Arbitrage Magazine - February 2022 - Finance & Investment Club | IIM Rohtak

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Presents

February 2022 Vol 5 Issue 6

Our best read – ‘Budget'22: Pedal to push virtuous cycle of investments and crowd in private investment in the country?’ ’

Special Mention: New Age IPOs - A journey towards something good or a farce?

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INDEX

S. No. 1 2 3 4 5 6

Article

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Budget'22: Pedal to push virtuous cycle of investments and crowd in private investment in the country?

New Age IPOs - A journey towards something good or a farce?

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THE PAST, PRESENT, AND FUTURE OF ECONOMIC INEQUALITY – AN INDIAN PERSPECTIVE The Plano Real – How a virtual currency solved Brazil’s Hyperinflation

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INDIAN IPO RUSH: HOW IS STOCK MARKET TRENDS MOTIVATING COMPANIES TO GO PUBLIC? Taper Tantrum – Inevitability of the Economic Alliteration

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Budget'22: Pedal to push virtuous cycle of investments and crowd in private investment in the country?

By: Saikrishna Sawale (IIM Tiruchirappalli) Since the mid-1980s, when India began liberalising its economy, private investment has played a critical role in quickening growth. However, private investment has declined in recent years, resulting in a slowdown in economic development, and its resurgence is crucial for maintaining India's growth rate. The size of the public invested capital, the real effective exchange rate, the output gap, and credit availability for the private sector are all variables that impact private sector investment. When we break it down further, the real exchange rate and the availability of credit to the private sector explain a major portion of private corporate investment. However, public investment is the most significant variable - since it crowds out private investment. The effect of the real interest rate on investment is negligible.

Corporate investment peaked in 2007-08 at over sixteen percent of GDP but has subsequently declined to around ten percent of GDP as a credit to the private sector has slowed and banks have begun to experience nonperforming loan issues. Due to robust growth and ongoing government expenditure backed by high fiscal deficits, non-corporate investment, including housing, real estate, small and medium firms, and agriculture, increased to roughly 18 percent of GDP in 2011-12. However, as the economy slowed and fiscal spending was cut, it, too, fell substantially.

In addition, India has a significant public infrastructure deficit and low public investment. Large fiscal deficits suffocate private-sector financing. However, nonperforming loans in the banking system used to finance unfinished PPP infrastructure projects have recently stifled credit expansion, which must be rectified. Nonperforming loans are a big concern in the financial sector, with some of them stemming from halted infrastructure projects. As a result, privatesector financing has stalled, limiting private investment.

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Why slowdown in private investments?

Since independence, India's exports grew at their quickest rates as global demand increased. As people became optimistic about the future, investment - notably in infrastructure - surged, rising by 11 percent of the GDP in four years to an all-time high of 38 percent of GDP. A remarkable increase in credit accompanied this investment boom: non-food credit doubled in three years, and capital inflows reached 9% of GDP in 2007/08. GDP growth nearly reached 10% for a while, at least according to the numbers available at the time.

The boom, however, only lasted a few years before collapsing due to the global and structural causes that supported it. Domestic investments, meanwhile, began to falter. As a result, profits fell, making it impossible for many businesses to fulfil loans incurred during the boom. Within a few years, stressed companies, or those that didn't generate enough to pay their debts' interest, accounted for 40% of all corporate debt. Nonperforming assets in the banking industry rose to double-digit levels as corporate debt servicing issues worsened. Many businesses were no longer in a financial position to make new investments, and those that were found it difficult to secure loans from banks were themselves financially distressed.

As a result of these global and structural issues, two of India's development engines had broken down. Beginning in 2010, the rate of investment growth slowed significantly. To summarise, global and structural forces have significantly impacted the Indian economy since the GFC (Global Financial Crisis of 2008).

Budget 2022: A push to a cycle of investments Typically, public investment attracts private investment. The budget for 2022 has placed a renewed focus on public investment, with the Hon'ble Finance Minister emphasizing the urgent need for government capital spending to attract private investment and generate job opportunities. This is in addition to the long-term impact of capital investment on the economy in terms of higher FDI. The capital expenditure allocation in the Union Budget is being boosted by

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35.4 percent, from Rs. 5.54 lakh crore this fiscal year to Rs. 7.50 lakh crore in the fiscal year 2022-23. This is already 2.2 times what will be spent in 2019-20. This spending will account for 2.9 percent of GDP in 2022-23. With such a substantial increase in CAPEX in two consecutive budgets, the Government of India is focusing on infrastructure. The focus is on growth rather than subsidies.

Massive government infrastructure expenditure will also benefit the private sector. Infrastructure investments have a four-fold multiplier effect on the money spent. More money invested in infrastructure equals more employment. In terms of employment and new enterprises, the youth, in particular, will profit immensely. Increased local and international demand will be driven by improved economic possibilities and cheaper logistical costs. We will see an increase in private investment as demand rises.

Figure: The four-fold multiplier effect of Infrastructure Investments As a result, the government's approach is predicated on the assumption that a significant increase in infrastructure investment will accomplish two goals. Firstly, it will increase demand for a

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variety of sectors such as steel, cement, pipelines, and construction equipment and increase factory capacity utilization. Secondly, it will expand employment across India, hence increasing demand and, as a result, private spending.

For example, the NHAI has been given a capital budget of Rs 1.34 lakh crore for 2022-23, accounting for around 70% of the share of the ministry of road transport and highways.

Furthermore, the NHAI plans to collect Rs 20,000-30,000 crore through novel financing techniques such as toll securitization through special purpose companies for select showpiece routes such as the Delhi-Mumbai expressway.

In addition, once they have a larger order book, some engineering, procurement, and construction contractors will be required to expand their balance sheet equity size, primarily to maintain a decent debt-equity ratio. These businesses will then raise money from the stock market or the private equity market, allowing private investments to flourish. According to the IMF, raising public investment by one percent of GDP may grow GDP by 2.7 percent, private investment by ten percent, and employment by 1.2 percent, assuming the investments are of good quality and current public and private debt loads do not dampen the private sector's reaction to the stimulus.

Opinion: Public investments boost private sector confidence in the economy and reinforce the government's commitment to long-term prosperity. Massive funding for infrastructure projects will be a shot in the arm for a massive number of core industry suppliers like steel and cement, resulting in more jobs and more economic demand – the two booster dosages the economy requires. In this context, the 2022 budget's emphasis on public investment and infrastructure development is a smart move toward not just epidemic recovery but also long-term growth, especially during the Amrit Kaal. Steel, cement, water pumps, construction equipment, and other industries would see capacity utilization improve to 80-85 percent as capital investment rises.

These sectors will have to invest in new factories once they achieve that level of capacity utilization.

I expect the government's actions will encourage private investment in the second half of the fiscal year. Credit expansion will emerge from the considerable increase in capital investment, which will boost the financial services sector's potential.

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New Age IPOs - A journey towards something good or a farce?

By: Vani Agrawal (B. Com, The Liberal College - Indore)

From a society that was fixated on investing in only gold and creating fixed deposits is now locked within their house and are easily creating multiple demat accounts online for each and every family member to increase their probability to get allotted an IPO in this bull run. This scenario has unfortunately been reduced to a lottery ticket - after all, the connotation has been established that their stock price is going to double on the day the company gets listed.

As of October 2021, in India, there are 7.38 crore demat accounts, more than double that of March 2019. As per MoneyControl, as many as 10 to 30 lakhs new demat accounts are expected to be opened with the upcoming IPO of LIC. With the higher participation of these first-time investors (including high net-worth individuals) analysts are suggesting that companies are going public due to the excellent performance that is currently seen in the stock markets.

According to The Economics Times, 63 Indian companies cumulatively raised an all-time high of ₹1,18,704 crore through IPOs in 2021. To put this in comparison, a total of only ₹73,003 crore was generated by IPOs in the last three years combined.

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We also saw the growth of finance educators on social media platforms raising awareness amongst their young audience. They have also contributed towards the transition of the Indian public to not be as risk-averse and to dip their fingers in these financial instruments. With the emergence of the new players, the companies are now pushing in IPOs to raise capital in these times of excess cash being injected into the market, in other words causing a temporary bullish situation that could potentially be a disastrous crash awaiting in the future.

Freshworks, a SaaS company founded in Chennai was listed in NASDAQ and created more than 500 crorepatis overnight with 70 of them being under the age of 30. A prime example of the newage software companies applying for IPOs. In 2021, India witnessed the birth of 33 unicorns. With the changing landscape of tech and software companies who are successfully able to disrupt markets and generate hyper-growth, is it time to also re-evaluate how we look at an optimal company? Zomato marked the debut of loss-making unicorns to hit the public markets.

In 2021, SEBI relaxed its regulation and framework for listing startups. Moreover, it altered its procedure for the listing of large companies by allowing the IPO to divest a low to 5% from 10% and allowing 5 years, from the previous 3 years, to get the public float to 25%. This has paved the path for India’s largest IPO to get listed - LIC which is currently valued at ₹4-5 trillion. These positive reinforcements have become a catalyst towards companies going public. In the year 2021, we saw a record total of 115 IPO filings with SEBI, to put this in context, a total of 50 filings were cumulatively witnessed in 2019 and 2020.

Previously, the lock-in period for shares held by institutional investors was 30 days, which could arise in a situation where they would exit after 30 days irrespective of the fundamentals of the company; thus, the shares of the newly listed company would fall and hurt the retail investors.

From April 2022, SEBI has plans to increase the lock-in period of 50% of the shares held by institutional investors to 90 days, this step will increase the confidence of retail investors in IPOs. My two cents on riding this bull market: entering through the primary markets (getting the shares of the newly listed company directly) and exiting with the listing gains profit is completely acceptable, however, the same companies’ shares are not that attractive in the secondary market for a reason. My advice is to look at the subscription rates of the institutional investors as well as the subscription rates of the first day. They had subscribed 4.77 times for Nykaa and just 2.77 times for PayTM, which was a reality check to the retail investors who bore the burnt of the shares

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listing at a discount. A clear trend is visible in identifying the companies that can provide listing gains. However, the very same companies might not be your best bet in the longer run. Moreover, the IPO’s first-day returns aren’t predictive nor an instrument to gauge its long-term returns and performance.

To conclude, we can witness the evolution of the market and its growing participants, of course, it is a good thing that IPOs are being listed, these are all new-age companies that are going to directly benefit from the growing economy and digitalization of India; the bullish scenario could just be an exaggerated unrealistic fear-mongering tactic, however, one thing is certain: we are bullish on India, this is just the start of India’s golden era and our entrepreneurs shall be spearheading our new-age companies to the moon!

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THE PAST, PRESENT, AND FUTURE OF ECONOMIC INEQUALITY – AN INDIAN PERSPECTIVE By: Gayathri Ajayan and Syed Salman Ashraf (National Institute of Bank Management)

Here’s a little something that encapsulates the essence of economic inequality, and perhaps of what an equal society should look like.

“A society can be said to provide equal opportunities when circumstances do not determine the differences in life outcomes.” (Ferreira et al., 2009) One only needs to look around to comprehend that the reality of our country is nothing short of sharp contrast to the utopia described above.

Mumbai, the financial capital of India, the so-called city of dreamers, is also the city of maximum contrasts. Behind the allure of glass facades and some of the most expensive housing projects in the world like Antilia, the city also houses one of Asia’s largest slum regions (Dharavi) where a sizeable population lives in uninhabitable dwellings and go to bed hungry.

There is growing consensus in India and the world over that the benefits of increasing economic growth are shared inadequately, with poorer countries and communities getting a disproportionately smaller share of benefits. Such widely skewed income distributions are a serious threat to social and political stability. The latest World Inequality Report 2022 found that the richest 10% of the global population currently takes 52% of global income, leaving a mere 8.5% to the poorest half of the population. The report also flagged India as a poor and very unequal country, with the top 10% holding 57% of national income in 2021, and the bottom 50% holding just 13%. This begs the question -is this outcome the natural order of things, or is the system rigged? French economist Thomas Piketty gives us a noteworthy argument in this regard - he observed that inequality, far from being an outcome solely of fate/chance, can be reversed through targeted policies and reforms.

UNDERSTANDING ECONOMIC INEQUALITY A 2015 definition of economic inequality by the Department of Economic and Social Affairs of the United Nations gives a holistic view of looking at inequality. It defines economic inequality as the distribution of key economic variables among individuals in a group, among groups in a population, or among countries. While historically, development theory has largely been concerned with measurements of inequality in terms of studying the distributions of income and wealth, the focus slowly shifted to a more broad-based approach of access to a basic minimum standard of living, defined not only in terms of income and wealth, but also in terms of other fundamentally important economic variables such as education, health, and nutrition.

WHAT THE PANDEMIC LEFT IN ITS WAKE

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Throughout history, financial and economic shocks have disproportionately affected the developing and underdeveloped economies, and within them the poorest sections of social strata.

The same is true of the novel coronavirus pandemic. Primarily a health crisis that manifested into a financial and economy-wide crisis, the pandemic triggered an economic downturn that left the poor to fend for themselves amidst lockdown induced mobility restrictions, consequent job losses and compounded further by an already strained healthcare infrastructure. In many ways, the pandemic revealed how easily the financial security of working-class individuals could be destabilized by factors beyond personal control.

According to Oxfam's "Inequality Kills" report, despite the fact that the wealth of Indian billionaires surged by Rs 30 lakh crore during the pandemic, over 4.6 crore people fell into abject poverty. The collective wealth of India’s 100 richest people hit a record high during the pandemic months, however, the income of 84% of Indian households declined during the same period.

The fallouts of the pandemic were apparent from early on when in the months of April-May 2020, India witnessed its worst domestic migration crisis since the partition of the subcontinent in 1947.

Triggered by government-induced lockdowns and job losses, millions of unemployed wage laborers left crowded cities to travel back to their villages. According to a study conducted by The Lancet, India ranks poorly in measurements of healthcare access and quality. The fractures in India’s healthcare infrastructure were evident during the peak of infections in the country when a deficiency in the supply of oxygen-supported beds, ICU beds, vaccines, and drugs spelled out death for the less privileged. Many families that have lost the sole earning member of the household have been pushed to the edge of poverty.

India was a highly unequal economy even before the advent of the pandemic. And what the pandemic has done is collateral damage. Although we are one of the fastest-growing economies in the world, we continue to rank poorly in various global indices that reflect the quality of human life such as the Human Development Index (rank 131 out of 189 countries) and the Global Hunger Index (rank 101 out of 116 countries). It is also generally recognised that India's economic

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recovery is K-shaped, which means that the earnings of the lower sectors of society are declining while those of the affluent sections are growing.

WHAT CAN THE GOVERNMENT DO TO ADDRESS ECONOMIC INEQUALITY? The continuous increase of economic disparity in India – and throughout the world – is not unavoidable. It is the product of policy decisions. Governments may start reducing inequality by rejecting market fundamentalism, opposing the special interests of powerful elites, and altering the norms and procedures that have got us here. They must enact measures that redistribute money and power and level the playing field.

So far, the weight of the crisis has been unequally distributed, with the poor bearing the brunt of it. A greater direct cash transfer to the poorest, the continuance of PDS rations, the extension of MGNREGA in rural regions, the implementation of a new urban employment guarantee program, and increased expenditures in education should all be included in the recovery package.

These steps would assist households in regaining their footing, partially compensating for previous losses, and mitigating long-term consequences.

A case in point here is the inadequacy of direct provisions in the recently unveiled Budget 2022 to address the inequality and insecurity of the poorest. While there are some welcoming decisions such as increased allocation to urban planning to make urban spaces more equitable and inclusive, the allocations towards big-ticket social expenditure items such as MGNREGA and PDS is not enough to meet the reality on the ground.

The amount budgeted for food grains delivered via PDS has also been reduced in the forthcoming year. Ideally, even if households were now earning enough to meet their basic food needs at the pre-pandemic levels, provisioning of expanded rations will enable them to devote some resources to other ends, such as paying down debt or increasing consumption on other items and will go a long way in improving living standards.

Experts have also proposed restoring the wealth tax, which was repealed in 2016 or imposing a one-time tax on the affluent to fund the Covid-19 economic recovery. According to a Business Standard editorial, low-skilled job development, which may provide employment for a lowskilled workforce, is critical.

CONCLUDING NOTES Extreme inequality is a form of economic violence. As long as a rising tide fails to lift all boats, for every family that can afford three meals a day, there will be many more that get by on one and for every child that has the privilege of accessing a decent education, there will be many more who are forced to drop out of school.

If India is to achieve its target of transforming into a global superpower, then it must ensure that the benefits of burgeoning growth are shared more equitably among all sections of society.

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REFERENCES: WORLD INEQUALITY REPORT – https://wir2022.wid.world/executive summary/#:~:text=The%20World%20Inequality%20Report%202022,%25%20today%20(Figure %2012).

CONCEPTS OF INEQUALITY https://www.un.org/en/development/desa/policy/wess/wess_dev_issues/dsp_policy_01.pdf WOMEN AND COVID-19 INDIA - https://www.unwomen.org/en/news/stories/2021/7/faqwomen-and-covid-19-inindia#:~:text=In%20India%2C%20reports%20of%20domestic,between%20February%20and%2 0May%202020.

INEQUALITY MEASUREMENT https://www.un.org/en/development/desa/policy/wess/wess_dev_issues/dsp_policy_02.pdf

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The Plano Real – How a virtual currency solved Brazil’s Hyperinflation By: SHRUTI CHILLURE (Dr. Ambedkar Institute of Management and Studies, Nagpur) INTRODUCTION Brazil has been the world's largest producer of coffee for the last 150 years. Being the largest national economy in Latin America, the world’s ninth-largest economy, and the eighth largest in purchasing power parity (PPP), it is hard to believe that less than three decades ago the country was battling crippling inflation. The transition was not smooth. Brazilian economy has always been a series of economic roller coaster. After a decade of failed attempts at stabilizing the economy, some of which aggravated the problem, in 1992, Brazil managed to formulate a successful strategy which reduced from 303% YoY in the early eighties to a single digit in 1998.

CAUSES: 1. MILITARY DICTATORSHIP Brazil had always been under military rule. In fact, the country had seen two dictatorship periods: During Vargas Era (1937-1945) and during the military rule (1964-1985) under the Brazilian military government. Juscelino Kubitschek de Oliveira, 21st president of Brazil during the dictatorship era, undertook large-scale projects under Target Plan(1956) and National Development Plan (1972), which focused on improving the country’s infrastructure. Some of these large public projects included the construction of The Itaipu Dam, Trans-Amazonian Highway, and Rio-Niteroi Bridge.

The government believed that investing in such projects could spur private and foreign investment which would, in turn, result in the growth of the country’s economy. Besides relying on government funds, the plan additionally relied on large foreign investments. These initiatives resulted in massive growth in the economy of the country but not without a price.: the cost of living increased with the rising exchange rate, while Brazil’s enormous foreign debt increased.

That process also led to a surge in the number of public banks, to finance their fiscal deficits, and to the creation of some of the largest Brazilian SOEs, such as (Joao Ayres 2019) 2.

OIL CRISIS

Brazil relied heavily on oil imports during the 1970s. As the oil prices quadrupled during the first oil crisis (1973), the country found itself in a pickle. Although it presented challenges to the continuation of committed high-end infrastructural projects, the Brazilian government decided to carry forward even if it meant borrowing from abroad lenders and increasing external debt.

During the oil crisis, one of the main goals of the country was to reduce dependence on oil imports by focusing on country-owned oil projects. To wean the nation away, the government spent a considerable amount on research and development of alternative energy sources.

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Ethanol produced from sugar cane has played a key role in Brazil's effort to find a substitute for oil. National oil production has been increasing by 20 percent a year, and in 1982 oil imports accounted for 68 percent of the country's consumption, down from 85 percent in 1974.

The country also imposed limitations on the use of petroleum. Brazil has had a long period of high inflation. It peaked at around 100 percent per year in 1964, decreased until the first oil shock (1973), but accelerated again afterward, reaching levels above 100 percent on average between 1980 and 1994.

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POLITICAL INSTABILITY

The 21 years of dictatorship finally came to an end in 1985, when the first democratic elections were held. While the military regime played a significant role in industrial development, they could not curb the uncontrollable high inflation and repeated external crisis. But, the advent of democracy did not bring prosperity either. After the establishment of democracy, President Jose Sarney launched multiple stabilization policies which, more or less, proved to be unsuccessful.

GOVERNMENT MEASURES 1. Crusado Plan (1986)- The basic objective of the plan was to halt the acceleration of inflation by stopping the fall of wages. It was based on the theory of inertial inflation.

Wages were frozen for a year yet, the result was an increase in inflation to a new level of 600%.

2. Bresser Plan (1987) - aimed to improve the healthy functioning of the economy by reducing inflation to a manageable level rather than eliminating inflation. The plan began to collapse in the latter quarter of 1987 and was predominantly due to the significant raises government staff were given.

3. Summer Plan (1989) – Along with the price freeze, the government privatized SOES and laid-off civil servants. The aim was limitation of inflation rather than eradication.

4. Collor Plan (1990) – named after President Fernando Collor, the aim was to eradicate inflation in one go. The inflation had reached the heights of 5000%. The plan involved a reduction in the stock of money through freezing bank accounts and restricting financial markets. This plan succeeded in managing the hyperinflation by reducing monthly inflation from 81.3% in March 1990 to 11.3% in April 1990 (Pereira & Nakano, 1991, p. 44). In July 1990 when price controls were lifted, Brazil saw the re-emergence of high inflation.

THE REAL PLAN: In the midst of mounting inflation and a series of failed stabilized plans, The real plan appeared like a knight in shining armor. The plan aimed to "The establishment of balance in the government's accounts to eliminate the main cause of Brazilian inflation.” Initiated by Fernando Henrique Cardoso, first as Minister of Finance and later as President of Brazil, the plan sought to transform the Brazilian economy by privatization, financial sector reforms, attracting foreign investment and opening the country’s economy to the world.

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In June 1994, one month before the introduction of the real as legal tender, the annual inflation rate was around 5,150.00%, whereas by December 2001, the annual inflation rate had fallen dramatically to approximately 10.0% The inflation at the time was increasing so rapidly that the prices had to be changed twice or thrice a day. This led civilians to expect darker times. The currency had lost its meaning. To tackle this problem, the government introduced a new fictitious unit of account, called URV (Unidade Real de Valor). Its initial value in Cruzeiros Reais was approximately equal to one dollar, at the market rate of February 28, 1994, ie Cr$ 647,50 647,50 in URVs. Fictitious in the sense that it existed only in name.

All the transactions were done in Brazilian currency Cruzeiros. All the goods were marketed in both URV and Cruzeiros but on the one hand, where Cruzeiros increased by hours, URV remained stable. The civilians didn’t really grasp the concept and objective of the virtual currency but over time unchanging URV gave them a sense of stability.

In the coming weeks, they sponsored dissemination of URV government denominations in order to replace all existing indexation devices including implicit discounts and premiums in the pricing of deferred obligations One of the major problems associated with URV adoption process was the existence of two competing means of payment. The widespread use of the URV, in itself, was nothing more than a perfecting of the process of indexation with a considerably increased level of uniformity in the indexation process.

The law established URVs, to be issued as a "full" currency provided that, at this moment its name be changed to "Real". Soon after, the new currency “Real” was legalized and the old currency “Cruzeiros Reais” was demonetized.

Along with the introduction of a new currency, one of the major decisions government took was to cut back government spending, tightened tax collection, and collected on debts state governments owed to the federal government. It also opened the economy to the world. Brazil had always been a closed economy with its main focus on an inward-oriented growth model. Loans are once again flowing to Brazil, partly because the International Monetary Fund has stepped in with $2.5 billion to tide the nation over.

CONCLUSION Over the years, Brazil's resilient economy has pulled through obstacles thrown at it. The stabilization program redefined the country’s trade orientation. Even though they failed to fulfil their main objective, several initiatives taken by the government to subdue inflation, they did manage to take several steps in the right direction. Building infrastructure and reducing the use of oil had benefited the economy in numerous ways. From the establishment of a new currency to be the largest exporter of coffee, Brazil has come a long way. Even after being faced with such an adverse situation, it has managed to come out almost unscathed. Brazil is far from a prosperous economy and it has a long way to go.

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References Contributors to Wikimedia projects. “Brazil - Wikipedia.” Wikipedia, the Free Encyclopedia, Wikimedia Foundation, Inc., 30 Sept. 2001, https://en.wikipedia.org/wiki/Brazil#Economy.

---. “Hyperinflation in Brazil - Wikipedia.” Wikipedia, the Free Encyclopedia, Wikimedia Foundation, Inc., 6 Mar. 2012, https://en.wikipedia.org/wiki/Hyperinflation_in_Brazil.

---. “Hyperinflation in Brazil - Wikipedia.” Wikipedia, the Free Encyclopedia, Wikimedia Foundation, Inc., 6 Mar. 2012, https://en.wikipedia.org/wiki/Hyperinflation_in_Brazil.

João, et al. “The Monetary and Fiscal History of Brazil, 1960-2016.” Publications, Inter-American Development Bank, 19 Apr. 2019, https://publications.iadb.org/en/monetary-and-fiscal-historybrazil-1960-2016.

Smith, Nigel. “How Brazil Bested the Oil Crisis - CSMonitor.Com.” The Christian Science Monitor, The Christian Science Monitor, 23 Mar. 1983, https://www.csmonitor.com/1983/0323/032328.html/. “‘The Case of Brazil’ on Manifold at the Becker Friedman Institute for Economics.” “A Monetary and Fiscal History of Latin America, 1960–2017” on Manifold at the Becker Friedman Institute for Economics, https://manifold.bfi.uchicago.edu/read/the-case-of-brazil/section/a3fd5ab8-87e549aa-b4a9-b4f4b682f359/. Accessed 27 Feb. 2022.

“---.” “A Monetary and Fiscal History of Latin America, 1960–2017” on Manifold at the Becker Friedman Institute for Economics, https://manifold.bfi.uchicago.edu/read/the-case-ofbrazil/section/a3fd5ab8-87e5-49aa-b4a9-b4f4b682f359. Accessed 27 Feb. 2022.

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Taper Tantrum – Inevitability of the Economic Alliteration By: Rajas Shahade (IIM Bangalore) While the phrase Taper Tantrum can easily pass off as a fancy tongue twister, it is actually a very interesting concept having widespread implications on the global economy and markets. So, let’s set some context and try to find out why is it suddenly relevant again!

Rolling back the clock Let’s roll back time by a few years. 2008. The housing bubble had burst to pieces in the United States, taking down the stock market with it. The world had witnessed an unparalleled crash with the S&P 500 falling more than 20%. Within 18 months, the Dow had also dropped by more than 50%. The economy was reeling under an unprecedented recession with activity levels bottoming out. It was time to take some rampant decisions to save the economy and this is where the Federal Reserve stepped in. As a reactionary measure, it increased liquidity in the market by buying bonds to pump more money into the banking ecosystem with the hope that transfer of cash in hands of the people would lead to improvement in overall demand and stability. The dents made by the crash were being straightened out and the economy seemed to be getting back on its feet again.

However, with so much money into the economy, an interest rate fall was inevitable – rates fell from 5.25% in September 2007 to 2% in April 2008. While this was good news for the borrowers, a fall in interest rates always has a flipside. With abundance of money, US investors started looking for alternative investment destinations since the returns (in the form of interest) did not remain competitive in the home market. And this is where emerging markets like India, Brazil and Indonesia, South Africa, and Turkey (the fragile five) started getting pieces of the US investment pie.

Calling it a day When the US economic revival became evident, one fine day, the Fed decided that it would stop putting more money into an already overloaded economy. It announced, in 2013, that there would be a tapering of the quantitative easing norms put in place. Emerging economies did not take this announcement in the best spirits as they believed that such a reversal would eventually restore interest rates in the US, with investors pulling out their invested money. This led to tantrums thrown by the stakeholders of these economies, with the stock markets taking a hit.

While the Indian economy remained largely insulated from such an announcement, with a few minor hiccups, intensity of the ripples was stronger in other emerging countries. Eventual outflow of US dollars led to depreciation of various local currencies in the range of 20%-45%, leading to harmful effects such expensive imports, the need to increase rates and fall in activity levels. A combination of these factors had an adverse impact on the stock market due to dwindling investor sentiments about their country’s economic strength.

Back to the future The big question now is whether such an episode is expected to recur? If we compare the situation in 2008 to the one now, the resemblance of US policy response is uncanny. The Fed has pumped in a lot of money in its economy (asset values increased from $4.7 million in March 2020 to $7.8

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million in April 2021) to pull it out of pandemic’s disruption and a huge chunk has found its way across the world, which will be removed once the pandemic’s effects subside. However, this time around, the Fed has been more transparent in its signaling and the scaling back is expected to be gradual and smoother. The recent rise in the US interest rates has also been passed off as being fleeting in nature with a focus on global financial interconnectedness.

The Reserve Bank of India has also recently announced the maintenance of its accommodative stance, with a focus on growth. Since the inflation is within the tolerance band (2%-6%), the RBI doesn’t seem to be interested in increasing the interested rate and curbing growth. However, this announcement has received polarizing opinions with former RBI governor D S ubbarao and current Monetary Policy Committee member Jayanth Verma opposing the RBI’s stance. These voices, being very strong and important, indicate that an interest rate hike to curb the inflationary pressure may be on the cards sooner rather than later.

Time will eventually tell its tale. But if I am an investor in any of these emerging markets with US money, I would be treading very carefully since likelihood of a widespread market correction cannot be discounted.

Remember, all it takes is a single announcement!

-xReferences: economictimes, finshots, thewire, indianexpress, reuters, groww, livemint, bloombergquint

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INDIAN IPO RUSH: HOW IS STOCK MARKET TRENDS MOTIVATING COMPANIES TO GO PUBLIC? By: R V Pooja (IIT Madras)

Initial Public Offer, also known as IPO, is a set of shares (basically a portion of the company) that the company releases for the public to buy. This is done in order to raise funds wherein the public plays the role of the investors. Only the private companies that possess and have maintained a minimum net worth of or over one crore rupees in each of the previous three years can apply to make Initial Public Offering. The Securities and Exchange board of India (SEBI), which supervises the Indian securities market and the capital, has mandated some more criteria that need to be met to let the firm issue its IPO. These include net value of IPOs being issued be lesser than or equal to five times the value of the company, at least three crores (of which lesser that fifty percent is held in cash or cash equivalents) of net tangible assets being owned and maintained for the past three years, Earnings Before Interest and Tax (EBIT), also called operating profit of the firm should be greater than or equal to fifteen crores in any of the three years from its history of past five years.

While the above eligibility criteria hold true for the Indian companies, there are multiple other criteria that might have to be met in different countries. A clear rise in the number of IPOs globally has a trend as shown below in Figure 1.

Figure 1: This figure shows the year-wise trend and total number of Initial Public Offers made during the period 2000 to 2021.

The figure has been obtained from https://stockanalysis.com/ipos/statistics/

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So, what are the multitude of reasons for the huge leap, considering the 2019 to 2020 and its further jump, taken by the number of IPOs being issued? To begin with, after the major hit to the market with Covid-19, unpredictability rose. Over time, things started falling back to their places and thus stability rose. Companies and firms that decided to go public mostly saw this turning point, of the market getting back to normalcy and assuring high performance, as an advantage.

While this reason applied majorly to the medicine and pharmaceutical sector (that was and is in quite some huge demand at the moment owing to making of Covid-19 vaccines, medicines and other treatments) and some younger companies who dreamed big, the other reason for such jump in the number of IPOs is to cover up the losses they incurred when the market misbehaved during the Covid-19 breakout, to keep sustaining themselves and be in the business competition.

In addition to that, because most transactions moved to online platforms to curb the spread of the virus, the world started to adapt to the massive shift i.e., from physical to digital life. This led to more and more issuing of IPOs, by the companies that were mostly into tech driven digital platforms, so that they could expand their business, gain popularity while conquering the market.

With an increasing number of people opting for home delivered food, for a change in taste or hectic work schedule, a good portion of the IPOs made include food sectors. Most countries are pushing themselves to become independent in a situation of crisis like the pandemic, this has led to lesser international trade of specific commodities while prospering of companies that intend to produce the same commodity. Expansion of such companies also has a key role to play in the jump seen in the number of IPOs before and after the breakout of Coronavirus. Some reasons for the companies to go public is that IPOs give them the flexibility to manage losses and work around them, makes them more credible, accountable and popular, helps them take calculated risks at times and the best benefit, on their part, is that they will never have to repay back this capital to the investors as it is just sold by the holders if they do not want it.

All these reasons and the quite some record breaking number of 815 companies going public, as noticed just till the month of October (which implies 2021 still has a long way to go) has raised another concern which is the ‘Market Bubble’. This is a situation where the market performs unusually well and then ends up going down. So, with such a massive number of IPOs, the question of the market bubble should not be overlooked because this is a never-seen-before rise in the number.

In hindsight, it should not be forgotten that off market trades have a role to play in the bubble too, if there is one being expected. About the bubble, nothing can be said for sure but there are chances that some valuations of the companies might be stretched to quite an extent that might be far from reality. Also, the markets behave irrationally at times. With the profits here, comes risk too. And all the investors know this. They better keep an eye out for a bubble and act accordingly. Oh! Their sixth sense might come in handy here.

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References: https://www.investopedia.com/terms/i/ipo.asp https://www.5paisa.com/stock-market-guide/ipo/what-is-the-eligibility-criteria-for-applying-ipo https://www.indiatoday.in/business/story/decoded-why-so-many-companies-are-going-public-in2021-1827513-2021-07-13 https://www.bakermckenzie.com/en/newsroom/2020/12/ipo-report-2020 https://www.pwc.com/gx/en/services/audit-assurance/ipo-centre/global-ipo-watch.html https://www.investopedia.com/articles/stocks/10/5-steps-of-a-bubble.asp Image reference: https://stockanalysis.com/ipos/statistics/

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