EDITOR’S DESK Dear readers This month we witnessed a slew of reforms taken up by the government in the wake of distress in the global market to make the climate of business more sustainable and productive. Government of India along with RBI came up with the policy to bring the transformation in the banking system by providing licenses to 11 out of 41 financial institutions to function as payment banks and the impact the metamorphosis of micro-financial institutions to payment banks will have on our banking system is what we have tried to decode and decipher in our cover article. After the previous month's bloodbath in Chinese stock markets, this month we witnessed its aftermath on Chinese economy which witnessed its slowest growth in the last two decades, weak exports, weakening demand of commodity prices and eventually the death attempt made by the Chinese authorities to keep them afloat by devaluating their currency. The article of the month explains out the possible reasons and repercussions of this act across the economies in the world particularly on India. In spite of depression in the global trade, growing uncertainty in the emerging markets due to heavy currency sell off, India is still the bright spot for the investors across the globe; this is mainly due to the strong macroeconomic fundamentals, which has been explained in our economic section through ISLM model. Our faculty section tries to solve the conundrum exist between the Mint Street and the North Block regarding what should be the right time for RBI to bring down the interest rate or Is it the interest rate that is not allowing the economy to break the shackles of slow growth. Finally it gives me immense pleasure to declare PALASH NAYAR GAUNEKAR of IIM TRICHY as the Winner of Article of the Month. I would also like to thank our sponsors Finacue Research and Education for their support, all our readers, Faculties and seniors for their constant support and encouragement. Abhimanyu Singh Chauhan
Page 2
CONTENTS
EDITOR’S DESK
2
COVER STORY
4
ARTICLE OF THE MONTH
11
ECO SECTION
15
FACULTY SECTION
17
ALUMNI SECTION
19
ARTICLE BY FINACUE
21
NEWS BUZZ
24
TRIVIA
27
FACULTY INCHARGE : Prof. Pankaj Trivedi EDITOR IN CHIEF : Abhimanyu Singh Chauhan EDITING TEAM : Shreya Gupta, Tamoghna Das, Partha Banerjee, Preyas Jain, Prateek Singh, Abhijit Khadilkar, Rishi Tekchandani, Gunjan Pathak DESIGN : Geetanjali, Prateek Singh, Rohit Prabhakar Page 3
COVER STORY New kid on the block: Payment Banks take on the Old Giants Preyas Jain, MMS , Batch 2015-17 What is a payment bank? A payment bank is a differentiated bank that will undertake only certain restricted banking functions that the Banking Regulation Act of 1949 allows. These activities include acceptance of deposits, payments and remittance services, internet banking and function as business correspondent of other banks.
More than 50% of Indians do not have bank accounts
Out of the 5.94 lakh villages only 30,000 villages have a commercial bank branch
Why the need for payment banks? Much of this imbalance has to do with the inability of bigger banks to reach into the hinterland, even as other service providers, such as telecom operators, have made deep inroads. The underlying objective of RBI is to use these new banks to push for greater financial inclusion by providing (i) small savings accounts and (ii) payments/remittance services to migrant labour workforce, low income households, small businesses, other unorganized sector entities and other users.
Page 4
Who has Reserve Bank granted in-principle approval to be a payment bank? There were 41 entities that had applied for the payments bank license in India. On August 19 2015, RBI granted ‘in-principle’ approval to 11 of these 41 institutions which satisfied the following requirements: These institutions should belong to one of the Prepaid payment instruments issuers, Professionals, NBFCs, Telecom companies, Supermarket Chains, Corporates etc., The Payments Banks would be required to use the word ‘Payments’ in its name to differentiate it from other banks. The minimum capital requirement of Rs 100 crore. Apart from amounts maintained as Cash Reserve Ratio (CRR) with the Reserve Bank on its outside demand and time liabilities, it will be required to invest minimum 75 per cent of its "demand deposit balances" in Statutory Liquidity Ratio (SLR) eligible Government securities/treasury bills with maturity up to one year and hold maximum 25 per cent in current and time/fixed deposits with other scheduled commercial banks for operational purposes and liquidity management.
The list of India’s new payments bank license holders: Aditya Birla Nuvo Airtel M commerce Services Cholamandalam Distribution Services Department of Posts Fino PayTech National Securities Depository Limited Reliance Industries Dilip Shantilal Sanghvi Vijay Shekhar Sharma (Paytm) Tech Mahindra Vodafone M-Pesa
These applicants now have 18 months to fulfill a list of requirements laid down by the RBI, before they can be granted a full license.
Page 5
What all can the Payment banks do?
Acceptance of demand deposits. Payments bank will initially be restricted to holding a maximum balance of Rs. 100,000 per individual customer and pay interest on these balances just like a savings bank account does. They can issue debit cards and ATM cards usable on ATM networks of all banks. Business Correspondent of another bank, subject to the Reserve Bank guidelines on Business Correspondents. Distribution of non-risk sharing simple financial products like mutual fund units and insurance products, etc. Offer services such as automatic payments of bills, and purchases in cashless, chequeless transactions through a phone. They can transfer money directly to bank accounts at nearly no cost being a part of the gateway that connects banks. Provide forex cards to travellers and forex services at charges lower than banks. They can also offer card acceptance mechanisms to third parties such as the ‘Apple Pay.’
Page 6
Limitations of payment banks
The payments bank cannot undertake lending activities. The upper limit on cash in these accounts is set to just Rs. 1 lakh They cannot issue credit cards. Payment banks are not allowed to accept NRI deposits. Also, the payment banks are only allowed to invest the money customers deposit into government securities.
Why are they going to be a game-changer? First, and foremost, payment banks will bridge the last mile (or last 10-20 miles) between bank branches and the remote customer living in a rural hamlet Second, banking costs will come down due to intense competition driven by the expected proliferation of payment banks. Third, the public sector banks are sitting ducks for bankruptcy and taxpayer bailouts if they do not change. Between them, efficient payment and private sector banks will take away their lucrative businesses and prized customers, as they will be both well capitalized and efficient. Fourth, the arrival of payment banks - including India Post - will transform social welfare and subsidy schemes. Fifth, mobile banking will create the conditions for cash-less banking. India’s domestic remittance market is estimated to be about Rs. 800-900 billion and growing. With money transfers made possible through mobile phones, a big chunk of it, especially that of the migrant labour, could shift to this new platform. Sixth, it might serve as an additional tool to eliminate black money in large parts of the financial system. A government that wants to eliminate black money - which the Modi government says it wants to - can effectively ban cash transactions once a 95 percent mobile and Jan Dhan penetration rate is achieved Seventh, the government will be one of the biggest beneficiaries of payment banking, as payment banks will expand its access to cheap funds. Eighth, bank depositors can expect to earn higher short-terms deposit rates from payment banks, and the old 4 percent savings bank norm will probably fade away.
Page 7
According to a recent Nielsen survey on consumer attitudes towards payment banks, a resounding 72 percent of consumers—both low income & mid/ high income—say they will consider opening an account with payment banks, with equal preference shown for the retail and telecom sectors.
What will be the impact on universal banks? The impact on private sector banks will be minimal because they have already made strong investments in technology. Also some of the private sector banks like Kotak Mahindra Bank Ltd, Yes Bank Ltd and ICICI Bank Ltd have tied up with some of the companies that have got approval for setting up payment banks and hence will not be affected much. Large public sector banks have also tied up with or will very probably tie up with entities that have received payment bank approval. They could act like feeder banks and make the larger banks more competitive. But there could be an impact on small and medium public sector banks as incremental deposit growth and market share will see some impact from payment banks, especially in the rural and semi-urban areas. Remember, public sector banks are also seeing their current and savings account (Casa) deposit share slowing and have a huge pile of bad debts, which is affecting their profitability and ability to grow. There could also be pressure on public sector banks’ deposit franchise from India Post, which has received payment bank approval. India Post’s reach, with 139,000 post offices, significantly exceeds the number of bank branches at around 44,700 in rural areas. Since payment banks are allowed to take deposits up to Rs.1 lakh, public sector banks could lose out on customers who might open savings accounts with the post office. Page 8
Post offices have long been trusted for long-term deposits and by offering Casa deposits, they could potentially cannibalize public sector banks’ Casa share in rural markets, which makes up around 90-95% of the Casa deposits. Moreover, mid and small public sector banks could also lose out from business correspondents (BCs). Payment banks are permitted to collect deposits through branches or BCs. FINO PayTech Ltd is one of the largest BCs to get a payment bank license. With an established rural network, it will create strong competition for public sector banks in rural areas. Payment banks could also start offering competitive deposit rates of as high as 6-7% to lure customers, compared with the average 4% savings deposit rates of traditional public sector banks. This could weigh on the deposit franchise of public sector banks in the long run. Besides the threat to deposits, competition for state-owned banks will intensify as payment banks, which are backed by digital platforms, adequate capital, zero legacy issues, and low-cost innovative and convenient services, will compete heavily for liabilities in rural and semi-urban areas. There could be a loss of market share in payment transactions and government transfers too.
Page 9
Pros and Cons of Payment banks a)Easy availability: 11 popular names getting the license may make the services provided by these banks easily available to the masses. b) Mobile and connectivity: These banks would largely operate and capitalize on the gigantic mobile outreach and available internet connectivity. This is a big step and something on the lines of Kenya's M-Pesa. c) Funds: The deposit services provided by these entities may fetch humongous amount of untapped savings and provide a greater liquidity in the financial markets. There are some limitations too. a) Restricted product space: These banks can't offer credit services which means they can't earn an interest income traditionally. They have to depend on interest rate offered by G-secs (7.5%) which is quite lower than competitive market rates. This impedes their financial growth. b) Diversity: Most of the government schemes have not been able to cover all households under formal financial system because they have failed to appreciate the diversity and customize their product offering accordingly. This may well be the case with these banks too. c) Monopoly: If these entities don't turn out to be competitive as they are expected to be, it would result in 2 or 3 major deep-pocketed payment banks snatching the chunk of the market share. This may well culminate into higher service charges along with other customer discomforts. Conclusion Payments banks will make Indian banking more competitive and more inclusive on both the assets and liabilities sides – that is, for both depositors and borrowers. For the small and mid sized banks, competition from here on is only going to get tougher. That means, in the long term, some of the smaller public sector banks may remain under pressure, particularly those that are strapped for cash. Last but not the least, payments banks will enable poor citizens who transact only in cash to take their first step into formal banking. The era of the consumer is finally at hand.
Page 10
ARTICLE OF THE MONTH Yuan Devaluation Palash Nayak Gaunekar, IIM Trichy , PGP 15-17
Overview A widely debated topic over the past few weeks has been the People’s Bank of China’s devaluation of Yuan by 5% in a span of 11 days. This may have been a bolt from the blue for a few but owing to its slowest growth in decades coupled with a 9.2% reduction in exports, China’s decision to devalue its currency towards pushing exports on which 22.6% of its $ 9.2 trillion GDP and the subsequent growth prospects are based was nothing more than an issue of when rather than if. The active focus and a fresh impetus to boost the tapering exports has had repercussions analogous to a much more frequent phenomenon of a rate cut by the central bank leading to a barrage of lending activity. However the situation has been compounded by the magnitude by which People’s Bank of China has leveraged its day-to-day currency regulatory mechanism to cultivate temporary demand leading to a fear of possible ripple effects on economies across the globe with close trade ties with China which could eventually lead to a China-initiated depression according to a worrisome few.
Reasons for Devaluation Beijing’s primary focus has been to strengthen its currency, deploying a two pronged, dual strategy to support the exporters by having a cheaper currency as well as simultaneously not allowing any capital outflows from its economy which could lead to a weakening of its economy.
Page 11
To achieve this People’s Bank of China had purchased the Yuan in the currency markets and sold US dollar holdings before the first of the devaluations was engineered. Thus the devaluation was primarily in line with its motive of reviving the dilapidated growth of exports. The devaluation also had a long standing long-term motive. It wanted to increase the international usage of Yuan in order to pave its way into IMF’s Special Drawing Basket comprising of reserve currencies. The deregulation of its control over the currency fluctuations is a move intended to achieve a quicker inclusion in the SDR.
Impact on fragile economies exporting to China Looking at the trade of African countries closely, that involves export of goods to China like platinum, copper and coal, the pinch of the currency devaluation is far severe. African economies are extremely fragile and in a large manner dependent on the inflow from China. Even a small change in the currency affects their fragile African economies owing to the humongous trade volumes involved. This can be substantiated from the fact that currencies in South Africa (gold and wine), Angola (oil), and the Zambia (copper) have already fallen following Beijing’s move.
Page 12
Conjuring up some numbers to demonstrate the interlinking and the fragility, analysts have found that a 1 percentage point decline in China’s investment growth leads to a 0.6 percentage point decline in Africa’s export growth. However all is not lost for the African countries as imports related to heavy machinery have become cheaper for countries like Ethiopia, Kenya and Mozambique.
Impact on India The devaluation has impaired the reserve currency value of the Yuan held by the RBI as a reserve currency. Also due to a reduction in price of goods, imports from China and its manufacturing setup would lead to an increased buying and an eventual dip in the revenues of local firms competing with the Chinese ones. Indian companies in the steel, chemicals, trading, automobile and mining sectors would also get affected owing to debt-funded production setups built in the high growth years of the Chinese economy. Possible Repercussions The sentiment has been that the slowdown of the fastest growing major economy for the past 20 years is a worrying factor and this devaluation is just a start of the process that could lead to further such corrections of the floating exchange rate. This could lead to currency wars as it is rightly called. Countries would devalue their currencies in order to compete with the Yuan and capture the largest possible share of the market demand.
Page 13
The current volatility in the Foreign Exchange markets has also risen from the devaluation as most of the economies that import from China have been affected leading to their currencies to fall by a significant amount. For example the rupee has depreciated by close to 3.6% leading to an increased import bill. If there is a sustained outflow from the Chinese Markets, it could lead to a further substantial weakening of the Yuan and subsequent depression on Asian markets leading to a China initiated recession.
Page 14
ECO SECTION Monetary Policies and its impact on the Stock Markets Partha Sarathi Banerjee , PGDM (Finance) , Batch 2014-16 Prateek Singh , PGDM-FS , Batch 2015-17
The Monetary policy as explained in the August edition affects the interest rate, liquidity in the economy. In this edition we will try to bring our analysis of the changes in the monetary policies and its impact on the Stock markets. The monetary policy has direct impact on the overall financial markets including not only the stock market, but also the mortgages markets, government and corporate bond or the foreign exchange market. The monetary policy affects the short term interest rates which alters the returns and the prices of the financial assests. Thus it becomes important to understand the how the monetary policy decisions affect the key financial markets and how the changes in the returns in affect the behavior of the individuals, firms and other decision makers. In this article the analysis will be of the stock market.
Before entering into the macroeconomic details, let us discuss the demand supply scenario from a layman’s point of view. The rise or fall of any stock index say Sensex or Nifty in the Indian context is a function of the demand or supply of that vector of stocks comprising the index. A rising Sensex essentially implies that there is an excess demand for most or some of the Sensex stocks, due to which the prices of those stocks rise, leading to the overall increase of the price index of Sensex. The reverse is also true. So when the money supply in the economy is high, it essentially implies that the demand for stocks will also be high as people have more money in their hands to purchase stocks. As a result stock prices are bound to surge up as the forces of demand for stocks outweigh those of supply. Similarly a low money supply in the economy essentially implies low stock demand, leading to a continuous fall in stock prices. Page 15
Stock prices can be defined in the context of the financial markets as the capital raised by the company through the issue of the shares. It is impacted through the various channels like Inflation, Deflation Economic & political outlooks etc. The stock market has a strongly correlated relationship with the economy of the country. In fact it is commonly said that the stock market is a “barometer” of the country’s economy. It is a leading indicator of the economy’s health. When the country pursues an expansionary monetary policy, it causes the liquidity in the economy to rise and it also reduces the interest rate. A lower interest rate reduces the cost of borrowing which leads to increase in the investment. The increase in the investment leads to rise in the employment opportunity. With the rise in the employment opportunity the overall demand in the economy increases. Firms also experience the higher retail sales. This puts them on the growth path which attracts the investors and it increases their stock prices. While in the vice versa case when the government follows a contractionary monetary policy it causes the decline in the investments as the cost of the borrowing increases due to the rise in the interest rates. Thus unemployment level rises and the overall demand in the economy declines. This leads to lower expectations of the growth and the cash flows of the company in the future. Thus the stock prices decline and this makes stocks less desirable. The other impact is in terms of the risk premium. With the monetary policy tightening the interest rate rises and this causes the price of the stocks to fall. The stock thus becomes a risky asset therefore the investors seek higher risk premium. While the case is vice versa when the monetary easing happens because then the monetary policy reduces the rate of interest and the value or the price of the stock increases and this causes the demand for the risk premium to diminish as they become more attractive and less riskier comparatively. We can see the impact of the monetary policy as a tool for controlling the stock market “bubbles”, and their usage in the “bubble pop up” strategies. Even though the monetary policy would be able to bring the asset prices down, it is likely to do so only through hurting the livelihoods of average households. Since it’s very tough for the central bank to identify the bubble in advance therefore the monetary policy is generally not considered a good measure for the stock bubble pop up strategies.
Page 16
FACULTY SECTION Should interest rates be reduced? Prof. Vineet Swarup, Finance These days there is a lot of talk of how interest rates are too high in India and need to be reduced. We look at whether the rates are too high and should they be reduced. We look at these rates from the perspective of savers, banks and users of capital.
a. Savers – Bank pay interest on deposits to compensate the savers for inflation as also for loss of ability to use cash for their own purposes (the real rate of interest). Currently the consumer price inflation is around 3.6% and the real rate of interest is taken to be 2%. The savers should earn an after tax interest of 5.6% for the amount they deposit in the bank. On a pre- tax basis for tax rates of 10%, 20% and 30%, the rates come out to be 6.2%, 7% and 8% respectively. Currently if we look at the one-year deposit rates, these are the rates being offered by the banks. Based on this, there seems to be no case of reducing interest rates. Any reduction would result in customers opting for investment in physical assets as opposed to financial assets.
b. Banks – Banks raise deposits from the customers and further lend to the users of capital. The savings rate is 4% and the one year fixed deposit rate is about 8%. Assuming that fixed deposits account for 60% of the deposits, the overall weighted average rate on deposits comes to be 6.4%. The base rate of most of the banks is about 10% and the lending rates start at about 12%. This gives the bank, net interest margin of 5.6%. In my view, this is too high and possibly is high due to large amount of non-performing assets. Also banks in India generally behave as a cartel and so even banks with low nonperforming assets do not lend at lower rates. A case should be made out to reduce the net interest margins. If net interest margin can be reduced by 2%, lending rates would fall by 2%. Again there is no case of reducing interest rates, rather there should be more efficient use of capital by the banks.
Page 17
c. Users of capital – The cost of capital usually influences the investment decisions and a higher cost would reduce the amount invested. In Indian context due to presence of friction, my expectation is the corporates who invest generate a much higher return on investment as compared to the overall cost of capital. In any case a 25 basis point reduction will hardly make any difference in the investment decision. If we look back, we would notice that investment was high even with higher interest rates since it is the demand which drives the investment. In the current scenario with tepid local and international demand, reductions in interest rates would not make any difference in investment requirements.
In conclusion, in my opinion, asking to reduce interest rates is a red herring. It distracts us from the real reason why corporates are not investing. The sooner we give up this pretense that interest rates are the problem, better it would be for the economy. If we reduce, it would only lead the savers to invest more in physical assets such as gold and real estate and would preserve the inefficiencies in the Indian banking system.
Page 18
ALUMNI SECTION The Lender’s Perspective—My experiences at L&T Infrastructure Finance Venkatakrishnan V PGDM Finance Batch- 2012-14 At the outset, I would like to extend my warm greetings to the Management of KJ Somaiya, Faculty members, my fellow SIMSRITES, members of FINSTREET and all the avid readers of FINLY. It gives me immense pleasure to be able to write again for FINLY and when Abhimanyu approached me for this article, I simply could not deny this opportunity to reengage with our readers. I would like to congratulate the team at FINLY for this initiative and also Paridhi Dixit for sharing her wonderful experiences at Marsh India in the previous edition of FINLY. The primary purpose of writing this article was to share some perspective about the Business of Lending and give some food for thought to those interested in pursuing a career in this field. I do not intend to give any advice, shortcuts, recipes to success but basically an overview of Project finance and share my limited experiences of the past few months. I am currently employed with L&T Infrastructure Finance (L&T Infra), the Wholesale Division of L&T Financial Holdings Ltd (L&T Financial Services) which came to our campus last year. I am currently placed in the Project Finance Group (part of the Wholesale Business Group) at its Chennai office. L&T Infra Finance is an NBFC (Non-Banking Finance Company) and classified as an IFCInfrastructure Finance Company (IFC’s need to have a minimum of 75% of their Lending portfolio in the infrastructure Sector) and has also achieved PFI status (Public Finance Institution) giving it access to instruments like DRT, SARFAESI and allowing companies appraised by PFI access to Capital Markets, Exemption from Eligibility norms and lower Tax Rate among other benefits. The company is headquartered in Mumbai and has offices at Delhi, Hyderabad and Chennai. Formed in 2006-07, L&T Infra Finance has been a pioneer in the Renewables Segment with an in-depth expertise in Solar, Wind, Thermal and Hydro Projects. It has also developed expertise in Roads, Real Estate and Non Infra business like Lease Rental Discounting of Commercial Real Estate, Steel, Cement and other sectors. The creation of L&T IDF (Infrastructure Debt Fund) has been a Financial Innovation and an Instrument to offer best possible Solution for Refinancing Operational Projects. Page 19
L&T Infra is primarily engaged in the business of Structured Financing by means of Securitization of Cash flows at various tenures tailored to the needs of its Clients. Apart from Project Finance and Balance Sheet Based Corporate Lending it is also engaged in various Financial Advisory Services like Debt Syndication, Equity Syndication, Debt Capital Markets, and IDF among others. As far as my role goes, we at the Project Finance Group are primarily involved in Debt Origination and are the single point of contact, offering End to End Solutions to our clients. A typical Dealing Officer engages with both External Stakeholders viz. Clients and Internal Stakeholders namely Risk, Legal, Compliance, Regulatory, Operations department among others. We are essentially the bridge between all the stakeholders as we map the client requirements and present our cases to the Management Committee and Investment Credit committee for Approval. Therefore this role involves a mix of both Technical aspects like Financial Modelling, Financial Analysis, Term sheet Preparation, Legal Documentation and Soft Skills like Engaging with Multiple stakeholders to drive your case across. Every day brings new challenges and demands innovative solutions. We also help the Debt Syndication Team in Assignment/Novation of our Debt to other lenders and also have the experience of Consortium Lending giving an opportunity to engage with the Banking Community. I am sure that a whole lot of you would be eagerly awaiting and preparing for your placement season and might be having a lot of questions in your mind. My only piece of “Gyaan� would be that each of us needs to identify his/her core strengths and see where one thinks one can best fit in. Give your best shot for all the companies on campus and explore all the opportunities available. Try to be as open and flexible as possible. While you may not get all that you want ,try to extract as much as you can from your job at campus especially those who are yet to start their career. After all, it is the journey that matters and not the destination. I am also a traveller on this road and hope to be your guide and friend on this journey. I sincerely and wholeheartedly convey my best wishes to all my fellow SIMSIRITES for the road ahead. Do cherish your time at SIMSR and enrich yourselves with all the sweet memories and experiences. I would once again like to thank the Team at FINLY and FINTSTREET for this opportunity and wish them greater success on the road ahead. I would like to extend my appreciation to our Program Coordinator CP Joshi and Finance ACP-Dr Pankaj Trivedi and all the Faculty members for the guidance and support provided at SIMSR.
Page 20
ARTICLE BY FINACUE The Global-Local Conundrum—Making sense of the Indian Stock Market correction “In the short run, the market is a voting machine but in the long run, it is a weighing machine” -Benjamin Graham, Father of Value Investing
At the cost of sounding clichéd, short term stock market gyrations are governed by the direction and quantum of money flows, while longer term stock market returns are governed by a combination of valuations and outlook on fundamentals of the economy and sectors. Using this framework we attempt to analyze the Indian Stock market correction and the way ahead. Why the voting machine (sentiments) is against us Chinese Concerns: China has been in a massive Infrastructure binge for the last decade providing an impetus to commodity prices in an otherwise slowing world. As China’s growth slows due to a transition from an Investment-led economy to a Consumption driven one, commodity prices have corrected significantly. For more details of China’s slowdown… http://contrarianedge.com/2010/02/12/china-the-mother-of-all-black-swans/ S&P World Commodity Index The Commodity index is at its lowest level in a decade. This has massive negative ramifications for economies of many countries such as Australia, Indonesia, Brazil and Russia which are heavily dependent on commodity exports. The economic imbalances are leading to political uncertainty in certain countries such as Indonesia and Brazil. China and Russia seem to weather the storm better because they do not have democracies. Page 21
Slower Chinese exports and competitive devaluation across emerging country currencies are leading to concerns about currency wars and hence greater uncertainty. Fed rate Hike: On the back of a possible revival in the US economy (improving GDP growth, higher home starts, lower unemployment rates), the Federal Reserve is looking to raise rates. This could result in money flowing out of Emerging market economies, creating more volatility. However, such a thought process overlooks the fact that a stronger US economy is great news for World Demand in the medium to long run. Indian stock market dependence on Foreign Institutional Investor (FII): FII ownership in Indian Equities has reached a historical high of 24% (29% for SENSEX companies). A significant portion of these investments are through Emerging Market (EM) Funds – not just dedicated to India. So, when other parts of the world have big concerns – China, Brazil, Russia, Indonesia, Malaysia, and Thailand, these funds see Investor outflows. And when EM funds are forced to sell, India also becomes a basket case in the short run. Why the weighing machine (Fundamentals) looks to be in India’s side Strong Government and improving Federal structure – After almost 3 decades, Indians have voted for an absolute majority of a single party at the centre. The new government has implemented the 14th Finance Commission’s recommendation of a higher share of Central Tax receipts to States; implying that States will have the requisite resources and can possibly run more effective state-specific programs for development. Structural reforms in the Financial system – As an outcome of crony capitalism, slow growth and policy paralysis in the previous regime, stressed assets in the Indian Banking Sector have reached a decadal high. A joint effort by the Central Government and RBI has resulted in the roll out of structural reforms in Project Finance as well as Public Sector Banks. A bankruptcy code (First for India in the lines of Chapter 11 in US) is coming out by March 2016. Bringing transparency in Governance – Recent initiatives around E-Auction of Natural Resources (Telecom Spectrum, Radio Auctions, and Coal resources) as well as Direct Benefit transfer of subsidies straight to the Bank Accounts sets the foundation of a robust governance framework. Structural measures such as Foreign Policy, Energy self sufficiency – the Prime Minister has significantly increased India’s presence in the International arena leading to improved relations with US as well as India’s strategic neighbors such as Sri Lanka and Bangladesh.
Page 22
Improved Macro Economic indicators – India’s inflation management has been exceptional in FY16. Despite two back to back monsoon failures, CPI inflation has been under control. Proactive food supply management and RBI’s hawkish view on inflationary expectations apart from soft global commodity outlook are key success factors. India’s manageable and improving Current Account deficit is leading to currency stability vis-à-vis our emerging market peers. All these fundamental factors feed into the framework of any investor looking to invest in India, be it domestic or International – and go a long way in distinguishing India with other emerging market peers, where fundamentals are worsening with every passing day. Valuations – Indian Equity market valuations are just below their 10 year averages. Structural changes in Governance and cyclical improvements in the macro-economic situation should help in lowering India’s country risk premium increasing its valuation attractiveness. Final Word - Sentiments (which govern short term money flow) give way to Fundamentals as the investment time horizon increases. The recent stock market correction seems to be fallout of sentiments against a backdrop of improving fundamentals in India.
Team Finacue - Finacue offers role-specific industry projects in Finance, allowing B-school students to hone their skills in the subject of their choice.
Page 23
NEWS BUZZ
IndiGo's Rs 2,500-crore IPO gets SEBI nod Low cost airline IndiGo's parent firm InterGlobe Aviation has received approval from market regulator Sebi for its Rs 2,500 crore initial public offer. At present, listed domestic airlines include Jet Airways and Spice Jet while trading.
The Federal Reserve just decided not to raise interest rates Amid speculations and volatility, equity markets around the world heaved a sigh of relief after the decision to raise interest rates by the US Federal Reserve was deferred. This decision will create more uncertainty for markets over the medium term and this may limit the scope for RBI to cut rates later this month. The last time Fed raised interest rates were in 2006.
Page 24
NEWS BUZZ
PSBs will now have to brace for higher competition PSBs are already lagging behind their private sector counterparts in terms of business growth and asset quality. They will now have to brace for higher competition as two new private sector banks have been granted license. Bandhan Bank recently started operations whereas IDFC Bank will be launched in October 2015. Apart from these, 11 payment banks and 10 small banks have been approved by RBI and are expected to begin operations in 1-2 years’ time frame.
Government is considering increasing FDI limit in private banks to 100% Currently, 74 per cent FDI is permitted in the private sector banking, of which up to 49 per cent is allowed under the automatic route and beyond that through the approval of the Foreign Investment Promotion Board (FIPB). The move will help the existing private sector banks, payments banks and small finance banks tap overseas markets to enhance their capital base.
Page 25
NEWS BUZZ
FIIs losing interest in Indian corporate bonds Most of the corporate bond issuances this year have been subscribed to by local investors with foreign investors not showing much of an appetite. For foreign investors, liquidity is a matter of great importance. As government bond markets are more liquid than corporate bond markets. It seems unlikely that the FII limits in corporate bonds will get completely filled in the near future.
Fragile PSBs to merge with strong peers if worries persist According to the Finance Minister Arun Jaitley, consolidation of weaker state-run banks with stronger ones will be the next step if some of the lenders continue to remain fragile despite steps to strengthen them. The government was taking steps to strengthen the public sector banks and highlighted the measures, like capital infusion and hiring of professionals, including from private sector. Bringing down government stakes in these banks to 52 per cent would further augment their capital. Page 26
NEWS BUZZ
As Raghuram Rajan completes second year, pressure mounts to cut rates Raghuram Rajan took charge as the 23rd Governor of RBI on September 4, 2013 for a threeyear term, amid a bleeding rupee threatening to plunge to 70 levels, very high current account deficit and rating agencies threatening to junk the sovereign. To his credit he has successfully implemented many things that changed the financial sector landscape radically. The Governor successfully brought down retail inflation to 3.8 per cent in July from 9.8 per cent in September 2013. He now faces the challenge for rate cuts with the finance ministry raising alarm bells over the deflation demon in the economy. Markets this month:
Between May and September, this year a number of events like the selloffs in global bonds, the China market meltdown followed by Yuan depreciation, Eurozone crisis and intermittent fears of rate hike in the US had led to a spike in volatility. However in the month of September market has recovered well from the lows of 24890 to the highs of 26000.
Page 27
TRIVIA
The federal government runs 83 different welfare programs, and 108.2 million Americans are enrolled in at least one of them. That equals about 35% of the population.
The 'Wimbledon Effect' (which is apparently a Japanese analogy) is a commonly used term to compare the success of the tennis with London's economic success in the financial services industry. Every summer, Wimbledon has a booming effect on tourism in London during which the two-week tournament occurs.
In mid-January 2009, Zimbabwe began printing 100 trillion dollar banknotes. According to the Reserve Bank of Zimbabwe, this was with the “convenience of the public� in mind. At that time, the country had the highest inflation rate (231 million percent) in the world.
Page 28
TRIVIA
The biggest cheque ever written was for $9 Billion. The cheque was written from Mitsubishi UFJ to Morgan Stanley in the fall of 2008, during the crisis of global economic meltdown. This large amount could not be wired electronically as it was Columbus Day, and banks in the US and Japan were closed. Because it was an emergency, however, Mitsubishi cut an actual physical cheque.
India's mission to Mars cost less than the movie Gravity. The entire mission cost $74 million. That is $26 Million cheaper than it cost to make the movie Gravity (the film's budget was about $100 million)
The Greek government used Google Earth to track those who have swimming pools and then cross indexed their address with the amount of tax they are paying.
Page 29
We Welcome Your Valuable Feedback www.finstreet.weebly.com Finstreet, Finance Committee of SIMSR finstreet@somaiya.edu