July 2022 Vol 5 Issue 11 Special Mention –‘Unprecedented FII withdrawals: Profit booking or loss of confidence in emerging markets?’ Our Best Read: ‘RBI’s New Proposition – A Boon or a Bane’ Presents
2 | Page INDEX S. No. Article Page No. 1 RBI’s New Proposition: A Boon or a Bane for the Economy 3 2 Unprecedented FII withdrawals: Profit booking or loss of confidence in emerging markets? 7 3 Analysis of UBI Experimentation on COVID 19 Economic Revival in the Indian Paradigm 14 4 The Sri Lankan Economic Crisis 18 5 Unprecedented FII Withdrawals: Profit Booking or Loss of Confidence in Emerging Markets? 21 6 A post LIBOR World: Advantages and disadvantages of alternate reference rates 25 7 Fintech : An Emerging Industry in India Economy 30 8 Cloud Automation: The future of Banking and Capital Markets 34
By: Bhargav Murthy (S.K College of Science and Commerce)
RBI’s New Proposition A Boon or a Bane for the Economy
The rupee's internationalization is greatly accelerated. The RBI has relaxed regulations in our banking system, allowing us to denominate commerce in Indian Rupees (INR) rather than in USD or EUR. Even while the modification was undoubtedly intended to facilitate trade with Russia, it has considerably wider implications. Read on. International transactions can now be settled in INR thanks to the RBI. Indian Rupees only. This means that if a person in another country so desires, they may opt to purchase our goods or services from us in INR (paying for exports). On the other hand, we might import products and services and pay in INR. This alters everything. How will the trade based on INR rupees operate?
According to RBI, all exports and imports will be invoiced in Indian rupees under the new rules for international trade settlement, and exchange rates between trading partners will be set by the Accordingmarket.
to the RBI, the relevant banks will need Special Rupee Vostro Accounts of Correspondent Bank(s) of the Partner Trading Country to settle trade transactions. The opening of rupee vostro accounts by authorised dealer banks in India is permitted, and these banks will also open special rupee vostro accounts with correspondent banks in trading partners' countries to settle trade transactions.
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What is a vostro and nostro account?
An Indian bank's account with a foreign bank in foreign currency in the foreign country is referred to as a Nostro account, on the other hand. Its comparable to SBI maintaining a British pound denominated account with HSBC in London.
Which countries are likely to use the new model? For trade based on the rupee, India and the UAE have already inked agreements, but the RBI lacked specific regulations to enable this. Iran has also been attempting to export goods to India using rupees. Venezuela has shown enthusiasm. If we permit their vostro
A Rupee Vostro account is a rupee account held by a foreign bank with an Indian bank in India.
India may witness some cancellations of supply orders by the Russians; domestic exporters, too, may choose to cancel some. If all Russian banks are ousted from the SWIFT network, payments will get delayed and ultimately hit trade. This can all be countered if they follow this arrangement proposed by the Government.
But recently, something changed. Now take into account that most commerce occurs in USD and EUR. As a result, all nation's banks have vostro accounts with European or American financial institutions (Russian banks did as well). Then Russia invaded Ukraine which ticked them off.
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America froze all their payments, accounts and even removed Russian banks from the SWIFT Duenetwork.tothis
The Special Vostro Account's INR surplus balance may be used for the following things: payments for investments and projects Management of advance flow for exports and imports investment subject to FEMA and other legal restrictions in government treasury bills, securities, etc. Why does India want to shift away from dollar dependency?
Authorized dealer banks will be able to open unique Rupee Vostro accounts in order to receive payments in rupees.
A Rupee Vostro account, for instance, is one that HSBC maintains with the Mumbai branch of the State Bank of India and is valued in rupees. Through these Rupee Vostro accounts, foreign parties would be able to transfer and receive money from Indian exporters and importers.
What can be done with the surplus Indian rupees in the special vostro account?
The use of dollars as a medium of exchange pleased everyone. Prior to the introduction of the Euro, trades were marked in Euros. also, pounds sterling and Yen as well. These were acceptable because they were all capable of allowing foreign banks to open vostro accounts in each nation and therefore settle trades. They were also all widely accepted.
5 | Page banks to exchange rupees for other fiat currencies (now uncertain whether this is permitted), there will be more.
We let foreign banks to own T Bills and other short term government assets. This was only permitted under the present regulations until the end of 2022 or such. That must be always permitted.
Settlement will take place in rupees, and the exchange rate between the Indian rupee and the currencies of trade partners will be established by the market.
How much money would India save with this decision?
According to Mr. Narayan, utilising rupees in trade with Russia would prevent India from losing hard cash in the process. The reduction in monthly foreign currency outflow of $3 billion will have an effect on the rupee market. Technically, it would lessen the downward pressure on the rupee, which has regularly recently been falling to new record lows.
Exchange rate?
According to the most recent trade statistics, India imported commodities from Russia worth $2.5 billion in April and May. Analysts predict that this will annualize to $30 billion and could perhaps reach $36 billion. If India paid for all of its Russian imports in rupees, it would end up saving $30 36 billion in dollar outflows.
We permit foreign banks to transact with OTHER foreign banks utilising the INR in their vostro accounts (so two countries can trade with each other using INR). This is significant because Russia might want to purchase something from Bangladesh, for example, and Bangladesh may accept INR as payment. This enables Russia to use the INR on a multilateral basis. (Honestly, without this, no currency is useful.)
Which countries are likely to use the new model?
Exporters' organisations said the RBI's action will promote commerce with nations that are subject to sanctions, primarily Russia and Iran, as well as with neighbouring Sri Lanka and countries in Africa and South America that have limited access to hard currency. However, the RBI has not formally identified any of the nations for whom the new procedure may be employed.
Exporters have lobbied the Indian government to establish such a structure, similar to one that was set up in 2012 to facilitate commerce with Iran following the imposition of banking sanctions by the US and other western nations.
Banks will be permitted to give advance payments, bank guarantees, and letter of credits to exporters for commercial transactions. What are the benefits for India?
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According to economists, the RBI's decision might somewhat reduce India's growing trade imbalance by lowering the cost of importing commodities. They pointed out that imports of Russian crude oil have increased recently. However, government officials stated that given the dangers to the economy, including the country's significant sensitivity to global shocks, asset bubbles, and exchange rate volatility, India will proceed cautiously with the internationalisation of the local currency.
Unprecedented withdrawals: Profit Booking or Loss of Confidence in Emerging Markets?By:Aishwarya
FII
Mass sell off by the Foreign Institutional Investors wreaked havoc on the Indian stock market. This aggressive trend has been seen since the Indian equities touched a record high in October. According to the data provided by National Securities Depository Limited (NSDL), shares worth up to Rs 1,64,118 crore were reported to have been sold by FIIs till May 25, 2022. Securities affected comprise not only equity but also debt and hybrid securities. This situation is a sharp contrast to₹50,088 crore investment in the Indian markets in 2021. Rising inflation globally owing to the Russia Ukraine war could be to blame. It is responsible for the spike in interest rates and, consequently, the rise in bond yields in the US and other developed markets. A rise in bond yields drifts money from emerging markets like India into US Thebonds.inflation pace of increased inflation touched a 40 year high as the costs of food, gasoline, housing, and other necessities adversely impacted American consumers. It wiped out the pay raises that many people had received.
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Saxena (Lucknow University)
A 10 dollar increase in the average cost of oil widens the Current Account Deficit (CAD) by $14 15 billion. The average oil price was $75 a barrel at the beginning of April 2021.
8 | Page Inflation has been baneful for the Indian economy. Russia meets 85% of India's total import need for crude oil.
*https://www.businesstoday.in/markets/stocks/story/fiis got really nervous in two trading sessions indian stock market 325674 2022 03 11
On March 7, the prices stood at $140 a barrel, decade-high fees. The Government of India estimated that if the oil price touched $100 a barrel, it would pull down the expected growth rate from 8 8.5% (as expected earlier) to below 8% (even as the global demand is not yet recovered from the pandemic) as the excise duties would be cut down to cushion inflation. The deficit could widen by 2.3 2.4% of GDP. According to HDFC bank, the current account deficit would be 2.3% for FY23. CAD was 1.3% of GDP in the September quarter, and the Current Account Surplus (CAS) was 0.9% in the consequent year.
sell-off?
The pandemic was no less than a disaster for the global economy. These woes, coupled with severe supply chain issues resulting from the Russia Ukraine war, led to aggressively high inflation rates that, if not tackled efficiently, possess the potential to snatch away decades of development from the global economy.
In order to control the rapid surge in prices in the US, The Federal Reserve raised the interest rates. Through this measure, the central bank is attempting to stop the measures for economic stimulus, which saw their inception in the pandemic.
What caused this
History bears the precedent that in situations such as these, Foreign Institutional Investors pull their money out of emerging markets such as India that they find risky only to invest in safer and more secure markets such as the US.
9 | Page 2022 Total January ₹28,526 crore February ₹38,068 crore March ₹50,067 crore April ₹22,688 crore May so far ₹11,394 crore Total ₹1.50 lakh crore Source: https://www.businessinsider.in/stock market/news/foreign investors have pulled out 1 5 lakh crore from the indian markets in 2022 so far heres why/articleshow/91485411.cms
Impact on Rupee
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Thebillion.current strategy, however, is not appropriate. The current depreciation is a global economic phenomenon, and halting the natural flow of currency in the direction in which all the like currencies are moving would make the exports more expensive, resulting in their decline. This is a time to leverage exports, given the economies' supply chain issues that have wreaked havoc. The current moves by RBI can be drawn parallel to the faulty government policy to impose wheat export restrictions stripping away from the Indian farmers a golden opportunity to reap huge profit from the prevailing high wheat price.
On June 30, Rupee settled shy of the 79 mark against the US dollar. This depreciation in the currency value owed itself to the fact that FII outflows led to a fall in the value of domestic equities. Its value was Rs. 78.97/$. Analysts expect it to touch the 80 mark soon. Moreover, according to them, even if it appreciates, it would not exceed Rs. 78.38/$. Touching the 80 mark should not be considered a threatening situation, however. Most countries have been experiencing inflation due to the pandemic and the Russia Ukraine war resulting in supply chain issues. The spike in the interest rates by Federal Reserve has led to the depreciation of several currencies against the dollar. Moreover, the Indian currency has depreciated by a smaller magnitude in comparison. This is a positive sign. RBI intervened to limit volatility in the Indian currency market. Anticipating such situations, it expanded its Foreign Exchange reserves to shield Rupee from runaway depreciation. Since February 25, when the war started, the foreign exchange reserves have gone down by $40.94
On June 30, BSE Sensex and NSE Nifty settled 0.3% lower than the previous closing. FII has sold stocks worth up to $6.3 billion and equities worth $28.4 billion. The Rupee has depreciated by 5.9% till now.
When companies declare their shareholding patterns, the FII stake is expected to be lower for the March 2022 quarter. In January 2022, the brunt of the FII selling was taken by healthcare and IT stocks. IT companies have been facing severe consequences, especially after the results hinted that most prominent IT companies faced the headwinds of weaker operating profit margins and high attrition rates.
preferred stocks, such as HDFC, HDFC Bank, ICICI Bank, Infosys, and Kotak Mahindra Bank, have seen a correction.
Other Impacts
The price of Brent crude surged by 2% after UAE refused additional supply. Given that India imports 80% of its oil needs, the current account deficit can be expected to widen.
In addition, RBI must take a lesson from the crisis prevalent in Sri Lanka and Pakistan. The Central Banks of both countries excessively intervened in the market to hold the domestic currency strengthened against the dollar, negatively impacting the exports. The pandemic consumed the reserves rendering them in a situation of economic crisis and default.
Financial entities are also experiencing pressure for the past two months. In January, FIIs were heavy sellers in NBFCs, selling stocks worth US$ 1,169 million. Owing to heavy selling witnessed in HDFC twins and Kotak Bank, which are high FII exposure stocks, the Nifty Bank index took a beating.
Federal Reserve is expected to hike interest rates by 150 basis points, further intensifying the FII'scrisis.most
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Conclusion
While the stock markets have similar situations where FIIs sold off positions in the past, Indian equities have never before been under such intense discussion and scrutiny concerning FIIs. However, even if FIIs remain bearish, the Indian growth story would remain intact.
The aggressive sell off trend has wreaked havoc in the stock markets since the Indian equities touched a record high in October. The reason boils down to the spike in the interest rates by US Federal Reserve to rapidly surging inflation that has grappled the economy owing to the pandemic and the war. In situations like this, Foreign Institutional Investors pull their money out of emerging markets such as India that they find risky only to invest in safer and more secure markets such as the US. On June 30, Rupee settled shy of the 79 mark against the US dollar. This depreciation in the currency value owed itself to the fact that FII outflows led to a fall in the value of domestic equities. Its value was Rs. 78.97/$. RBI intervened to limit volatility in the Indian currency market. The current strategy, however, is inappropriate as it can lead to a decline in exports. RBI must take lessons from the crisis prevalent in Sri Lanka and Pakistan. On June 30, BSE Sensex and NSE Nifty settled 0.3% lower than the previous closing. FII's most preferred stocks, such as HDFC, HDFC Bank, ICICI Bank, Infosys, and Kotak Mahindra Bank, have seen a correction.
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13 | Page References: 1)The Fed's aggressive hiking campaign will lead to a recession ... CNBC. https://www.cnbc.com/2022/05/03/the feds aggressive hiking campaign will lead to a recession according to cnbc survey.html 2)https://www.business standard.com/article/markets/foreign investors in retreat mode across most emerging markets 121112200419_1.html 3)https://www.businessinsider.in/stock market/news/foreign investors have pulled out 1 5 lakh crore from the indian markets in 2022 so far heres why/articleshow/91485411.cms 4)https://economictimes.indiatimes.com/markets/expert view/etmarkets smart talk worst of fii outflows from india and ems is possibly over seshadri sen/articleshow/91919527.cms 5)https://www.cnbctv18.com/market/stocks/explained why are fiis selling and what can reverse this trend 11874512.htm
The World Health Organization (WHO) on 12th March announced the recent outbreak of the novel coronavirus disease (COVID 19), a pandemic, crumbling away Rs.11.4 trillion of shareholders' wealth. The Indian economy traces parallels with the underdeveloped and developing economies like Brazil, South Africa, Sri Lanka, Spain, African economies, Greece, etc. The June 2020 Global Economic Prospects defines both the immediate and thus the near term outlook for the pandemic's effects and therefore the long term harm it's caused on growth prospects. The baseline forecast envisions a 5.2 percent contraction in global GDP in 2020, using market rate of exchange weights the deepest global recession in decades, considering the unprecedented efforts of governments to fight the slowdown with fiscal and monetary policy support. The deep recessions caused by the pandemic are projected to leave permanent scars over the longer horizon by lower investment, the loss of human resources by lost jobs and education, and therefore the fragmentation of worldwide trade and supply.
Analysis of UBI Experimentation on COVID-19 Economic Revival in the Indian Paradigm
In addition, the COVID 19 pandemic continues to paralyze economies causing innumerable job losses worldwide, countries are starting to consider adopting UBI. A Universal Basic Income (UBI) may be a regular fixed cash outgo provided by the govt or another institution within the public sphere to each citizen or resident, no matter whether he or she is rich or poor and/or wishing to be engaged in paid employment (Raventós, 2007). The thoughts of a basic income are often modified during implementation by fixing the sum as within the above definition or making it unconditional.
The UBI appears to be the panacea of economic turbulence. Its numerous merits, including its potential to strengthen personal freedoms, particularly by providing a more diversified range of labour arrangements. It also has the potential to empower people, especially the vulnerable (e.g., women, LGBTQIA+, etc.) and the poor. It will further reinforce the efficiency of welfare programs alongside strengthening collective unity and cooperation.
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By: Ramdinthar and Vidushi Sharma (Maitreyi College, DU)
Furthermore, State Bank of India (SBI) research predicts a contraction of over 40 percent within the GDP in Q1 FY21. For the states, the entire loss because of COVID 19 is estimated at 13.5 percent of the entire Gross state domestic product. The Ministry of Statistics released India's GDP estimates for Q4 FY20 at 3.1 percent while the GDP for FY20 is 4.2 percent. India’s ongoing GDP losses are likely to be approx. $5 10 billion (0.15 0.35 percent of GDP), as per data. With quite a 20 percent cut in benchmark indices; the Indian equity market has entered market territory. New coronavirus has also driven investors to bid up bond prices, leading to yields in major economies to inch lower. While other commodities are down, gold has gone up as a result of the demand for a secure haven in uncertainty.
The world has met an unprecedented catastrophe in terms of the COVID 19 pandemic. The year marks the downfall of numerous industries, recessionary trends in economies and astronomical increase in the unemployment and inflation rates. Anthony Fauci, renowned specialist in infectious diseases, has stated that reopening too fast risks causing uncontrollable outbreaks.
In 1986, James Buchanan received the Nobel Prize for his development of the contractual and constitutional bases for the theory of economic and political decision making. James Buchanan (1997) found that when a basic income policy is combined with a flat tax, ought to be more averse to experience the ill effects of lease problems compared to other forms of welfare state policies.
It gives support to the unemployed and companies who lost their businesses and are in financial crisis. Especially during this time of the pandemic, economies have been shut down. In order to deal with widespread unemployment and decrease in wages, a universal basic income is the optimal solution.
In order to minimize disincentives, the UBI helps a government to cut welfare spending, and reduce the complexity of the tax, and welfare system.
Businesses are down
Contract tax complexities
Unemployment factors
Workplace innovation may be increased as individuals would have greater income security, and be more likely to take risks.
Reasons for implementation of UBI accumulated from the results are summarised below:Fighting technological unemployment
Individuals are often reluctant to shift across jobs due to a fear of the lower opportunity cost as of the existing job. Furthermore, the lingering uncertainty of not being able to find a suitable job in time and long transition periods prevent individuals from efficiently using their skills. Hence, choice is not often included in job selection obstructing diversity, and hence, causing deadweight loss and hampering productivity.
Research shows that the longer one is unemployed, the longer it takes to find employment. With the help of UBI, they would be able to find new jobs, and contribute to the economy faster with a basic income.
Accumulation of diversity, and choice in field of employment
It paves a way for people whose job has been taken away from them due to artificial intelligence. UBI would serve as a kind of safety net for the millions of people left unemployed due to the tech revolution.
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Many with sick or otherwise eligible members are frequently required to leave their jobs to take full time care of them. UBI will encourage care staff to support themselves, facilitate home care work, and relieve pressure on public services that provide sick, and elderly care.
Enhanced income securities
As per the definition, “self interest” means what people consider to be in their own self interest and there are a wide range of self interests. It is recognised that money would encourage individuals to advance their interests, and gain new alternatives. Hence, political leaders will respond to incentives in predictable ways. As economist Paul Heyne (1987) says, “Even Mother Teresa does better with more money”.
Supporting unpaid care workers
The epidemic period has left devastating wounds on the global economy, and it is far from over. Many organisations, like the Centres for Disease Control, and Prevention and the World Health Organization, have warned of an impending pandemic. For a recovery to occur, an efficient, effective, and extraordinary fiscal policy is essential. Consumers choose tolerable solutions, and options above perfect options. As a result, the consumer prefers satisfactory answers to ideal alternatives, and they choose to take actions that are beneficial to them. Therefore, they prefer actions that yield benefits now rather than in the long term. As a result, as other public finance and package programmes produce long term outcomes, UBI appears to be a better alternative because it produces positive, and desired results in the short term. The world's largest free market economy, the United States of America, has likewise recognised the necessity for economic packages to get the country back on track. This not only reinforces the idea of public finance but UBI as a particularly efficient, and preferred policy choice to metamorph the economy from rags to riches. This flow of income induces an initiative, and incentive in individuals to provide a more conducive environment for the development of the existing resources. The definition of basic income sounds disappointingly easy, but in fact, as you dig deeper, it's like an iceberg with much more to show. The big picture price tag in the form of investing for even higher returns in human resources, and its impact on what really motivates us are only glimpses of these depths. Debts appear to plummet. Entrepreneurship appears to be growing. Further studies are yet to discover other results.
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17 | Page References: 1. https://medium.com/working life/why should we support the idea of an unconditional basic income 8a2680c73dd3 Scott Santens Jun 2, 2014 · 2. https://www.scottsantens.com/the cost of universal basic income is the net transfer amount not the gross price tag Scott Santens July 07, 2017 3. https://www.huffpost.com/entry/why should we support the_b_7630162 Scott Santens 06/26/2015 04:06 pm ET 4. UNDP CHINA working paper: Universal Basic Income; Authors: Yuan ZHENG, Economist, UNDP China (Contact email: yuan.zheng@undp.org);Marta GUERRIERO, Global Sustainable Development, University of Warwick; Enrique; Valencia LÓPEZ, Instituto Nacional para la Evaluación de la Educación, México; and Patrick HAVERMAN, Deputy Country Director, UNDP China. The paper is a working draft and is published to solicit further comments and feedback for revision. A final version is tentatively planned for October 2017. 5. MLA style: Press release. NobelPrize.org. Nobel Media AB 2021. Sun. 24 Jan 2021. https://www.nobelprize.org/prizes/economic sciences/1986/press release/ 6. Data from the State Bank of India, Ministry of Statistics, World Health Organization, Center for Disease Control, WORLD BANK. 7. The World Bank (2020). The Global Economic Prospects, June 2020. Washington DC: World Bank. DOI: 10.1596/978 1 4648 1553 9. License: Creative Commons Attribution CC BY 3.0 IGO. 8. https://udyamimitra.in/page/Subsidy Schemes 9. https://thewire.in/books/abhiji banerjee esther duflo ubi excerpt nobel prize; The wire; 15/OCT/2019 10. covidhttps://www.povertyactionlab.org/evaluation/effects-universal-basic-income-during-19pandemickenya;JPAL
By: Swapnil Sanjay Soparkar (IIM Ahmedabad)
Amidst the bedlam of protests, the resignation of the president and Colombo’s policies to save the day, the real victims are the people of Sri Lanka food prices have shot up by almost 60%, transport is completely unavailable, basic amenities like drinking water and electricity have been discontinued, and doctors, pharmacies and hospitals remain devoid of life saving medicines. In this article, we will look at how the economic crisis unfolded, the various actors involved, and the steps being taken to keep the Sri Lankan economy afloat. Sri Lanka’s primary sources of revenue are tourism, rice production, textiles, apparel and tea export. Since the Easter Bombings on 21st of April, 2019 in churches and high end hotels which led to 255 dead and more than 500 injured, tourism had been steadily declining. Adding insult to injury, the Covid pandemic in 2020 decimated the tourism industry in Sri Lanka completely; the industry accounted for 6% of Sri Lanka’s GDP in 2018 and that number went down to 0.8% in 2020. Earnings were 4400 million USD in 2018, 3600 million USD in 2019, a paltry 680 million USD in 2020, and lower still with the onset of the economic crisis.
The most important aspect of the crisis was the mismanagement of foreign exchange reserves and the debt servicing cost. While the net export of the Sri Lankan economy has traditionally been in deficit (more imports than exports), the debt servicing, the decline in tourist receipts, the payment of worker remittances, the increased cost of fuel due to the Russian invasion of Ukraine, have all put tremendous pressure on the Sri Lankan reserves.
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Since the beginning of the year, the citizens of Sri Lanka, a tiny island nation to India’s south, have been reeling under an economic crisis whose origin lies in the misbegotten policies of its government and the Central Bank of Sri Lanka (CBSL). The result an entire State of 22 million citizens facing the worst economic crisis in Lanka since the country was called Ceylon.
The Sri Lankan Economic Crisis
The other sectors of the economy majorly rice production and other agricultural products were severely affected by the policies of President Gotabaya and his government. In 2021, the government of Sri Lanka announced that the import of chemical fertilisers an essential commodity for any farmer will be completely prohibited in an attempt to promote organic fertiliser and its domestic production. This led to widespread turmoil crops failed incessantly and rice produce was down by 15% in 2021. Economists believe the move had less to do with the promotion of organic farming and more to do with reducing the cash outflow of 600 million USD per year on import of chemical fertilisers. However, the government ended up having to import 650 thousand tonnes of rice, five times 2020’s imports, to make up for the fall in domestic produce, leading to more cash outflow than imagined.
Debt servicing is defined as the cost involved in repayment of contractual principal dues along with the interest payment, and the administrative costs of the debt instrument. The Sri Lankan economy has a total debt outstanding of 51 billion USD and its debt servicing commitment for 2021 2022 was 5 7 billion USD, which it chose to forego due to a lack of funds. A major repercussion of the loan default was that credit agencies have downgraded the economy and thus, the central bank or the government are unable to get credit lines from banks or other financial institutions. Liquidity is scarce and the government has since resorted to printing currency to pay
19 | Page worker salaries and remittances. As a result, the Sri Lankan rupee has depreciated by 80%, and the food inflation is up by 59%.
To alleviate the hardships of the Sri Lankan people, a lot of countries have stepped up, including India, who considers Lanka as its most important neighbour in our ‘Neighbourhood First’ policy. India has extended a 1 billion USD credit line to Colombo for import of essential items including food, medicine and fertilisers. A diesel shipment worth 500 million USD has already reached Sri Lanka from India, to attenuate the effects of the fuel crisis. India is considering giving up to 4 billion USD in aid, swaps and credit lines to Sri Lanka. Colombo is negotiating a 3 billion USD bailout package with the IMF, and asking China for more bailouts. China has already given the CBSL a 1.5 billion USD swap and another billion as a syndicated loan. Other QUAD nations (Japan, Australia and the US) have given a few hundred million USD. Colombo estimates the cost of the economy staying afloat every year amounts to 6 billion USD, a tremendously difficult amount of money to procure. Sri Lanka needs to restructure its debt payment and servicing, and the overall functioning of its economy. But before that, the distress faced by the Lankans must be reduced, a task far more arduous than one could possibly imagine. The Sri Lankan economic crisis represents one of South Asia’s most baneful and onerous crises of the 21st century, and the fact that it transpired in front of our very eyes makes it much worse. How Sri Lanka deals with the aftermath of the crisis is a crucial juncture, not just for Sri Lanka and its people, but for all nations in South Asia.
The crisis has been unfolding for almost 12 months now, with its effects transparently visible even to the common people of Sri Lanka. The government, on the other hand, has taken almost no steps to counter this, downplaying the crisis when the world was asking. The president directly refused to approach the IMF despite advice from high ranking officials of the government and directives from the World Bank, the IMF and the European Union.
The fuel crisis is also a direct consequence of the foreign reserve crisis. Sri Lanka is completely out of fuel, so much so that the hospitals do not have diesel even for emergency power generation. Electricity cuts are frequent, averaging 13 hours a day in the cities, and powerplants are out of operation due to a combination of lack of fuel and other raw materials. The government has since turned to producing power by hydroelectric projects, but they are using irrigation water, furthering the water crisis looming on the horizon. Populist tax cuts are also to blame for the reduction in the government’s income. The president made electoral promises that involved massive tax cuts (so implausible that the opposition thought the campaign was a gimmick) which he chose to administer just before the pandemic, a mistake that heavily cost the treasury. The government since coming to power, has halved the value added tax, reduced company tax significantly and scrapped a number of levies, without paying heed to the revenue of the government.
20 | Page Works Cited 1. Sultana, G. (2022). “Economic Crisis in Sri Lanka: An assessment” IDSA 2. Amnesty International (2022). “From bad to worse: Rights under attack in Sri Lanka’s economic crisis.” 3. Soumya Bhowmick (2022). “Understanding the Economic Issues in Sri Lanka’s Current Debacle,” ORF Occasional Paper No. 357, June 2022, Observer Research Foundation. 4. Farlex Financial Dictionary (2009). Retrieved July 30 2022 from https://financial dictionary.thefreedictionary.com/debt+servicing
Profit Booking or Loss of Confidence in Emerging Markets?
By: Pratham Kadiyal (HRD College)
FII
The recent outflow of Capital by the Foreign Institutional Investors has led people into Dysphoria before coming to a Conclusion one must and should know why do FII invest in other countries? Foreign Institutions invest in other Countries for either diversification of their capital so as they don’t keep concentration of their portfolio in one or two assets or to be a part of Economies that are strong and have room to dominate the global stage in a way such as China has done by Manufacturing Goods and India known for its IT Outsourcing and is known as The Outsourcing hub of the world. We live in a society that is fond of following Capitalism and the core principle of it is to make a Profit. Money flows where there is Opportunity and India is still an untapped market. India has the Potential to become one of the Global player’s because of the youth population present and it being a Country with One of the Most Indian Speakers (2). Now we should know when do FII’s sell? When there is a better Opportunity elsewhere, there is bad sentiment in market either locally or globally, by performing few calculations and checking ratios of the Assets in the case of Equity they use the PE Ratio, GDP to Market Capitalization, Debt to GDP Ratio, etc. They derive a Conclusion if the Asset is Overvalued or Undervalued and to keep their Portfolio percentages in check, so that they don’t have too much exposure in any one or two Asset Classes also known as Asset Allocation, because as and when an asset rises the total percentage share of that particular asset in portfolio Increases and the portfolio henceforth becomes more vulnerable to the movement in that Asset.
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Unprecedented Withdrawals:
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After a Remarkable Journey of Indian Indices, such as Nifty 50 during the Corona Pandemic from the levels of ~7500 to 18500(*) points within a matter of 574(*) days which turns out to be ~1.59 years! Usually this kind of returns requires a time period of 9 10 years assuming an average of 15% Appreciation (3) in the Index. This V shape recovery had increased the confidence in the market and the Influx of Retail Capital saw high levels in Decades high of De mat account openings(4) along with the Celebrity Endorsements that catered this notion of “free money” to the Common Man who did not have this motive prior. This Recovery was primarily because of the Quantitative Easing done by the Federal Reserve of U.S.A. which helps in increasing the Demand in the economy overall and the Trillions of Dollars of Stimulus packages distributed among the citizens, few spent it as the government wanted them to and few invested it in Financial Institutes who in turn invested into Emerging Markets.
Taking the Indian markets into context, India has been one of the Fastest Country in the World to recover from the Covid 19 Crash in Early 2020.There’s a term to show the performance of an Asset by benchmarking it with other Assets called “Alpha”. Indian markets has an high Alpha, which means it has High Volatility, that means during a Downfall it will fall further than others and due to its High Alpha, during a boom it rises further when compared.
The Real Estate boom in the US back in 2000’s that converted into a Bubble owing to factors such as loose lending conditions and government policies to promote Home Ownership had to burst. In 2008 the prices of Real Estate crashed, which lead Investment Banks such as Lehman Brothers, who had to file for bankruptcy in turn leading a Ripple Effect around the world causing markets to crash World Wide.
India has seen rise Indian Equities bought by FDI’s totalling to ~240 Billion Dollars in the past 3
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At Present, people believe that the History is repeating itself in India as a result of Quantitative Easing and falling of Indian Rupee against Dollar. In the past 14 Months FII have Sold Equity worth ~4 Lakh Crore(.) of stocks most being Index heavy weights. They have sold ~80% of stocks that they bought back during the crash of 2020(`). The Inflow of money from Retail Public members helped Stabilize the market for a bit but it wasn’t going to help for long. As a matter of fact it gave FII’s good levels to exit from as they could now exit at higher level. As we know from the Real Estate bubble from late 2008 its break down lead to a Ripple Effect all over the world. We can see the same happening in India as the drop in the portfolio of Retail investors as Stocks took a hit, it has propelled them into selling as most of them were motivated in wrong way about stock market and functioning, believing that it was a source of “Free Money” and that it only gave profit because of the Recovery in the 2020 21, this delusion broke eventually. The reasons for the recent correction can be attributed to the Strengthening of Dollar because of the Demand it has as it is the Global Reserve Currency, Global Inflation triggered by the FED due to Quantitative Easing and the Russia Ukraine war, as War leads to unrest and Russia being a prominent producer of Oil and contributes close to 10% of Crude Oil production (+). The Capital now is moving into Safe Havens such as Government Bonds and Gold. YES, this FII Sell-Off was Unprecedented but it is Nothing but Profit Booking as we have only Corrected by ~18%(as of 6/7/22) (*) mostly Contributed by Foreign portfolio Investors (FPI’s) and Foreign Institutional Investors (FII’s) who act as traders rather than being a Long term Investors, while the FDI’s who Invest for a Longer Tenure have increased their Investments.
24 | Page years which turns out to be ~19 Lakh Crore with an Incremental rise in Allocation of funds ($83.6B,$82B,$74.4B in FY22 ,21,20 respectively)(.) every year since FY2020. In Conclusion, India is en route to become a $5 Trillion Economy and is believed to be achieved by 2024 2025. India is projected to be the fasted economy yet again (2). As once India was called as “Sone ki Chidiya”. One must try looking at a Clear picture at all times because there will always be Distortions caused due to the Ripple Effect of Events which are considered Crucial for a short span but the One who Sees The Larger Picture and Understands how Capitalism and Stock Market works the more Confidence is Induced in them. As Quoted by the Legendary Investor Warren Buffet: “Think Long term and Our favorite holding period is forever” (3). (*) Trading View, (.) Money Control, (~) Approximation, (`) Outlook, (+) dallasfed, (1) Business Today, (2) BBC, (2) Taking 10 YR average returns as per Angel One, (3) Business Standard, (4) Internet
2. Many analysts believe that post Brexit, LIBOR has another reason to be termed as obsolete.
LIBOR, the benchmark for short term interest rates, has a critical role in global markets. It is used as a reference rate for financial contracts and to gauge financial returns on investment products. LIBOR has been widely used to price adjustable-rate mortgages, asset-backed securities, credit default swaps, private student loans and other types of debt. As of 2019, $1.2 trillion worth of residential mortgage loans and $1.3 trillion of consumer loans had been priced using Libor. The methodology to calculate LIBOR has largely remained the same: each day a group of large banks submit their rates at which they would lend to other banks. These rates are averaged, and released at 11.45 a.m. London time on every business day.
1. In 2021, an investigation reported that major banks: Deutsche Bank, UBS, Barclays, Rabobank and RBS were manipulating the interest rates (LIBOR) for their gains. This was happening since 2003.
3. LIBOR has also been told as unsustainable due to lack of activity in the market. Rates of Credit Default Swaps (CDS) were set using LIBOR. The abuse of CDS was a major driver of the 2008 crisis. When subprime mortgages and securities started to fail, banks became reluctant to lend to each other, and as a result LIBOR kept on increasing. Although, LIBOR was not the only reason of the crisis, but it being a driver of the crisis led the stakeholders shift to alternate rates. There were some more problems associated with LIBOR:
By Muskan Garg - IIFT, Delhi In 2023, the London InterBank Offered Rate, or LIBOR will cease to exist in United States.
Reasons to phase out LIBOR
25 | Page A post LIBOR World: Advantages and disadvantages of alternate reference rates
The reasons for which LIBOR’s credibility has been questioned are:
3. Banks were not willing to submit the reports that contained the responses used to derive rates due to legal risks associated with reporting. There were nearly 40 such private lawsuits.
Most of the US dollar derivatives market has already shifted to SOFR. However some short term contracts in Eurodollar domain remain in LIBOR. According to JPMorgan and IHS Markit, 87.8% of leveraged loans are still linked to Libor.
2. There were allegations that the banks understated their borrowing costs to look stable in the market using LIBOR.
4. Usually, interbank rates for lending shrink when markets are at their lows. It was noticed that interest rates given by banks during such times was purely based on judgment. Banks were misreporting: they were reporting the rates where they could attract the maximum funding.
Alternative Reference Rates
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Hero FinCorp has become the first Indian company to raise a SOFR linked syndicated loan. The loan amounts to $350 million at 168 bps above SOFR.
In US, SOFR i.e. Secured Overnight Financing Rate will be replacing LIBOR. SOFR is calculated on the basis of rates US financial institutions pay each other for overnight loans. These transactions take the form of repos agreements, or treasury bonds repurchase agreements. SOFR constitutes the weighted average of the rates used in these transactions. Essentially, while LIBOR is forward- looking, SOFR is backward- looking as it looks at the previous night.
1. LIBOR was initially created to help banks set the bank loan rates, but it began to be used in derivatives markets.
SARON (Swift Average Rate Overnight) SIX Swiss Exchange Transaction and binding quotes based, secured, O/N
1. SOFR is risk- free, secured rate and does not include credit risk premiums, unlike LIBOR.
TONA (Tokyo Overnight Average Rate) Bank of Japan Transaction based, unsecured, O/N
The various rates which will be used across geographies are as under: Nation Selected Alternative Rate Administrator Key features
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There are some reasons which make SOFR safer as compared to LIBOR:
SOFR (Secured Overnight Financing Rate) Federal Reserve Bank of NY Transaction based, secure, O/N
3. SOFR is based on a much higher volume of transactions than LIBOR, hence making it more credible.
€STR (Euro Short Term Rate) European Central Bank Transaction based, unsecured, O/N
SONIA (Reformed Sterling Overnight Index Average) Bank of England Transaction based, unsecured, O/N
2. SOFR is based on transactions that can be observed, while LIBOR is based on the rates which the banks are willing to transact on. This makes SOFR more reliable.
Benefits of SOFR over LIBOR
Adding to that, SOFR is a risk- free rate and does not carry any credit risk. Being based on US repurchase agreement market, it might fail during stress times.
28 | Page Disadvantages and challenges of using an alternative rate
Transitioning Challenges: borrowers and banks
However, since SOFR is backward looking, it comes with a set of its own disadvantages.
2. The shift from LIBOR to SOFR brings pricing challenges for loans and borrowers. It is still not clear as to what Spread will be added to SOFR to account for the credit risk premium and how that spread will be determined.
SOFR is more volatile than LIBOR as can be seen in the line graph below. The graph shows the daily rates from January 2019 to July 2019.
1. A borrower won’t know what to pay until it’s time to pay. A forward looking SOFR is in the process of being made for futures, but due to the fact that the market for futures is less robust, this remains a challenge.
3. Banks have reported that significant changes will be required in their operations systems and loan documentation to accommodate for the transition.
There are various transitioning challenges associated with LIBOR and SOFR. The contracts outstanding in LIBOR won’t mature before LIBOR phases out. This majorly includes the 3month LIBOR, which has $200 trillion of debt and contracts tied to it. Repricing the existing contracts is complex as LIBOR has 35 different rates but SOFR has just one rate attached to it. That being said fixed rate loans won’t be affected much. The transition would impact the derivatives market hugely. Also, it is too early to understand how the transition would impact the income statement of US banks. But the banks need to develop a hedging mechanism to manage their balance sheet risks. It would be interesting to see the era of LIBOR end and how the new rates phase in.
References:
29 | Page https://bpi.com/credit sensitive benchmarks in a post libor world/ https://treasury.worldbank.org/en/about/unit/treasury/ibrd financial products/libor transition https://www.financialpoise.com/sofr vs https://www.forbes.com/advisor/investing/whatlibor/ is libor/ https://www.pwc.com/gx/en/industries/financial services/publications/libor reference rate https://www.morganstanley.com/ideas/liborreform.html its end transition to sofr https://www.investopedia.com/secured overnight financing rate sofr 4683954
By: Kalpesh Khandare and Namita Bhatt (SIMS, Pune)
Preliminary research indicates that the economic implications of this transformation are immense for both individuals and society at large. It's important to understand India's on going financial restructuring that will have lasting effects on our country worldwide.
What Is Fintech?
Fintech is an emerging industry predicted to generate trillions of dollars in revenue by 2020. It means "financial technology." This term encompasses any technological innovation supporting or providing services to the finance sector think anything from credit card processing software to investment risk modelling software.
What's so great about fintech? There are two significant reasons why this emerging technology is essential. Fintech allows for more customer convenience while improving financial services and productivity. A trustworthy fintech company is focused on enhancing the customer experience and enabling customer interaction with the bank in a way that was not previously possible.
Economic Background India's economy has been in a state of flux since the 1990s, with significant social and economic changes impacting the Indian landscape. The most important economic reform was the liberalization of foreign direct investment (FDI) in India's financial sector. This resulted from then Prime Minister Narasimha Rao's decision to give up India's 'license raj' system of controls, established in 1947 after gaining independence from Great Britain. These regulations limited competition and subjection to discretionary bureaucratic approvals. Licensing requirements were
Fintech: An Emerging Industry in India Economy
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Are you curious about the future of banking? You should be! The paperless, mobile, and customer centric financial industry is only just emerging. Understanding it will be essential for anyone who wants to stay relevant in the coming years. Let's look at what fintech is, how it's impacting our financial lives, and where it's headed.
The market size of Fintech in India has grown by more than 400% between 2010 and 2016. Furthermore, the Size of the market is estimated at $ 6.9 bn by 2025. The growth of this industry is the result of a confluence of factors: increasing consumer demand for financial services, increasing use of mobile money products, push from the government to support technology in growing industries like banking and taxation, and innovations in payment systems and online
31 | Page replaced by increased transparency and market competition, with regulators evaluating on a case by case basis whether or not an investment would benefit the country. This strategy helped India's GDP per capita grow at an average rate of 6 per cent per annum and its GDP rate of growth at an annual average of 4.5 per cent. In addition, the country largely stayed out of the global financial crisis the nation's economy grew at 6.5 per cent in 2008, compared to 0.3 per cent in the U.S. and 2.7 per cent in China. The value of shares traded on India's Stock Exchange surged to $1 million during this time. The total market capitalization was over $500 billion by 2012 compared to only $150 billion before economic reforms took place in
The FinTech industry is emerging as a major consumer in the Indian economy because of the increasing need for online and mobile banking services, new financial technology companies offering innovative products and services at affordable rates, and government backed initiatives designed to improve consumers' use of these services.
Thelending.FinTech sector has no shortage of capital since it didn't have a place in traditional finance when banks decided to leave the business of consumer banking (primarily offline) to other
The1991.industry restructuring has also impacted India's demographics. Since the early 1990s, the country has experienced a boom in the IT industry and outsourcing, leading to significant growth in professional jobs. By 2005, more than 60 per cent of the population between 20 and 35 were under training or employed by the IT and outsourcing industry. However, this led to major demographic shifts as well.
As more develop their products and services to meet regulatory requirements, competition between companies is likely to increase. As a result of these pressures on compliance with Know Your Customer (KYC) laws and Anti Money Laundering (AML) statutes, some fintech companies will merge or purchase one another to stay afloat. Other events predicted for 2021 include the rise of digital only banks and significant investment in artificial intelligence (AI).
Change in the FinTech Industry Through 2021
Technological advancements are projected to continue to drive change within the fintech industry. For example, block chain technology is predicted to be at the forefront of this growth. The same applies to other emerging technologies like Artificial Intelligence (AI). AI will likely affect every aspect of our society, including finance and law. To comprehend how these developments will affect our economy as a whole, it's essential to examine demographic and financial trends that may determine how the industry continues to evolve. Demographics in this context refer to the overall population of people within a particular country or region. It can be used as a tool for predicting future financial and economic tendencies by looking at factors like population size and age distribution. Statistics such as these can be used to make inferences about the spending habits of particular groups and population segments.
For example, the prediction that Generation Y (people born between 1981 and 2000) will continue to dominate the workforce in 2021 suggests that this group will represent a large portion of consumers. The social media craze at this time also supports the idea that more millennials will be inclined to bank online through their mobile devices rather than in person at brick and mortar branches. These statistics support earlier predictions that mobile banking and payments are expected to increase in popularity during this period.
32 | Page private companies who are already experts at it. As with other industries, new companies are squeezing their way into the FinTech sector by finding innovative business models, taking advantage of big data analytics, and partnering with non traditional players.
A Fintech start up is a company that uses technology, software solutions, and data analytics to provide financial services. Some significant start ups are already like Paytm, MobiKwik, etc., but fintech is an emerging industry in India. Whether it's easy to access capital or new avenues for investment, go digital or perish!
Current Challenges in the Indian FinTech sector
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It's interesting how millennials are changing existing paradigms within both finance and law. To illustrate this, let's look at some recent trends that millennials have influenced.
Obtaining a banking license can be a long, tedious and expensive process. As of January 2016, only 19 companies have managed to get in principle approval from the Reserve Bank of India (RBI) for starting a payments bank. Out of these 19, only ten companies have already been granted final permission by the RBI, while ten are still under due diligence. The number of approvals is a far cry from what was initially anticipated when the program for payments banks was announced in 2014. There were about 82 applicants for this program at the outset.
This article concludes that Fintech start-ups are dominating the Indian economy with innovations like UPI, which will make transactions fast and smooth. The future of Fintech in India looks promising.
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Jamie Dimon CEO, JP Morgan The bank of 2030 won't resemble the one we see now. Banks need to start developing plans today to assist them in getting ready for the future as they deal with shifting consumer expectations, evolving technologies, and alternative business models. The chief information officer, C-suite executives, and board members are increasingly focusing on cloud computing. The recent Big Data Revolution is causing industries worldwide to improve their ability to access and mine data from various sources. As a result, existing information technology (IT) infrastructure is under severe strain while increasingly innovative digital solutions are sought, not least in the banking sector. Cloud computing is one of the most transformative digital solutions in the industry.
Cloud Automation: The future of Banking and Capital Markets
By: Harshit Agarwal (XIMB)
"Silicon Valley is coming: There are hundreds of start ups with a lot of brains and money working on various alternatives to traditional banking. They are very good at reducing the "pain points" in that area, they can make loans in minutes, which might take banks weeks.
Leaders in banking and capital markets are beginning to understand that the cloud is more than just a technology; it is where banks and other financial services companies may store their data and applications and access cutting edge software online. The leading public cloud providers provide a variety of innovative products-as-a-service that can be accessed via their platforms and assist banks in implementing business and operating models to improve revenue generation, increase customer insights, contain costs, deliver market relevant products quickly efficiently, and monetize enterprise data assets. The cloud also provides a tremendous opportunity to synchronize the enterprise; to break down operational and data silos in risk, finance, regulatory, customer support, and other areas. The organization can use advanced analytics to gain integrated insights when massive data sets are brought together in one location. In an industry where security is a key motivator, cloud adoption has become critical because it provides a more efficient way to outman oeuvre security threats. The risk of cyber attacks is reduced when data is
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From a regulatory standpoint, the cloud's scalability means that banks can potentially scan thousands of transactions per second, significantly improving the industry's ability to combat financial crimes such as fraud and money laundering.
Source: www.tendtechnology.com
The cloud is being proved to be a superior substitute for increasing data capacity and is now providing banks with an unrivaled level of agility, security, and scalability. Further, the technology requires banks to pay only for the services they use; cloud computing enables financial institutions to achieve significant gains in efficiency and cost reductions. It offers a cutting edge customer centric platform with superior security to protect banking data and a high level of redundancy and backup at a lower cost than traditional managed solutions.
Source: www.processmaker.com
It was evident in 2015 that the Digital Revolution had finally affected the banking industry. The British Bankers' Association reported that customers now prefer mobile banking as their preferred payment method, while global investment in FinTech increased by three times to USD 12 billion between 2013 and 2014. According to a PricewaterhouseCoopers (PwC 2016) survey of 176 CEOs from the Banking and Capital Markets sector in 62 countries, interviewed CEOs see customer relationship management systems (80% of respondents), data analytics (75%), and social media communication and engagement (56%) as the top three technologies that would generate the greatest return.
The ability to analyze a larger volume of data faster and make more accurate predictions can result in a timely, targeted, and forward thinking response to customer demands and capital market developments. Artificial intelligence driven intelligent automation in banking is a concept that most customers and banking organizations are familiar with.
36 | Page stored offsite with multiple security layers rather than in the traditional in house system. Ninety four percent of businesses believe incorporating cloud computing into their daily operations will improve their security.
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Source: www.commverge.com
Source: www.processmaker.com
The BFSI sector must constantly be vigilant and identify any non compliance issues as soon as they arise due to evolving rules. Fast-moving technical advancements are not being kept up with by the legal system. Numerous studies highlight the advantages of cloud computing for the financial sector, but concerns about non compliance and cloud hazards hamper adoption. In this context, it is obvious that banks must take regulatory environments into account before implementing cloud services widely. Regulators are nonetheless concerned about storing private information in the cloud, especially when non banking businesses start. Before introducing any third party cloud functionalities or partnerships, financial institutions are typically encouraged to adopt a risk based strategy.
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Source: www.dsautomation.com
Source: www.pinterest.com
Financial and banking organizations are ready to join the cloud revolution. However, the majority of businesses lack the knowledge and resources to use cloud solutions. Most banks are still debating whether to migrate their clunky legacy systems to the cloud. Organizations that use outdated methods miss out on the productivity gains of cloud apps. Banks must endure hours or days of server disruption as they rush to migrate to the cloud, which will simultaneously affect consumers and staff. Employees using unapproved cloud technologies to complete jobs are a rising risk for shadow IT in enterprises. However, Banks can look to the cloud easily if they have the right migration strategy in place and the right cloud tools and partners.
39 | Page ALL RIGHTS RESERVED FINANCE & INVESTMENT CLUB INDIAN INSTITUTE OF ROHTAKMANAGEMENT For any queries/feedback/comments, email to fi@iimrohtak.ac.in Website: https://www.facebook.com/FIclub.IIMRohtakFollowhttps://fi9522.wixsite.com/homeusonFacebook: To Advertise with us: Contact Yash Deepak99272755868619904708
