Finxpress august 31 2014

August 31, 2014 Volume 10

Exchange Traded Fund

India records 2.5 year high GDP growth in first quarter

India’s persistent inflation hurting growth prospects

FinNiche

FinXpress

FinXpress Volume 10 August 31, 2014

From The Editorial New Term, New Challenges

CONTENTS

From The Editorial In Focus: India Records 2.5 Year High GDP Growth in First Quarter Opinion: India’s Persistent Inflation Hurting Growth Prospects Term of the Week: Exchange Traded Fund Market This Week News Fun Corner

While Juniors beginning their Second Term with new zeal and enthusiasm and Seniors preparing for their End Term Exams, we bring to you yet another illuminating edition of FinXpress.

This week, the In Focus section talks about the India’s GDP which grew at a two and a half year high rate of 5.7% for the first quarter. The Opinion provides how India’s persistent inflation is hurting its growth prospects.

The term of the week describes "Exchange Traded Fund", a security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange. Do have a look at the Market and News section to bring yourself up to speed with market volatility and the reasons behind it. Towards the end “Fun corner” to juggle with some in trend questions and financial parody.

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

Happy Reading!

Regards The Editorial Team Club FinNiche

Disclaimer: FinXpress takes no responsibility for the opinions expressed in the magazine.

AUGUST 2014

Page 1

FinNiche

IN FOCUS

India records 2.5 year high GDP growth in first quarter —— By Abhinay Gandotra

Finally bringing some respite and the much needed cheer, the Indian economy gave a glimpse of hope that it is back on track by recording 5.7 percent GDP growth; a record high in the past 2.5 years.

of 0.7 percent in the financial year 2013-14.

In the new fiscal year 2014-15 manufacturing sector recorded a 5 percent growth in May and 3-4 percent growth in June i.e. positive growth in for three straight months.

The growth is not contained only to manufacturing sector but a substantial growth in other sectors is also visible. The services sector recorded a growth of 6.8 percent as compared to 6.4 percent quarter on quarter basis (QoQ).

Indian economy recorded a 4.6 percent growth in the fourth quarter and 4.4 percent growth in the first quarter of the last financial year. The GDP growth recorded for the last two fiscals was below 5 percent except in the second quarter of the last fiscal when it recorded a growth of 5.2 percent.

One of the main reasons behind the low GDP for the last two fiscals was the faltering growth in the manufacturing sector. Manufacturing sector saw a decline

AUGUST 2014

The industrial sector recorded a growth of 4.2 percent compared to a 0.2 percent decline QoQ. The mining sector, construction sector, electricity gas and water supply, trade, hotels, trade, hotels, transport and communication all recorded a positive growth. The highest growth rate was recorded by financial services sector at 10.4 percent. There was a dip recorded only in agricultural sector to 3.8 percent as compared to 6.3 percent QoQ.

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IN FOCUS

Narendra Modi led government can be attributed to the turnaround seen in the economy. Relaxing FDI cap in railways and defense, higher allocations in infrastructure sector, cutting red tape etc. are some of the decisions that have helped in reviving back the growth.

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Asia’s third largest economy in hope of a better future after years of declining growth and increasing inflation. This hope has led to increase in foreign capital inflows in the country making Indian market shares the best performers in Asia this year. Though still there is a long way to go and Mr. Narendra Modi has not yet announced any big reforms that will bring back the economy to double digit growth. The three month old administration has set the pace for the revival of Indian economy. The challenges ahead are formidable but the government change has inspired confidence.

Economists often predict that India needs at least eight to nine percent of robust economic growth for creating jobs catering to the humongous population and the first quarter results are a step forward.

There is not only an increase in GDP for the first quarter but at the same time inflation level is also contained around 10 percent level. Citigroup has predicted that inflation will further decline to 8 percent in financial year 2015 and 6.5 percent in financial year 2016. The current account deficit has also reduced from a staggering 4 percent of GDP in financial year 2013 to 1.7 percent in financial year 2014. As per the predictions made by the Citigroup the deficit is likely to be contained within 2 percent levels for the coming financial years 2015 and 2016 also.

Narendra Modi’s promise to make doing business in India easier with stable tax policies, speedy clearances especially in case of forest and environment allocations has given investors confidence to invest in

AUGUST 2014

So going by the notion set by the government “Achche Din Aane Wale Hain” presumably it can be said “Achche Din Aa Gaye Hain” but at the same time the government should have no feeling of complacency as there is a long road ahead.

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Opinion

India’s persistent inflation hurting growth prospects ------ By J.Sindhuja

Expected policy reforms and robust investors sentiment poised India for accelerated GDP growth ,but inflation remains high from a global standpoint weighing down a promising economic recovery. Even though India's potential for growth looks better now inflation constrains its sovereign rating as it keeps domestic capital costs high, erodes domestic purchasing power as well as savings and lowers international competitiveness.

India has been rated as Baa3 with a stable outlook by Moody’s analytics. Indian economy expanded 4.6% in the first quarter of 2014,accelerated 5.1% in the second quarter of 2014.India's potential growth is around 6%, but it could move towards 7% if some modest economic reforms are enacted. The factor which is to be worried the most in India’s inflation is food prices, which can't be controlled with increase in interest rates. Food inflation in India is much higher than the global average. India's consumer price inflation increased to 7.96% in July, from 7.31% in June. As food comprises a significant portion of the average consumer basket it is a key contributor to India's overall inflation.

India's large, young population and rising wages among low earners who spend most of their incomes on food have raised the AUGUST 2014

demand for food. However, there was no equal supply response due to poor irrigation and rural infrastructure, suboptimal fertilizer use, and conversion of agricultural land to alternative uses. Food supply constraints have been worsened due to inefficiencies in the government directed food distribution system.

Inflation trends will depend on policies to address agricultural supply issues. Indian authorities recognized that the current recovery will be difficult to sustain if inflation persists. Several measures have been announced by them to curtail food price pressures which include a stabilization fund to lower market prices, greater food price monitoring by state governments and harsher penalties for hoarders.

Page 4

Opinion Though these policies alleviate the foodprice spikes stemming from lower food output due to this year's relatively weak monsoon but they do not address the long term widening of the gap between food demand and supply. Bridging of this gap will depend on the implementation of government plans to re-orient fertilizer subsidies to encourage best usage, increase spending on rural infrastructure and restructure the Food Corporation of India, which is solely responsible for executing the government's storage operations and food grain procurement.

However, the authorities are yet to set out concrete plans vis-à-vis certain other major constraints on supply. It is hard to see the significance of private investment in cold storage facilities, if current restrictions on foreign direct investment in the retail sector remain in place. There is no clarity on whether officials will substitute the previous practice of ad hoc trade bans on food items with a medium-term trade policy that would enhance predictability in food supply.

AUGUST 2014

FinNiche Risk of inflation spreading is high as growth accelerates. The central government's efforts to implement effective supply-side policies may be complicated by the intricate nature of current agricultural market practices and the fact that agriculture is a state-level subject in India's federal system.

But if the gap between food demand and supply does not narrow, food costs will keep mounting. In absence of a significant increase in output of food, the risk that inflation could limit India's growth prospects remains salient.

Robust growth in agriculture is key to India’s economic growth prospects. A growth rate of 4.8% for agriculture was projected by prime minister’s economic advisory council compared to 1.9% last year. Agricultural growth is expected to support industry and services, and increase employment opportunities in rural India.

Pressure on government employment schemes might also be reduced.

Approximately half of India's workforce is engaged in agriculture, as it remains the backbone of the Indian economy. Food Security Act and the ongoing National Rural Employment Guarantee Scheme views greater significance of agriculture’s performance. The majority of low income, poor and vulnerable people in the country are supported by agriculture. An average Indian spends almost half of his/her total expenditure on food. Low agriculture growth pulls down overall growth because of its indirect connection to industry and services. There is a low pressure on public spending and employment schemes due to rise in agricultural activities. Logically it should lead to lower inflation for a common man in urban areas. In rural areas, demand for employment in both farm and non-farm activities will be increased.

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FinNiche

FINANCIAL KNOWLEDGE

ETF: Exchange Traded Fund Exchange Traded Fund has a similarity with mutual fund as it tracks an array of assets, an index or a commodity but it differs on the point that it trades like a stock on an exchange. So, in a simple term we can say ETF—a basket of stocks.

Types of ETF: In BSE following types of ETFs are traded: 1.Equity ETFs: It is a gamut of stocks that reflects the composition of an index. E.g.

S&P CNX NIFTY .

2.Gold ETFs: This tracks the price of Gold.

E.g. Birla Sun Life Gold ETF 3.Liquid ETFs: The objective of Liquid ETF is to provide money market returns. E.g.

Goldman Sachs Liquid ETS.

In recent times ETFs have become coveted financial instrument for the following reasons:  Diversification: ETFs can track wide range of stocks including multiple sectors, companies and market segments.  Lower cost: Expense ratio is quite lower compared to other managed funds.  Stock-like: ETFs can be traded in similar fashion like a stock trading.  Reinvestment of Dividend: Dividends of open-ended ETFs are reinvested immediately.  Capital-Gain tax: ETFs are more taxeffective when compared to others.  Price fluctuation: Due to the involvement of arbitrage price cannot fluctuate much beyond its actual value.

Trading of ETF: Like any other stock ETFs can also be bought or sold through any trading terminals. All clearing and settlement activities are performed through stock There are demerits also. exchanges. Therefore in case of any  Dividend yield: Dividend yield may not untoward situation the exchange provides be as high as having high-yielding immunity to the investors. ETF units can stocks. be utilized for paying margins to the stock  Actual cost: once compared to stocks exchange. actual cost comes out to be higher for ETFs. ETF and other Financial Instruments:  Intraday pricing: For long-term Trading value of ETF entirely depends on investors this intraday-pricing is a the underlying net asset value (NAV) of the deterrent. stocks that it represents. The NAV of ETF Considering all these aspects we can changes in real-time whereas NAV alters on comment positive aspect of ETFs outweigh daily basis in case of Mutual Funds. few demerits of this comparatively new Besides, throughout the day price change is financial instrument, first introduced in US observed for ETFs whenever they are in the year 1993. ETFs facilitate investors bought or sold. Futures trade much larger to gather wide exposure to different stock in size when compared to that of ETFs. markets with relative ease, on a real-time basis and at a lower cost. Hence, we can Pros and Cons of ETFs: say ETF has created a new investment opportunity for all sorts of investors.

AUGUST 2014

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FinNiche

FINANCIAL KNOWLEDGE

Market This Week This week the Indian markets have shown a turn of events which triggered the entire market volatility. With the reforms slowly coming into picture and the harsh fines which were imposed on DLF and the automobile companies threw a gambler’s dice into the market. The sentiments were not respected last week as scripts fluctuated for about 5-8 % and some even like DLF had shown a downfall.

Though the domestic markets were not stable still they stayed on the higher side and sentiments of positivity moved with all rise as the spokesperson of Citi Bank showed immense confidence to invest in the Equities of Indian listed companies. Long Term investments still stay an unturned stone as speculations persist about the expected turn around in the Indian indices.

BSE SENSEX

SENSEX Simple Moving Averages Thirty Days Fifty Days Hundred Days Two Hundred Days

26,626.69 26,625.98 26,614.99 26,544.86

CNX Nifty

AUGUST 2014

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FinNiche

FINANCIAL KNOWLEDGE Nifty Simple Moving Averages Thirty Days

7,952.77

Fifty Days

7,953.31

Hundred Days Two Hundred Days

7,950.42 7,930.63

Commodities Commodity

Unit

Rs / Unit

% Change

Gold

10 grams

27,996

-0.28

Silver

1 Kg

42,255

-0.35

Crude Oil

1 bbl

5,831

1.22

Lending / Deposit Rates Base Rate

10.00%-10.25%

Savings Deposit Rate

4.0%

Term Deposit Rate

8.00%-9.25%

Key Policy Rates and Reserve Ratios Bank Rate Repo Rate

9.00% 8.00%

Reverse Repo Rate

7.00%

Cash Reserve Ratio Statutory Liquidity Ratio

4% 22%

Exchange Rates

AUGUST 2014

INR / 1 USD

60.48

INR / 1 Euro

79.86

INR / 100 Jap. YEN

58.27

INR / 1 Pound Sterling

100.35

Page 8

FinNiche

FINANCIAL KNOWLEDGE

NEWS RBI eases procedure of ECB refinancing

free trade agreement with the South East Asian countries, India will soon propose

The Reserve Bank of India has eased the circulation process for signing the pact in refinancing

procedure

of

external services and investments with the ASEAN.

commercial borrowings where borrowers Under

the

circulation

process,

each

can repay any existing debt by raising fresh member will separately sign the agreement ECB at lower all-in-cost but subject to the and it will become effective only after the condition that the outstanding maturity of last member signs the pact. the "It

original has

loan

been

decided

is to

maintained. simplify

the RBI eases norms for overseas investors

procedure by delegating powers to the buying government bonds banks to approve even those cases where The Reserve Bank of India has eased norms the average maturity period of the fresh for overseas investors buying government ECB is exceeding the residual maturity of bonds, allowing them to invest directly in the existing ECB under the automatic route secondary market debt. "Consequently, the but subject to some conditions," RBI said in eligible a notification on Wednesday.

securities

investors in

any

can

acquire

manner

as

such

per

the

prevalent/approved market practice. "With ADB to provide up to $9 billion loan to a view to provide flexibility in regard to the India over 3 years Committing

to

manner in which government securities can support

infrastructure be acquired by eligible investors, it has now

development in India, Asian Development been decided to remove any stipulation as Bank today said it will provide up to 7-9 to the manner of acquisition from the said billion loan to the country over the next regulations." three years. "ADB's operations for India will maintain high level of lending, amounting Startups

in

a

fix

over

RBI’s

extra

to a total of $7-9 billion over the next three verification circular years," ADB president Takehiko Nakao said Startups

operating

through

foreign

Besides, the multilateral funding agency payment gateways that allowed them to will

provide

around

$30

million

for sidestep

the

mandated

two-factor

technical assistance grants, especially for authentication are in a quandary after the building institutions and capacity at the Reserve Bank of India recently insisted on state as well as the local levels.

additional

verification

for

all

credit.

Besides the US-based taxi hailing app Uber, Signing of India-ASEAN FTA

this move by the central bank is expected to

Eager to expedite the implementation of the

AUGUST 2014

Page 9

FinNiche

FINANCIAL KNOWLEDGE

NEWS affect companies that have subscription- construction. As he moved to the Centre, based business models and those that sell Modi started work on implementing the software and applications on Google and idea all across India. It is among his few Apple stores, among others. In addition to plans that are moving smoothly ahead. additional authentication, the central bank also wanted transactions to be carried out India Inc. to spend Rs 2,000 crore on ads in Indian rupees and not dollar.

during Onam-Diwali

Petrol price cut by Rs 1.82 a litre, Diesel “Achhe din” are almost upon us — this hiked by 50 paise

festival season will see India Inc. spending over

Rs

2,000

crore

on

advertising,

Petrol price was on Saturday cut by Rs 1.82 marketing and promotions, which will be a a litre, the third reduction in rates this five-year record, and a sharp contrast to the month, but diesel rates were hiked by 50 pessimism of past few years. ET spoke to paise

per litre. The

effective

from

revised rates

midnight

tonight,

are scores of companies, media planners and oil advertising

agencies,

and

they

were

companies announced on Saturday. With unanimous in predicting a record spike in international oil rates on the decline, petrol advertising spends. price was cut by Rs 1.51 a litre, which after including local sales tax or VAT translated into a reduction of Rs 1.82 a litre in Delhi.

Indian School of Business to launch Big Leap Club for North India-based SMEs

PM Narendra Modi's 100 days: Smart cities set for take-off, state governments The asked to identify cities

Indian

School

of

Business

(ISB)

announced the setting up of a 'Big Leap Club' meant exclusively for SMEs spread in

Among PM Modi's pet plans, few would be and around Punjab, Haryana and Himachal more significant to India than building 100 Pradesh to help them get access to the best smart cities, as the country is in the middle industry practices. The objective of the Big of a massive wave of urbanization. Modi Leap Club is to help small and medium was smitten with the idea of a smart city enterprises (SMEs) get access to the latest long ago, and he had set the ball rolling in and Gujarat

with

the

Greenfield

best

practices

across

the

world,

Gujarat interact with ISB and international faculty,

International Finance Tec-city (GIFT). This network with leading industry experts and venture is now proceeding rapidly, as it has leaders from large Indian corporates and been allotted 11 million square feet for MNCs.

AUGUST 2014

Page 10

FinNiche

FUN CORNER

FUN CORNER FinQuiz 1.

_________ is a measure of continued rise in the worth of an asset.

2.

Last Week’s Answers

_______is a set of conditions against which a product

1) Tarini Vaidya, KBC Bank of India and South Asia 2) Part of capital not represented by assets 3) Ticker 4) Covenant 5) Economy

or business is measured.

3.

________ is amount paid by the bond at maturity.

4.

________ is when a business funds growth is purely from personal finances and revenues from the business.

5.

IFC is headquartered at __________.

CARTOONS

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Publisher: Bharti Alwani

AUGUST 2014

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