Arbitrage Magazine - February 2020 - Finance & Investment Club | IIM Rohtak

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February 2020 Vol 3 Issue 12

Article Of The Month: WILL PROLONGED CORONA VIRUS PROBLEM IN CHINA DESTABILISE BUSINESS IN INDIA AND AROUND THE WORLD?

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INDEX

S.No.

1

Article

Will Prolonged Corona Virus problem in China destabilise business in

Page No.

3

India and around the world?

2

Budget 2020: Mismatched Allocations

12

3

Priority Sector Lending and Inclusive Growth in India

16

4

Is covered Interest Arbitrage Profitable

20

5

Non-banking finance in India- Regulatory challenges and concerns

25

6

What are the reasons for slower retail credit growth despite its cheaper availability?

28

7

Growth & Development: A policy Implementation “Sagarmala Programme�

33

8

$5 Trillion Economy: A Realistic Target?

36

9

Low household saving bane for economic growth

38

10

Vodafone Idea seeking hike in tariffs

40

11

Impossible Trinity

42

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Will Prolonged Corona Virus problem in China destabilise business in India and around the world?

By: Mayukh Mukhopadhyay (IIM Trichy)

China, also known as the “World’s factory” for being the largest exporter of the world, has been deeply affected with an abrupt slump in production, which has a domino effect on the global economy. We will look into exports & imports separately to get a granular understanding of how the prolonged corona virus will impact the global economy. We will focus more on the exports than imports, as China is a trade surplus nation.

Export China’s total exports recorded 283.3USD bn in Dec 2019, growing at a Y-O-Y of 6.3%. The major exports were to the countries like US, Hong Kong, Japan, Germany, South Korea and Vietnam. We have analyzed the broad categories of exports over the past decade. We will look into the RCA (Relative Competitive Advantage) of the goods in order to gauge the impact on global business.

Animal Hides (RCA: 0.96) The major contributors include tanned equine and bovine hides and leather apparels. Import of US in this segment accounts for 61% of the total US import in this category. We expect the US leather market to face a rising cost of raw materials.

Human hair, meat and honey are the key contributors in this segment. With China export slump, we expect India to have a price advantage in this category (Indian being the major importer of crustaceans to US).

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Animal Products (RCA: 0.54) India and US have been the major importers of antibiotics and nitrogenous fertilizers. With 80% of Indian antibiotics being imported from China (2017), we expect inflation in this price inelastic category of product.

Chemicals (RCA: 1.025) Footwears and headwear export of China showed a steady increase till 2015, before taking a sudden dip. In India, Chinese imports constitute more than 80% of the rubber and textile footwear market. Since these are not essential products, Chinese production decline may give very little competitive advantage to Thailand, which is the next largest exporter in this segment.

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Footwear & Headwear (RCA: 3.44) LCD, watches and medical instruments are the major contributor to this segment. This China being in competitive advantage, we expect the downstream industries like the PC and healthcare sectors to feel the heat.

Instruments (RCA: 1.50) Ever increasing dependence of Chinese electronics equipment, computers and semiconductor is bound to face the consequence of Chinese slowdown. We expect the wave of COVID to hit the industries up in the value chain as well.

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Machines (RCA: 1.36) With US and South Korea maintaining a steady import volume of finished iron products, the Chinese slowdown will hamper the industrial and the home dĂŠcor sectors, which heavily rely on these items as raw materials.

Metals (RCA: 1.30)

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Mineral Products With Hong Kong the only major importer of items like petroleum and refined gas, we expect the country to face severe energy constraints as China contributed 99% of the refined gas consumption of Hong Kong.

Paper goods (RCA: 0.91), Plastic/ Rubber (RCA: 0.99), Animal & vegetable biproducts (RCA: 0.22), Foodstuffs (RCA: 0.42), Transportation (RCA: 0.88), Vegetable Products (RCA: 0.51) & Weapons (RCA: 0.53) With China having a competitive disadvantage in these categories, we expect little change in these sectors.

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Precious Metals (RCA: 0.59) HongKong was the major importer of precious metals & ornaments from china. But over the past few years, the dependency on China has dwindled in the hands of India and Australia. India can gain a competitive advantage in the readymade jewellery market in the absence of China.

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Precious stones and glass (RCA: 1.65) The ever increasing demand of Chinese building stones and glass fibre, we expect the real estate sector to take a hit if the epidemic continues for long.

Textiles (RCA: 1.98) The demand for Chinese fabrics has been high across the globe. We expect this industry to face an upward price trend given one of the major contributor downsizing its output.

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Wood Products ( RCA: 1.37) China has maintained a supremacy in products like plywood. With Chinese production slump, we expect competitors like Malaysia, Vietnam to gain a competitive advantage.

Imports The major imports of China has been integrated circuits, crude petroleum, cars, iron ore and gold. With prolonged corona virus effect, the demands of these goods are expected to decline. The following charts shows the share of various products on the total import of China.

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Integrated Circuits are mainly supplied by South Korea, Singapore and Japan. Russia, along with the gulf countries like Iraq, Saudi Arabia, Iran and Oman contributes the bulk of the crude petroleum products of the country. German, American and Japanese car manufacturers mainly control the auto import sector of China.

Chinese gold consumption is majorly catered by the exports of Switzerland, Australia and South Africa. India exports Iron Ore to China along with Australia and Brazil. With a slump of consumption, India will be adversely affected.

Thus, we see that the impact of prolonged corona virus will be a mixed bag, with some sectors will be benefiting India while others will be hurting. The overall impact will depend upon the dominance of one over the other.

Reference: https://oec.world/

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Budget 2020: Mismatched Allocations By: Tanay Rasal (NMIMS) India is facing its worst economic slowdown in many years with Gross Domestic Product (GDP) for FY20 pegged at 5%, an 11-year low, down from 6.1% in FY19. As a result, this has dramatically stretched the government’s fiscal position, an increase of 0.5% in fiscal deficit to 3.8% (both direct & indirect tax receipts and divestment receipts have fallen short). At a time when the financial sector (the mainstay of the economy and major barometer of the stock market) is reeling under stress due to real estate sector weakness; the weak global cues led by Coronavirus attack and protectionist measures adopted by foreign nations have added to the woes for the government. Moreover, rising inflation levels (although due to non-financial assets) and drop in IIP (after a rise last month) numbers have been worrisome for the government.

Exhibit 1: Math behind 0.5% fiscal deficit slip % of GDP

0.3

0.21 0.1

(%)

0.1 -0.1 -0.11 -0.18

-0.3 -0.5

-0.46

Tax revenue

Non-Tax revenue

Divestment Revenue Capital reciepts expenditure expenditure

Source: Ministry of Finance India’s FY21 budget proved to be a lackluster one on the back of economic growth slowdown. It is confirmed belief budgetary measures would fail to revive the animal spirit. The government has set an ambitious divestment target of Rs 2.1 Lakh crore through stake sale in Air India, BPCL and LIC; however, a closer look into the past reveals’ disinvestment target has only met twice in the last 10 years. Moreover, gross market borrowing in FY21 is budgeted to balloon up to Rs 7.8 lakh crore. This burden would be offset by shifting focus to non-market funding, particularly NSSF (National Small Savings Fund). Notably, the share of NSSF in fiscal deficit financing has increased from 1.6% in FY13 to 31.3% in FY20. During the same period, net market borrowings have dropped from 96% to 65%. Higher NSSF borrowings have blocked transmission of rate cuts as banks tend to compete with the high rate of NSSF to maintain deposit growth.

Upward revision of target borrowing In FY20, 65% of fiscal deficit borrowing was done through Government securities and Tbills. The government has revised borrowing figure upward to Rs 4.99 lakh crore from earlier Exhibit 2: Divestment target a big ask implies more issuance of bonds for this fiscal. In FY21, budgeted Rs 4.5 lakh crore which market borrowing is pegged to increase to further Rs 7.8 lakh crore, up by 9% YoY.

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2.5

(Rs. lakh crore)

2.1

1.9 1.3 0.6

1 0.56 0.4

0.23

0.4

0.18

0.3 0.26

0.29

0.63

0.38

0.73

0.7

0.42

0.8

0.95

0.57

0.48

1.05

0.65

0.0 FY11

FY12

FY13

FY14

FY15 BE

FY16

FY17

FY18

FY19

FY20

FY21 BE

Actual

Source: Ministry of Finance The government has utilized the room to widen its fiscal deficit in FY20 while maintaining the deficit reduction path. Currently, the combined deficit of state and centre is estimated at 6.9% of FY20. It should be noted, India’s credit rating is above investment grade, any increase in the deficit would throw India into junk status which would, in turn, hurt the debt market in India, a major driver for financing infrastructure and manufacturing projects.

Possible area of slippages Divestment receipts – As mentioned earlier, government has been able to meet its divestment target only twice out of past 10 years; it has set an ambitious target of Rs2.1 lakh crore for FY21. The government proceeds from divestment, despite sharp focus, fell short of Rs 0.4 lakh crore. If the history repeats, it could affect fiscal deficit target for FY21 Telecom receipts – Budgetary target of Rs 1.33 lakh crore from telecom revenues includes spectrum auction, license fees and usage charges, and impending AGR dues. Given the current scenario, government could receive AGR dues worth around ~Rs 40,000 crores but this could hamper or derail 5G spectrum auction process.

RBI, on its part, has played a major role in maintaining liquidity in the system. A repo-rate cut of 110 bps since April 2019 has eased the flow in the economy. In a bid to facilitate more transmission into the system to help bank retail lending RBI announced long term repo of 1 year and 3 years to push excess liquidity.

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Exhibit 3: GDP Indicators 2018-19 GDP (INR lakh) 140.8 Growth (%) 6.8 GVA basic prices (2011-12) 129.1 Growth (%) 6.6 Source: Economic Survey 2019-20

2019-20 147.8 5.0 135.4 4.9

A closer look at budgetary allocation raises issues that needs prognosis.

1) Food subsidies continue to garner highest allocation despite continuous effort of poverty alleviation efforts.

2) Lack of political will to think in a new way which has resulted in instance of frequent resource wastage given its scarcity.

For instance, allocation towards Department of Higher education (0.2%), Department of School education and Literacy (0.06%) and Department of Youth Affairs (0.2%) is infinitesimal if we consider it from broader perspective. To put it more simply, India’s demography necessitates higher allocation towards Human Resource Development as we are a home to largest number of youths across the globe.

In the Budget 2020-21 it was highly anticipated more focus would be on employment generation, especially rural employment schemes (Eg: MNREGA) as demonization had a ripple effect on rural sector. In this regard, departments critical for employment generation – MSME (0.88%), Tourism (0.4%), Textile (0.4%) and Dairy (0.16%) received miniscule allocation.

On the healthcare front, India has the second largest population after China; hence healthcare and social security of the citizen should be of utmost importance. FM, Nirmala Sitharaman, in her budgetary speech stressed on government’s intention to eliminate TB in the next five years. But allocation towards, Ministry of Ayush (0.02%) and department of health & Family welfare (1.17%) did not indicate any.

Urea, which contaminates soil and water and results in health-related issues received a major chunk of subsidy, Rs47,805 crore. On the contrary, AYUSH, health, family welfare and health research received Rs9,300 crore.

On the similar aspect, government’s persistent effort on moving towards clean fuel through Ethanol and Electric Vehicle (EV); Department of renewable energy was allocated 0.68% v/s 5.15% for Petroleum & Natural Gas.

Exhibit 4: Allocation to Major core schemes of the government Rs.Cr (FY21 BE) MNREGA 61,500 National Health Mission 34,115 Pradhan Mantri Awas Yojana 27,500 AMRUT and Smart cities mission 13,750 Pradhan Mantri Krshi Sinchai 11,127 Pradhan Mantri Gram Sadak Yojana 19,500 Source: Budget Documents

% YoY FY20 FY21BE 14.9 -13.4 8.9 -0.5 -0.4 8.6 -18.6 39.7 -3.0 40.9 -8.7 38.6

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Increasing capex spend mildly supportive of growth One of the positive aspects of budget is government has made some room for higher capex despite tight fiscal condition. Of the overall capex, a large part of spending is fastened to infrastructure spending, is budgeted to increase at 18% in FY21 Exhibit 5: Higher capex 20

18.1 13.4

(%)

15 10 5 0 FY21 BE

FY20 RE Capex (YoY)

Source: Budget Documents Outlook India seems to be heading towards a state of stagflation described as a period of low growth and rising inflation levels. A gradual recovery is expected from this stage would require time to unclog the bottleneck in the sectors. Government’s reliance on market or non-market funding has led to upside pressure on cost in turn creating a hindrance for credit growth and economic recovery. Government’s gross market borrowing is pegged at Rs 7.8 lakh crore for FY21 this is expected to put pressure on 10-Year G-sec yields. A nominal GDP growth of 10% looks achievable aided by inflation and a weak base. The government should go for aggressive monetization of assets as it would have no impact on the fiscal position and address liquidity problems. In addition to this, a lot of clamor is surrounding around policy uncertainty over spectrum auction, higher AGR dues have rocked telecom sector; hence, imperative policy should be designed to help this sector.

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Priority Sector Lending and Inclusive Growth in India By: Subhiksha Kamath (Shaheed Sukhdev College of Business Studies)

The termed ‘Priority Sector Lending’ (PSL) was coined in the year 1972, when Dr. K.S. Krishnaswamy, emphasized on the importance of giving loans to the priority sectors of the economy. Since then, the Reserve bank of India (RBI) controls the flow and direction of credit through the qualitative instrument.

The primary objective of Priority Sector Lending is to ensure that institutional credit flows in the less profitable sectors of the economy. It has always ensured that priority sector lending captures untapped business opportunities among the financially excluded sections of society and thereby leads to a holistic development of the economy. After the nationalization of 20 largest commercial banks, PSL emerged as a major function of the RBI.

As per a circular issued by RBI in 2018, Priority Sector comprises of the following categories: Agriculture, Micro, Small and Medium Enterprises, Export Credit, Education, Housing, Social Infrastructure, Renewable Energy, Others. These sectors hold national importance.

The RBI has also given special status to some of the sections as Weaker Sections so as to uplift the backward classes of the society. These are SHG groups, minorities, artisans, farmers, backward classes and many others.

Priority sector lending is meant for the purpose of improving credit availability in the weaker but large sections of the economy. These sectors give employment to a large segment of the population. Such targets are mandatory for the banks to meet. In case they do not, then banks are required to invest in Rural Infrastructure Development Fund (RIDF) instituted with National Bank for Agriculture and Rural Development (NABARD) or National Housing Bank (NHB) or Small Industries Development Bank of India (SIDBI) or Micro Units Development Refinance Agency Bank (MUDRA Ltd).

Under this regime, all sectors have seen a steady rise in the amount of loans that the commercial banks have provided. In some cases, it has nearly doubled in money amounts. Therefore, it has helped in uplifting the

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parts of the economy that are not catered by the market forces. There has been a surge in the living standards of the people who have taken advances under PSL. Public sector banks contribute the majority of the loans although the trend has been positive for other types of banks as well.

There have been significant benefits of such priority sector lending. Government sponsored schemes have shown a positive growth, concentration of sample beneficiaries has reduced amongst the lower income groups, there has been a significant shift from non-institutional creditors to institutional credit and a definite growth in the exports of the country.

However, all this growth and development is marred by the excessive pressure on the commercial banks that this system exerts.

Most of the sectors included under such set targets include people who have a no/ less capacity of paying back the funds taken as loans. This has led to a low profitability and High Non-Performing Assets in the banks, especially in the public sector. The Government ultimately has to cover the losses thereby widening the fiscal deficit. Another issue is the high amount of direct/indirect costs involved in the process of providing priority sector lending to the borrowers. These are funding costs, transaction costs and credit costs.

Additionally, there is a lot of interference by the government when it comes to the targets set under the priority sectors. This makes it difficult for the banks to work properly and has reduced the viability of these institutions. A huge chunk of the loans advanced are also misused. These have been diverted in non-productive activities, family consumption and repayment of old debts. Hence, such loans have poor repayment rates.

With local and national leaders making promises for loan waivers, borrowers (especially farmers) have also been reluctant to pay their loans back. This has annihilated the credit culture amongst the masses.

So, the question to be addressed is what can be done to salvage the banking system of the country? It is extremely necessary for banks to reduce their NPAs. For this, the banks need to: Carefully consider compromise settlement proposal Introduction of an internal audit of sanctions of loans before releasing large averages Debt Recovery Tribunal

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PSL norms should aim to make bankers incentivize the shift to modern methods of farming and change the models of farming. This would reduce the risky loans which is unviable in general. In MSME segments, special emphasis should be focused on ‘Micro’ and ‘Small’ units.

There are various non-banking organizations like private equity funds, Housing Finance Corporations, NBFCs, microfinance institutions, cooperative banks. These institutions can also be involved in order to ensure deeper penetration in the market.

Innovative financial Mechanisms will help separate the process of manufacture and distribution of financial products. Additionally, there should also be no distinction between cash credits and term loans. The branch managers should be given more powers to make decisions regarding the priority sector loans. Also, the service sector is understaffed in rural areas.

There should be qualitative targets along with quantitative targets in order to boost commercial bank. Banks should follow the guidelines of RBI in the matters of rate of interest. If the reasons for default are genuine then banks should be more accommodating.

Priority sector lending has led to socio-economic development of the country. Priority sector lending is also considered to be a cornerstone for inclusive growth in the economy. There has been an impressive growth under the wake of priority sector lending. Credit is more easily available in the sectors thereby leading to more investment in the economy.

But the increase is marred by a lot of shortcomings. There is a need to address these problems as soon as possible so as to increase the efficiency of priority sector lending to the maximum. It is high time that the required actions be taken to salvage the otherwise banking system while still maximizing the benefits of priority sector lending.

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Sources and References Handbook of Statistics on Indian economy, RBI RBI master circular FIDD.CO.Plan.BC.4/04.09.01/2015-16 dated 1st July, 2015 amended 1st Dec, 2015 RBI (FAQs) Priority Sector lending- Targets and Classification (Updated as per 28th December, 2018) PSL Final Report; IIBF Organization Problems and Prospects of Priority Sector Lending, Manjushree S. Priority Sector Lending in India, an Analysis- A. Udhaya Sweetline Impact of Sectorial Advances on Priority Sector NPA by Rajesh Desai Asia Pacific Journal of Research by Akhila Ibrahim K.K Priority Sector Lending and Inclusive Growth, FICCI Insights, Mr. R Raghuttama Rao, Priority sector advances: Trends, issues and strategies R. K. Uppal Priority Sector Lending- A Review by Vijay Sarabu Priority Sector Lending and Inclusive Growth, Vivro.net Priority Sector Lending- GK today Priority Sector Lending-Arthapedia Priority Sector Lending- Legal Services India

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Is covered Interest Arbitrage Profitable?

By: Ganesh Krishna Bhagat & Shreedevi Kathyani N (Justice K S Institute of Management) Introduction According to interest rate parity (IRP) theory, the interest rate differential between two countries should be equal to the forward premium/discount (Taylor, 1989). The absence of IRP (interest rate differential is not equal to forward premium/discount) provides an opportunity for the covered interest arbitrage (CIA) or popularly known as carry trade. It seems generally accepted that CIA opportunities will not exist in an efficient foreign exchange market. CIA is the strategy of using interest rate differentials to invest in the higher-yielding currency with entering into a forward currency contract to hedge against exchange rate risk. CIA is a popular medium- or long-term strategy within the FX market, provides the volatility in the FX market and more importantly it provides the opportunity for a trader to execute a carry trade with high odds of positive return.

Due to an increase in the funds managed by hedge funds, carry trades have a price impact on both currency and interest rates across the world. However, the attitudes towards individual carry trades changed as a series of economic crisis rearranged the relationship among currencies. In reaction to many economic weaknesses, interest rate differentials got a lot narrower. Over the years, the foreign exchange market has become efficient by providing very few arbitrage opportunities (Khuntia & Pattanayak, 2019). In spite of increasing efficiency several studies in the past have reported the existence of CIA (Du, Tepper & Verdelhan, 2018). It is in this context; this paper examines if the covered interest arbitrage opportunity still exist in major and emerging currencies. If the opportunity exists, we examine the profitability of CIA. Methodology In this paper, we investigate the CIA possibility for three major currencies and three emerging currencies. We calculate the CIA profit for three different maturities, i.e. 3 months, 6 months and 1 year. The major currencies are Australian Dollar (AUD), British Pound (GBP), Canadian Dollar (CAD) and the emerging currencies are Mexican Dollar (MXN), Indian Rupees (INR), Hong Kong Dollar (HKD and Australian Dollar (AUD). All the currencies are quoted against US Dollar (USD). The CIA calculations are carried out using the FXFA function (interest rate arbitrage calculator) of Bloomberg Professional Service terminals. The CIA opportunities are tested assuming a notional capital of 1$0 million or equivalent in other currencies.

Results The results of the CIA calculations in presented in the tables below: Table 1 Covered Interest Arbitrage of USDMXN Particulars 3 months 6 months 1 Year USDMXN Spot Rate (Bid) 19.0991 19.0991 19.0991 USDMXN Spot Rate (Ask) 19.1035 19.1035 19.1035 USD Yield (Bid) 1.6793 1.5169 1.3809 USD Yield (Ask) 1.6793 1.5169 1.3809 MXN Yield (Bid) 7.2096 7.0763 6.8999

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MXN Yield (Ask) 7.2301 7.0970 6.9137 USDMXN Forward Rate (Bid) 19.3428 19.5878 20.0952 USDMXN Forward Rate (Ask) 19.3503 19.5975 20.1075 Interest Rate Difference (%) 5.5303 5.5594 5.5190 Forward Premium 5.1757 5.1355 5.2153 Carry Trade Profit (in US$) 10,426.1108 18,277.0282 24,359.1190 Source: Bloomberg Table 1 reports the results of covered interest arbitrage possibilities in USDMXN currency pair. The trader who borrows US$ fund and invest in MXN$ will have profit because the number of US dollars received from the Mexican investment exceeds the repayment on the US loan. The unexploited profit opportunities exist between US and Mexican markets whenever the interest rate differentials are larger than the forward premium in those markets.

Table 2 Covered Interest Arbitrage of USDINR Particulars 3 months 6 months 1 Year USDINR Spot Rate(Bid) 71.8850 71.8850 71.8850 USDINR Spot Rate(Ask) 71.8850 71.8850 71.8850 USD Yield(Bid) 1.6793 1.5155 1.3809 USD Yield(Ask) 1.6793 1.5155 1.3809 INR Yield(Bid) 5.9015 5.5556 6.8999 INR Yield(Ask) 6.0338 5.6471 6.9137 USDINR Forward Rate(Bid) 72.4915 73.1838 20.0952 USDINR Forward Rate(Ask) 72.5515 73.2309 20.1075 Interest Rate Difference(%) 4.2222 4.0401 5.5190 Forward Premium 3.4217 3.6637 5.1823 Carry Trade Profit(in US$) 22,461.4926 16,904.5769 27,391.3360 Source: Bloomberg As reported in Table 2, the forward premium and the interest rate differential is not same for all the terms (3 months, 6 months and 1 year) providing an covered interest arbitrage possibility. The arbitrageurs can earn profit if he borrows in USD which is a low yield currency and invest in INR which is a high yield currency.

Table 3 Covered Interest Arbitrage of USDHKD Particulars 3 months 6 months USDHKD Spot Rate(Bid) 7.7921 7.7921 USDHKD Spot Rate(Ask) 7.7925 7.7925 USD Yield(Bid) 1.6439 1.5028 USD Yield(Ask) 1.6439 1.5028 HKD Yield(Bid) 1.9263 1.8511 HKD Yield(Ask) 1.9263 1.9013 USDHKD Forward Rate(Bid) 7.7921 7.7947

1 Year 7.7921 7.7925 1.3705 1.3705 1.7101 1.8117 7.8020

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USDHKD Forward Rate(Ask) 7.7932 7.7959 7.8046 Interest Rate Difference(%) 0.2824 0.3483 0.3396 Forward Premium 0.0017 0.0661 0.1260 Carry Trade Profit(in US$) 7,515.1725 13,757.3106 31,783.0110 Source: Bloomberg Table 3 provides an overview of the arbitrage possibilities between USD and HKD. Forward rate is greater than parity rate and forward rate is at a premium. Hence trader should borrow from US and simultaneously invest in Hong Kong. He will get arbitrage profit in 6 months and 1-year exchange rates after reducing the transaction cost.

Table 4 Covered Interest Arbitrage of USDGBP Particulars 3 months 6 months 1 Year USDGBP Spot Rate (Bid) 0.7696 0.7696 0.7696 USDGBP Spot Rate (Ask) 0.7697 0.7697 0.7697 USD Yield (Bid) 1.6793 1.5181 1.3816 USD Yield (Ask) 1.6793 1.5181 1.3816 GBP Yield (Bid) 0.9007 0.7964 0.6982 GBP Yield (Ask) 0.9007 0.7979 0.7089 USDGBP Forward Rate (Bid) 0.7678 0.7661 0.7633 USDGBP Forward Rate (Ask) 0.7679 0.7663 0.7634 Interest Rate Difference (%) -0.7786 -0.7217 0.6834 Forward Discount -0.9591 -0.9132 -0.8168 Carry Trade Profit (in US$) 5,864.3431 11,137.4977 15,905.6322 Source: Bloomberg Table 4 presents the arbitrage opportunities in major currency pair USDGBP. In this calculation Forward rate is lesser than parity rate and forward rate is at a discount. Hence the arbitrager should borrow from US and simultaneously invest in Britain.

Table 5 Covered Interest Arbitrage of USDAUD Particulars 3 months 6 months USDAUD Spot Rate(Bid) 1.5156 1.5156 USDAUD Spot Rate(Ask) 1.5156 1.5156 USD Yield(Bid) 1.6793 1.5155 USD Yield(Ask) 1.6793 1.5155 AUD Yield(Bid) 0.8600 0.7981 AUD Yield(Ask) 0.8600 0.7981 USDAUD Forward Rate(Bid) 1.5129 1.5098 USDAUD Forward Rate(Ask) 1.5130 1.5100 Interest Rate Difference(%) -0.8193 -0.7174

1 Year 1.5156 1.5156 1.3793 1.3793 0.7066 0.7066 1.5064 1.5071 -0.6727

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Forward Discount -0.7241 -0.7765 -0.6093 Carry Trade Profit (in US$) 2,273.6719 3,202.6438 5,496.5876 Source: Bloomberg Table 5 reports the results of covered interest arbitrage calculation for US dollar and Australian dollar. Where, the forward rate is higher than the parity rate and difference between the interest rate difference and forward discount is minimum. Although the arbitrager will get carry trade profit due to the effect of transaction cost there will be net loss for the trader.

Table 6 Covered Interest Arbitrage of USDCAD Particulars 3 months 6 months 1 Year USDCAD Spot Rate(Bid) 1.3296 1.3296 1.3296 USDCAD Spot Rate(Ask) 1.3297 1.3297 1.3297 USD Yield(Bid) 1.6467 1.5085 1.3772 USD Yield (Ask) 1.6467 1.5085 1.3772 CAD Yield (Bid) 1.9385 1.8099 1.7023 CAD Yield (Ask) 1.9385 1.8099 1.7023 USDCAD Forward Rate(Bid) 1.3296 1.3294 1.3303 USDCAD Forward Rate 1.3297 1.3296 1.3306 (Ask) Interest Rate Difference (%) 0.2918 0.3014 0.3251 Forward Premium/Discount -0.0037 0.0282 0.0728 Carry Trade Profit (in US$) (6,084.9774) 14,263.9950 28,205.7022 Source: Bloomberg Table 6 shows that, the interest rates between US and Canada are not in parity. That means riskless profit opportunity to be made because the no-arbitrage condition does not hold. Arbitrager can create a covered interest rate trade to exploit this gap. Hence the arbitrage strategy will be borrowing from Canada and simultaneously invest in US money market. Arbitrager can make profit in 6 months and 1-year duration after deducting the transaction cost.

Conclusions The paper is set out to answer the objective, is there any arbitrage possibilities in major and emerging currencies in foreign exchange. We analyzed 3 major currencies and 3 emerging currencies using FXFA calculator. The study on the major and emerging currencies show us, the arbitrage opportunities is possible in both the baskets. However, in major currencies namely, CAD, GBP and AUD the trader will face arbitrage loss due to the effect of transaction cost. But if the carry trade is for longer duration there is still possibility of arbitrage in major currencies.

The emerging currencies such as MXN, INR, and HKD generate more arbitrage profits compared to the major currencies because of the in efficient market. Therefore, we conclude that there is less possibility of covered interest arbitrage in major currencies because of the interest

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rate parity. Whereas in emerging currencies the interest rate parity does not hold, this offers for covered interest arbitrage.

References Ashraful Haque, Mohammed (2003),”Covered Interest Arbitrage: A Comparative Study of Industrialized Countries and Selected Developing Countries”, Journal of International Business Research, Annual 2003. Available at: https://www.questia.com/read/1G1179817831/covered-interest-arbitrage-a-comparative-study-of

Callum

Cliffe. (Financial writer (2016),

“Major Currency Pairs”. Retrieved from

https://www.ig.com/en/trading-strategies/major-currency-pairs-190618

Du, W., Tepper, A. and Verdelhan, A. (2018), Deviations from Covered Interest Rate Parity. The Journal of Finance, 73: 915-957. doi:10.1111/jofi.12620 John A. Doukas & Hao Zhang (2013), “The Performance of NDF Carry Trades”, Journal of International Money and Finance, 5th April 2013.

Available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2244339

Khuntia, S., & Pattanayak, J. K. (2019). Evolving Efficiency of Exchange Rate Movement: An Evidence from Indian Foreign Exchange Market. Global Business Review. https://doi.org/10.1177/0972150919856996

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Non-banking finance in India- Regulatory challenges and concerns By: Samayita Bhattacharya (IIFT)

The Non-Banking Finance sector includes a plethora of institutes which fill the crevices in the financial architecture of the nation. They include the incorporated ones like Non-Banking Finance Companies (with and without deposits), Nidhi Companies, Chit Funds, Housing Finance Companies, Insurance Companies, Alternate Investment Funds, Micro-Finance Institutes, Infrastructure Finance Company, Infrastructure Debt Funds, Guarantee Companies, Account Aggregators, Peer-to-peer lending platforms etc, which constitute around 44% of total credits in India; as well as unincorporated ones like private money-lenders. They have been pivotal in last mile delivery of credit, and have passed on the baton of credit from he banks to the common household entities. The 6th Bi-monthly monetary policy report (Feb 2019) suggested the classification of all into three broad heads: NBFC- Investment and Credit Companies Mutual Benefit Financial Companies NBFC Factor Incorporated Non-Banking Finance Sector: Problems and suggestions The incorporated members of the Non-Banking Financial Service industry in India has been majorly affected by the implementation of the Basel II Norms. This has led to fundamental mismatch between policy and the environment. The financial ecosystem in India is fairly isolated from the rest of the world as far as Risk Contagion is concerned due to multiple reasons. Limited convertibility of the Indian currency, barriers in foreign ownership of our Financial Institutions, and the Sovereign backing of Public Sector Banks (which dominate the Indian financial environment; NBFCs have only 15% of total assets of Public Sector Banks), are sufficient reasons to suggest the inappropriateness of applying such stringent measures to define and classify assets.

Assessment of project viability rather than a blanket numeric criteria of defaulting time period must be used to categorize projects as NPAs. However, sector specific parameters must be come out with to distinguish poor assets from those suffering from temporal problems. This shall be vital for effective delivery of sovereign financial help in times of illiquidity, like the ones we have recently observed. For this a comprehensive defaulter data base and annual credit rating of the retail Institute must be done. Only after such germane distinction and subsequent asset assessment is made, should an NBFC be allowed to accept deposits and the much sought after NRI Bonds.

The current trend of providing cheap long-term loans to NBFCs is a unsustainable one as it may create unsustainable bubbles and further reduce its standing for any future foray into retail deposit acceptance. Hence along with flexibility in defining Non-Performing Assets as argued above, long

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term funds, contingency liquidity funds, tailor-made refinancing plans and credit insurance support shall be necessary for the same.

Without the sound implementation of the above mentioned measures, blind and non-contextual application of Basel inspired framework on Liquidity Risk Management, consisting of mainly keeping a minimum Liquidity Coverage Ratio and Net Stable Funding Ratio, along with the total Net Outflow of 30 days in the form of Cash or Cash like instruments, are bound to create more stress for these institutes, and appointment of a compulsory Chief Risk Officer shall be fruitless.

Un-incorporated Non-banking Financial Ecosystem: Problems and suggestions The Informal (Unincorporated) Sector has been the key driver of the “services” boom of our economy, and as illustrated by National Accounts Statistics 2011-2017, and has been the major contributor of the Gross Domestic Savings of our nation, as these firms are often categorized under “Household Firms”. They contribute to roughly 50% of the nation’s GDP, and by various estimates, 85-90% of all employments. The majority of their credit requirements are met by Small Money Lenders and other Unincorporated Non-banking entities.

The status quo is expected to remain unchanged due to a structural flaw in the Scheduled Commercial Banks. Due to the bureaucratic and removed-from-the-ground nature of employees in the SCBs, make it impossible to gauge a project viability on a Cash Flow/Income Basis rather than on the Asset Basis, which it is so accustomed to. Assessment of such businesses are impossible to be done by the later, and the former requires intimate knowledge of the Catchment Pool of Small Businesses. The administrative nature of a regular Bank Manager makes it impossible for him to dedicate such time and resources.

The professional reward system also encourages them to participate in low risk investments, preferably those in big Corporate Houses and Govt Securities, drawing the comment of Dr.Rakesh Mohan, formerly Dy Governor of the Reserve Bank of India, describing them as “Lazy Banks”.

Unsurprisingly this gap needs to be filled by Unincorporated Entities, who charge interest typically ranging from 2-5% per month, which is phenomenally higher than that availed by large Corporate houses from Public Sector Banks, due to the absence of sovereign backing of the Government and insurance of the Deposit Insurance and Credit Guarantee Corporation, which the Public Sector Banks enjoy. Also, absence of robust judicial mechanism for contract settlement increases the overall risk faced by these entities.

Hence the strategy for the Unincorporated Non-Banking Entities would be multifold.

Unincorporated Non-banking Financers to be connected to Scheduled Commercial Banks for refinancing, and refinancing them to be given the importance akin to Priority Sector Lending.

Thus, exposure of SCBs to malafide risk and business risk shall be taken care of.

Unincorporated Non-banking Financers to be assessed by a comprehensive credit rating mechanism by these refinancing Banks. Cost of capital would decrease not only due to the Priority Sector status, but also due to availability of funds for these Entities, which currently is a personal

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loan from mostly relatives or other non-institutional lenders. This would help in minimizing the negative correlation often observed between Cost of borrowing and the Size of borrowing. The synergy between capital resource rich, and those expert in on-ground utilization of funds shall automatically improve the overall credit delivery of the system. Concomitant education of personnel in the NBFS sector is also the need of the hour.

Better integration of both Incorporated (by means of suitable Asset Quality Review mechanism and Financing/Re-financing options), and Unincorporated Non-Banking Finance Entities (by extending formal credit) is essential to create an efficient mechanism for monetary policy dissemination and drive demand by providing cheap capital to the sector which accounts for majority of the employment in the country. A centralized source of funds shall ensure penetration of monetary policy to every nook and corner of our economy.

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What are the reasons for slower retail credit growth despite its cheaper availability?

By: Monika Behera (IIM Trichy) A retail credit facility is a mode of financing which can provide capital for various purposes, to both the business to business (B2B) and the business to consumer (B2C) domain. Retail credit facilities are portfolios structured with various types of fixed income securities that can be used by a firm or an individual. The retails credits can be offered by both the banks as well as the NBFCs. According to the Crisil report, the outstanding retail credits offered by banks (excluding securitization) grew at a rate of y-o-y 12.2% in FY19 over 16.4 in the precious financial year.

Retail credit can be broadly classified into two categories, based on the usage- Customer lending and business lending.

Customer lending can in in various forms, such as auto loans, house loans and other form of hire purchase for durable goods. Another metric for measurement of customer lending is credit card. According to the RBI data, the number of credit cards in the economy has grown at a CAGR of 25.9% from 24.5 million in FY 15-16 to 48.9 million in FY 18-19. During the same period, the transaction volume grew at a CAGR of 36.25%. This data shows that the average amount transacted per card has risen from FY15-16 to FY18-19.

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A major contribution to consumer lending comes from house loans (by amount) and auto loans (by volume).

The data from National Housing Bank shows the data on Housing Price Index in the major metro cities in India from 2013 onwards- all with a positive trend.

The data of the vehicles showed that the two wheeler and four wheeler domestic vehicles have shown a rise in sales over the years.

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Fig: Sales volume y-o-y in India

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Thus we see that all the major sources of consumer credit has shown an upward trend. ‘The RBI: Future Expectations Index’ data showed an improvement from 114.5 unit in Nov 2019 to 115.10 unit in January 2020.

Thus, reinstating the fact that consumer retail credit has no signs of declination.

As far as the business funding is concerned, it can be classified into two broad categories- the term loan and the revolving line of credit.

What are the major reasons for a slump in the business retail borrowing?

Probably it is an aggregate of a lot of factors, but for our simplicity of understanding, let us focus on three major reasons for slowing retail lending.

First, limited expansion opportunity. A firm opts for credits if and only when it has plans for expansion of its operations- both in terms of new product lines and exploring new geographies and scaling up of the business.

The overall industrial sector growth was 6.9% as per the estimate of national income for 2018-19 as compared to 5.9% in 2017-18. But a bulk of this expansionary projects are funded by FDI, which saw a 16% increment from FY18-19 to $49 billion inflow in FY19-20. Thus, there is a slump in the domestic retail borrowing.

Secondly, business-based retail borrowing is affected by the economic outlook of the nation. The Indian economy is expected to have a sluggish growth in the coming future. The International Monetary Fund has slashed its estimate on India’s 2019 economic growth to 4.8% from the 6.1% expansion it projected in October, citing a sharper-than-expected slowdown in local demand. In order to boost the economy, we expect a expansionary monetary policy by RBI because of the faster impact of monetary policy on the economy as compared to the fiscal policy.

Fig: Interest rate over the years in India

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Thus, the expectation of a lower interest rate, coupled with inflow of FDI has led to a decline in the retail credit growth in business sector.

Thus, we have seen various reasons for the slump in the retail credit growth in India in the business sector.

The business sector credit overshadows the improvement in the domestic sector credit by volume.

Fortunately, positive measures have been taken up by the Central Bank (RBI) in order to alleviate this issue.

The RBI announced measures to improve the flow of credit. Risk weight on unsecured consumer credit has been cut from 125 percent to 100 percent. The lower risk weights will help banks reduce capital allocation for such lending, allowing them to extend more loans. More loans will lead to more market liquidity, enhanced consumption, which in turn will lead to the growth of the industries and boost the GDP of the nation. Thus, a small initiative by RBI will spin the wheel and lead to an economic upturn.

Reference:

https://tradingeconomics.com/india/interest-rate https://www.ceicdata.com/en/india/consumer-confidence-survey-reserve-bank-of-india/consumerconfidence-survey-rbi-future-expectations-index https://data.gov.in https://economictimes.indiatimes.com/markets/stocks/news/credit-growth-slows-to-6-7-in-2019-onconsumption-slowdown/articleshow/73077886.cms?from=mdr https://economictimes.indiatimes.com/t-t-ram-mohan/is-credit-growth-aconcern/articleshow/2090062.cms?from=mdr https://www.bloombergquint.com/business/india-consumption-slowdown-is-strong-retail-credit-growtha-myth-asks-crisil

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Growth & Development: A policy Implementation “Sagarmala Programme” By: Parul Mehta (MDI Gurgaon) India is the 2nd biggest country on the planet with a population of 1.3 billion plus, responsible for nearly 18% worldwide human population. The Government of India constantly addressing the gaps and improvising the new growth opportunities to support the backbone of the Indian economy.

Recently, the World Bank has released Doing Business Report 2019 and India is placed now at 77th rank among 190 countries against its rank of 100 in 2017.

The conception of Sagarmala project was approved by the Union Cabinet on 25th March 2015. To enhance the hinderland connectivity, bridging the infrastructure deficit of India’s 7,500 km long coastline, 14,500 km of potentially navigable waterways and to take advantage of strategic location in the globe.

Mode of Transportation

Transportation Cost (Rs/Ton-Km)

Road

2.0-3.0

Rail

1.2-1.5

Waterways

0.2-0.3

Pipelines

0.1-0.15

Ports act as an important interface connecting ocean transport and land transport. India, continuously emerging fast in the Marine sector, has 12 major ports viz. Kolkata (including Dock complex at Haldia), Paradip, Vishakhapatnam, Chennai, Ennore, Tuticorin, Cochin, New Mangalore, Mormugao, Jawaharlal Nehru at Nhava, Mumbai, and Kandla, and 187 minor ports, utilizing the opportunities gifted with as the long coastal line (7,500 km).

Sagarmala Project is strongly integrating four basic pillars: • • • •

Port Modernisation Port Connectivity Port-linked Industrialisation Coastal Community Development

Need for the Sagarmala Project Initiation: •

Dwell time issue

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• • • •

Weak infrastructure at seaports and connectivity with roads & rails In-efficient transport & logistics modes Hinterland inland linkages Support growing needs for trade:

India had a fleet strength of 1,400 vessels with gross registered tonnage (GRT) of 12.68 million in 2018, as compared to fleet strength of 1,371 vessels with 12.35 million GRT at the end of December 2017.

The ongoing projects include diverse infrastructure projects, coastal berth development, fishery harbours, and skill development projects.

Current Status & Impact of the Sagarmala Project: Reference to the information disseminated by Ministry of Shipping, GOI, Government Of India, a total of 334 projects (May, 2019) have been taken up under the Project Sagarmala and out of which 91 have been completed itself in the year 2019. This also includes the development of National six greenfield projects, 111 water-ways, heavy rail corridors to link industrial clusters with seaports, 10 expressways corridors, and 80 connectivity projects.

14 new Coastal economic zones have been identified with an aim to construct infrastructure building. The rest of the projects are in various stages of implementation and completion. The total estimated cost of these projects is Rs 70,000 crores.

This has dramatically impacted the international trading on the key international maritime trade routes. There has been recorded an increase of 54 percent in the cargo & logistics transported or carried through coastal shipping and navigable waterways since the beginning of the Sagarmala initiative. The cutback in the transport time and related costs has helped the exporters to offer better prices to their international clients.

Indian Ports are now handling around 90 percent of EXIM Cargo by volume and 70 percent by value, efficiently.

The Sagarmala Project emphasised and concentrates on the port operational efficiency improvement, capacity expansion of existing ports and new port development.

These efforts have drastically impacted and reduced the time consumption at ports for customs clearance and documentation i.e. the dwell time.

The ambitious Sagarmala Project has not only contributed to the growing GDP of Indian Economy but practically generated 10000+ jobs during the last three years.

In regard to the above, Sagarmala Project is constantly quantifying the achievements and growth of the Indian economy and integrating all sectors like Petroleum, chemical, transportation, logistics, cargo, and exporters.

All the stakeholders in India associated with the EXIM is getting benefitted by this project.

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The presence of information on the schemes and the program as a part of Digital India program has enlightened the desires to move ahead and helps in breaking the internal and external barriers related to financial support, knowledge gaining, industrial implementation.

In view of the above, the Indian Exporters may able to differentiate them on the basis of the cost-leadership strategy i.e. offering better price to the International buyers and also: • • • • • •

Better affordable prices to the Farmers, Distributors, & Retailers.

Discounts on bulk buying Achieving economies of scale Implementation of State of Art Technology Maintaining relationships with customers and serving fast repeat orders Expanding and Focusing on the emerging rural markets.

References 1. http://sagarmala.gov.in/ 2. https://www.thehindubusinessline.com/economy/logistics/sagarmala-project-will-reducelogistics-lost-drastically/article23431738.ece 3. https://economictimes.indiatimes.com/industry/transportation/shipping-/-transport/economicsurvey-2019-port-capacity-augmentation-top-on-governmentagenda/articleshow/70075433.cms 4. https://www.businesstoday.in/sectors/jobs/sagarmala-project-created-nearly-10000-jobs-inlast-3-years-says-minister/story/364571.html

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$5 Trillion Economy: A Realistic Target?

By: Rahul V (IIM Kozhikode) There is absolutely no doubt that India is going to become a five trillion-dollar economy given our huge potential. The real question, therefore, is whether India will reach the milestone within the timeline outlined

by Narendra Modi: By 2024, the end of his second term. Global cues, slowing domestic consumption and rising unemployment however, point to a different direction. It is my categorical belief, that becoming a five billion-dollar economy in the next five years is impossible.

Chart: Indian economy five years down the line with different growth rates

As illustrated above, India will require over a 12%+ growth rate to reach the enumerated target within the set time limit. The IMF revised India’s growth rate to 5.8%, down from 6.7%. The figure is unlikely to rise for multiple reasons.

Firstly, India’s growth for the past two decades, has been consumption-driven. While there has been significant FDI, it is still marginal in comparison to growth in domestic spending. A middle class with a lot of disposable income has started participating in financial markets through mutual funds and has also become shoppingsavvy. This in turn fueled production which pumped up our GDP number. The participation in financial markets unlikely to increase as the trust of the public in the financial sector has been broken by the Reliance Capital tumble, NBFC crisis and the NPA problem coming to the surface. Further, the increased unemployment leads to less disposable incomes leading to less spending. More importantly, the NBFC crisis has reduced liquidity and big spends, thus hampering job creation.

Secondly, the global cues are also weakening. The growth forecast of global growth is down to around 3%. A number of economists and luminaries such as Ray Dalio are also predicting a recession this year due to emerging economic weakness and Fed policy. The ongoing trade wars, fueled by jingoism in western nations, is leading to increased tariffs by foreign nations or a demand for decrease in ours. Both these factors mitigate our scope of exports and industry growth which could have been a driver of growth.

The NBFC crisis has led to a liquidity crunch with the effect that businesses are unable to borrow easily due to a lack of liquidity. The last resort for growth is government spending. If the government wants to maintain its stringent fiscal deficit target, there is not a lot of maneuverability in terms of spending. The government can use dividends from the RBI, but that will devalue our currency against dollars and not really change our GDP in dollar terms.

Finally, the problem of twin balance sheet problem. In early 2000, Indian economy was growing at alarming pace so most Indian corporates stretched themselves by getting more loans. Corporates was very optimistic

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about the future growth but when this growth did not materialize, they were pushed into huge debt. Corporate companies who faced this stress stopped repaying the loans to the banks and the banks looked into alternative sources of financing to cover this massive NPA. But in 2015, RBI asked the banks to come clean when they exposed amount of NPA hidden in every bank. Many of the NPA was held by PSU banks so the government which was enjoying huge amount of cash saving from the low crude oil prices globally started recapitalizing these banks. But this is no longer happening since the global crude oil prices (in dollars) is continuously increasing and depreciation of Indian rupee further aggravating the problem. Historically PSU banks are the main source of credit to the rural economy and the MSME industries. Thus, the stress in banking sector is spiraling out into other industries which further pushes down the macroeconomic growth estimates.

The question therefore is- where is the growth to be a five trillion-dollar economy in the next five years going to come from? Modi is viewed as reformist, and structural reforms are indeed required for the Indian growth story. But no policy can give us the numbers that we need. India will become a five trillion-dollar economy, but not by 2024.

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Low household saving bane for economic growth By: Mayur Phalak, Sai Ashish Pentamsetty (T A Pai Management Institute) Historically, Indian families were thrift at their spending and channelized their remaining into savings. This in fact helped Indian economy to escape 2008 economic crisis to a large extent. Post 2008 there is a sharp reversal in this trend and Indian household savings have been falling ever since. This trend has accelerated over last 3 years, the net household financial savings now stand at 6.5 % of GDP even with the broader definition of savings.

Millennials preference of spending over savings and easy availability of credit due to multiple category of players entering into this market eventually will lead to faster erosion in household financial savings. Recent government initiatives to fuel the growth of economy through investment in infrastructure would face a serious setback without lack of savings from these households.

In 2008 the total savings in the economy was 38 % while in 2018-19 the total savings in the economy has fallen below 30 % for the first time and it is safe to assume that the number would be around 26-28 % for the financial year 2020. Traditionally economist believe that every 4% of savings would lead to 1% growth in GDP. So, 26% of savings would barely lead to 6 to 6.5% growth in economy which is dismal by Indian standards. With the less than 7 % growth rate millions of people would not find new jobs and with present country demographics this can create an unrest in social fabric. These trends are already visible and recent UP government data shows 58% rise in jobless people in the state. This is a long-term trend happening in the country although the data is scares but this trend in unemployment has fairly increased in the country.

The recent government budget initiatives would further discourage savings due to relaxation in tax slabs and people will increase their spending. Also, this would boost consumption in short run the price rise will be seen due to increase in demand in the economy but would counter the gains and eventually the economy will reach at the same stage of previous output. In a long run for an economy to grow it should be through investments which are fueled by savings. If the existing trend would continue the net financial savings may not even fund government budget deficits which is expected to be 4 % of the GDP for the coming financial year. This would have a huge implication in terms of cost of borrowing which will have an adverse impact on corporates and virtually shut out them from borrowing through financial markets. Now with corporates being crowded out and government finances going towards social and welfare schemes would have a big impact on real investment in the economy.

How does savings fuel economic growth?

Savings mainly are of two types: Savings into physical assets (Gold, land etc.) and savings into financial assets (Currency, Bank deposits, Shares and debentures, Insurance, Pension and Provident fund, post office saving schemes etc.). When household or corporates save into physical assets the money gets locked into unproductive assets. Financial savings are more liquid compared to physical asset and predominately channeled as investment in banks (deposits) and has a money multiplier effect. Once the money is accumulated with the financial institutions, they either lend it to corporates or buy government debt securities. Corporates in turn invest this into capacity building while the government invest it into infrastructure or any social program. These

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investments would create employment which would lead to increase in household income and eventually leading to increase in savings and this would be a self-propelling cycle.

What can Government & Regulators do?

•

•

• • •

Encourage and channelizing investments into infrastructure especially via tax free bonds.

This would help infra companies to raise long term debt from stable funds at a competitive price. As infrastructure has a multiplier effect of 1.8 on GDP as compared to 0.95 that of consumption.

Discouraging households by dis-incentivizing savings in physical channels of investments, by imposing tax on such investments. This should be carefully implemented as this may generate a huge public out lash. Hording tax can be implemented on empty real estate which would make holding physical units of empty real estate difficult for a long period.

Reduction in corporate tax and personal tax would leave money in the hands of the people which would lead to savings and eventual investments.

Compelling PSU to sell land parcels and use that money to invest in financial assets as compared to physical assets. This would increase total pie of savings (financial savings).

Encourage households to save in gold bond and gold ETFs by giving tax exemption on investment in them by amendment in Income tax act

What can be other regulatory initiatives?

• •

• • • •

The regulator can assign favourable risk weights to instruments which would lead to investments in Infrastructure or other productive assets.

Relaxing caps on foreign investments into Indian debt market especially corporate debt market there by allowing foreign investors to invest their risk capital in India. However, caution should be exercised as hot money outflow would be extremely destabilizing to the economy. To avoid this robust risk management techniques and hedging should be allowed.

To provide real positive interest rates to public so that the money would invested/saved rather than tendency to hold on cash.

Active management of yield curve across the spectrum whereby yield hunting corporate would channel their investments which would lead to capacity expansion.

Issuance of bonds similar to TIPS (Treasury Inflation Protected Securities) so that subscribers are shielded against sudden spike in Inflation.

Active management of the yield curve with a clear focus on channelizing corporate savings to a desired tenure.

Data Source: https://m.economictimes.com/markets/stocks/news/indias-savings-rate-plunges-to15-year-low/articleshow/74200784.cms https://wap.business-standard.com/article-amp/economy-policy/household-savings-dip-to-6-5-ofgdp-in-fy19-despite-new-rbi-methodology-120020301450_1.html

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Vodafone Idea seeking hike in tariffs By: Eshan Sharma (IBS Hyderabad) There is news surfacing around that Vodafone Idea is planning to raise the tariffs by 7-8 times for the mobile data which has triggered a panic kind of situation in the market and certainly has direct impact on customers' pockets. Now with this it becomes necessary to dig deep into it and see what made them write a letter to DoT (Department of Telecommunication) and express their concerns for the current tariffs.

How it started?

This all started with a verdict on October 24,2019 when Airtel and Voda Idea were penalised by apex court and have to pay penalties of not paying spectrum charge from aggregate principal for 14 years. This amount totalled to ₹53,000 Cr. for Voda Idea and ₹35,000 Cr. for Bharti Airtel and were asked to pay the dues by the last week of January which now has been revised to March 17, 2020. Airtel has paid ₹10,000 Cr. of this amount to DoT while Voda Idea managed to pay only ₹3,500 Cr. to DoT and now it is not in the position to pay more amount and if it does so they have to shut the company, while Bharti Airtel has accepted its fate and is trying to pay the amount.

Currently Voda Idea customer pays ₹7.8/GB of data which is now requested by Voda Idea to set it at a floor price of ₹35/GB and adding to it they have also requested to fix ₹50 as a monthly connectivity charge, this if accepted will inflate the mobile bills for Indian consumer and on other hand will double the revenue of telecom sector which is currently at ₹1.75 trillion and will help the sector to come out of crisis and will help the company to pay its dues.

Why is the RBI Worried?

RBI is continuously monitoring the situation of this sector and raised concern during December too when operators raised the price, and the concern is justified as this can possibly trigger inflation and will put a cost push pressure to CPI and also will be having some impact on bank as they have considerable amount of fund (1-2.5%) and non-fund (1.5-3%) exposure in telecom sector with major contributor being SBI and Yes Bank.

This will again make the market unstable and disturb the price equilibrium at the point when MPC is trying hard to get inflation on control.

What is DoT doing?

DoT is looking into the issue along with Digital Communications Commission (DCC) to figure out if the telecom operators can be given a relief, on total telecom operator owe ₹1.47 lakh crore to DoT which is a humongous amount and hence there are several request made by telecom operators to DoT so amount can be reduced. Too much focus is on this issue as telecom directly employees over 13k people and if continuous pressure is exerted it can leave many people jobless and create chaos among the subscribers.

What can be done?

The root cause of all this stress is the competitive pricing scheme on which these operators were running and hence has resulted in decline in revenue after entry of Jio, but one thing which can be looked by DoT is

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accuracy in calculation of which has been brought in light by telecom operator mentioning that few things has been calculated twice by DoT and thus they have been given a chance for self-assessment so in case of any difference DoT can revise the penalties. As of now the telecom operator should not be forced as there is a risk of huge job loss and hence proper framework should be setup to address the concern of both the parties’ w.r.t verdict of apex court.

Also, if this continues for a long time then probably Indians need to wait a bit more for 5G services as it will again require a lot of infrastructural investment that cannot be seen under the current condition of the telecom sector.

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Impossible Trinity By: Mohak Shah (KJ Somaiya Institute of Management Studies & Research) INTRODUCTION Central Banks like to be in control, however, there are certain things that are beyond its control. One such concept is of “The Impossible Trinity”. As dilemma has two goals, trilemma has three goals. However, the issue is that not all the three goals can be achieved as they are mutually exclusive and selecting either of them would imply losing the other.

A concept developed by Fleming and Mundell "The Impossible Trinity" or the "Trilemma" is a concept in economics which deals with three goals that an economy wishes to achieve. Exchange rate stability, free capital movement between countries and domestic monetary policy autonomy are the three important goals of any economy which are impossible to achieve simultaneously. For any country and the monetary planners of the country, they can choose at best any two of the three options. Any economy which wants to stimulate would want to increase its money supply but the moment the money supply is increased, the domestic rate of interest would fall. When the domestic rate of interest falls below the foreign rate of interest, capital starts outflowing (Free Capital Movement) from the economy. The reason for the outflow of capital would be to get better returns in the foreign market. For example, when foreign investors would be investing in host country, in order to get better returns on their investment they would be selling dollars, and in exchange would be buying their local currency. However, it is imperative for the central bank to maintain the stability of the exchange rate.

With the increase in the demand of local currency, the central bank has to buy dollars to give local currency in return. Soon it may have excess of dollar reserves and will see appreciation of the domestic currency. The moment there is excessive appreciation, the goal of Exchange rate stability is disturbed.

THE INDIAN SCENARIO EXCHANGE RATE STABILITY Exchange rate basically means how much your currency is worth when you trade it for another country’s currency. A country that has a current account surplus usually sees its currency appreciate over time, and vice versa. In India, RBI has the responsibility to keep a stable rupee exchange rate. But the rupee doesn't have a fixed rate of exchange and the RBI cannot interfere too frequently to fix it. The only major option available is to sell and buy dollars to take care of the fluctuations.

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USD INR 80

69.79 71.27 66.32 67.95 63.92 61.89 63.33

70 60 50

48.45 46.68 44.81

53.26 54.77

40 30 20 10 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 USD INR

(Source: RBI) FREE CAPITAL MOVEMENT As the exchange rate of currency isn't stable, any foreign investment made would impact the rupee. When we buy dollars and sell rupee in return, to make foreign investments, there is a fall in the rupee. On the contrary, a foreign investment leads to the rise in the value of the rupee. So, a free capital movement affects the exchange rate of the rupee. Moreover, countries like India, which face Current Account Deficit, need higher capital inflow so as to fund the deficit in the balance of payments. However, due to the slowdown of the Indian economy and comparative robustness of the US economy India has been witnessing reduced inflows of capital flows.

MONETARY POLICY AUTONOMY Since RBI doesn’t have the autonomy to fix the exchange rate nor the capital movement, then it’s quite unlikely it has the independence from the external factors to set interest rates. Having Control of one of the above factors is a prerequisite to be able to have autonomy in setting the monetary policy.

In the era of globalization to stay relevant to other developed western economies, India too has chosen to go for autonomy in monetary policies. It fluctuates between fixing exchange rates and the free flow of capital but mostly goes with the first one. However, looking at the present scenario, the need of the hour is to allow the free flow of capital considering the increasing deficit in trade. India saw a deficit of $14.3 billion in Q1 of 2019-20, which is about 2.4% of the GDP. Though this number is encouraging compared to the previous year, being in deficit is a matter of concern. Moreover, with the rise in crude oil prices on the wake of US-Iran Tensions and the impact of Corona Virus outbreak and increasing gold and other capital goods inflow, India has been staring at an increased import bill.

The trade deficit is a subset of the bigger problem called Current Account Deficit (CAD). The increasing CAD, which is 2.4% of the GDP now.

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Conclusion Considering the state of the Indian economy and the mutually exclusiveness of the options available in the “Impossible Trinity� the RBI has been time and again recalibrating its policies in the best interest of the economy.

Reference: 1) Investopedia 2) Livemint

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