August 18 2013 Volume 4
FinNiche
FinXpress
FinXpress Volume 3 Aug 18,2013
From The Editorial
CONTENTS
Exam Time
From The Editorial In Focus: Import tax on Gold Opinion: Stock MarketsWhat should we do? Term of The Week Market This Week News Fun Corner
It’s true, there’s no time to catch a breath in a B School. Quizzes, Presentations, Interviews and GD’s, finally we got done with everything, at least we thought so. But alas it is not to be, the dreaded first semester exams are here and studies are the focus of every junior’s agenda. Amidst this atmosphere of tension and fear, FinGyan sessions came to the rescue of the batch and helped them clear their doubts on FRA and ME. Thanks to our team of Mukul, Ashish and Avishek for such a wonderful job. On the global front, Finance Minister P Chidambaram’s efforts seemed in vain as the Indian Markets tanked, the rupee breached the previous lows and Indian Gold prices shot up. Do read on the Opinion section of “Stock Markets” and In Focus section on “Import tax on Gold” to know more. Also don’t miss the news section which gives a glimpse of the major happenings this week. The Term of the Week section includes ‘Hedging’. We hope that you find the content engaging and informative. We hope you enjoy the various articles in this edition of FinXpress. We look forward to your comments, acknowledgements and your criticisms regarding our online magazine. We plan to invite articles for the different sections in FinXpress in a few weeks. Hopefully, you would write one for us! All the best first years!! Regards, The Editorial Team FinNiche Club
Disclaimer: FinXpress takes no responsibility for the opinions expressed in the magazine. August 2013
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IN FOCUS
FinNiche
IMPORT TAX ON GOLD The yellow metal which is a highly valuable and most sought after precious metal for coinage, jewelry, and other arts is now an aid to the policymakers to narrow a gaping current account deficit. But concerns about the slowing economy and fears of more capital outflows keep up pressure on the ailing rupee. On Tuesday, 13th August 2013, India hiked the import duty on gold to a record 10 percent (previously 8 percent), the third such increase in eight months, while also raising excise duty on the metal. The tax on silver was also raised to 10%, from 6%.
—- By Divya Arora
buyer of bullion. On Tuesday, international spot gold was quoting around $1,334 an ounce, while silver was around $21.6 an ounce. In India, spot gold was around 29,000 rupees ($472.50) for 10 grams and silver was around 43,000 rupees a kilogram. The tax increase came a day after Finance Minister P. Chidambaram said he planned a series of steps to bring the currentaccount deficit down to 3.7% of gross domestic product in the year ending March 31, 2014, from 4.8% last fiscal year. Reducing silver and gold imports was among these steps. He also plans to curtail imports to 850 tones in the year ending March, compared with 845 tones in 2012-13. Overseas purchases surged 87% to 383 tones in the four months through July from a year earlier, according to the ministry of finance. Imports of metals have been a drain on the country's foreign-exchange reserves as India-based buyers need to sell rupees for dollars. Since early May, the rupee has lost more than 10% against the U.S. dollar. Last week, it hit a record low of 61.8 to the dollar.
A glimpse of tax hike on gold for the past Prior to Tuesday's move, India had already year and a half raised the import tax on gold four times in Gold is India's biggest luxury import and a the past year-and-a-half, in addition to key contributor to the all-time high in the temporarily restricting gold imports by and trading agencies. current account deficit. The move comes b a n k s as imports of gold revived to $2.9 billion in C.P. Krishnan, a director at Geojit July after a series of tax hikes and Comtrade, said gold imports have largely constraints on supplies had initially remained in the same range over the past appeared to stem demand, confirming the five years despite price increases. The resilience of demand in the world's biggest restrictions on banks and trading agencies have created a temporary shortage of August 2013
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IN FOCUS
of bullion in the local market, but analysts and dealers expect supplies to normalize when the festival season gets underway. For one, local prices of gold and silver will be roughly the same as a year ago even after the tax increases because international prices of both have declined.
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number of detected gold smuggling cases rose to 879 in last financial year through March from 119 two years earlier, when the import tax on gold was at a low.
"We have already seen in past that we have not been able to reduce imports despite increasing duty. So by increasing Consumption in India, which imports the duty we are inviting more and more almost all the bullion it needs, accounted smugglers and antisocial elements into the for about 20% of global demand in 2012, trade," said Haresh Soni, chairman of the according to data from the gold council. All India Gems and Jewellery Trade Federation. Gold is bought in India during festivals, for marriages as part of the bridal trousseau The outcome of this increase is that India's and gifted in the form of jewellery by jewelers are looking to shore up their gold relatives. The festival season in India runs stash with a campaign to buy back gold from August to October, followed by the jewelry, after import taxes and increasing wedding season from November to restrictions squeezed supply of the December and from late March through precious metal to the country. Jewelers, early May. who are scurrying to secure gold ahead of an expected surge in demand, are paying Gnanansekhar Thiagarajan, director of up to $8 a troy ounce over the international consultancy Commtrendz Research, said spot price, double the premium a week demand is likely to come roaring back from ago. September when the festival season in India begins. The country's Hindu majority considers this to be an auspicious time to buy gold and silver. The majority of India's gold and silver demand comes from rural areas, where people prefer to park their savings in precious metals. A good harvest boosts farmers' incomes. "This [tax increase] won't dent consumption," Mr. Thiagarajan said. "Once the summer crop harvest is out in a couple of months, consumption of gold and silver will increase, irrespective of prices," he added. Traders said the latest increase in taxes would result in more smuggling of gold as the demand for precious metals during festivals and weddings won't come down. Latest government estimates show that the
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OPINION
FinNiche
Stock Markets: What should we do? —- By Ashish Agarwal
The current stock markets is in a very volatile state and every other day we get the news of markets plunging and recovering back. This volatility is useful for a trader who can take positions in the market and earn huge profits but an investor finds it difficult to understand the timing for the entry in the market. This leads to a dilemma in the mind of the investor and he is not able to utilise the opportunity and enter the market when they are cheap. Eventually when he finds that he has lost an opportunity, he takes a hasty decision and enters the market when they are already on the higher side.
Markets whether they are in a bull phase or in a bear phase won’t affect an investor much if he is disciplined in his approach and he follows simple investing rules of entering the market when the markets are in a bear phase and exiting the market when the markets are on a high. This looks simple on the top but difficult to implement. Most investors panic when the markets start crumbling and exits their positions at prices which are very low and enters in the market when the markets are climbing and
August 2013
the prices of stocks are already on higher side and the room for further upside is limited. Most economic and financial theory are based on the rational thinking of investors, but it has been proven that the irrational behaviour and repeated errors prevail in the stock markets which has led to the birth of Behavioural Finance which primarily deals with how emotions and cognitive errors influence investors decisions. In the 2008 sub-prime crisis we have all seen how the emotions were hurt by the crisis and which led to an extreme pessimism in the markets creating an opportunity for those who were bold enough to utilise it.
Indian stock markets has always been susceptible to FII flows. Whenever we see substantial inflows from FII’s it gives an impression we are entering in a bull phase and the reverse causes a shiver in us. The present situation in India seems to be little of dubious kind because of the significant depreciation of Indian Rupee due to widening current account deficit and on the other hand we have many investors who firmly believe in the long growth story of India. So what an investor should do in this kind of situation- to enter the market or
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FinNiche
OPINION
stay away from it. This question can be to market risk. answered if the investor is aware of its time horizon, his/her risk taking abilities and if he follows a disciplined approach. One disciplined approach that can bear fruits in this type of volatile Indian markets is systematic investment wherein the investor invests a fixed amount after each interval which is generally 30 days. This approach would help the investor to average out the price he is paying for a stock, in case the markets turn weak and in the bull market he will have a good return on the stock which already exists with him. This strategy would turn out to be very fruitful in the long run. One more thing that also needs to be kept in market is diversification. As Warren Buffet has said “One should not put all apples in one basket”, there lies the need of diversification. Your exposure in the market should not be limited to few stocks but diversified across the market. Diversification is needed not only among stocks but also across sectors like healthcare, IT, FMCG, Banking and Financials. So the strategy is to first diversify across sectors and among that sector diversify in the stocks that are available among those sectors. Having said so this active strategy of systematic planning and diversification is not easy and comes at a cost of rebalancing of portfolio at intervals and keeping a track on the market. To overcome this we have diversified mutual funds which pool in investors’ money and invest in the markets. In this strategy the investor is not playing an active role and is invested in the market and is also exposed
August 2013
The Indian stock markets currently have very low participation from the domestic institutional investors as well as the retail investors which is the prime reason for our dependency on foreign flows. If we can start saving and invest some portion of it in a disciplined and systematic manner we can achieve more than average return in the long run. We all know the markets today are not doing well in terms of return but time will change. RBI is taking some steps to control rupee depreciation and to narrow current account deficit. We have got a new RBI governor in the form of Raghuram Rajan which we rate on very high regards. The Fed has given hints of withdrawing of its QE policy which is a negative for developing countries like India but the current valuations looks attractive and we have all seen in the past when India recovers it does so in a very emphatic manner and after a consolidation phase we expect the next bull market in the making. “Happy Investing”
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FinNiche
FINANCIAL KNOWLEDGE
Hedging —- By Vipul kumar Singh
Difference between Hedging and The best way to understand hedging is to Speculation think of it as insurance. When people Put simply, while hedgers are risk averse, decide to hedge, they are insuring speculators are risk seekers. Speculators themselves against a negative event. This make bet or guesses on where they believe doesn't prevent a negative event from markets are heading. Thus they are happening, but if it does happen and you're vulnerable to either upside or downside of properly hedged, the impact of the event is the market. Hedgers however, attempt to reduced. So, hedging occurs almost eliminate this very vulnerability by making everywhere, and we see it every day. For offsetting trade. Hedging is done to reduce example, if you buy house insurance, you potential losses not to make ‘extra-ordinary’ are hedging yourself against fires, break-ins profits. A trade is speculative if it adds to or other unforeseen disasters. the already long or short position a company is carrying while the same trade is Portfolio managers, individual investors and a hedge if by executing it the company’s corporations use hedging techniques to total open long and short position comes reduce their exposure to various risks. In down from current levels. financial markets, however, hedging becomes more complicated than simply How much and what to hedge? paying an insurance company a fee every Assume two competitors A and B (both year. Hedging against investment risk exporters). A completely hedges its current means strategically using instruments in the expected revenue of $1000 from Rupee market to offset the risk of any adverse downside by buying USD/INR futures (say price movements. In other words, investors 1 lot). For this they pay approx Rs 2000 as hedge one investment by making another . margin. B does not take any position. If Technically, to hedge you would invest in Rupee goes up (i.e. USD goes down) by two securities with negative correlations. Of 1%, company A loses on rupee upside, on course, nothing in this world is free, so you their hedge and on any potential return they still have to pay for this type of insurance in could have generated on the margin money one form or another involved. B only loses on rupee upside. Thus, to remain competitive company A will Although some of us may fantasize about a have to compete on margin. Hence, 100% world where profit potentials are limitless hedging may reduce competitive but also risk free, hedging can't help us advantage! escape the hard reality of the risk-return trade-off. A reduction in risk will always Common myths about Hedging mean a reduction in potential profits. So, •Hedging strategies are speculative hedging, for the most part, is a technique not by which you will make money but by •Hedging strategies are complex and which you can reduce potential loss. If the beyond reach investment you are hedging against makes •Un-awareness/wrong estimate of Forex money, you will have typically reduced the exposure profit that you could have made, and if the investment loses money, your hedge, if •Shareholder’s value will not increase due successful, will reduce that loss. Hedging to hedging techniques generally involve the use of •Only Large Multinational Corporations and complicated financial instruments known as Large Banks have a Purpose for Using derivatives, the two most common of which Derivatives are options and futures. What is Hedging?
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FinNiche
FINANCIAL KNOWLEDGE
Market This Week In the week of Aug 12 -16, the SENSEX opened at 18789.34 and slumped 1.02% to close at the 18598.18 mark. The Nifty fell by 1.03% to close at 5507.85. The Indian rupee which fell to its lowest level of 62.01 this week has taken a massive toll on the Indian equities -Sensex. Key benchmark indices slumped on Friday, 16 August 2013, wiping out all the gains posted in the first three trading sessions of a truncated week. The S&P BSE Sensex hit its lowest closing level in over seven weeks. The 50-unit CNX Nifty hit its lowest level in more than 18 weeks. The market fell in one out of four trading sessions. Note-Trading Remained suspended on 15th August on account of Public Holiday BSE SENSEX
SENSEX Simple Moving Averages Thirty Days Fifty Days Hundred and Fifty Days Two Hundred Days
19,502..60 19,343.17 19,426.92 19,346.64
CNX Nifty
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FINANCIAL KNOWLEDGE
Nifty Simple Moving Averages
Thirty Days Fifty Days Hundred And Fifty Days Two Hundred Days
5,822.18 5,802.03 5,864.53 5,851.04
Commodities
Commodity Gold Silver Crude Oil
Unit 10 grams 1 Kg 1 bbl
Rs / Unit 30230.00 49458.00 6657.00
% Change 3.58% 6.27% 1.90%
Lending / Deposit Rates
Base Rate Savings Deposit Rate Term Deposit Rate
9.70%-10.25% 4.0% 7.5%-9.0%
Key Policy Rates and Reserve Ratios
Bank Rate Repo Rate Reverse Repo Rate Cash Reserve Ratio Statutory Liquidity Ratio
10.25% 7.25% 6.25% 4% 23%
Exchange Rates INR / 1 USD INR / 1 Euro INR / 100 Jap. YEN INR / 1 Pound Sterling
August 2013
61.73 82.25 63.25 96.43
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FinNiche
FINANCIAL KNOWLEDGE
NEWS It was Black Friday for markets It was a black Friday for the Indian economy, which experienced a bloodbath on the bourses, a free fall of the rupee to a record low and a surge in gold prices with nervous investors rushing for ‘safe haven’ cover in a highly volatile and uncertain environment. BSE’s SENSEX plunged by 769.41 points – its lowest in 4 years whereas the Rupee momentarily breached 62 mark touching 62.03 – an all time low. At this uncertain time, investors turned to gold and the price of yellow metal surged by Rs 1310 most in last two years to reach Rs 31000 per 10 grams. WPI inflation rises to 5-month high 5.79% in July
assessments (BCAs) of three Indian public sector banks i.e. Canara Bank, Union Bank of India and Punjab National Bank. At the same time, Moody's has downgraded by one notch the local currency deposit ratings and has also downgraded the senior unsecured debt ratings or issuer ratings of the same three banks. Japan's debt crosses 1000 trillion Yen
Japan's national debt has exceeded 1,000 trillion yen and has topped economies of Germany, France and the UK combined. Japan is now looking at doubling taxes after Moody's investor service warned that worsening of finances of would erode the confidence in government bonds.
Driven by vegetables, wholesale price index-based inflation again moved out of the comfort zone of the Reserve Bank of India to stand at 5.79 per cent in July against 4.86 per cent in the previous month. The rate was 7.52 per cent in July 2012. Prices in fuel and manufactured sector did see a marginal rise but was very low when compared to vegetables which soared by 46.59 percent in July against 16.42 percent in June. Mahindra and Mahindra Q1 net rises 16.9% to Rs 909.7 crore
With public debt more than 200 percent of GDP, the Japanese have long measured their red ink in hundreds of trillions of yen. The country’s outstanding public debt, including borrowings, increased 1.7percent in the second quarter of 2013 HSBC India profit dips, customer accounts sees over $500-mn plunge UK-based global banking giant HSBC has seen its first-half profit from India business falling to USD 414 million in 2013, amid a decline of over USD 500 million in customer accounts since the beginning of this year. According to the bank's interim financial report, its customer accounts balance in India fell to USD 9.85 billion as on June 30, from USD 10.41 billion at the beginning of 2013.
Powered by tractor sales, Mahindra and Mahindra, India's largest utility vehicle and tractor maker on Tuesday reported a 16.9% increase in net profit for the June ended quarter, that beat analyst estimates. The net profit for Q1 ending June of FY14 stood at Rs 909.7 crore While the bank did not specify any versus Rs 778.5 crore in Q1 of last year. reason for the decline in customer accounts, it said that the profits from India Moody’s downgrades 3 banks fell to USD 414 million in the first half of Moody's Investors Service has 2013, from USD 515 million in the same downgraded the bank financial strength period last year. ratings (BFSRs) and baseline credit
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FinNiche
FINANCIAL KNOWLEDGE
NEWS PSU banks' NPAs at Rs 1.76 lakh cr in Data) technology that prompts users with interactive and guided menu options June quarter Gross non-performing assets (NPA) of towards booking tickets. public sector banks rose to Rs 1.76 lakh crore at the end of June quarter from Rs ONGC June quarter net profit down by 1.55 lakh crore at March 31, 2013. 34% RBI has issued detailed instructions State-owned Oil and Natural Gas to banks to address the issues of NPA Corporation (ONGC) reported a 34 percent management to improve the health of the drop in the June quarter net profit mainly financial sector, reduce the NPAs, improve due to impact of subsidy it pays so that asset quality of banks and prevent diesel and cooking fuel can be sold at slippages. subsidized rates. Accenture to acquire Germany's Prion Net profit in April-June fell 33.92 per Group cent to Rs 4,015.98 crore from Rs Global technology and consultancy 6,077.70 crore in the same period a year giant Accenture PLC will acquire Germany ago. Turnover was marginally lower at Rs based Prion Group, a move that will help 19,308.93 crore in first quarter as enhance its product lifecycle management compared to Rs 20,177.78 crore a year (PLM) services. No financial details were ago. disclosed. Combining Prion Group with Accenture's management consulting, technology and outsourcing capabilities will create a market-leading global PLM offering for a range of industries, including industrial equipment, automotive, consumer goods, and aerospace and defense, the statement said. Bharti Airtel ties up with IRCTC for railway bookings Bharti Airtel has tied up with Indian Railways Catering and Tourism Corporation (IRCTC) to offer railway bookings through Airtel Money in Upper North comprising Punjab, Haryana, Himachal Pradesh and Jammu & Kashmir. IRCTC mobile bookings through Airtel Money service works across all mobile devices, does not involve any data or SMS charges. It uses a simple USSD (Unstructured Supplementary Service
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FinNiche
FUN CORNER
Fun Corner Last Week’s Answers
Fin Quiz 1. Indication of future operating cash flow is ____ 2. _______gives buyer the right but not obligation to sell a given quantity of asset at a given price on or before its future date 3.Longterm debt/(Long term debt + shareholders' equity) is _____ 4.Contract in which 1 party sells a specific security to another party with an agreement to buy back on a specific future date at a specified price is ________ 5.Total liabilities/Total assets is____________
1.Bear market 2.Buyback 3.Balloon payment 4.Bull market 5.Adjustable rate mortgage
CARTOONS
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Volume 4 Publisher : V.V.Raviteja
August 2013
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