Arbitrage Magazine - JANUARY 2019 - Finance & Investment Club | IIM Rohtak

ARBITRAGE JAN 2019

VOL. 3 ISSUE 2

ARTICLE OF THE MONTH:

NBFC CRISIS & ROAD AHEAD

FINANCE AND INVESTMENT CLUB

Editor's Note We are pleased to publish the twenty-fourth issue of ‘Arbitrage’ – Finance and Investment Club’s monthly magazine. Arbitrage aims to cover a diverse range of topics under the wide domain of Finance and Economics. Our goal is to ensure that we provide significant value to the readers through informative articles and articles on current affairs. We would like to thank all the authors for contributing their articles for Arbitrage.

In the Article of the Month – "NBFC Crisis & Road Ahead”, the author Mr. Tushar Garg from Indian School of Business (ISB) has highlighted the causes behind the nationwide crisis, and has drawn out a remedial plan for the NBFCs We hope for the continuous support of our authors and readers to make this magazine a success.

-Finance and Investment Club, IIM Rohtak Yash Jalan Aditya Singh Sumit Kumar Himanshu Aditya Singh 1 Kirti Dang Rajat Bhatia

Index S.No.

Article

Pg. No.

1

NBFC CRISIS AND ROAD AHEAD

1

2

FINTECH IN THE ERA OF 4TH INDUSTRIAL REVOLUTION

3

3

SUPREME COURT UPHOLDS INSOLVENCY LAW IN ENTIRETY

6

4

SHOULD THE US WORRY ABOUT A RECESSION?

9

5

THE ECONOMICS OF GLOBAL FINANCIAL STABILITY

12

6

JET’S TAILSPIN

14

7

IMPACT OF GOVERNMENT REFORMS ON INDIAN ECONOMY

16

8

UNDERSTANDING GOLD AS AN INVESTMENT INSTRUMENT IN INDIAN CONTEXT

19

9 10

IS GDP A RIGHT MEASURE OF PROSPERITY??

RUPEES VS DOLLAR; REASONS & STATISTICAL STUDY

21 23

NBFC CRISIS AND ROAD AHEAD Tushar Garg Indian School of Business

ARTICLE OF THE MONTH

India experienced its near-Lehman moment in 2018 when IL&FS was on the verge of collapsing, if not for the disaster management intervention by the Government. Its hysteric aftermath was the liquidity crunch faced by the Indian economy in 2018.

Beginning from the early 2000s – NBFCs started as a link to attend the geographies and masses, where neither the banks had reach nor the intent to serve.

Even if some of the banks reached these masses, they remained underserved if not unserved. Thus, NBFCs were undeniable in India. While NBFCs were filling in shoes of banks in unreached turfs, it was functioning like banks in all aspects. However, in the regulator’s lingua banks and NBFCs were treated differently.

NBFCs started with a single-digit share in the Indian credit market and were thus regulated lightly by the regulator, however, now with nearly 20% share, the old rules won’t suffice for these shadow banks – IL&FS saga was a jolty realisation.

Banking industry’s primary job is the management of risk – they borrow money from depositors and lend money to borrowers and earns the interest spread .

First principles advocate that to mitigate risks, duration of both the assets and liabilities should match; otherwise, it may lead to an asset-liabilitymismatch (ALM). While ALM management is thrust upon banks by the regulatory norms, NBFCs were not under the purview of those norms. This led to a difference in the duration of assets and liabilities of NBFCs, making it contingently vulnerable on the inflows from its assets (i.e. the repayment of loans that NBFC has lent). Difference between lending and collections lead to the dreaded non-performingassets (NPAs).

Credit is more of a collection business than a lending business it is easier to distribute millions than to collect them back Following example elucidates ALM:

Imagine in the above case that the depositors want their money back after two years, but the assets being long term will not provide enough cash flows in two years to meet this demand of depositors. In such a case the entity may either sell off its assets at

a discounted value to arrange for immediate liquidity to pay its depositors or may default altogether.

In the cases mentioned above, the creditworthiness of the entity is compromised as either it will not earn enough returns when the assets are short-sold, or if it defaults to pay, then creditors will not provide future funding.

Something similar happened in the IL&FS case, as the entity was not able to pay off the creditors on time since its assets were long-termed and were not generating enough cash in the shortrun to pay the short-term creditors.

But what led to a nation-wide NBFC crisis?

Modern age has made businesses interdependent and is indeed introducing a world of cross-dependence. While it brings along its numerous benefits – the interdependence ensures cohesive business glory for all and tech-innovations such as blockchain – however, it also means that the whole matrix may collapse if one node turns out to malfunction. Even worse, if that node is well entrenched and has many business lines to its disposal!

IL&FS, with 347 entities as direct and indirect subsidiaries in th businesses of infrastructure, finance etc. turned out to be that feared evil node IL&FS held ~INR 91,000 crores as debt, and with that humongous amount being feared to be added to the large pool of NPAs, lenders to NBFCs (mainly via Commercial Papers) became cautious. Nobody wants to bet their money on uncertain business, and this risk aversion led to a chain of events � lesser lending to shadow banks leading to smaller lending by them to the general masses.

The repercussions of the NBFC crisis are felt across sectors, with significant hue and cry emerging from Real Estate (affordable housing and developers alike), MSME and automobile sectors. The chapter led to two realisations – First, if not for NBFCs, significant sections of the Indian population will remain deprived of credit.

Second, it was time for some substantive

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actions to be undertaken at both the regulator’s and the NBFC’s ends to adjudge NBFC the status of a fully organised key sector in India’s growth story.

How can NBFCs have a better future?

The issue of NBFC is akin to an adolescent who has not realised that childhood is over, and adulthood is around the corner. The actions needed are two-fold from the parents’ perspective to start treating the adolescent as an adult and on the adolescent’s end to start behaving responsibly. Analogically, the road ahead has been presented underneath from the regulator’s perspective and NBFC’s perspective.

A. Regulator’s perspective Regulators need to shift focus from NBFC’s asset side (loans to the struggling section of the society) to its liability side – from where NBFCs get their funds!

1. Liquidity coverage

to squeezed interest spread (higher borrowing rate for NBFCs). Though it may lead to lowered profitability, it will relieve NBFCs from its existential crisis of illiquidity; perhaps insolvency.

2. Resorting to foreign borrowings and bonds External commercial borrowings and rupeedenominated bonds issued to foreign investor – Masala Bond will also help diversify the funding pool for NBFCs and enhance duration of liabilities – potentially avoiding the ALM scenario.

3. Realising that one size does not fit all Traditionally, NBFCs evaluated borrowers against a single credit policy, resulting in the exclusion of a potent credit-worthy customer base. With new-age tech, NBFCs can now adopt a personalised approach to underwrite customer profile by incorporating segment-specific policies that leverage alternative data sources and apply scorecard-based credit decisions. This will ensure expanding the good asset-pie for NBFCs and assure cash inflows.

The systematically relevant NBFCs – such as those catering to farm-loans – must be mandated to maintain a minimum liquidity reserve, just as Banks 4. Synergistic alliances with Fintech players are required to maintain a CRR and SLR. This will help in avoiding a sudden need of liquidity to pay-off Fintech is creating ripples in BFSI with the augmentation of Blockchain and other such the lenders if the need arises. technologies. NBFCs can collaborate with such fintech players to conjointly devise an enhanced 2. Securitisation mechanism for: Just as banks are required to meet a target of • Credit scoring of different customer class; preferred-sector lending, so should NBFCs be • Exploring Peer-to-Peer lending and crowdfunding; required to have a part of their portfolio be • Working capital loans by introducing invoice mandatorily securitised. This will help two-fold: trading; • Profiling by accessing potential client’s • NBFCs will get liquidity to meet liabilities; e-footprint; • Banks will get an avenue to fulfil their preferred• Check payment durability and accordingly action sector lending targets as most of the NBFCs asset collection operations. class comprises of these preferred-sector loans B. NBFC’s perspectives Some points that may help NBFCs to improve operations and amend the extant liquidity bottleneck: 1. Shift from short-term to long-term funding This shift from short-term to long-term would, on the one hand, stabilise the associated volatility with the ALM and on the other side, it will lead

While the above suggestions are speculative and holistic sectoral changes may take longer, but the wait is worth the effort.

Both Regulators and NBFCs need to contribute to reshaping the NBFC industry as recent times warned us of its riskiness and the need to manage them.

Risks and returns go together, and the focus should be on managing risks, not eliminating them.

No risks = No returns

2

FINTECH IN THE ERA OF 4TH INDUSTRIAL REVOLUTION Deepak Rawtani KJ SIMSR

Fintech. The birth of PayPal in 1998 strengthened the Fintech ecosystem. The turning point came

when Bitcoin was launched with the Buzz being

spread that era of cash and credit would become a

thing of past and cryptocurrency will soon rule the

roost. The latest milestone in the history of Fintech was when Venezuela launched its own The brand in the above photo doesn’t need any introduction. In marketing terms, PayTM, the

cryptocurrency, Petro, reflecting the growing importance of Fintech.

poster boy of Fintech in India is now regarded as Top-of-the-mind Recall for Indian consumers seeking digital payments.

So, what is Fintech? In layman terms, Fintech is

simply the creative and innovative use of financial technology to deliver and design customized

financial products and services. At the core of

What is Industrial Revolution 4.0?

and processes by using specialized algorithms and

would fundamentally reinvent the way we live and

being the drivers of Fintech.

by the emergence of technologies like IoT, AI,

Fintech lies the utilization of financial operations

We stand today on the brink of a revolution that

software with PC, laptops and lately smartphones

work. The 4th Industrial Revolution is characterized Machine Learning, Robotics, etc. aided by the Internet. It is the successor to 3rd Industrial

Revolution which is also called Internet Age. While the 1st Industrial Revolution introduced the world to the steam engine to mechanize production, its

successor 2nd Industrial Revolution invented and popularized the concept of mass production by harnessing the potential of electric power.

Throughout the last 6 decades, Fintech has seen a plethora of milestones. The transition has taken

place from electronic payment methods and cash

machines to a full-fledged online banking and the

lucrative digital currency. The 1950s introduced us to credit cards in order to reduce dependence on

cash while Barclays introduced ATMs to the world in late 1960s. Internet gained prominence

during the 1990s and 2000s, further propping-up

Key Areas of Fintech 4.0

A) The New Face of Retail Services

Retail Banks and Financial firms have embraced the

successful adoption of internet and mobile banking

into their day-to-day operations. The journey began with the trend of digitalization in personal banking services and cashless payments. For example, MPesa, a successful venture among Vodafone,

3

Commercial Bank of Kenya, and Kenyan micro-finance and compliance processes through automation, institute Faulu began by facilitating payments and

money transfers. It now provides Banking services

identity verification, and smart contracts.

access to 19.3 million Kenyan mobile network

subscribers, many of whom previously did not even

have a bank account. Thus, strengthening the concept

of financial inclusion too. By using IoT, firms gain real time data on their own and then use Machine Learning algorithms to study their financial patterns and

Fintech in the era of 4th Industrial Revolution:

behavior. Hence, an example of Risk Management too. Challenges Artificial Intelligence is playing a significant role for

financial firms. It solves the need by driving predictive

A) Lack of Skilled Manpower

analysis and recommendations around product

The backbone of any economy is its skilled labour.

contract intelligence service to analyze and review

which become a hindrance to its potential

personalized marketing in the form of 2-way

infrastructure could pose a significant challenge.

offerings based on demographics, product history, and There is a shortage of skilled labour in the market to develop and manage the above technologies financial standings. JP Morgan introduced COiN, a legal documents. AI-led Chatbot has led to communication.

expansion. This coupled with the lack of

B) Classifying the areas that need Automation

B) Automation of trading and investment activities

For organizations and enterprises, it is increasingly

the role of automated data-gathering and analytics is

Areas like current financial positions, issuance

provide real-time market surveillance to help identify

up for grab for Automation. However, not all areas

risk. Algorithmic traders use automated trading

combined with noisy, incomplete and, dirty data

With the Financial Services becoming data crunching,

becoming difficult to separate facts from fiction.

becoming paramount. Big Data and ML techniques

history, market conditions, and historical data are

weakening or adverse trends in advance with the aim of need automation. It is for the organization to decide which area is to be automated. This better data-driven investment decisions and mitigate programs to determine when and how to trade based

are obstacles to an ideal working system.

on market conditions and pre-specified rules. Another key innovation that is gaining prominence is Roboadvisory service that offers automated advisory

C) Regulatory Issues

services like asset allocation, trade execution, portfolio Regulations aren’t making things look bright. Lack of policy support, unclear policy measures and optimization, and tax strategies to retail investors. excessive bureaucracy creates a toll on Fintech

C) The new face of financial security

development. The recent Data Localization laws of

The biggest obstacle a Fintech faces is Security. This is countries is a bane for Fintech industry as a whole. where Blockchain comes to the rescue. The Blockchain

is decentralized and distributed ledger for maintaining D) Slow adaption It would be interesting to see how small and an immutable and permanent record of transactional data in a progressive order. It stores and links the data

medium banks and financial services firm adopt

Cryptography. Blockchain along with Distributed

is not to become elite and out-of-bounds for the

record, and track financial assets on a secured basis.

biggest beneficiary should be the last person

in a growing list of records called Blocks using

Fintech 4.0 is their day-to-day operations. The idea

Ledger Technology (DLT) offers a new way to store,

vast majority of the industry. Ultimately, the

Additionally, DLT could bring efficiencies to post-trade standing in the queue or indirectly Financial

4

Inclusion should be a key agenda for the financial

personalize the customer experience and enhance

Conclusion

problem of an industry becoming increasingly data

industry. Â

security of financial industry but the emerging

Fintech will play a central role in transforming the way and number crunching would be minimized. Though finance and finance services function. Industrial

there are minor hiccups in this journey but they too

and act as a complementor to Fintech. Not only will itÂ

with an upward trajectory in coming years.

Revolution 4.0 will be an integral part of the change

will become a thing of past if the Fintech 4.0 moves

5

SUPREME COURT UPHOLDS INSOLVENCY LAW IN ENTIRETY: HOW WILL IT IMPACT THE FINANCIAL CONDITIONS IN INDIA AND THE FUTURE OUTLOOK Vrusha Patel Raghav Gupta Rajeshwar Gupta NMIMS Mumbai Introduction

Justice delayed is justice denied. This is not just for

to the creation of Insolvency and Bankruptcy Code,

market laws. Newspapers are flooded with such

solve insolvency issues in a time bound manner.

criminal or civil laws but even true for financial

2016. They are a collection of rules and laws to

circumstances in which there has been nonpayment The basic premise was to consolidate and amend for years which ultimately resulted in insolvency.

the laws related to a bunch of stakeholders like

2000s.

individuals. Now, there is a strict time bound period

Such situations have become a daily nuance since

corporate persons, partnership firms and

i.e. it provides a moratorium for insolvency

resolution of 180 days which can be extended up to 270 days under special circumstances.

The Apex court had many petitions related to IBC

which focused on majority two challenges. The first challenge was that it violates Article 14 of the

constitution. There were strong sentiments that the IBC doesn’t make a intelligible differentiation

between financial and operational creditors. Even Ranking of major countries for resolving Insolvency (Source:marketexpress.com)

Before the IBC came into the picture, there was a recovery of a modest 26.4 cents per dollar lent which was the lowest among the developing

economies. A law was the need of the hour which could restore the faith of creditors in the Indian

economy and protect their interests by the timely payment of money.

What is Insolvency and Bankruptcy Code?

These factors made way for a single law for meeting

the bankruptcy and insolvency standards which led

though the operational creditors are allowed to

initiate the proceedings in case of defaults, they weren’t allowed to participate in the resolution

process. The second major concern was that IBC was debarring the fundamental rights of the

promoters of the organization. It was pulling the

rights of the promoter from bidding for their own companies.

What was the verdict of the Supreme Court?

The apex court of India has upheld the insolvency law in ‘entirety’. Now, founders and promoters cannot bid under the bankruptcy process. The Supreme Court rejected the petitions which

challenged the IBC and upheld the constitutional

6

validity of the law. Independent Power Producers

Association and 12 major companies which were a trap of this law were driving the case from the

defense side. The apex court has refused a plea to allow the operational creditors parity with the financial creditors.

How the impact of upholding the IBC will impact the financial condition of the economy?

The NPA Recovery

India is facing the biggest ever challenge in the

history of its financial markets- the growing NPAs. Because of the IBC law, there was a recovery of 4

lakh crore of the NPAs which is 44.44% of the total recovery. So, within 24 months there is a strong

Removal of Duplication of laws

There were 12 different laws before the IBC came into the picture. If the IBC would have been

dissolved then it would bring that situation again in which there would be multiple laws, multiple reporting and a lack of clear understanding

regarding the liquidation process to be followed.

This would have resulted in major entropy and inefficiencies in the system.

recovery of the NPAs which is a rare achievement for Time taken to resolve bankruptcy an Indian economic law. With time being, the

It takes 4.3 years to resolve the bankruptcy in India

the total NPAs.

takes half a year. The law promotes the rapidity

government predicts recovery of more than 70% of

Definition of clear hierarchy of payments

With operational creditors not on the same page

while in Finland it takes 9 months and in Japan it just which is a must in Indian context.

Promotion of Entrepreneurship

with financial creditors, it will result in promotion of It has resulted in the promotion of

restructuring by the committee of creditors. Now, it entrepreneurship in our country. The ease of doing has become a clear waterfall with the first right

business rank of India has moved from 134 in 2015

creditors and then everyone else including

strong chances on major developments in this

coming to the bank which is the committee of

operational creditors (account payables). It will

result in a clear hierarchy of the payments to be

to 77 in 2019. With the law being upheld, there are front.

followed.

Credit Culture Upliftment

Bad Loans Recovery

It will also result in greater investments which are

The ruling will help recover Rs 1.8 lakh crore in the current financial year. This will help in recovery of

bad loans by the banking sector. After the IBC law, the Public Sector Banks recorded a staggering recovery of 10.77% of previously given loans.

Savings in costs to the banks

A large amount of effort and money is utilized for

There will be more availability of credit in business. the need of the hour in India. The size of India’s

corporate bond market is just a meagre 16%. With the law being there, it will just increase and

promote the credit culture in the country and thus will harmonize the interests of all stakeholders.

What if the law was not withheld?

The pro-Indian favoring economists always talk

resolving the insolvency. For example, it requires an about its fastest growing economy but there are average 9% of the total value of the estate to resolve crucial facts being ignored. We stand at 136th the insolvency by the borrower. It has resulted in savings to a huge extent.

position globally when it comes to resolving the insolvency.

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ARCs and restructuring of debts respectively. This speaks for the success of confidence in IBC law.

(Survey: pwc results,2018)

Taking Inspiration from other countries

The judgements and petitions may raise a doubt

regarding the sustainability of the IBC. However, a

comparison among countries with similar law must be closely watched to take inspiration. Taking If the law was withdrawn, then the situation would

developing countries as a model for validity like

the recovery rate of the loans.

Colombia with 0.16% bankruptcy shows that even

There are 70000 court cases that were pending

fetched. But these are only possible if we allow the

then such a situation would become prevalent

these countries.

country.

Conclusion

Analysis of One Year Report Card

IBC law has given a major life to this law once again

was conducted to gauge the trust of creditors and

process. Petitions and challenges should be seen as

resolution through IBC as a mechanism to recover

scope, it can truly redefine the Indian economic

worsen and there would be a further reduction in

before the IBC. If the law would not be reinstated, again which will affect the legal jurisdiction of the

Thailand with 0.13%, Argentina with 0.12%,

India can achieve these targets which look far-

law to take some time and gain momentum as in

“A stitch in time, saves nine”. The SC upholding the

After one year of establishment of law, a survey

as the law has true potential to reform the economic

investors in the IBC law. 69% of loans preferred

initial hurdles of the game but considering the future

loans while 16% and 15% resorted to the sale of

scenario.

8

SHOULD THE US WORRY ABOUT A RECESSION? Yash Agarwal FORE School of Management America has enjoyed one of the longest expansions

curve is the spread or difference between returns

fastest pace in five years, American organizations

but different maturity period. One of the most

in its history, the US economy has grown at its

are earning record high profits and unemployment rate is among the lowest levels in almost 50 years.

on two different bonds that have a similar quality, common examples is the yield on a 10-year

treasury bond minus yield on 2-year Treasury bond.

SOURCE: THE ECONOMIST

However, investors now worry that a recession (essentially a decline in GDP for two or more

successive quarters) might be lurking around the corner. The concerns about an upcoming US

economic slowdown have escalated in recent times, in part by the worrying signals being

generated by the fixed income or bonds market.

The stock markets were also in decline across the

globe, clearly indicating the rising uncertainty and

risk of an economic slowdown. The S&P 500 fell by 15% between November 30th and December 24th and the total returns—capital gains/losses plus

dividends—from the S&P 500 was negative for the first time in a decade. Other markets were worse,

especially China’s, where the Shanghai index fell by a quarter. Even the treasury bonds outperformed stocks.

The negative returns of the stock markets is a major cause of concern about the world economy.

To understand the current situation better and why is it alarming, let us go through some basics first.

The yield on a bond is the return on investment a person receives by buying the bond. The yield

As we know lenders and bond investors who invest their money for the longer duration of time, take

much more risk because of the volatile economic conditions, like fluctuating inflation, changing Federal Reserve policy, and dynamic global environment.

Therefore, for the compensation of additional risk,

these long-term investors demand a premium over the short-term investors, which is referred to as term premium.

Under normal circumstances, there is a positive

term premium, due to which the yield curve slopes upwards. However, in some rare cases, the short-

term yields overtake the long-term yields causing a negative spread. This negative spread leads to an inverted yield curve.

Now, there is a cause of concern in the markets as

9

the spread between 5-year and 2-year treasuries

on American goods around US$60 billion. On

both went negative recently. This is the first time,

90-day truce between Donald Trump and Xi Jinping

and spread between 5-year and 3-year treasuries

the yield curves have inverted since 2007 and every time the difference has gone negative, an

economic slowdown or recession (the light grey areas in the chart above) has followed.

December 1, 2018, the trade tensions eased with the to work out the differences. However, investors are

not very optimistic; as the Trump-Xi deal is still very fragile and Donald Trump can threaten to impose

tariffs again if any kind of disagreement crops up (the recent controversy regarding Huawei CFO arrest caused lot of distress).

Apart from this, the US government just went

through the longest shutdown in its history, which

lasted around 35 days, over the Mexico border wallfunding debacle. According to S&P Global ratings, the partial shutdown easily costed the economy

around $6 billion, i.e. more than the cost of the wall itself. This was the third shutdown since Donald The yield curve can invert due to several reasons,

Trump became the president and the most damaging

term interest rates might go down, i.e. markets

self-harm. Around 800,000 federal employees were

Federal Reserve will cut short-term rates in the

affect the consumption of the economy. Kevin

In addition, the bond market offers one important

Council of Economic Advisers, said his officials

the future. Therefore, markets could be

percentage points per week the partial shutdown

future, also negative for the economy. The Fed

postpone investment and hiring decisions due to the

consumption expenditures (PCE) price index,

Why does it matter?

which was below the Fed’s 2 percent inflation

everyone. As the old adage goes, ‘when America

The cause of concern is that inverted yield curve

A U.S. recession will probably hurt other countries

sentiment: panic about the volatile economy and

and other global economic problems, the recession

which lead to curve inversion, which in turn can

faces the disruption of Brexit, and create more

A situation may arise that a recession eventuates

will also definitely put downward pressure on

might occur.

largest importer and has been, to some degree, the

troubles in trade land. The trade war started with

Nevertheless, the good news, to an extent, is that

Chinese imports and China retaliating with tariffs

And, most leading indicators of recessions show up

but one main reason is the expectation that long-

one, and can be easily called as an act of economic

expect that the economy will worsen and that the

not paid during this time, which would definitely

future.

Hassett, the chairman of Trump administration’s

way to gauge investors’ inflation expectations for

estimated a dent to GDP growth worth 0.1

anticipating low inflation or even deflation in the

continued. Moreover, businesses had begun to

calculates inflation, using the core personal

shutdown further spooking investors.

which rose 1.78 percent in October year-over-year,

US recession is significant because it affects almost

target.

sneezes, the world catches cold.’

can create an ugly feedback loop in investor

more than the US itself. In this fragile environment

stocks can trigger negative or lower bond yields,

will further damage Europe’s anemic recovery, it also

trigger further stock market weakness, and so on.

problems for the Chinese economy. US recession

just because enough people believe a recession

commodity prices, as the United States is the world’s

The problem is only further exacerbated by the

motor stabilizing the international system.

the US imposing about $250 billion tariffs on

yield curve inversions act as early warning systems.

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up almost around six months to a year before the

mitigate the threat of recession, because even a

Therefore, adequate steps can be taken in time toÂ

implications.

downturn actually hits the economy.

relatively mild U.S. recession will have global

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THE ECONOMICS OF GLOBAL FINANCIAL STABILITY Anantha Varshitha IMI New Delhi It was 1944.

and Latin America, which were underdeveloped

Depression and World War 2 was at its conclusion

markets. On the other hand, closed Capital Markets

The World was still recovering from Great

when the United Nations Monetary and Financial Conference gathered at Bretton Woods, New

Hampshire. With the aim to financially rebuild the

market economies having weakly regulated financial such as China and developed open- market

economies such as Australia and New Zealand were not at all affected.

Global Economy and to prevent anymore prolonged The World Bank is also criticised for lending economic downturns, Bretton Woods Institutions-

programs being deceptive to the poor. Although

World Bank were established. However, even with

the conditions imposed on them, they need to take

the International Monetary Fund (IMF) and the

the concerted efforts of both these institutions, no

significant economic growth was seen in countries which borrowed from these institutions and recessions persisted.

Despite their intentions, the IMF and World Bank do not contribute to Global financial stability though

they were formed with this very objective in mind.

These institutions acted like banks which pooled

loans are intended to help a country develop, to fulfil on debt on which higher interests need to be paid.

This amounts to a “perpetual debt” forcing countries to spend on clearing their debt obligations rather than on Social and Infrastructure development

projects. Consider the Indian Scenario where the

World Bank funded the construction of a Dam on the

Narmada. This displaced people of the Valley and the World Bank was blamed for causing social turmoil as

money from the developed countries and lent to the the territories that had been inhabited since poor and developing countries. This concept of

centuries were lost to manmade reservoirs. With its

institutions in turn imposed certain conditionalities

Bank needs to have a keen eye on GDP Growth,

redistribution of wealth was not one- sided. The

onto them after negotiations (such as opening up the economy globally to trade, removing tariffs

etc.). However it is quite obvious a fact that crisis-

primary focus being poverty alleviation, the World Unemployment, Fiscal deficits and Debt

sustainability of its member countries. Also, such projects should be undertaken only if there is

hit economies which borrowed from the IMF are not consensus amongst all the stakeholders involved in a position to negotiate the terms and end up

and not just the officials.

important question on the sovereignty of the state.

dubious and intransparent forecasting mechanism.

acquiescing to the terms laid down. This raises an The Government lacks the power of financial control as they blend their knees to these

institutions. Although they claim it to be good for the countries, the truth remains that these

institutions have all the power in their hands. Their functioning, hence, seems to contradict their purpose.

The imposition of conditionalities has had an

adverse effect on the recipient countries, which

eventually led to instability in the form of a crisis.

The East Asian crisis was one such case which was caused by the IMF promoting open- capital flow

around the world. This majorly affected East Asia

Another major criticism of these institutions is their The IMF and World Bank publish many forecasts of economic data every year. But it has been noticed that many a time these predictions are not just

inaccurate, they are misleading to the point of being fraudulent.

For Example, the growth forecasts for India had an

error varying from 10.50 per cent to as much as 46.80 per cent in a span of 7 years, that is, from 2006 to 2013.

These forecasts, however inaccurate, mattered a lot as they influence investors’ expectations and

decisions of credit rating agencies. Since the World Bank and IMF do not disclose details of their

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forecasting model, including what assumptions they

institutions’ bias towards specific regions is surely

But the results do have drastic deviations, the reasons

which was the primary reason for their

make, it is hard to critique them on their methodology. not in line with the goal of a stable global economy for which might include improper assessment of factors operating within national and global

establishment.

economies. This undoubtedly conveys the fact that the institutions should appoint personages with

strong analytical skills and should be engaged in a more democratic system when it comes to its

forecasting model. Also, calculations should be

transparently shared on the official websites and the critics should be taken into proper consideration.

It has been argued that the IMF is biased towards

European countries as it lends to them more money relative to their economic power. The reason is the

voting power of each country, which is decided by the share of funds pooled in by them. Thus, it is not

surprising that the USA and Europe have a much

larger share of votes. During the Financial Crisis of 2008-09, the IMF lent large sums of money to the

PIGS- Portugal, Italy, Greece and Spain. Coincidently, at that time, the present Managing Director of IMF,

Christine Lagarde was the Finance Minister of France

and she was accused of negligence which was seen as a major reason which led to the crisis. On the other

hand, Greece which suffered huge spending and tax evasion, found itself unable to cope with

debt repayment and ended up borrowing from IMF even at a 12.70 per cent deficit, which is about four times higher than the European rules allow. The

Global stability is a distant dream for these

institutions. Presently there is a dire need for

reforms in their working, and a departure from bias and corruption is imperative. Also, transparency in functioning, loan and debt calculations, and

forecasting methodology is required. Reform, and

not elimination of these institutions, is the need of the hour.

Forums like the IMF and the World Bank would serve as a medium to financially integrate the

economy and provide a global perspective to

issues which can be combated only when all the states are in concurrence with each other.

This, if it happens, would lead to Global Stability, not only financially but otherwise.

13

JET’S TAILSPIN – DOES THE DEFAULT ON BANK PAYMENTS MARK THE END OF INDIA’S LONGEST SURVIVING PRIVATE AIRLINE? Abhiram Padmanabhan IIFT

The cost per available seat kilometer (excluding

fuel costs) exceeds that of its archrival, IndiGo by

about a rupee. Before Inter-Globe Aviation Limited, the parent company of IndiGo decided to scale up its operations back in 2015, Jet was earning half a

rupee more in terms of revenue per seat kilometer than its competitor. By September, 2016, IndiGo

drove the fares lower by forgoing a revenue of 90 paisa per km. Jet tried to counter this by

relinquishing a revenue of 30 paisa per kilometer.

Jet Airways, the country’s second largest airline in terms of market share has defaulted on loan

repayments to a consortium of Indian banks. This evoked a response in the form of an immediate downgrade in the ratings of the cash-strapped airline by ICRA which in turn led to dwindling

share prices. The deadline for the payment was

By mid-2017, there was a spike in oil prices and the ride for Jet turned topsy-turvy.

Now that the fuel price surge has subsided, the

airline is exploring possibilities to beat the cash-

crunch. But, repayments worth Rs. 63 million are due by FY2021 and of its current fleet of 124 aircrafts, Jet owns only 16 of them.

31st December, 2018. As per a statement by Jet,

the delay in the payment of interest and principal installments was owing to a mismatch in the

temporary cash flows. ICRA assigned a ‘D’ rating

to the airline’s fund and non-fund-based facilities valued at Rs.10963 crore. Owing to this rating

downgrade (for the 7th time since March, 2017),

the shares dropped by 6.16%, the sharpest intraday decline in the past three weeks.

To protect the interests of the travelers and to ensure that this hiccup does not affect the

airline’s safety standards, the Directorate General of Civil Aviation (DGCA) has reaffirmed that it

would conduct a fresh financial audit of the firm.

The Plaguing Payments Conundrum

The beleaguered airline hasn’t reported profits in 9 of the past 11 fiscal years with intense pricing wars dominating this period. As a signal of

deepening financial distress, the firm reported

losses in the third straight quarter in November

2018. The airline has fallen behind on the payment of salaries to its employees and pilots.

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Goyal, on the other hand, had proposed that a part of the debt be converted to equity by the

consortium of banks. The lenders refused to budge to this proposal unless Jet’s shareholders infused equity funds into the airline. SBI, Jet’s largest

lender, has sought assistance from EY to conduct a forensic audit into the books of accounts of Jet

Airways from 1st April 2014 to 31st March 2018. The report from this audit would also be a factor in

deciding if the consortium of banks allows the availability of funds to Jet.

In September 2018, the airline had informed its The Road Ahead

According to regulations issued by RBI in February 2018, as soon as a firm fails to make its loan

payments, banks have to monitor the account and outline a revival plan. An account falls in special mention account-1 (SMA-1) category if it

continues to remain in default for a period of (30-

60) days, in SMA-2 if it fails to repay its dues in (6090) days and a non-performing asset post 90 days.

According to the 2017-18 annual report, Jet is a

borrower from 26 lenders. Strategic partner, Etihad which owns 24% of the stake has been approached to buy more stake.

But the Gulf-based airline wants founder chairman, Naresh Goyal’s controlling stake.

overseas lenders that the firm would raise Rs. 3500

crores over 6 months by selling a stake in its loyalty programme, Jet Privilege Pvt. Ltd. Certain

stakeholders from Jet have also proposed an

option to securitize the revenue from ticket sales against the loans issued by the lenders. But this

would not suffice to cater to the entire outstanding amount.

The carrier’s share has dropped 67 percent in the last year and this default has further deteriorated the stock.

Considering the fact that time is running out for

India’s longest surviving private airline, it is very

important for the stakeholders to come up with an immediate solution to resolve this impending problem.

15

IMPACT OF GOVERNMENT REFORMS ON INDIAN ECONOMY Bikash Pratap Singh Saheli Majumdar IMI New Delhi Introduction:

US $500 billion by 2020 contributing 15% to the

major outcome of demonetization. Although this

Impact on Indian Economy:

Digitalization of the payment system has been a has been highly criticized as a cover for

government’s failed motives of curbing black money, but if we deeply analyse the current

country’s GDP.

Some of the key impacts of government reforms have been discussed below:

transforming payment scenario vis-à-vis the offline

• Increased consumption and growth of E-

demonetization, one can clearly outline the range

Post digitalization, the consumption habits of Indian

payment system that had been into vogue pre-

of positive impacts that this transformation has

brought into the financial system. Nevertheless, digitalization has not only increased the level of

convenience while making transactions but is also providing a lot of incentives to its users, therefore encouraging them to adhere to this.

Commerce Business Sector:

citizens have undergone a change. The adjacent graph depicts the growth trend of E-commerce

space between 2016-2022, which in itself reflects the change in trend. In pre-digitalization era people had to travel down to markets to shop or maybe plan in

advance for a family dinner. In Indian houses one of the prime reasons for a family to go out and dine was a break from cooking for a day.

Post digitalization this too has gained prominence

By February 2017 digital wallets transaction grew by almost 271% with transactions valuing

approximately around US $2.8 billion. Currently digital transactions account for 36% of total

transactions that have occurring in the system.

The recent report of world bank indicates a GDP growth to accelerate by 7.3%, given the

increased consumption rate post digitalization.

India’s digital payments is expected to grow to

as we see planning or travelling is no longer a hinderance, everything happens at a click.

However, the underlying crux of this matter is the

fact that such advancements in technology has led to an increase in consumption of people which

directly contributes to GDP growth of the country.

Moreover, increased discounts on wallet

transactions, provides further incentives to people to spend, thereby increasing consumption on an individual level.

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• Increased Lending Capacity of the Banks:

Digital transactions offer a lot of incentives in form of cashbacks and discounts, which is encouraging

upwards, indicating 6.7% yearly growth on investments.

people to gradually adopt it. Since 2016 till date

almost 37% of transactions have gone digital. The increased balances in savings account indicates a

lower cash transaction. All these have certainly led to increase in credit extension capacities of banks, as people are preferring to maintain higher cash

reserves as compared to before. This has resulted in improved growth of industry growth.

Where on one side we look at digital economy as a tool which is contributing towards our booming economy whereas on the other side it is clearly

evident that introduction of digitalization has taken a huge toll on our economy. Therefore, we cannot clearly conclude as to whether digitalization is

actually a boon to our economy or a bane, nor can we say that it is helping our economy to boom, Fig 3 shows the year on growth of deposits and

credit capacity of the Indian banks. In 2016 we can see that the credit extended by the banks was

around $1,149 billion, which grew to $1,347 billion

since we can see that the very introduction of the same had led to a steady decline in growth of the Indian economy and now all we can see is our economy slowly recovering from the impact.

in 2017 indicating a steady growth of 8.6% per year.

• Impact on Trade:

growth in deposits post 2016 has shot up, which

from 2016 to 2018. Observing the graph carefully

It is very evident from the same figure that the

further elucidates the sudden increase in credit creation capacity of Indian banks.

• Impact on GDP & Investment:

As exhibited in figure 4 post digitalization GDP has been growing at a fairly decent rate, we the GDP

graph sloping upwards indicating positive slope. A recent study by world bank projects GDP of India to grow at the rate of 7.3% in 2019. Looking at the

investments graph, one can clearly make out that post demonetization, the investments have

reduced drastically and is recovering slowly post 2017 as we see the investment graph sloping

Figure 5 indicates the trend observed in Indian trade one can state that digitalization had impacted this sector of economy as well. From 2016 to 2017 we

see that our exports have fallen, and imports have increased, leading to increase in current account deficit as shown in figure 6. Post 2017 we see our

exports growing at a steady rate and studies have

projected that this growth is going to be steady in future as well. However, looking at the import

graph, we get a slightly different perspective, on one side where see our exports growing, on the other side we see that although imports are

expected to come down in 2018-2019, but post 2019 it is expected to grow at a steady rate.

17

Even though the projection shows growth in both imports and exports, indicating that exports will

always be greater than imports, but the difference between the two will almost be the same, leading to increase in current account deficits.

intensified post government demanded RBI to

release its surplus fund to help government to meet its debt obligations.

Conclusion:

The overall impact of various reforms brought in by the government has been fairly balanced, where

Although one of the reasons behind increased

exports and decreased imports can be attributed to ‘Make in India’ initiative, but looking at the

trends it appears that the initiative needs to be

scaled up so as to meet the purpose for which it has been undertaken.

on one side we say the economy decline sharply

• Government Debt:

observing the several positive outcomes of the

Figure 7 shows the year on year reduction in

government’s debt, this projection has been

shown mainly on the assumption that introduction of digitalization will help in curbing illegal

transactions. It was expected that digitalization will help government to keep a track of various transactions that have been happening. But

however, this too could not be implemented, as the graph indicates the quantum of debt going

down every year, but still government is not able

to meet this declining obligation. It becomes more evident as one recalls the recent ongoing tussle between RBI and government, which got

from 2016 to 2017, on the other side we are also

same. Though we cannot deny the fact that these reforms did take a serious toll on the country’s

economy, but comparing the situations as on date

we do see a lot of positive changes that have taken place, for instance let us take into consideration “Make In India”, to some extent it is due to this

initiative, that we have been successful in reducing

our imports. Also considering the level of resistance to change exhibited by the Indian citizens during the implementation of digitalization, none of us

would have ever imagined that besides simplifying

our lives, it would also have such a great impact on our economic and financial system.

18

UNDERSTANDING GOLD AS AN INVESTMENT INSTRUMENT IN INDIAN CONTEXT Mayank Gandhi IIT Kanpur Do not read it, if you know about gold as an

accounts for more than one-fourth of India’s trade

backed schemes to invest and the recent market

of gold in the world despite having ceded the title of

and should be invested wisely. Now that you have

and hence the government wants to reduce its

investment instrument, various government-

deficit, and the country remains the largest importer

trends in gold. Time is the most precious resource

the “largest consumer” to China in the last few years

chosen to read it. Let’s start.

reliance on gold imports.

Indians household savings account at 30%, one of

The government of India has backed the following

billion, barely 18 million invest in equity markets.

We will try to understand them, what benefits does

Thanks to demonetization, 2016, which made

behind it, one by one –

diverted to invest in Gold. Investing in gold

1.) Gold Monetization scheme - Under this scheme,

the tangibility of the instrument, portfolio

deposit gold in any form with an interest rate of

the largest in the world. Of a population of over one

schemes to decrease investment in physical gold.

Then one can ask where are Indians investing.

it provide, and what is the government’s intent

investing in land less lucrative, Indians majorly provides benefits such as Hedging against inflation,

the government is allowing Indian residents to

diversification, ease of Liquidity, etc.

2.25% - 2.5% (for the medium and long term). It is a

savings account of gold providing safety in addition to any time redemption, which can be done in

rupees or physical gold form. Also, the earnings are exempted from capital gains tax, wealth tax and

income tax. There will be no capital gains tax on the appreciation in the value of gold deposited, or on the interest, you make under Gold Monetisation Well, I wouldn’t argue with the technicality of Gold (in physical form) being an investment instrument but, I can say with a definite level of certainty that

Gold is not a good investment. Reason being gold comes under those class of investments that will never produce anything. Any rise in the price of

gold is assumed on the belief that someone else will buy at a higher price. Unlike stocks, gold doesn’t enhance a company’s economic

productivity. 1 Kg of gold will always be 1 Kg only, unlike equivalent money that will fundamentally

generate larger wealth when invested in a business.

The value of gold is driven by the fear of other

stocks may lose. Gold investment does not only add anything to the economy but also subtracts from it.

Investing in gold leads to gold imports and

Scheme.

Government’s objective here is to mobilise the

physical form of gold and put it into productive use.

2.) Sovereign Gold Bonds scheme – Government

backed bond @ 2.5% p.a. in paper and demat form,

can be traded on stock exchanges within a fortnight of the issuance of a date provided by RBI, and on

maturity (8 years) the price is decided as the simple

average of last three business day’s closing price of gold – are the benefits of this scheme.

The government intends to provide a substitute for physical gold with proper incentive mechanism.

3.) Indian Gold Coin – To tame the Indian resident’s

sentimental attachment with physical gold, GOI has launched gold coins of 5, 10 and 15 grams with

Ashok chakra and Mahatma Gandhi on its two sides. .

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The benefit of the scheme is its BUYBACK scheme.

bureaucracy. Also, approximately three-fourths of

India) buys coins back at prevailing market rates in

and carries a lot of sentimental value. Additionally,

counterfeit features on the coin cover, hence

form of jewellery allows women some control over

MMTC (Metals and Mineral Trading Corporation of

India’s gold stock is held in the form of jewellery

the same tamper-proof packing and advanced

there is also a gender aspect to it, as gold in the

ensuring the safety.

ownership and inheritance. Given this aspect,

After reading about such schemes, one would think

gold loans, which allow them to get back the gold

market in India. But, for the novices, these schemes

government’s scheme which offers cash or solid

many households might prefer private schemes or

that these should have surely disrupted the gold

in the form of jewellery as opposed to the

have been in place since 2015, and since then it has

gold.

of total imports in India.

Also, there is some sign of relief recently, when the

been successful in monetising 6,410 Kg of gold, 2%

government has decided to attract gold from

temples, which account for 4,000 tonnes out of the

total estimated number of gold imports, i.e., 22,000 tonnes. It’s a win-win for both as temples will earn a tax-free dividend on its hoard and the government will get its gold.

To sum it up, investing in gold in non- physical Reasons being a low rate of interests on the offer,

perception of ease of liquidity when held in physical form, not wanting to involve in avoidable

form is definitely a good step in diversifying your portfolio against sudden market shifts and one should take a decision wisely based on one’s

duration of investment and diversify accordingly.

20

IS GDP A RIGHT MEASURE OF PROSPERITY??

Chaitanya Kamboj FORE School of Management GDP is value of goods and services produced in a

“spread” between the risk free interest and a lending

calculated in two ways: nominal GDP and real GDP.

value. But the lending spread also is a measure of

country in a specific time period. It can be

The value of real GDP is obtained by multiplying

number of goods and services produced and base

year price of goods and services. The nominal GDP is obtained by multiplying the current price of the

goods and services with the number of goods and

services produced. Real GDP is a better indicator of the overall economic health of the country

between the two. The GDP can be increased in two

rate is multiplied by the stock of loans to get the

the risk banks take. So if there is an increase in the

spread although the GDP increases but actually the health of economy is declining. As, in 2009 Britain’s financial sector was close to collapse. But because fear of bank defaults was driving spreads up, GDP

figures recorded a spike in the sector’s value added, and thus its contribution to GDP.

ways either by generating a trade surplus or by increasing the internal consumption of the economy.

The problems with nominal GDP is that it becomes difficult to compare the current GDP value of two

years as an increase in GDP may be due to increase in price of goods and services rather than increase the number of goods and services produced and vice- versa. At times of natural disasters such as

earthquakes and flooding the production rises as

there is a need for rebuilding the region which will

show up as an increase in the GDP but this does not mean that standard of living has improved for people living in that region.

GDP was born in a manufacturing era which has led to the bias towards manufacturing and many

services are still not fully covered under GDP. It is not able to cover the effect of wide variety of

choices available to the consumer for example the 880 pairs shoes produced of same color and size

would be accounted for the same value as 880 pairs of shoes produced of different sizes and color keeping the price constant.

Financial services typically are not paid directly in the form of fees. For example banks make a large part of their income from the difference in the

interest they charge on the loans and what they pay on deposits. To capture this in the GDP, the

The benefits of digital services are also not included in the GDP. By convention the zero priced goods

are excluded from GDP calculations. So, voluntary platforms like Wikipedia and open source

computer programs are not part of GDP. Consider a

person used to hire a middleman to book tickets for his travel but now he can do it easily by accessing the internet thereby eliminating the middlemen.

Now although the convenience has gone up but the GDP will go down in this case.

GDP is a measure of the aggregate, GDP per capita is an average figure. It does not highlight the

inequality in resource allocation in the society.

Averages are not a correct indicator instead

medians would be a better measure in such a case.

An increase in GDP could be unwelcoming if it leaves most of the population resentful.

GDP takes in account the goods that pass through the official, organized markets, it misses out the

home production and black market activities. There is a significant error in this measurement

particularly in developing economies where much of what is consumed is produced at home. For

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example if people hire someone to clean their

produced is the same.

go out on dinner instead of cooking at home, GDP

The economy is recovering after suffering from the

homes instead of doing it themselves, or they seems to grow even though the total amount

transitory shocks of implementation of Goods and service tax and demonetization. In addition to that the robust investments and private consumption

will support the growth. To boost the cash flow in

the economy, MSME lending has been eased which

will help in encountering the cash crunch. Recently, there has been pressure on the RBI to reduce the

interest rates to shift the demand curve, but it would not be helpful as this demand would be at a higher price which would boost the inflation.

22

RUPEES VS DOLLAR; REASONS & STATISTICAL STUDY Pankaj Soni Mahima Jain Shri Yogindra Sagar Institute of Technology & Science, Ratlam The Rupee had reached a record high of Rs.74.72

level of $75 per barrel, the problems had risen again.

had seen worse days even under BJP rule. It’s BJP

value or rising price of petrol has come again and

against the dollar on 10th October 2018. The former who opposed Congress administration during their tenure 2009-14 when Rupee went to Rs.62.33 in

So all those problems whether its declining rupee has questioned government.

2014, but now under BJP rule has come down at the

(B) Wider Trade Deficit:

This steep decline in the value of Rupee has been

but it is upto a certain level beyond which it could

same level of Rs. 74.72 per Dollar.

witnessed since 2017. The major reason for the fall

is the increasing price of Crude Oil globally. India is the third largest importer of Oil in the world. India had imported 213.93 million tonnes (MT) of crude oil 2017-18 for USD 88 billion or Rs 5.6 lakh crore.

With such high amount of imports backed by rising crude oil prices, Rupee was surely ready for a setback.

History of Indian Rupee Vs US Dollar

If we turn the pages of history, since 1950 till 1965, Rupee was pegged at Rs.4.76 against USD. In

around 50 years the value has increased 15 times of

what it was in 1965. This also shows how Dollar has been dominating us since then. Since our country

has been dependent of imports and had never been able to increase exports, we always have been dominated by USD.

Major Reason for Decline in value of Rupee (A) Increasing Crude Oil Prices:

India imports nearly 80% of its fuel needs, so rising

oil prices leads to a higher dollar bill which, in turn, weakens the rupee. Increasing demand of dollar to buy oil from Gulf countries is the major reason for strong Dollar value. The crude oil prices in went

Most of the countries in the world have trade deficit, trouble the economic stability in the country. The difference in imports and exports had widened in

last year or so. It has widened to $15.8 billion from $14.8 billion. The rising imports against the slow

deck exports had led to a level where an increase of 1% could bring India under economic unstability like it had in 2012-13.

In India, the trade bill is dangerously close to that

limit. In 2018, our imports exceeded the exports by $156.8 billion as compared to $105 in the previous year. So, when imports increase, it leads to more

purchase or demand of Dollars, thus the value of rupee depreciates.

The rise of imports has been witnessed from

manufacturing sector due to failure of “Make in

India” started by BJP led government. The concept

did not worked due to various economic factors like

inflation, changes in tax system, demonetization and people’s willingness to take risk. Even though Government’s effort in promoting domestic

manufacturing has been up to the mark, the impact is not the same. The government has increased

import duty on certain commodities, but still the trend hasn’t changed.

above $110 in the year 2013, which was also the

Every year rupee marked its highest value and

in the country at that time. The dollar also went

is seen that range was highest in year 2013-14. This

reason of Current Account Deficit problems faced strong with same move. After 2014 elections, Crude Oil prices started declining thus favouring Modi led government in many ways. The oil bills were

eventually reduced, prices of petrol came down

then. Now with steep rise in Crude Oil prices to the

lowest value through which Range was calculated. It was due to high crude oil prices and wider current account deficit. The range was highest (15.08

according to the above table) in year 2013-14 and

lowest in the year 2017-18. This means in the 201718 year, the volatility was very low. After 2014

23

elections the range has got down consistently till 2017-18, but now since the crude oil prices are

going high and also with increase in CAD, the range

more is the movement of rupee deviating from its mean value.

has got up to 9.29 in just April to September 2018. It

The volatility of the rupee value is also an important

months, and if it goes with the same rate, it could

concerned value. For this, Coefficient of Variance is

is even expected to go higher in the coming

also go pass the previous highest 15.08 which was in year 2013-14.

The below table shows the statistical figures of rupee value against dollar from year 2012-13 to 2018-9 (Apr-Sept).

factor to consider while studying the changes in the the best factor to consider. Since the range,

Standard Deviation are highest in the year 2012-13, probably it could be imagined that the volatility

would highest in that year only, and that’s the case

here itself. The volatility is highest (5.140) in the year

2012-13. The concerns currently are that in year 2018, the volatility and standard deviation has already

gone very high relatively. In the coming months

there are chances of increasing even more because of lack of any major actions or initiatives taken by government and Reserve Bank of India (RBI) to

improve on these issues. Certainly, the rupee has Taking Mean value to into consideration, it has

always been increasing except in one year that is

from 2016-17 to 2017-18. This shows that rupee has consistently gone down but it’s just that degree of change could be more or less.

Standard Deviation has been lowest in the year 201718 (Standard Deviation = 0.482), this could be termed

as success for the government’s actions, but it didn’t last long. Eventually the succeeding year only it

went very high up to 2.453, an increase of around

408%. Taking Standard Deviation into consideration, the scenario was worst in the year 2012-13, where

the standard deviation went to 3.105 units. This also implies the amount of risk involved in the changing value of rupee. More the standard deviation,

already hit an all-time high and would probably go at the same speed.

Optimum Solution:

Currently, as the dollar is strengthening and all

accompanying fundamentals are strong at the global context, it looks difficult to control the rising dollar value. However, government and Reserve Bank of India’s (RBI) efforts to further strengthen FDI and

promote exports — by diversification, improving the quality of our commodities, and focussing more on

developing and emerging market economies — will be helpful. Also, rising imports duty on certain

commodities could be the possible solution. That is the only long term sustainable and viable way to prevent the rupee from falling.

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