into IDFs, providing the necessary impetus for the growth of infrastructure.

FinNiche

Term of the Week —- By Aditya Vikram Agrawal

October 2013

Page 6

FINANCIAL KNOWLEDGE FinNiche

Market This Week

This week witnessed BSE Sensex surging to record its highest closing in 3 years riding on the bolstered sentiments driven by foreign investments and from announcement by LIC Chairman S.K. Roy that it will invest Rs 400 billion in the domestic equities in fiscal 2014. Sensex saw a rise of 1.7% week-on-week closing at 20882.89 and Nifty gained 1.5% to close at 6201.45. This week saw an FII inflow worth Rs 4,400 crore in equity shares. In October so far, they are the net buyer with more than Rs 9,000 crore of share

SENSEX Simple Moving Averages

BSE SENSEX

CNX Nifty

Thirty Days 19,938.07

Fifty Days 19,392.20

Hundred and Fifty Days 19,389.45

Two Hundred Days 19,448.72

October 2013

Page 7

FINANCIAL KNOWLEDGE FinNiche

Bank Rate 9.00%

Repo Rate 7.50%

Reverse Repo Rate 6.50%

Cash Reserve Ratio 4%

Statutory Liquidity Ratio 23%

INR / 1 USD 61.27

INR / 1 Euro 83.79

INR / 100 Jap. YEN 62.69

INR / 1 Pound Sterling 99.08

Commodity Unit Rs / Unit % Change

Gold 10 grams 29480.00 3.98%

Silver 1 Kg 48195.00 2.87%

Crude Oil 1 bbl 6192.00 -0.38%

Base Rate 9.8%-10.25%

Savings Deposit Rate 4.0%

Term Deposit Rate 8%-9.0%

Nifty Simple Moving Averages

Commodities

Lending / Deposit Rates

Thirty Days 5,901.68

Fifty Days 5,734.91

Hundred And Fifty Days 5,815.17

Two Hundred Days 5,847.26

Key Policy Rates and Reserve Ratios

Exchange Rates

October 2013

Page 8

FINANCIAL KNOWLEDGE

FIIs pull out $1.2 billion from debt market in two weeks Overseas investors have pulled out more than Rs. 7,800 crore ($1.2 billion) from the Indian debt market so far this month amid concerns about the US government shutdown. Fore ign

institutional investors (FIIs) were gross buyers of debt securities worth Rs. 5,541 crore during October 1-11, while they sold Rs. 13,365 crore of bonds, resulting in a net outflow of Rs. 7,824 crore. In September, FIIs had pulled out a net Rs. 5,600 crore of debt securities, according to data available with market regulator, the Securities and Exchange Board of India. Market experts attributed the sell-off to global cues, including the US shutdown. In the equity market, foreign investors pumped in a net Rs. 3,230 crore so far this month. As of October 11, the number of registered FIIs in the country stood at 1,748 and the total number of sub-accounts at 6,353. Public Sector Banks cut retail loan rates

A number of public sector banks (PSBs) on Wednesday cut their rates for retail loans, following a strong suggestion in this regard from the government. State Bank of India (SBI), Dena Bank and Corporation Bank were among those which announced a reduction in rates on car, two-wheeler and consumer durable loans. On Tuesday, Punjab National Bank and Oriental Bank of Commerce had cut their rates. Last week, Finance Minister P Chidambaram said the government would provide additional capital to PSBs, to enable them to offer loans to the retail segment at lower rates, especially for two-wheelers and consumer durables. SBI cut the rate on car loans to 10.55 per cent from 10.75 per cent and the processing charge from 0.51 per cent of the loan amount to a flat rate of Rs 500.

Bharti and Walmart call off their retail JV After the Townhall meeting, part of the Walmart culture, the news that the US retail giant was splitting with its Indian partner Bharti was out. But that was not the only townhall meeting for the

day — Walmart’s fourth-floor Gurgaon office hosted three on Wednesday. The first, a joint one, confirmed something as top executives from both sides indicated the venture wasn’t going anywhere. Walmart will fully own the cash-and-carry business, buying out Bharti’s 50 per cent stake for an undisclosed amount. In the second, it was announced that Raj Jain, who had stepped down as Walmart India head in June, under mysterious circumstances, would return — but as part of the other camp. The third townhall was addressed separately by Walmart Asia head Scott Price, back from Bali where he had hinted at a break-up. He is believed to have asked the employees, around 10,000 of them across Bharti-Walmart and Bharti Retail, to decide within three months on whether they want to stay

with Walmart or Bharti. Yellen set to become US Fed Chairman US President Barack Obama is set to nominate Fed number two Janet Yellen on Wednesday to run the world’s most influential central bank, providing some relief to markets that would expect her to tread carefully in winding down economic stimulus. The nomination will put Yellen on course to be the first woman to lead the institution in its 100-year history. The advocate for aggressive action to stimulate US economic growth through low interest rates and large-scale bond purchases would replace Ben Bernanke, whose second term as Fed chairman expires on January 31. If confirmed by the US Senate, she would provide continuity with the Fed has established under Bernanke.

FinNiche

News

October 2013

Page 9

FINANCIAL KNOWLEDGE

SEBI allows SME listing sans IPO The Securities and Exchange Board of India (SEBI) has allowed listing of small and medium enterprises (SMEs) without raising any money from the public, a move expected to help provide an exit avenue to existing investors. The

companies would be listed on a platform which is open only to institutional investors and which would have a minimum trading lot of Rs 10 lakh, according to a regulatory notification dated October 8. India’s forex reserves up $1.5 billion India's foreign exchange (forex) reserves gained $1.51 billion to touch $279.24 billion for the week ended October 11, official data showed. Forex reserves had risen by $1.46 billion to touch $277.72 billion for the week ended Oct 4. According to the Reserve Bank of India (RBI) Weekly Statistical Supplement, India's foreign currency assets (FCA), the biggest component of the forex reserves, increased by $1.52 billion to $250.85 billion for the week under review. RBI said the FCA expressed in

US dollar terms included the effect of appreciation or depreciation of non-US currencies held in reserve, such as the pound sterling, euro and yen. China’s Q3 GDP growth fastest this year, but outlook dim China's economy grew at its quickest pace this year between July and September in a rebound fuelled largely by investment, although signs are already emerging that the pick up in activity may lose some vigour. Gross domestic product in the world's second-biggest economy rose 7.8 percent from a year earlier, official data showed, marking only the second quarter in the last 10 in which growth has accelerated. An unexpected fall in exports in September, and easing growth in factory output and retail sales suggested the economy was already slowing down at the end of the quarter.

JP Morgan in $4 billion deal with US housing agency JPMorgan Chase & Co (JPM.N) has reached a tentative $4 billion deal with the U.S. Federal Housing Finance Agency to settle claims that the bank misled government-sponsored mortgage

agencies about the quality of mortgages it sold them during the housing boom, according to a person familiar with the matter. JPMorgan and the FHFA, which is pursuing claims on behalf of finance agencies Fannie Mae and Freddie Mac, have agreed on the amount as a tentative part of a potential $11 billion global settlement with government agencies, including the U.S. Department of Justice. Google shares break $1000 barrier as mobile pays off Google Inc shares jumped past $1,000 on Friday as investors bet on the In te rne t company 's cont inued dominance of the mobile and video advert i s ing businesses despi te aggressive competition from Facebook Inc and Yahoo Inc. Shares of the world's

No. 1 search company rose more than 14 percent to an all-time high of $1,015.46, swelling its market value by about $40 billion. That vaulted Google past Microsoft Corp and Berkshire Hathaway Inc in capitalization and brought it to No. 3 among U.S. companies, behind only Apple Inc and Exxon Mobil Corp. E&Y to pay $99 million to end Lehman investor lawsuit Ernst & Young (ERNY.UL) has agreed to pay $99 million to former Lehman Brothers (LEM.MX) investors who have accused the auditor of helping Lehman misstate its financial records before the investment bank's collapse triggered a financial crisis in 2008. The agreement, which must still get court approval, signals the end of a massive class action against Lehman's former directors, as well as several other financial institutions. Lehman is accused of using

FinNiche

News

October 2013

Page 10

FINANCIAL KNOWLEDGE

the infamous "Repo 105" accounting practice to misleadingly understate its leverage to make itself appear more financially solvent. The investors who brought the lawsuit asked the court to suspend the case while the sides draft a settlement agreement.

L&T net profit rises 7%, beats analyst estimates Larsen & Toubro Ltd, India's biggest construction and engineering group, is stepping up efforts to win more orders overseas to hit its annual revenue growth target as a weaker domestic economy keeps a lid on spending on big p r o j e c t s . M u m b a i - b a s e d L & T maintained its revenue growth forecast of 15 percent for the current fiscal year to March after reporting on Friday a 7 percent annual rise in recurring net profit for the three months to September 30. L&T, which lays roads, builds ships, makes power plant equipment and develops real estate, has been looking to boost overseas sales as the domestic economy, where it gets 80 percent of its revenue, grows at its slowest pace in a

decade. Global stocks gain, dollar falls as Fed seen staying course Global stock markets climbed to a five-year high on Friday as investors bet the Federal Reserve would extend its stimulus policy well into 2014, but uncertainty over when U.S. interest rates will rise caused the dollar to sink to an eight-month low. Better-than-expected results from Google Inc and Morgan Stanley also helped lift stocks on Wall Street, with shares of the Internet search and advertising company surging past the $1,000 mark for the first time. An acceleration in China's giant economy provided another boost for equity markets, as well as for commodities such as oil and copper, as the prospect of an extended spell of ultra-easy money policy and improving growth buoyed investor sentiment.

No plan to close dollar-swap window for oil firms: RBI The Reserve Bank of India (RBI) Friday said it has no immediate plan to close the dollar-swap window for oil companies and it will be done in a calibrated manner. The Indian rupee fell

sharply after a section of media reported that the RBI plans to close the swap-window for oil marketing companies. The central bank opened a special window in late August to provide dollars directly to oil marketing firms, in a bid to support the battered rupee. Oil marketing companies need $8-9 billion every month to pay for their crude imports. MCX says CEO Javalgekar submits resignation The Multi Commodity Exchange of India Ltd said on Saturday its managing director and Chief Executive Officer, Shreekant Javalgekar, had submitted his resignation from the company, in which Financial Technologies holds a 26 percent stake. It did not specify a reason for the resignation in a statement.

PMO defends coal block allocation to Birla’s Hindalco Firm Days after the CBI registered a formal complaint in allocating a coal block to Hindalco in Odisha, Prime Minister Manmohan Singh's office Saturday defended the government's decision, saying it was "entirely appropriate" and based on merit. Breaking its silence over the allocation of Talabira coal block to Hindalco, the PMO accepted that the decision was different from what the screening committee recommended, but said it was taken following "a representation" it received from one of the parties, which was referred to the coal ministry.

FinNiche

News

October 2013

FinNiche

Fun Corner

FinQuiz 1. A group elected by stockholders to oversee management in a corporation: ______________

2. ___________ refers to meeting the needs of the present without compromising the ability of

future generations to meet their own needs.

3. A technical momentum indicator that compares the magnitude of recent gains to recent losses

in an attempt to determine overbought and oversold conditions of an asset is called ___________.

4. Who is known as the “oracle of ohama”?

5. The acquisition of another company using a significant amount of borrowed money (bonds or

loans) to meet the cost of acquisition.

CARTOONS

FUN CORNER

Page 11

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Volume 13 Publisher: Pragun Aggarwal

October 2013

Last week’s answers 1. No maturity bonds 2. The great depression 3. Low cost funds 4. Spiking 5. Less