finly november by FINLY

FINLY| NOVEMBER 2017 | Finstreet | SIMSR

From the Editorâ&#x20AC;&#x2122;s Desk

Dear Readers, The momentum seems to be building and the perception is changing about India. Modi stands taller than Moody's and the world recognizes the heavy lifting done by the government as India leapfrogs thirty places in ease of doing business rankings. We hope every finly reader's story is as promising as that of our country. Team Finly is back with yet another sensational edition of your beloved magazine finly. In this month's edition the writers in the cover story have explored the Big Bang recapitalisation of the Indian public sector banks which made the markets ecstatic whereas the eco section covers the Doing business report released by World Bank which increased the Modi Government's credibility as a reform oriented government. Also, you must not miss out the fintech section where the writers tell you how you can save broking charges while trading in the stock markets. We also understand that you all have busy schedules, so we have news buzz, trivia and sector analysis to update you with the recent news from around the world and the best performing sectors on the Indian bourses. I would like to extend my gratitude to Dr. Pankaj Trivedi for his unflinching support and constant guidance to the entire finly team. Also, I would like to extend my heartiest gratitude to the finance department of KJ SIMSR and our sponsors Finacue Research & Education for the constant motivation and contribution to finly. I would also like to extend a thank to Ms. Geetanjali Rai for sharing her valuable insights in the Alumni Section. I would also like to recognise the constant dedication and hard work of the members of finly team who have taken this magazine to newer heights. It gives me immense pleasure to announce that Pritam Shetty from KJ SIMSR has been declared as winner and Isha Varma from TAPMI has been declared as the runner up for the Call for article competition. We wish you a great luck in all your future endeavours.

Madhur Saxena Editor-in-Chief PGDM (2016-18) KJ SIMSR

Team FINLY

FINLY| NOVEMBER 2017 | Finstreet | SIMSR

Table of Contents

FINLY| NOVEMBER 2017 | Finstreet | SIMSR

RECAPITALIZATION

Cover Story

Shreya Maheshwari PGDM Deepanshi Agrawal PGDM Aarzoo Doshi PGDM

Introduction The Indian government came up with its big bang announcement to recapitalize public sector banks, yet another move after demonetization and GST to push the economy on the path of inclusive growth and development. The move is unprecedented in terms of the size of recap, Rs 2.11 trillion, will be disbursed within two years and was accompanied by the moment of awe and shock by all sections of society and abroad. Such was the impact and the dire need of it that the market saw 30 percent jump in the stocks of PSBs within a few hours of the announcement. While many research houses dubbed the recapitalization plan as India's TARP, Troubled Asset Relief Program—$ 700 billion$ capital infusion plan formulated by the US Treasury, to save its privately managed banks during the surprise

mortgage crisis—the Indian government views it as one of the major components of the 4R strategy of recognition, recapitalization, resolution, and reforms to tackle the challenges faced by the banking industry at large and to ensure sustainable growth of the economy. The story behind… After India dodged the worst of the financial crisis a decade ago, a flurry of investments were made on overoptimistic assumptions, especially in infrastructure-related sectors, also there were large capital inflows from overseas reaching 9% of GDP in 2007-08. The investment boom was followed by credit boom with many banks expanding their credit lending to the corporates in order to gain revenues from them.

Cover Story

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The estimated bank credit growth rate was 15-20% during this period with many corporates leveraging themselves in terms of financial borrowings. However, the economic cycle had already turned downwards with the global financial crisis. The revenues forecasted collapsed and the projects built on the assumption that growth would continue at double-digit levels were suddenly confronted with growth rates half that level. Costs soared far above budgeted levels due to administrative inefficiencies in terms of securing land and environmental clearances that proved much more difficult and time-consuming than expected. RBI, on the other hand, increased interest rates to quell the double-digit inflation which resulted in a sharp rise in borrowing costs for firms domestically. Also, the firms which had borrowed from abroad were hit hard when the currency depreciated from Rs 40 per dollar at the time of borrowing to Rs 60 – 70 per dollar at the time of

repayment. Emergence of the Twin Balance Sheet Issue Higher costs, lower revenues, greater financing costs — all squeezed corporate cash flow, quickly leading to debt servicing problems. This was clear from the balance sheet of the companies; especially in steel and power sector, as their interest coverage ratio—the ability of the company to repay the loan using the profits—is less than 1. As per the economic survey 2016-17, 40% of the debt was owed to the corporates, which did not earn enough to pay the interest obligations on their loan. This issue of the balance sheet of corporates linked it to the banks' balance sheet in terms of loss of revenue which is generated from the interest earnings incurred on the loans to the corporate and eventually turning them into a non-performing asset or bad loans for the bank. The result is that the balance-sheets of both banks and much of the corporate sector came under parlous state.

FINLY| NOVEMBER 2017 | Finstreet | SIMSR

Cover Story

Rising NPA and the Policy Paralysis

The inability of the government to take decisive steps during the emergence of Twin Balance Sheet problem in 2010 resulted in the accumulation of NPA for the banks. This was mainly concentrated in the public sector banks with administrative inefficiency. The situation has worsened to the extent that currently, the NPA ratio in India is the highest among the major emerging markets; at 10.21% which is 829,338 Cr according to the June quarter report by the India Care ratings. On a q-o-q basis, the increase in NPAs have been the

highest in Q1 FY18 witnessing an increase of about 16.6%. The public sector banks accounted for the major share with the top 5 banks - SBI, BOB, PNB, CB, BOI account for a share of 47.4% totaling to Rs 4,11,305 Cr

Recognition policy of Asset Quality Review (AQR) Although the earlier signs of stress were visible in 2010 with rising NPAs, it was in 2015 the real picture came to light when RBI took up the Asset Quality Review as the measure to force the banks to recognize the true state of their balance sheet in terms of asset valuation. In fact, most of the large borrower accounts were inspected to check if the classification was in line as per the RBI norms. AQR as a part of the recognition approach helped in understanding the true extent of the problem and in coming to grips with it.

Cover Story

The â&#x20AC;&#x153;Big Bangâ&#x20AC;? Recapitalization With the increasing burden of stressed assets and the atmosphere of uncertainty that has existed for some considerable time, PSBs have had to focus on their NPAs than on new lending. For that, PSBs have been forced to be in damage limitation mode and not seeking out new clients and opportunities. Hence, to address the issue, banks have to clean up their balance sheets so that they have the financial ability, managerial attention span and incentive to refocus on their core activity of lending viable projects. Under the current scenario, the bank recap plan of Rs 2.11 trillion roughly accounts for 1.3% of the GDP, out of

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which recap bonds worth Rs 1.35 trillion (equivalent to 0.9% of GDP) will be released by the government and the remaining Rs 76000 Cr is through budget allocation and fundraising from the market. The budgetary allocation includes Rs 18000 Cr as a part of the Rs 70000 Cr fund infusion plan called the indradhanush plan launched in 2016 over a period of 4 years, while the rest is to be raised from the market. Also, this capital infusion into PSBs is driven by regulatory compulsion, as the tier I or core capital of banks (equity plus reserves) must conform to global standards embodied in Basel III norms, to improve efficiency and transparency in the banking system, by April 2019.

Cover Story

The Implications of Recapitalization and the Resolution Process The impact of recapitalization should be very well aligned with the resolution process of rehabilitation and restructuring of the underlying stressed assets in the corporate sector in order to gain from its benefits. Capital Expenditure of the country has been weakend due to excess leverage. Private investment should pick up over time as capacity utilization improves (Assuming that demand will grow in future as the after effects of demonetization is being controlled). Capital shortage due to rising NPAs had resulted in a wider gap between the public sector banks' weighted average lending and deposit rates which made it unaffordable for corporates to borrow at higher interest rates. To solve the problem of capital shortage, recapitalization seems to be viable as it should enable more efficient transmission of funds. Recapitalisation should also be neutral for monetary policy as increase in inflation may negatively affect the economy and force the monetary policy committee to increase the interest rates which may become counterproductive in nature. The new legal framework provided by the bankruptcy code with its welldefined set of rules has simplified the resolution process to an extent. Prominent success was achieved in the earlier stage when RBI identified 12 loan accounts and took them up under the

current framework as these loans account for 25% of the current NPAs (not the overall stressed assets) in the banking system. The Downside Risk Despite the benefits derived by the process of recapitalization, the plausible downside risk could be taken into consideration in terms of macroeconomic implications. Resolution Capital for the provisioning of NPAs The adequacy of the resolution capital depends on the size of the haircut, i.e., the reduction applied to the value of the asset and determining the total cost of PSBs NPAs adding the incremental capital needed to adhere to Basel III norms by April 2018. Any increase in the size of the haircut might lead to capital shortfall which would be very difficult for the banks to raise from markets given the current scenario. Growth Capital to boost lending by the public sector banks The adequacy of growth capital determines whether the current package will jump-start lending and credit growth (and therefore GDP growth). With PSB credit growth slowing down, current constraint was in terms of money supply which would be released after the recapitalization. However, the credit growth will still be pegged at a modest level of 7 to 9 per cent for the PSBs which might not be able to generate the currently expected future earnings.

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There will be a requirement of additional capital taking together the cost of growth capital and resolution capital ,however to what extent and whether the residual amount can be raised through the market by these PSB is yet to be observed. Fiscal Cost of Recapitalisation The true fiscal cost of issuing recapitalization bonds is likely to be limited to the additional interest payments, which are estimated at Rs8090 billion per year (0.05% of GDP). This cost can be offset by the confidence impact of addressing the critical economic bottleneck, thereby increasing credit supply, private investment, and growth. Currently, the consolidated public debt is currently around 68% of GDP which under the current baseline scenario based on - GDP projections, interest rate policy and fiscal deficit trends - will gradually decline to 63% by 2023, as per the Fiscal Responsibility and Budget Management (FRBM) review committee's report. The key factor to be considered here is that under the more comprehensive plan of providing both

resolution and growth capital, it's more likely that GDP growth will pick up. If nominal GDP growth picks up by just 0.5% every year for the next five years, the bank recapitalization plan essentially pays for itself. Concluding with the Reforms The current state of the banks not only entails the economic hazard but also highlights the administrative inefficiency in dealing with the situation and the lackadaisical approach on the part of the government to control the situation. Now, that the government has finally moved in this direction, it is important to discuss the possible reforms that are in line with this strategy. The element of recapitalization attaches with itself the element of moral hazard that the banks will not take adequate precautions while lending in future when they know that the government will step in to help if the loans turn sour. Hence, the government should be selective about which banks get the additional capital on offer.

Also, the larger borrowers who have defaulted on loans should face the heat of the new insolvency law, rather than be allowed to free ride on the recapitalization. Another major reform is to implement the recommendations of the PJ Nayak Committee on improving governance structure, credit and risk management practices. While its suggestion on reducing the stake of government below 51 percent may not look feasible, one can still consider one of its recommendations of vesting the government's shareholdings in public sector banks in a separate holding

company and limiting the finance ministry to deal only with the holding company on policy issues Also, the individual public sector banks should be free of finance ministry control and become board-managed entities with the top appointments under their purview. Hence, to take the comprehensive process to its logical conclusion and to sustain the health of the banking system it is imperative for the government to move towards reformation process to ensure long-term growth of the economy.

Article of the Month - Winner

FINLY| August 2017 | Finstreet | SIMSR

Name: Pritam Shetty Class: KJ SIMSR, MMS – B (17-19)

INTRODUCTION: “Bhaaiyo aur Beheno desh ko brashtachaar aur kaale dhan deemak se mukt karane ke liye ek aur sakt kadam uthaana padega,” and India was about to witness demonetisation of currency for the third time after 1946 and 1978 on 8th November 2016. It was made clear by our PM that this move of demonetising 500 and 1000 rupee notes had objectives of curbing Black money, Corruption, Fake currency and Terrorism funding to which later on the objectives of less cash economy and wider tax base were added. Black Money Government informed the supreme court last year after demonetisation that almost about a third of the total

15.44 lakh crore rupees banned will not return to the economy with a fear of risk of detention. But the recent report of RBI showed that almost 99% of demonetised currency has been successfully deposited. This clearly depicts that not all the black money is in the form of cash. It could be in the form of gold, real estate etc. So, demonetising could not be seen as a full proof solution to bring out the black money as only 1% of the total value of currency did not come back to the banking system. Even if we consider these Rs 16000 crores which didn't return to the RBI as the value of domestic black money held in cash then the cost of bringing it out outweighs its benefit as the amount spent on printing new notes were around Rs 21000 Cr

FINLY| July 2017 | Finstreet | SIMSR Article of the Month - Winner

Terrorism However, many official statements from the government claim that merely depositing the money in the bank does not make it white and according to the tax officials around 17000 Cr rupees deposited by the shell companies are under watch and around 1.77 million individual accounts which were deposited with cash are also under scrutiny. Status: Objective not achieved yet, actions yet to be taken.

After demonetisation there was a decrease in the number of stone pelters in the Kashmir region which was due to the lack of money distributed to the pelters which used to be in the denominations of 500 and 1000 rupees. But this did not solve the problem of insurgent violence permanently as along with the new cash being pumped into the system the funding to these pelters and maoists also increased which led to the increase in the number of attacks subsequently.

Fake Currency As per RBI's annual report 7,62,072 pieces of fake notes has been detected in the fiscal year 2016-17 against 6,32,926 pieces detected last year. This is a significant increase in the detection of fake notes as compared to the previous year by 20%. But the percentage of fake currency to the total currency in circulation is just 0.08%.

According to the South Asia Terrorism portal, data from 10 months before and after demonetisation shows a 38 per cent rise in the number of terrorist incidents in J&K. Also, there is a rise of 2% in the number of security personnel killed in J&K and a staggering rise of 82% in the naxalaffected states. Status: Objective is not achieved as terrorism and related activities are on a rise again after initial downfall. Cashless economy

This value was 0.07% year ago. Also, the counterfeit of new 2000 rupee note stood at 638 pieces which is a signal in itself that there is much more to do than just demonetise to curb the fake currency circulation in future. Status: Objective is fairly achieved as the detection of counterfeit notes has increased.

Cashless economy means more use of digital mode and less use of cash for transactions. Going by the recent data released by RBI, the value of the cashless transactions went up very high shortly after the demonetisation and remained quite high after that. Trends and values of various cashlesstransactions before and after demonetisation are depicted in the graph below.

Article of the Month - Winner

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Fig.1 Transaction value of IMPS Imps which now includes UPI and BHIM after Dec 2016 has shown a healthy growth and is having an upward trend thereafter in terms of volume and value.

Fig.2 Transaction value of Debit at POS Debit card usage at POS initially spiked just after demonetisation when there was a shortage of cash in the system but the trend showed a decline after January and now appears to flatten out.

Fig.3 Transaction value of m-Wallet

Article of the Month - Winner

FINLY| NOVEMBER 2017 | Finstreet | SIMSR

The sharp rise which was seen just after demonetisation did not continue, however there is a new normal now after demonetisation for the m-Wallet transactions. The trend is same as every year but the value has increased drastically with some analysts claiming that India has leapfrogged to these figures 3 years in advance. The total currency available in the system has been reduced to Rs 15.89 lakh Cr in Sept 2017 from Rs 17.77 lakh Cr in November 2016. But people still largely prefer cash over digital transactions and this can be seen by the figures released by RBI which shows that the value of withdrawals from the AT M ' s a r e b a c k t o t h e p r e demonetisation level

Fig.4 Cash withdrawal from ATM Status: Objective is partially achieved with the boost in volume of transaction but the trend seems to flatten out and more incentive needs to be given to increase the trend. Tax Evasion

released by the Finance Ministry shows that there has been a 25% rise in the number of tax returns filed after demonetisation. But the long-term data of tax return shows that returns had gone up by 27 per cent in 2016. Status: Objective is not achieved yet, we need to wait for few more years. Conclusion One thing which we could identify clearly in this one year is that demonetisation had an immediate objective of curbing black money and a long-term objective of converting our cash based economy into a digital one. As claimed by many economists and analysts there could have been a 'slow demonetisation' which might have prevented the panic and inconvenience caused to people by a 'surgical demonetisation,' as the main purpose of surgical demonetisation was curbing black money. Demonetisation might have crippled the economic growth in the short term but it remains to be seen how it affects the economy in the long term with its other goals like cashless economy and widening of the tax base. There has been a mixed support by the economists and politicians both for and against the demonetisation drive. The key here is patience as when 86% of a country's legal tenders become illegal it is expected that finding a new level of equilibrium would require time.

Success in widening the tax base would help increase the government revenue in our country where less than 4 percent people file tax returns. Official statistics

Article of the Month - Runner Up

Venezuela Debt Crisis: A Threat To Stability

Isha Varma , TAPMI, Manipal ,2016-18

Introduction One of the most urbanized countries of Latin America and a leading exporter of oil, Venezuela or the Bolivarian Republic of Venezuela has witnessed political and economic unrest earlier as well, however, never before, has the country been on the brink of default. The rating agency Standard and Poor's Global has already declared the country in â&#x20AC;&#x153;selective defaultâ&#x20AC;? position. The reasons for this crisis are primarily the

decline in oil prices, political instability and years of mismanagement. The country is facing acute cash crisis and has huge amounts of debts, which, if not repaid would compel the investors to seize the properties and other underlying assets such as oil tankers and even refineries. Venezuela, at present, is the country with the highest inflation with the forecasted inflation rate for 2017 (Figure 1) being around 650%.

Figure : Venezuela CPI Inflation YOY growth (June 2015-Nov 2017).

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Article of the Month - Runner Up

The Crisis The Venezuelan economy relies heavily on oil exports but because crude prices have been dropping since mid-2014, this has lead to a severe economic crisis. To make things worse, U.S has put financial sanctions barring the banks in States from investing or trading in any newly issued Venezuelan debt. The state-run oil company PDVSA owes more than $ 60 billion to bondholders but the central bank of Venezuela only has $ 9.6 billion in reserves. On 13th November 2017, the Venezuelan President Nicolas Maduro called a meeting for investors (who hold around $ 60 billion of bonds) and other representatives in the country's capital Caracas, to discuss about restructuring of the debt. However, later there were reports that the meeting was not planned well, and there was no substantial solution given to the problem of repayment of debt. There was no clear discussion about how the government plans to renegotiate the $ 60 billion bonds. Around 80% of the nation's population

is below the poverty line. The people are in misery due to lack of food products, medical supplies, and other basic amenities. People living close to the borders, travel to Columbia on a daily basis, to buy such products. The citizens have lost confidence in the government and the President. The recent decision of payment of $ 1.1 billion dollars to international bondholders by PDVSA aggravated the people even more because the President is choosing to pay off the debts instead of using the money to feed its people. Economic tensions in the country are not a new phenomenon. It dates back to the economic shocks of 1980's which lead to the Caracas riots of 1989, two attempted coups of 1992, the impeachment of President Carlos Andrez Perez in 1993, then the economic crisis of 1996. The situation improved a little in 2000's but then decreasing oil prices and increasing external debt (Figure 2) since 2013 has caused the hyperinflation and economic depression, the nation is now going through.

Figure : Venezuela public external debt (201217) .Source - Banco

Article of the Month - Runner Up

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At present, this OPEC nation is in a state of severe uncertainty since they have to decide whether they should continue repaying the debt at the cost of their hungry and sick people or to fund the population and be declared as bankrupt. But bankruptcy will invite some very unfavorable consequences like- Venezuela could be excluded from any further credit provision or all the overseas assets of the country may be seized. There are some possible solutions to the problem facing this country, normally a nation in this state resorts to printing more money to repay the debts and devalues its currency. A recent example is Argentina debt crisis of 2001 wherein the country was unable to pay $ 132 billion worth of loans and hence opted to devalue its currency. In some cases, the IMF (International Monetary Fund)

Conclusion President Mudaro is hoping to restructure and refinance the debts. He is seeking help from countries like C h i n a . M ex i c o h a s a g re e d t o restructure $ 3 billion of debt. Russia has helped with a partial bailout. The crude exports to U.S., though low, have improved in October 2017 as compared to previous months. Venezuela has started making interest payments to its

bails out the nation by funding, but these funds are conditional and they are provided only if the nation agrees to abide by certain regulations imposed by the IMF. The forecasts for Venezuela are quite unpleasant. Every day the people are leaving their home, indicating a possible Syria-like refugee crisis. Estimates show that 1.2 million Venezuelans have fled to Columbia, another 1 million to Brazil and the numbers are increasing everyday. IMF forecasted a further contraction of the economy by 6% and an inflation of 2000%. The following table compares GDP and inflation forecasts for Latin American countries to their previous survey, and also provides end of 2017 forecasts for main central bank rates on a weighted average basis as of Nov. 17.

creditors, although delayed. And China has publicly shown confidence in the economy stating that â&#x20AC;&#x153;Venezuela's government and people have the ability to properly handle their debt issueâ&#x20AC;?. Despite the positive signs, there is a lot that has been damaged and a lot more that has to be done right. Now when will the country come out of the crisis, only time will tell.

ECO Section

Priya Keshari PGDM (FS) Aman Singh PGDM (FS) Priyansha Agarwal PGDM OVERVIEW

Calculation of Distance to Frontier score

The Doing Business report is published by World Bank every year since 2003. In this report, 190 countries are ranked based on the ease of starting a new business in that country, time taken to fulfill the legal requirements to start a new business, cost incurred to fulfill those requirements and such other factors.

An economy's Distance to Frontier can be between 0 to 100 where, 0 is the worst performance and 100 is the best performance or frontier. For every economy, World Bank collects data for the largest business city but for 11 economies it considers the data for two largest business cities, then the data collected for these cities are given weights on the basis of their population. For example, in India, Delhi and Mumbai are taken and weights are assigned as 53% and 47% respectively. To calculate the overall Distance to Frontier score for an economy, World Bank calculates individual Distance to Frontier score for 10 different indicators and averages them to find the aggregate Distance to Frontier score. The following are those 10 indicators:

METHODOLOGY This ranking is given on the basis of Distance to Frontier score which is a composite score given to every economy based on how close their regulatory practices are to the best or standard regulatory practices among all economies. The higher the Distance to Frontier score, the closer an economy is to the best practice

ECO Section

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World Bank also measures an 11th indicator which is the Labor Market regulations but this does not form a part of the calculation of Distance to Frontier score rather is presented in an annexure to the World Bank report. Selection of Indicators In order to select the indicators on which World Bank will score the economies, it conducts a survey known as World Bank Enterprises Survey. In this, entrepreneurs of 131000 companies in 139 economies are surveyed. They are asked about the biggest obstacles they feel in the business activity. On the basis of their response the indicators are selected. For example, in the latest Doing Business report, access to finance and electricity were identified as the most important factors which can be an obstacle in the business activity. Collection of Data World Bank uses four main sources to collect the data. These are:

타The relevant laws and regulations 타Doing business respondents 타Government of the economies covered 타World Bank Group regional staff

They collect data for 190 economies of which some are so small that very less or no data is available for them. They collect d a t a f ro m p r i va t e ex p e r t s a n d government officials through filling of questionnaires, conference call and visits to their office. This data is further verified by the World Bank and a report is prepared. The following chart shows the flow of data collection and verification: India's Ranking India is ranked 100 among the 190 economies as per the Ease of Doing Business report 2018. Before this, India was ranked in between 130 to 140. This is the first time that it has improved so much in World Bank rankings. With this, it has become one of the 10 economies to improve the most in this year's ranking. It is the only economy in South Asia and even BRICS countries to do so.

ECO Section

Reasons for Improvement India has improved in 6 out of 10 indicators of Doing Business 2018. The main reasons for this improvement are 타The number of processes required to

be followed for starting a business has been reduced from 14 to 5 in past few years. Processes like obtaining director identification number, permanent account number and tax deduction account number have been merged into one process

as against 160 days taken earlier 타Government has taken steps to

encourage trade across borders by directing all major ports to provide direct port delivery facility to all accredited client programme clients and to provide additional land area to DPD (Direct port delivery) containers for parking 타Enactment of Insolvency and

Bankruptcy Code to tackle bad loans and Non Performing Assets (NPAs) in a better and faster way

타The time taken to grant a construction

permit has also reduced significantly. According to Department of Industrial Policy & Promotion (DIPP), now, it takes only 60 days to complete 8 online procedure to get a construction permit

FINLY| FINLY| NOVEMBER NOVEMBER 2017 2017 || Finstreet Finstreet || SIMSR SIMSR Ĺ¸Since World Bank has taken into

account policies which have been implemented since June 02, 2016 to June 01, 2017 so the implementation of GST has not been taken into account but regulations like online payment of Employee Provident Fund and other measures to simplify corporate income tax regulations has shown its impacts and India has improved its rank from 172 to 119 in paying tax Benefits to India

ECO Section

The Ease of Doing Business ranking has a lot of importance for the investors. Many investors form their decisions to invest in a country on the basis of these rankings. This will attract a huge amount of Foreign Direct Investment (FDI) to India.

This ranking is like a barometer which indicates that India is on the right path in creating an efficient channel for the flow of investments to the country. This would indicate that the cost of capital of doing business in India has decreased as the implicit premium has reduced and it has become more favorable to do business Road Ahead Government wanted India to reach 90th position in 2017-18 and 50th position by 2020 Doing Business rankings. Though getting 100th rank is good enough but we still need to improve to not only retain this position but also climbing up the ladder. Improvement in following areas could help us get higher ranking:

On a deeper analysis, we find that India lag behind mostly in those indicators where state government interference is the most, like getting electricity, registering property and starting a business. So the government need to work on that front

Though, it takes 30 days to register a new business today as against 127 days taken 15 years from now, the number of procedures are still cumbersome for new entrepreneurs who have to follow 12 procedures Mere enactment of Insolvency and Bankruptcy Code has improved the ranking from 136 to 103, so the practice of it will also help us improve a lot in this indicator One of the indicators where India should focus is enforcing contracts. It takes 1445 days to enforce a contract today as against 1420 days 15 years from now. This has placed India at 164th rank in enforcing Contract. Improvement in this area alone will take India to a higher position globally Since the effect of GST was not taken into account for the ranking, it will also have its influence on the rankings of next year in the paying tax indicator

RISE AND RISE OF DISCOUNT BROKING

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FINLY| August 2017 | Finstreet | SIMSR

Fintech Section

Vaibhav Bhanushali PGDM Anika Prakash PGDM RISE AND RISE OF DISCOUNT BROKING It has been rightly said by Ben Graham that â&#x20AC;&#x201C;'Investors should purchase stocks like they purchase groceries, not like they purchase perfume'. Few years back, process of trading stocks was considered to be a herculean task. Dependency was high on the stock brokers. Stock brokerâ&#x20AC;&#x2122;s are agents who are trained and certified to participate in the securities market. They buy and sell securities on behalf of clients for which they charge commission. The stock broker does not own the securities but just does the service for the investor. As internet became mature, these brokerage services became available to the customers through online channel in a very simplified form. This increased the number of customers and the frequency of transactions. Increasing use of internet and electronic trading

has further helped to develop new kind of brokers- 'Discount Brokers'. Discount brokers provide good customer services with competitive brokerage rates. Before understanding Discount Brokers, let us first go through Full service brokers. FULL SERVICE BROKERS Full-service (Full-price) brokers are the traditional broker's who offers almost all kind of investment options and advisory to its customers. This includes trading in stock (equity), Future & Options, commodities and currency derivatives, Investment in Mutual Funds, IPO's, Fixed Deposits and Bonds, Life Insurance and General Insurance. They also provide Wealth Management and Investment Planning services to individual as well as corporate customers

Fintech Section

Full Service Brokers have their own research teams which helps the customer in their financial planning. Some of Full-service brokers in India are ICICIDirect, Sharekhan, Indiabulls, HDFC Securities, Reliance Securities, IDBI Paisabuilder, Religare, Kotak Securities, Angel Broking, SBI Securities, AxisDirect, etc. In India, stock brokers charge a brokerage around 0.3%-0.5% on delivery transactions. Brokerage services comprise of 3 major costs- Cost of execution, cost of advice and cost of funds. Cost of execution- Cost of actually placing trade through exchanges via online or offline mode. Cost of advice- Cost of research teams providing research and advice to clients with buy and sell recommendations Cost of Funds Working capital that is blocked by the broker from the period of settlement with the exchanges vis-a-vis with the client. Out of the above 3 costs, only the cost of funds is directly proportionate to the transaction size. This is because it takes sometimes 2 to 5 days to settle the transactions blocking large amount of broker's working capital. The other two costs have no relation with the transaction size but still customer has to pay for it. This type of pricing structure is termed as 'bundled pricing' which has problems like lack of transparency, excessive pricing and it leaves no option for the customer to cut his cost by doing

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away with services not being charged. DISCOUNT BROKERS Problems with traditional full time broking turned out to be an opportunity for some people and gave rise to new form of broking â&#x20AC;&#x201C; 'Discount Broking'. Discount Brokers are the online stock brokers offering cheap brokerage plans to the retail and institutional investors in India. They offer brokerage services in share, commodities and currency trading. They generally do not have their own research teams and thus do not provide wealth management related services. An investor/trader desiring to buy the shares has to pay the entire amount on the same day. Thus, there is no delay in the settlement there by reducing the cost of funds. Also, no cost is involved in research. Only cost involved is cost of execution which is charged as a flat fee. They are also called as flat fee brokers or budget brokers. Discount brokers are taking the advantage of economies of scale as the number of transactions is quite high on their platforms. They are able to keep their charges at lowest possible levels, as they employ fewer employees, fewer products and no research and advisory teams. So for example, a trader/investor who has his own set of criteria to make trade but he will still have to pay the same transaction cost as if he was taking the services of a broker, so what market participants wanted was a platform to trade, which is what these discount brokers gave them and thus these services were sold like hot cakes.

Fintech Section

FINLY| September 2016 | Finstreet | SIMSR

Robinhood Market Inc. is US based financial services headquartered in California. It provides mobile app that allows investors to buy and sell stocks on US stock exchanges without paying any commission. The source of revenue for Robinhood is the interest on the cash and securities in its accounts similar to that of banks. A new product named 'Robinhood Gold' has been launched which creates margin account for an investor that doubles their buying power and it also provides after hours trading. A flat fee of minimum $6 per month is charged for using 'Robinhood Gold'. FAMOUS DISCOUNT BROKERS IN INDIA: Discount broking was started around the year 1998 in western countries but it came to India the year 2010. Given below are some details about popular discount stock brokers in India: Zerodha: One of the largest and oldest discount brokers in India with a daily turnover exceeding Rs. 5000 Crore. They have franchise offices in many cities of India. They serve for a minimal brokerage charge (0.01% or Rs. 20 per trade whichever is minimum). No fee is charged for delivery based trading. It provides up to 14x exposure for intraday trade of stocks if there is no stop loss agreement. In case of stop loss agreement, it provides up to 40x exposure .There is no leverage for options. All Margin Intraday square off positions are auto squared off 10-15 minutes before market closes or when losses exceed 50% of the margin.

Upstox: Initially they were known as RKSV and they are the second most popular discount brokers in India. They charge Rs.20 per trade irrespective of the size of the trade. No fee is charged for delivery based trading. It provides up to 25x leverage on intraday trading for all NSE and BSE securities that have products on NSE-Futures and Options market. Example: Customer wishing to purchase 1 lot of NIFTY futures valued at INR. 2,07,500 (INR 8300 for 1 lot of 25 shares), need to have INR.8380 (INR.80 for providing leverage) in the account. For other stocks that are not on NSE- F&O list but have a 20% circuit limit breaker, it provides up to 2x exposure. For all others, no exposure is provided. For Options, no leverage is provided. Positions bought or sold on leverage will be automatically squared off at 3:15 PM for equities and F&O at no charge by Upstox. Samco Securities : It is co-promoted by legendary cricketer Kapil Dev and offers trading service at a flat fee of Rs.20 per transaction. One of its product CashPlus allow an investor to trade more than balance amount and is required to pay an interest of 0.05%per day of delay on outstanding amount. Number of clients for Discount brokers is increasing very fast as compared to full time brokers. Below chart is an evidence for the same.

Fintech Section

FINLY| NOVEMBER 2017 | Finstreet | SIMSR

ADVANCED TECHNICAL FEATURES WITH DISCOUNT BROKING: Some analysis is required before making a decision to buy or sell a stock. One of the most popular methods used by traders/investors is 'Technical Analysis'. In Technical Analysis, based on the past price data, a chart is created and by observing the price patterns on the chart, a bet is taken on the direction of the stock in the future. One such form of price chart is a candlestick chart which presents wide range of trading information that is easy to read and interpret. Each candlestick includes an open, high, low, and close price of a particular stock for the time frame. The time frame can be of in the form of minutes or days based on the user specification. If the closing price is less than opening price then it is a bearish candle which appears

in red color and if closing price is greater than opening price then it is bullish candle which appears in green color.

The issue was these softwares were expensive (a typical technical analysis software would be in the range of 30,00050,000) who provided this data. Or probably you could get it for free but for EOD or delayed data but with no surety about the accuracy of the data.

Fintech Section

FINLY| NOVEMBER 2017 | Finstreet | SIMSR

Discount brokers like Zerodha and Upstox helps users in carrying out technical analysis on their trading channels free of charge. Below is the interface of Upstox web which provides the user real-time charts with a complete set of indicators

Upstox facilitates its user by allowing them to place buy or sell orders on the candle chart which is not available with full service brokers. Various advanced technical analysis tools like MetaStock, Ninja Trader etc. are available in the market. Popular among them is 'Amibroker' which provides advanced charting with modern customizable user interface, amibroker formula language (AFL) that allows to create own trading strategy based on the analysis and Backtesting capability to test the formulated strategy on the historic data. Two types of costs are involved here â&#x20AC;&#x201C; Software

license which can cost up to INR 20000 and data subscription charge with Global data feeds for providing data to be analyzed. Discount brokers like Zerodha and Upstox allow their customers to save the data subscription cost by providing data to their Amibroker software from Global data feeds. Upstox allow their customers in executing the formulated strategies made on Amibroker tool by providing a connection between their Upstox account and Amibroker tool.

FINLY| August 2017 | Finstreet | SIMSR

Fintech Section

FINLY| NOVEMBER 2017 | Finstreet | SIMSR

Upstox also allows for API trading wherein customer can create a custom UI for creating a strategy or scripts. Orders are executed by calling appropriate Upstox API. Upstox also allows to create different options strategies by providing Options Strategy builder.

ADVANTAGES OF DISCOUNT BROKING: The biggest advantage of working with Discount brokers is that investor can save lot of money on the transactions thereby increasing the profits. Before the emergence of technology, only the wealthy could afford a broker and get access to the stock market. However, the internet has brought an explosion of discount brokers that let individuals with smaller capital to trade at a smaller

fee. Another advantage is the safety as the transactions take place in secured manner. Discount brokers offer a trading platform for their customers to make the trades of their choice and rely on offering a quality, efficient service that enables their customers to buy and sell investments easily. Leverage is high for intraday trading as compared to full service brokers

Fintech Section

FINLY| FINLY| NOVEMBER NOVEMBER 2017 2017 || Finstreet Finstreet || SIMSR SIMSR

DISADVANTAGES OF DISCOUNT BROKING: By using a discount broker, an investor does lose out on the advice which is not in the case of full time broker. However, research tools provided by discount brokers part offset this disadvantage. Unlike full time service brokers, these brokers provide investment for limited type of securities.

investment in various securities and is indirectly benefiting the economy. But the need of an hour for the brokerage industry is the low cost savings of discount brokerage and flexibility from full time brokerage. Even though Discount broking is offering no frills as a base model but in future it need to offer higher variants with incremental features. The power of picking and choosing the services needs to be put in the hands of customer.

Thus, an investor may lose out an opportunity to invest in many types of financial securities which can affect the profits in a long run. The problem with Discount broking in India is the lack of flexibility. Imagine a Monday when the markets were down by 5% and you had Rs. 50,000 in your trading account and desired to buy stock worth Rs. 1,00,000 with a commitment to pay off the balance Rs. 50,000 by the settlement day Wednesday (T+2), it would not be possible to do so with a discount brokerage in India. You could only buy stock worth Rs. 50,000. However, discount brokers do offer leverage on intraday trading. CONCLUSION: Before the emergence of technology, only the wealthy could afford a broker and get access to the stock market. However, the internet has brought an explosion of discount brokers that let individuals with smaller capital to trade at a smaller fee. Tech savvy millennial are the main customers of discount brokers. This has increased the

Alumni Section

Name: Geetanjali Course: PGDM FS 2015â&#x20AC;&#x201C;17 Org: The Smart Cube

INTRODUCTION It feels nostalgic to write for FINLY again. I would like to congratulate the Finstreet team for taking FINLY to greater heights and kudos to the editors and members for bringing in transformative ideas to make FINLY more relevant. I am currently working with The Smart Cube (TSC) which is a professional services firm that specializes in research and data analytics for providing business solutions. I am a part of the Strategy and Procurement Research (SPR) unit that is responsible for catering to clients from industries such as Consumer Packaged Goods, Energy & Chemicals, Financial Services, Industrials, Life Sciences, and Retail.

A s a r e s e a r c h a n a l y s t my r o l e encompasses from end-to-end project management to partial client management. Primarily, I work in Retail domain that caters to top retailers in the USA and UK. My daily task includes deepdriven data analysis to drawing meaningful insights from the research for the retailers. I have conducted various market assessment studies including both primary and secondary research wherein I get a chance to interact with the executives of the companies or sometimes industry experts too. The market assessment studies, generally, involve the overview of the market, its growth prospects, trends analysis, s u p p l i e r l a n d s ca p e , co m p e t i t i ve landscape, and business environment analysis.

Alumni Section

FINLY| NOVEMBER 2017 | Finstreet | SIMSR

The retailers basically want to devise strategies to enter a new market or to combat fierce competition from peers. Then, the next obvious issue that most of the retailers face is of procuring the raw materials or finished products. I analyze sourcing strategies for category managers and identify the most suitable business partners for sourcing and procurement, keeping in consideration their cost structure and profitability. I have also worked with clients from Financial Services domain, especially Private Equity firms. I was responsible for assessing investment opportunities for them in particular geographies of the world. This includes analyzing the new companies and start-ups that are going to be unicorns in the near future. Here, the analysis involves preparing company profiles, financial analysis by studying ratios or relative valuations of these companies. Then, the client is advised on the investment front as to how and when to invest in the prospective companies.

platform, rich with knowledge, cuttingedge tools and advanced analytics. I got an opportunity to contribute to the transformative process of TSC 2.0 by working on asset development initiative. This was an internal project for which I had to contribute in designing of one of the new products that is being offered to TSC's clients at present. The best part of working in TSC is that your views are welcomed by senior executives and you can add up value even if your idea is small. Overall, it's quite intriguing to work in research and analytics industry as you are always given a new problem to solve, you put on your thinking cap and deliver results that help Fortune 100 companies shape their strategies. I hope my experience helps you to understand what it is to be a research analyst. It is always a pleasure to contribute to FINLY. I wish â&#x20AC;&#x153;All the very bestâ&#x20AC;? to all the current batch students for their placements. Keep learning and don't settle for anything less than what you deserve. Cheers!

The company has recently undergone restructuring to transform itself into TSC 2.0 which has totally changed the working style and the brand equity of the firm. The company wanted to focus on its core strengths and capabilities, to enhance results and value for its international client base, which comprises nearly a third of the Fortune 100 and FTSE 100. So, it has launched a set of agile solutions to address specific sector challenges, and Amplifi â&#x20AC;&#x201C; its pioneering organizational intelligence

Real Estate

Sector Analysis

Varun Momaya MMS Aachman Vijayvargia MMS

Whenever we hear of Lehman Brothers, Bear Stearns, Freddie Mac and Fannie Mae, there is only one thing which comes to our mind, which is the US Economic crisis of 2008. A sector on which everyone was long, a sector which everyone thought would never go in recession, as it was every individual's dream to own a house, was the one which bought America and along with it the whole world to its feet. Yeah, the big Housing Bubble! So, in this article we'll be looking at an important sector – which is the Realty Sector. As per the data available from 18th October to 18th November of NSE listed companies and on the basis of parameters of percentage change in market capital & A/D ratio it can be seen that the top 4 sectors showing positive trend are as follows:

ŸNifty ŸPSU Bank ŸRealty ŸMedia ŸInfra

The Realty sector has shown a positive change of market capital of 8.51% and A/D ratio of 3.23.Realty sector contributes around 8-9% to the GDP of the country. The below table shows the returns of NIFTY Realty

Sector Analysis

FINLY| NOVEMBER 2017 | Finstreet | SIMSR

Ÿ1. Constituents of the Realty sector

Realty sector is constituted by the following sub sectorsŸResidential Space ŸCommercial Space ŸRetail Sector ŸHospitality Sector ŸSEZs Ÿ2. Drivers and Trends in the Real estate sector

ŸRising urban population: India has an

urban population of about 42 crore (about 32.4% of total population), and every year 9-10 million people move to urban areas. In the last 15 years, urban population has increased by 46%. It is

expected that the urban population will grow by 36% to 58 crore by 2030, which will lead to increase in housing demand in the long run. (Source: Department of Economic and Social Affairs) ŸMedian age: The median age of

population is 27.6 years. Also 2/3rds of the population fall under 15-64 years of age, creating a large base of potential home buyers. More population in the working age will lead to comparatively higher output, which results an increase in disposable income, and due to which there will be a good demand for housing.

(Source: World Urbanization Prospects, United Nations, KPMG

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Decrease in average age of home loan borrowers: The average age of home loan borrowers has declined from 43 years in 2000 to 33 years in 2016 and expected to go down to 31 years in 2021. This means, due to a vast variety of home financing options available to the people and most of the population in working class segment, their demand for housing would increase in the coming years.

an expectation to be reduction in new launches across all cities as only those developers confident of meeting timelines will undertake new projects.Post RERA, major developers are likely to enter into joint venture p a r t n e rs h i ps o r u n d e r ta ke j o i nt development with smaller developers to complete stalled projects. Transparency in the market is expected to increase.

Sector Analysis

Indian Real estate inching towards greater transparency: According to JLL Global Transparency Index Rankings, India moved from 50th place in 2008 to 36th place in 2016 for Tier-l cities and 52nd place in 2008 to 39th place in 2016 for Tier-ll cities. The parameters were investment performance, market fundamentals, regulatory and legal authorities and transaction process.

Paradigm shift in financing methods: Rising NPAs, higher risk provisioning assigned to the real estate sector by RBI and dwindling profits in the Real estate sector have made banks reluctant to lend to the sector. Private Equity (PE), NBFCs, pension funds, sovereign funds have replaced banks as the major source of funding Since 2014, new launches across major cities of India declined. Developers continued to focus on offloading unsold inventory rather than launching new projects. Residential sales continued to dip over the last three years on the back of home buyers anticipating probable price corrections. 2012-2015 saw a rise in unsold inventory due to shrinking demand. However in 2016, it recorded a slight dip due to reduction in supply. With implementation of RERA, there is

FINLY| NOVEMBER 2017 | Finstreet | SIMSR

The market realized the trends and gowth drivers earlier also but recently in last month a string of positive news related to sector and companies within made the stocks in this sector rally upwards. So let's try to look at the various news items that made the stocks move: a) Government of India approved the enhancement of the carpet area of houses for the middle income group (MIG) category under the Pradhan Mantri Awas Yojana-Urban (PMAY-U)

Sector Analysis

b) The Union government announced an Rs 2.11 lakhs crore capital infusion plan for state owned banks along with an enthusiastic road development programme to boost the economy and tackle short-term disruption triggered by structural and reformative reforms. c) The Central government has recently announced the construction of 1.2 crore affordable homes in urban areas under the Pradhan Mantri Awas Yojna (PMAY) in the next three years.

d) 52% of residential inventory registered under MahaRERA. 3.5 lakhs inventory remain unsold. 5620 projects including residential and residential cum commercial projects are registered under MahaRERA.

Bank to settle outstanding dues, Andhra Bank withdraws insolvency application filed against HDIL g) DLF – CCI approves GIC and DLF deal – 13000 crore; Q2 profit 94% down Q-o-Q due to lower sales (stopped sales booking during May-October but construction was continued) taking a cautious, conservative approach to understanding the rules and regulations under the RERA Act and GST. New sales booking have now been opened with effect from November 1. h Prestige estate – increased stake in partnership firm Prestige Pallavaram Ventures from 51 percent to 100 percent; registered 27.80 percent growth in Q2 net profit at Rs 80.9 crore l) Sobha – Q2 net profit up 30%, increase in sales bookings m)Unitech – Stays order on MD Sanjay Chandra, Verdict: He will be released if he deposits 750 crore (which will be given to home buyers), company planning to sell 6 unencumbered land parcels to raise money, stock surged 9% n) Godrej Properties – Q2 profit up 91% to 44 cr, sales bookings jumps 3 times to 2809 crore

e) Benami assets worth Rs 1833 crores seized till oct17. It has been observed that the maximum of benami properties have been booked in the Ahmedabad with 136 cases.

f) HDIL – made part payments to Andhra

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Conclusion RERA will have impact across all stakeholders in the real estate markets. Overall capital values are likely to go up across most cities as there will be an initial slowdown in supply, while demand will remain robust. A more regulated, transparent market will also see the eventual return of the investor, as he will see price rise accompanied with increased sales activity. RERA will prove to be a turning point for the sector as this legislation will bring in greater transparency, accountability and higher standards of governance. Thus this can be seen a new start for the Real Estate Sector.

News Buzz Trivia

FINLY| July 2017 | Finstreet | SIMSR

Return of FIIs to the Indian Market Soon after the government announced on October 25 about the infusion of ₹2.11 trillion as recapitalisation into Public Sector Banks and ₹7 trillion on building roads over the next five years, Foreign Institutional Investors (FIIs) are returning to India. The FIIs, who took a break in August and September from investing in Indian Shares, are buying into new shares. They have invested a net of $1.9 billion over the month of October and November so far & around $7.4 billion for the year to date in Indian Equities Market. There seems to be a positive sentiment and optimism among the FIIs. Also, after the recap announcement, overseas entities such as Goldman Sachs Group Inc. and Citigroup Inc. raised their target prices for Indian stocks. “It is the general pick-up in global inflows to emerging markets, and India is gaining. Also, the recent bank reforms in India are leading to expectations that t h e re co u l d b e m o re refo r m s underway.” Gautam Chhaochharia, Research Head, UBS Securities India Pvt. Ltd. Apart from India, the other BRICs nations - Brazil, Russia, and China (BRIC) posted consecutive weekly inflows for the first time since early April in the equity funds. Currently, for this fiscal year till 10th November 2017, the Sensex's one-year forward PE ratio is 18.61 which close to the highest. Forward PE Ratio indicates the current stock's price over its “predicted” earnings per share.

FINLY| NOVEMBER 2017 | Finstreet | SIMSR

As per the Official Data, a total of ₹1.39 trillion has been raised by the Indian Companies from the primary market in 2017, which is higher than the previous high of ₹1.04 trillion in 2010. In Secondary Market, the FIIs have invested $ 1.5 billion in November. “They (FIIs) have just started buying, but the numbers are still very small, in fact nominal.” Rikesh Parikh, Vice-President, Institution Corporate Broking, Motilal Oswal Securities Ltd. So let's see if this upward trend sustains!!

News Buzz Trivia

Thanks To Red Hat, India's Biggest Stock Exchange became The World's Fastest

Established in 1875, the Bombay Stock Exchange (BSE) is considered to be Asia's earliest established stock exchange with an overall market capitalization of Rs 141.79 lakh crore as of October 2017, making it the world's 11th largest. After struggling with inefficient and costly proprietary technologies for over two decades, the Bombay Stock Exchange (BSE) built a new trading system using open source technology from Red Hat in October 2015. As a result, BSE has expanded from 10 million to 400 million orders per day, achieved the fastest trading speed in the world.Since its switch-over to Linux and open source based solutions, the Indian stock exchange has increased trading volume from 10 million orders per day to 400 million per day. With a median trade speed of just 6 microseconds, the trading platform is now the world's fastest of its kind. There were even bigger wins to be made on the cost front. The shift has enabled the Bombay Stock Exchange to reduce its hardware expenses by 66% and lowered total cost of ownership by 90%. Also, it eliminated manual tasks, resulting in increased operational

eff i c i e n c y a n d re d u c e d sta ff i n g requirementsâ&#x20AC;&#x201D;from 15 to just 2 employees. Apparently, the transition to the new system was seamless, with zero downtime, claimed Red Hat. BSE also won the prestigious Red Hat Innovation Awards for 2016. How did the 140-year stock exchange achieve the mean feat? BSE implemented Precision Time Protocol (PTP) which offers time synchronizations in the range of Nanoseconds, helping the exchange to leverage the accuracy in all its time stamps, on its platform. It also extended the technology to all the members trading from its co-location facilityâ&#x20AC;&#x201D;a data centre with racks for computer servers, without levying any additional cost. The co-location facility allows brokers to host servers near the exchange's trading platform, facilitating faster execution of trades due to low latency in data transmission. Exchanges across the globe are slowly migrating to Precision Time Protocol because Network Time Protocol is not a suitable framework in today's ultra-low latency trading platforms. But the journey started earlier in 2014, BSE had launched its equity trading platform software BOLT Plus, which is based on the Deutsche Borse's T7 trading architecture and is currently the fastest trading platform in the country.The high speed or algorithmic trading refers to orders on bourses that are generated using high-frequency and automated execution logic. More than 900 brokers with over 1, 00,000 branches and millions of retail investors are on the BOLT PLUS system.

News Buzz Trivia

FINLY| NOVEMBEER 2017 | Finstreet | SIMSR

The Big Debate: Oil Prices â&#x20AC;&#x201C; What Lies Ahead for EM! A recent Global Markets research report published by Nomura has triggered significant discussion with respect to the movement of oil prices across Emerging Market (EM) countries. An increase in the prices of Crude, especially the Brent variety, from $44/bbl in June to $65/bbl, and not surprisingly, the drastic fall in prices from $115/bbl to $45/bbl in the year 2014-2015, gives scope for analysts to investigate. It seems difficult to ascertain whether the impact on oil prices is caused due to an increased demand from the limits and regulations imposed by the OPEC, reduction in the count of the US shale rig, or, longstanding geo-political insecurities in the Middle East nations. Continued high oil prices are likely to have a notable effect on the foreign exchange in emerging markets. Also, if the oil price rise is not contributed by aggregate demand, it is likely to drive immense divergence and skewedness across EM economic performance. What typically happens is that significant commodity exporting nations of Latin America (LATAM) and the Middle East, with Nigeria, South Africa and Russia, benefit the most as they profit from commodity export revenues. This fact immensely contributes in reducing the current account deficits, strengthening fiscal positions and stepping up profits in the energy sector. Global central banks will have more scope to reduce interest rates if the economic parameters attract

net capital inflows and currency appreciation. This will, in all probability, result in a fulfilling GDP growth, with considerably less regimented macroeconomic policies, and with flourishing corporate investments. On the other hand, countries that are large commodity importers, mainly, Europe Middle East and Africa (EMEA), large parts of Asia, will tend to face consequences as expensive commodity imports debilitate current account positions, and reduce profit margins. Along with these, companies will be likely to pass on higher costs of production, thus giving rise to CPI Inflation. A decision involving a trade-off between the will of central banks to curtail growth and the increase in the interest rates as a measure to reduce inflation will be critical. As such, the oil price impact is likely to affect emerging economies more severely as compared to developed economies, mainly because EM economies comprise the world's major oil producers and consumers. To add to the woes, EM economies are more energy intensive than energy efficient.

Finly | NOVEMBER 2017| Finstreet | SIMSR

We welcome your valuable feedback www.finstreet.weebly.com Finstreet, Finance Committee of SIMSR finstreet@somaiya.edu