FinXpress - 16 August '15 by FinNiche Imtg

AUGUST 16, 2015 | A FINNICHE INITIATIVE

EDITORIAL I S S U E

A U G U S T

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The first term of junior batch is coming to an end. We wish them a hearty good luck for their

CONTENTS

First-Term Exams. Club FinNiche organized “Survivor” last week, its first event for this academic year. The

RBI’s MONETARY POLICY | 2

response that the college showed was overwhelming to say the least. On behalf of our entire team we say “Thank you IMT”, and please stay tuned for more in the coming days.

HAS GOLD LOST ITS SHEEN | 4

This week we are covering a wide array of articles. On international front we will take a look at the recent stumble of China’s export based growth strategy to the Greece’s ongoing bailout

CHINA’s EXPORT LED GROWTH STRATEGY

saga. In national arena we are covering recent change in RBI’s monetary policy and the dip in gold prices. In addition, please enjoy a host of other articles on markets and global world.

STUMBLES | 6

Hope everyone likes the revamped version of magazine. Club FinNiche welcomes any

GREECE HOPES TO SEAL BAILOUT |7

comments, suggestions or criticism regarding the magazine. Please do write to us and share your ideas.

TRENDING NEWS | 9

Happy Reading!

MARKET | 10

Regards

FIN-WORD | 11

The Editorial Team

PERSONALITY | 12

Club FinNiche

PAGE

NATIONAL B Y

V I K A S

G U P T A

RBI’s Monetary Policy TOPICS COVERED

Monetary Policy is the framework decision

monetary

making done by the Central bank of a

stability in a way to ensure a positive

Monetary Policy: A Brief Introduction

specific nation or the financial institutional

impact

body authorized to take financial decisions

employment generation

Objectives of Monetary Policy

for the country.

RBI’s Bi-monthly Monetary Policy Review

income,

control

production

price and

The goal of monetary policy is primarily to

many objectives is to maintain a stable

maintain supply of money and basically

exchange rate which helps in maintaining

keeping a positive credit in the economy.

outflow of money and better international

Simply put, monetary policy endeavors to

trade leading to favorable balance of

manage

payment situation.

the

cyclic

expansion

and

the goal of attaining desired economic growth.

policies focusses mainly on overcoming inflation and depression cycles. However, in case of developing countries such as India, the policy has to strive to achieve a positive economic development. In India, monetary policy is governed by the Reserve Bank of India, which employs both

3. Money Neutrality - it means to control the effectiveness of money, by trying to minimize the impact of price,

In developed countries, the monetary

monetary

and

non-monetary

income and other factors on money value. Monetary Policy does not directly impacts the economic growth but it provides a positive

environment

that

encourages

growth through low and stable prices. Instruments: - the tools used by RBI can be

broadly classified as: I.

Quantitative Tools

measures to regulate supply, availability and

a) Reserve Ratios (SLR and CRR)

cost of money (or the rate of interest) to

b) Open Market Operation (OMO)

attain stability and growth in the economy.

c) Policy Rate

Objective

d) Bank Rate

The main aim of monetary policy is to maintain

the

following

economic

parameters:

1. Price Stability - RBI uses various 2

2. Exchange rate Stability - One of the

contraction of the volume of money with

PAGE

measures

 Liquidity Adjustment facility  LAF Repo Rate  Marginal Standing facility (MSF)  Reverse Repo Rate

II. Qualitative Tools

the regions are already facing the brunt of llow levels of monsoon. The impact of

a) Margin Requirements

this on the prices of some of the food

b) Consumer credit regulation

commodities have already started to

c) Selective credit control

appear. The RBI therefore has chosen to

RBI’s third bi-monthly monetary

wait for some more information before

policy 4th Aug 2015

easing the monetary policy further.

In its third bi-monthly monetary policy

meeting, RBI has maintained the repo

recovery - Another cause of concern is

rate 7.25%, unchanged from the previous

slight increasing trend in core inflation.

value. Some of the

factors contributing

Core inflation, which had been falling, has

to this decision are uncertain and erratic

begun to rise gradually since May.

progress of monsoon across the nation,

Moreover,

subdued growth rate and economic

economic recovery remains slow. In its

recovery across various segments, and

last rate cut decision in June, the RBI

certainly

policy

took into account low domestic capacity

being

utilization, subdued investment growth

considered by the RBI is the fact that

and mixed indicators of recovery. The

crude oil prices are low and are expected

situation is no different now

the

expectations.

federation

Other

factors

to be in this range due to which the rise in inflation is under check as of now. Three

PAGE

factors

that

will

shape

US.

information

Fed

the

speed

stance

economic

domestic

monetary

tightening - The US Federal Reserve’s the

stance on monetary policy tightening will

monetary policy decision are:

be delivered on September 16-17. The

1. Clarity on rainfall situation - By

pace of US economic recovery is now

the end of September month, the impact

seemingly lower than earlier expected,

of monsoon across the nation would be

and with some slowdown in wage growth

clear and hence its effect on inflation and

and renewed drop in oil prices, inflation

increased food pricing ,if any, would be

could remain subdued. While Standard &

clear so as to make an informed decision.

Poor’s (S&P) believes that the Fed will

The Indian Meteorological Department

raise rates in September, the odds of a

(IMD) has forecast 16% rainfall deficiency

December rate hike have increased.

during August and September, atop a

Therefore the RBI will perhaps wait to

15% deficiency in July. Although currently

get a clear picture before announcing any

rain has been 6% deficient, but some of

further policy action.

NATIONAL B Y

T U L I K A

Has Gold lost its Sheen HIGHLIGHTS

Gold which is seen as a tried and tested

Gold prices hit a

hedge against inflation recently hit a five

five year low in the world economy

year low on July 20th when it fell to USD

What are the reason for the fall? The following major factors are affecting gold prices

and pressuring them to fall

and two year low in India

1,100 an ounce. And in India it fell to a two

Affected by Chinese economy’s

10gms. The yellow metal is used both as a

1. Strength of USD

commodity and a store of value, especially

With the US economy stabilizing dollar has

as an insurance against the various political

strengthened with respect to the other

Central banks of developing nations

upheavals that happen around us.

currencies. Gold is denominated in USD in

reducing demand for gold

Investors are in a frenzy as are the financial

international markets which implies that

analysts over the dipping price of gold. It is

when the value of dollar rises in the

one of the most traded commodities the

market, gold becomes relatively expensive

world over. So, when its price fall down

in other currencies making its demand go

the whole world takes a note.

down. Since the demand goes down

year low and fell below Rs.25,000 per

slowdown to a large extent

down.

investors start disposing it off pushing the prices down. 2. Potential hike in Interest rates by US US’s Federal Reserve has recently hinted at the prospects of increasing interest rates

for the first time in nearly a decade and is The following is the expected price of gold

expected to do so by as early as

in India for the coming year 2016:

September. This could trigger a flight of money from other countries to US in the hope of earning more returns. This would ultimately lead to an increase in the value of USD. 3. China’s slowdown

Source: Metals Focus; GFMS, Thomson Reuters; ICE Benchmark Administration; World Gold Council

PAGE

China is the second biggest importer of gold after India. In the past 6 months

demand for gold has fallen down by 24%

prices these ETFs have come under a lot

and its gold reserves increased by only

of pressure with many investors seeking

57% which is half of the expected value

redemption before the due date. ETFs

due to the slowdown it is facing. This has

have seen more redemption in the

resulted in an overall decrease in demand

recent fiscal year compared to the period

at global level pressuring the prices

2007-11. The last time when gold prices

down.

fell.

4. Central Bank’s perspectives

Nevertheless despite the fall in price

Central banks of developing countries like India, are traditionally the largest buyers of gold. The recent news of a potential interest rate hike by US has forced the banks to pile up huge reserves of dollars and not gold to counter any outflows that occur once the rates are revised. India’s forex in gold has fallen from 7% in 2010 to 5% in 2015 Implications for India Gold is one

PAGE

the

experts believe that gold has not lost its sheen and is still a good long term investment . The increase in physical purchases testify this point. Only around 10% of the portfolio is held in gold securities whereas the rest is attributable to physical stock of gold in terms of jewellery and coins so a fall in gold prices is not destroying their wealth as fast as the derivatives do. The decrease in gold prices has affected

most traded

it’s import value which have fallen

commodities and any change in its price

approximately by 25% in the recent

is bound to have a lot of implications.

months .The drop in commodity prices,

Total consumption ranges from 850-950

particularly in gold, if sustained, could be

tonnes of gold on an yearly basis and

a major positive driver for India. The

accounts to almost 32%

of the total

immediate and most visible impact would

world consumption. Individuals buying

be on the current account balance which

for consumption are ecstatic due to the

is around 6-7% of GDP, could improve

fall in prices and in a country like India

by nearly 1% of GDP in the coming

which has an affinity for the yellow metal

financial year. The prices are expected to

this news has prompted a rush in physical

correct themselves further in the short

gold purchases for the coming festival

term, gold is expected to give healthy

season and wedding season.

returns in the future and as a result it

The most common investment platform

would not be wrong to say that ETFs

for gold in India is Gold Exchange Traded

should be invested in more when gold

Fund i.e. the gold ETFs which are traded

prices fall. It is good hedge and provides

by mutual funds and keep a track on the

a good diversification option to one’s

performance of gold. Because of fall in

portfolio.

INTERNATIONAL B Y

H E R S H

B H A N U

China’s Export Led Growth Strategy Stumbles Export expansion has been an indispensable

The experts, who were forecasting this

component supporting China's economic

devaluation believe the state of the economy

growth. Exports of goods and services

does not justify such strength and the politics

constitute 30% of GDP. China’s major

of devaluation would harm China. In the

exports are: electromechanical products (57

short run, there would be streaks of

percent of total exports) and labor-intensive

complaints

products like footwear, furniture, clothing,

currency

textiles, plastic products, bags and toys (20

possibility of countermeasures. In the long

percent). Recently, the exports of high tech

run, it would take a toll on China’s efforts to

products have been also growing and in 2012

make the yuan a rival to the

accounted for 29 percent of total exports.

biggest reserve currencies serve as safe

Investments

and

exports

have

been

encouraged by outstanding cost advantages from the low cost of capital, low cost of utilities,

pollution,

energy,

land,

tax

incentives, and a substantial undervaluation of the exchange rate.

market’s have lost a staggering $3.4 Trillion, an amount that is larger than the economy of

most nations. The Shanghai index has lost 32% of its value since mid-June.

manipulation,

about

Chinese

increasing

the

dollar. The

havens when others are in commotion. During the Asian financial crisis of 1997-98 and the global recession of 2008, China maintained a steady exchange rate against the dollar, despite having relevant cause to allow

depreciation.

Such

actions

have

devalue now would undermine it. After the 2008 global crisis, China's 9

percent-plus growth offered refuge for the West licking its financial wounds. But as Asia's biggest economy rests, officials from

Following which, on Tuesday, the People's

Tokyo to Sao Paulo are finding themselves

Bank

devoid of a reliable growth engine. Irregular

executing a one-time 2% devaluation of the

recoveries in the U.S. and Europe have

yuan (currently sitting at 6.39 Yuan equals

already crippled the exports that power

1$) and changing the way it's traded.

most Asian economies, including Japan.

Economists believe

China's descent could now throw Asian

China

surprised

China

markets

is purposely

weakening the yuan, also known as the Renminbi, to lower the cost of its exports.

America

harbored the yuan’s credibility. A rush to

But In the span of a few weeks, China's stock

PAGE

manufacturing into reverse.

INTERNATIONAL B Y

A B H I S H E K

G U P T A

Greece Hopes to Seal Bailout HIGHLIGHTS

Greece is trying to finalize its negotiations

first bailout plan had taken place in 2010

Finalization of

with the International Monetary Fund and

while the second bailout plan was agreed

Bailout Plan

European Union in an attempt to get a loan

upon in 2012. They have received loans

Proposal for a loan

sanction of 86 Billion Euro that can help it

worth 240 Billion Euros from their

sanction of 86 Billion Euro

avert the possibility of bankruptcy within

creditors and if this bailout plan is agreed

the country. If this deal works out for the

upon by all the parties then the amount

Greek economy, they will remain a part of

will go up to 326 Billion Euros.

Third Bailout program for Greece

the Euro Zone.

Introduction of

Planned Reforms and Actions

Greece needs to make a bond payment to

New Reforms

the

Tough time ahead

European

Central

Bank

before

20th August. Keeping this in mind, Alexis

for Tsipras

Tsipras the Greek Prime Minister is trying to pace the action plan and get the loan sanctioned before the due date. Before proceeding with the bailout plan, it first needs to be approved in the Greek Parliament. It is expected to come to the parliament by 18th August. The plan will

The Greek Government will need to

implement some reforms that might help it revive its ailing economy and make it debt free. The Government plans to hike the tax rates and revise the pension reforms so that they may be more sustainable in the future. Currently, the Greek Government has marked the age of 62 as the retirement

consist of the loan agreement and MoU (Memorandum of Understanding). It will

also include the reforms that the country plans to implement. These reforms will include the countryâ&#x20AC;&#x2122;s future course of actions that might help it repay all its debts. The bailout plan has to be approved not only by the ruling parties but by the opposition parties as well before it is set into action. Greece has been the recipient of two bailouts till now, this being the third. The

PAGE

Source: European Commission, IMF, Bloomberg, Seeking Alpha

age after which the Government starts

for the third bailout and how it can help

paying its citizen with the pension for

them recapitalize the fallen economy.

their services to the country but the lenders have urged the Government to increase this age to 67 so that more amount of fund is available to the

They are also planning to lower the

budget for Defence funding and raise VAT for hotels and restaurants. The is

also

discussing

the

possibility of privatizing some of the state owned assets like the regional airports that may help bring in more capital. Road Ahead for Tsipras

PAGE

the parliament for his proposal and that set the stage for the Greek bailout plan. Although Tsipras received support for his

Government for invest purpose.

Government

Tsipras received a staggering response in

proposal but the alliance government which Tsipras represents is divided over the prospects of this plan. Some of the top leaders in the Government stand against this proposal and this has led to revolt within the alliance against Tsipras. Tsipras needs to handle the internal matter

within

the

ruling

parties

cautiously but the need of the hour for

The Greek Prime Minister Alexis Tsipras

Tsipras is to concentrate his efforts

had to convince the MPâ&#x20AC;&#x2122;s about the need

towards reviving the fallen economy.