Financial Bulletin December Edition by Money Matters Club IBS-HYD

FB FINANCIAL BULLETIN 11thEDITION MONEY MATTERS CLUB

hen there is a talk of “SUPERPOWER” only 3 names have come up if we look at the past 50-60 years, Soviet Union, British Empire and The USA. The first two have since lost that distinction, leaving the US as the world’s only true superpower, according to most history experts. There are no hard and fast rules as to what

makes a state a superpower, but there are some defining characteristics that most experts agree are necessary to earn the title. Being a global leader in economics, culture and education, along with a strong military presence are all hallmarks of a superpower. Japan was believed to have been the next superpower in the 1980s, but that prediction never came to fruition.

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Now comes the main Rhodium Group. question. Who can be This is a huge investment and termed as the next “SUPER- this in a way tells the world POWER”? that US growth drivers are Only one name comes to somewhere are by this monmind CHINA. Over the years ey and it is them who conthere has been a tremendous trols the growth indirectinvestment by the Chinese ly. We have seen in the past in the US. Experts that China’s sniff use terms such has given the as “safe haven” whole world “I think the power and “stash a bad fever, pad” to refer of persuasion would be when they to Chinese the greatest superpower devalued acquisitions Yuan. of all time”. and investments in the -Jenny Mollen Although United States. the world is Including last year’s seeing that it is $14 billion and money China’s downfall and coming to the U.S. so far this GDP growth rate at a diminyear, Chinese Foreign Di- ished mere 6.5%, we have to rect Investment in the U.S. consider the base and the real since 2000 now totals nearly numbers. $40 billion, according to the

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The GDP in China was worth 10360.10 billion US dollars in 2014. The GDP value of China represents 16.71 percent of the world economy. Thatâ&#x20AC;&#x2122;s a huge number and when we talk about a slowdown or a boom in an economy we

BY ANKIT

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“Taxing sugary drinks”

“Stopping slurping . . Taxes on fizzy drinks seem to work as intended. It comes at a cost”

round the world, governments and beverage makers are locked in battle over taxes on sugary drinks. Hungary has been taxing them since 2011. In 2012 the French government introduced a tax on all drinks with added sugar or artificial sweetener, now €0.075 ($0.08) a litre. The Mexican government followed suit last year, with a tax of 1 peso ($0.06) a litre on all sugary drinks. Chile and the city of Berkeley, California introduced similar measures in January; Barbados followed suit in June and Dominica in September.

The drinks industry has won some victories too, seeing off proposals for taxes on sugar in several American states and persuading the Slovenian government to backtrack on plans to impose a 10% tax on sweetened drinks last year. In 2013 Denmark repealed its tax on soft drinks and ditched plans for a broader sugar tax.Governments are adopting the taxes in the hope of trimming bulging waistlines and slowing the rise in diabetes, which cost taxpayers vast sums in spending on health care. Mexicans, for instance,

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are the fourth-biggest guzzlers of sugary drinks in the world, according to Euro monitor, a market-research firm. In 2012 more than 70% of Mexican adults and 34% of 5-11-year-olds were overweight. Diabetes is a growing problem: 12% of Mexicans have it, and it was behind 14% of all deaths in 2009.

In response, the beverage industry argues that it is not the governmentâ&#x20AC;&#x2122;s business to decide what people should eat and drink. Pinning the blame for the worldâ&#x20AC;&#x2122;s increasingly greedy and sedentary ways on sugary drinks is unfair, they add.Whether taxes on drinks actually have an effect on consumers is a separate

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question. Some worry that retailers may absorb the tax rather than passing it on to customers, thereby obscuring the

to support these fears, however. A working paper by economists at the French central bank, the Sorbonne and the University of Par-

signal governments are trying to send; others, that higher prices will not lead to a change in behaviour, but will simply sap the incomes of the poor in particular.

is-Est Créteil found that retailers passed on nearly all of the French tax. A working paper on the Mexican tax by Raymundo Miguel Campos-Vázquez and Eduardo Medina-Cortina of the There is little evidence Colegio de México, FINANCIAL BULLETIN 11thEDITION MONEY MATTERS CLUB

a university, finds that retailers there went even further, raising prices for soft drinks by 30% more than the real value of the tax. Higher prices, in turn, do seem to have crimped demand for fizzy drinks. FEMSA, Coca-Cola’s Mexican bottler, blamed declining sales in 2014 on the price jump that followed the introduction of the tax. A monthly manufacturing survey found that overall sales of fizzy drinks fell by 1.9% in 2014, having increased by an average of 3.2% a year over the previous three years (see chart). Another study, based on household surveys rather than industry data, shows an even stronger effect: it found

that consumption of sugary drinks fell by 6% relative to pre-tax trends over the tax’s first year. Some data suggest that Mexicans switched to healthier alternatives. The manufacturing survey shows that sales of bottled water jumped by 5.2% in 2014. Not all the evidence from Mexico is in the tax’s favors, however. Researchers at the Mexico Autonomous Institute of Technology, who had previously collaborated with the industry on a report into the tax’s effects, found that the reduced consumption of sugary drinks thanks to the tax only saved Mexicans five calories a day on average, and what is more, the poor did end up losing a bigger share of their income

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to the tax than the rich. However, according to Barry Popkin of the University of North Carolina, low-income households were the most responsive to the tax, cutting their consumption of sugary drinks by 17% within a year of its introduction. That means the poor will gain greater health benefits from the tax. That is especially important since they are hit harder by obesity and diabetes, as they have less access to health care.

consumer behavior. Various states in America have had extra sales taxes on fizzy drinks, of 3-7%. This has helped to raise revenue, but the impact on consumption has been marginal.

It is also hard to impose a tax on sugary drinks when customers can easily shop elsewhere. Retailers in Berkeley passed on less than half of the cityâ&#x20AC;&#x2122;s tax, reckon John Cawley of Cornell University and David Frisvold of the University of Iowa, presumably for fear Although the academic that customers would drive to evidence suggests that taxes neighboring cities to buy their on sugary drinks are work- groceries. ing as intended, it also indicates that bad design can un- Taxes also work better if dermine much of the benefit. they distinguish between For one thing, relatively high different degrees of taxes are needed to change sugariness. FINANCIAL BULLETIN 11thEDITION MONEY MATTERS CLUB

Hungary’s tax, which also applies to salt and fat, varies according to the amount of offending ingredient used. A review of the policy found that 40% of manufacturers had adjusted their recipes accordingly.

may help governments design more effective taxes on fizzy drinks. But in one crucial respect, the evidence is wanting. The taxes have not been in place long enough to assess their impact, if any, on public health. A proven benefit would really sugar the pill

This fits with the inclinaBY tion of the drinks industry, which has been experiment- AASTHA ing with less sugary drinks. Coca-Cola, for instance, recently launched a product called “Coca-Cola Life”, which is made with a mix of sugar and stevia, a calorie-free sweetener. Yet France taxes sugary and diet beverages alike, giving the industry little incentive to make its drinks healthier. Mexico taxes all drinks that contain any added sugar at a flat rate. Such examples

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Yesterday is a cancelled check; tomorrow is a promissory note; today is the only cash you have - so spend it wisely. â&#x20AC;?

e have been hearing about participatory notes for quite some time now. So letâ&#x20AC;&#x2122;s understand about them. A Participatory note or Offshore Derivative instruments is a Financial instruments used by investors or hedge funds that are not registered with the Securities and Exchange Board of India to invest in Indian securities. For example, X Enterprises is a Mauritius based company and wanted to invest in the equity shares of an Indian listed company Limited. To do this X Enterprises should register as FPI with SEBI which is the regulatory board in India and start making investments. But to invest in just one company X enterprises may not go for the registration. To achieve this X Enterprise will go to another UK based company Z Enterprises which is a registered FPI with SEBI and has the authority to trade in the Indian equity market. X Enterprise and Z Enterprise will have an agreement that Z enterprise

P-Notes

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will buy Y Limited’s shares and X Enterprise will bear any loses or profits incurring from Y Limited’s equity shares. This contract between X Enterprise and Z enterprise is known as Participatory Notes or Offshore Derivative Instruments. In 1992 SEBI allowed FII to register and invest in the Indian equity markets. From that time P-Notes have been very popular among the investors. The underlying Indian securities instruments could be equity, debt, derivative or may even be an Index. India is the only country in this world to use Participatory Notes. These Market instruments are created overseas and hence SEBI can not ban them but can regulate them. Regulation 15(A) of Securities and Exchange Board of India(SEBI) Regulation,1995 controls the P-Notes transactions. The regulation was inserted in 2004 and amended in 2008. • P-Notes can be issued to those who pass the Know Your Customer(KYC) norms. • Downstream or transfer should be made to regulated entity. • FPI who issue P-Notes should notify the regulator of the issue. Now P-Notes or ODIs are regulated under SEBI Foreign

By kedhar FINANCIAL BULLETIN 11thEDITION MONEY MATTERS CLUB

“Negative interest rates”

Three months later, the ECB n June of last year the Euro- cut the deposit rate again, pean Central Bank reduced to -0.2%. When the ECB’s its benchmark interest rate, rate-setting council next at which it lends to commer- meets, on December 3rd, it is cial banks, to 0.15% and its widely expected to trim the deposit rate, which it pays deposit rate even fur to banks on their rether, as well as to serves, to -0.1%. approve more For a central “quantitative “Central banks are still bank that was easing” or QE testing the limits to how once cautious (the creation low interest rates can go” about unconof money to ventional meabuy bonds). In a sures, setting a recent speech Mr negative interest rate Draghi claimed that was a bold move. The ECB the ECB’s unconventionwas in effect charging com- al policies over the past 18 mercial banks to hold their months had been the “domexcess deposits at the central inant force” in spurring the bank, in the hope that this euro-zone economy and stavwould drive down borrowing ing off deflation. costs more generally. FINANCIAL BULLETIN 11thEDITION MONEY MATTERS CLUB

“Negative interest rates”

Lending by banks is slowly reviving. Even so, he suggested, deficient inflation and lingering concerns about the strength of recovery justify further action. Not so long ago, the lowest possible interest rate was thought to be zero. There is a ready alternative to keeping money in banks: holding it as cash. Mattresses do not charge for storing notes. Depositors might tolerate small fees, to avoid the cost and hassle of making other arrangements but most had assumed their tolerance would

be limited. “We are now at the lower bound,” Mario Draghi, the ECB’s boss, said after the last cut. He now seems to be reconsidering—but how low can the ECB go? The ECB is not alone in testing the lower bound to interest rates. Denmark’s central bank has set its main policy rate below zero for much of the past three years to repel capital inflows that had threatened its exchange-rate peg with the euro. In January the Swiss National Bank abandoned its attempts to stop the franc from appreciating against the euro by printing and selling francs in vast quantities; instead it resorted to negative interest rates to deter investors from buying francs.

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Swedenâ&#x20AC;&#x2122;s central bank, the Riksbank, took its main policy rate negative in February, to weaken the krona, make imports more expensive and thus push inflation closer to its target of 2%. For all these countries, it is the exchange rate against

interest rates that are further below zero than the ECBâ&#x20AC;&#x2122;s. The deposit rate in Denmark and in Switzerland is -0.75%. In Sweden it is -1.1%. This has not caused commercial banks to swap their reserves at the central bank for cash, as theory would suggest.

the euro that matters most. That is because to do so would To suppress their currencies, itself be costly. their central banks must offer FINANCIAL BULLETIN 11thEDITION MONEY MATTERS CLUB

To settle payments, banks must move vast sums between themselves each day. The costs of counting, storing, moving and insuring lorry-loads of banknotes apparently trumps the smallish charge Europe’s central banks are levying to hold electronic deposits. The other possible use for banks’ reserves is to lend them to other banks, but they are already awash with the excess liquidity created by QE. The deposit rate at central banks sets a floor for the cost of overnight loans more generally, which is why shortterm money-market rates have also turned negative. Indeed, negative policy rates and money creation through central-bank purchases of

bonds or foreign currencies have dragged the yields on sovereign bonds into the red all over Europe (see chart). That in turn has pulled down the interest rates charged by banks for new loans. Banks have passed on some of the cost of negative rates to their corporate clients.For them, too, the cost of moving and storing large stocks of cash is prohibitive; the obvious alternative—buying safe and liquid bonds— also now comes at a cost, thanks to negative yields. This week Alternative Bank Schweiz, a tiny Swiss outfit, said it would be forced to levy negative rates on personal accounts from January. Most banks, however,

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have shielded retail customers from such charges, on the assumption they would move their accounts elsewhere. As a consequence, overall bank deposits have been stable. The banks have simply absorbed t h e cost of deposits at the central bank, which has dented profits. A further cut in the ECBâ&#x20AC;&#x2122;s deposit rate of 0.2 percentage points could squeeze the net profits of European banks by 6%, according to Autonomous Research. As interest rates creep further into the red, economistsâ&#x20AC;&#x2122; prescriptions have become bolder. In a speech in

September Andy Haldane, the chief economist of the Bank of England, outlined a range of options to allow rates to go lower still. The most radical would be to get rid of the mattress option by abolishing cash altogether. Ken Rogoff of Harvard University calculates that there is $4,000 of currency in circulation for every person in America. Much of it is used to hide transactions from tax authorities or the police. Abolishing it would curb such activities, as well as helping central bankers. Yet depositors might still find ways to safeguard their savings. Switching to foreign currency or precious metals would be an

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obvious option. As Kenneth Garbade and Jamie McAndrews of the Federal Reserve Bank of New York point out, taxpayers could make advance payments to the taxman and subsequently claim them back. Depositors could withdraw funds in the form of bankersâ&#x20AC;&#x2122; drafts (certified cheques) to use as a store of value. Such drafts might even become a form of parallel currency, since they are transferable. Any form of pre-paid card, such as urban-transport passes, gift vouchers or mobile-phone SIMs could double up as zero-yielding assets. If interest rates became deeply negative, it would turn business conventions upside down. Companies would seek to make payments quickly and receive them slowly. Their inventories would grow fatter. In practice, euro-zone banks are the ones on the front-line of negative rates. That is sparking worries that, if rates go too low, they might harm the economy. Banks that are nervous about the stability of their deposits are less likely to lend, says Huw van Steenis of Morgan Stanley, an investment bank. Yet pushing rates lower still is also likely further to weaken the euro against the dollar, especially as the Federal Reserve seems set to raise its main interest rate on December 16th.

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That may even be the ECB’s main motive—just as suppressing their currencies is the explicit aim of the other members of the negative-rate club.

By Aastha

“MERGERS AND ACQUISITIONS”

here are many ‘ifs and buts’ in this topic –are mergers and acquisitions the same or they appear to be different..so on and so forth. To answer all these questions , one should know what exactly ‘mergers and acquisition’ is. Mergers and Acquisitions are two different concepts of strategic management used by companies and got popular in the year 1988.

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What is ‘MERGER’? In Merger, two companies voluntarily agree to combine their operations into a single entity. The combining of two or more companies, generally by offering the stockholders of one company securities in the acquiring company in exchange for the surrender of their stock is known as ‘merger’. What is ‘Acquistion’? One company overtakes or purchase another company, sometimes without the consent of another company. The company acquires 100% or nearly 100% of assets of the acquired company. What makes a company to merge with or acquire another company? The reasons are as follows: 1. desire to compete or survive in the market. 2. to gain market strength, to limit the competitor’s power 3. To make access to the market in a more effective manner 4. helps companies to lower the costs by using same production facilities and transferring technologies. Merger &Acquisition is a very good option for the

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companies that want to accelerate its growth and expand its business operations by adding product profiles or operations of other company. Diversification of business is a very used strategy for accelerating growth nowadays. By merging, companies do have a lot of advantages in the market over other smaller companies. It creates more shared decision making models where it gets easy to resolve staff issues. It provides more resources to the company, better skills and talent base, reduces commercial risks, good contacts in the markets and a competitive edge over other competing firms. Acquisition helps as a saver for the company

which faces downfall. EXAMPLE Tech giant Microsoft merged with Nokia in an effort to make its position in the smartphone market. FINANCIAL BULLETIN 11thEDITION MONEY MATTERS CLUB

Despite the marriage of Nokia hardware and Microsoft software, Lumia series continued to lag behind the Apple IOS and Samsung android smartphones. But on April 25, Microsoft purchased Nokia’s smartphone business for $5 billion as well as the companies patents of worth $2.18 billion. In this case, we can see that earlier two companies were merged together but after a while, when the Nokia was facing downfall, Microsoft acquired Nokia for a grand total of $7.2 billion. Besides the reason of mobile success, the merger was also motivated by the troubled financial state of Nokia’s mobile market. Microsoft not only lends a helping hand to Nokia but also proved that Microsoft is a trusted and reliable business partner. The CEO of Microsoft Steve Ballmer called the merger a “bold step into the future” and continued on saying that the deal will “accelerate the share of Microsoft and profits in the smartphone market”. Other well-known M&A’s are: • Bank of America’s merger with Fidelity Bancorp • Tata Steel takeover on Corus in 2007 Its negative side: A research indicates that the shareholders of acquired companies enjoy significant positive returns while, on average, shareholders of acquiring companies

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received a zero return. Some of these acquisition activity resulted in negative returns and a trend towards restructuring in many companies. So, there is always a dark side of everything if that is not implemented wisely.

By Aditi

â&#x20AC;&#x153;INCLUSION OF YUAN IN SDRâ&#x20AC;?

What is SDR?

Special Drawing Rights are supplementary foreign exchange reserves defined by the IMF(International Monetary Fund) in the year 1969. SDR is basically a currency basket which was introduced to solve the problems of liquidity in the International Market. Initially it contained four currencies U.S Dollar, Sterling Pound, Euro and Japanese Yen. IMF allows its member countries to withdraw any type of reserves within a specified limit.

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On 30, Nov2015 executive members of IMF decided to include China’s currency Yuan in the SDR. This decision has been taken after evaluating China’s performance since 5 years. For any currency to be included in SDR, the currency should be stable and transactional throughout the world. Christine Lagarde, Managing Director of the IMF, following the review meeting said, “The Executive Board’s decision to include RMB (Renminbi Yuan) in the SDR basket is an important milestone in the integration of the Chinese economy into the global financial system. It is also recognition of the progress that the Chinese authorities have made in the past years in reforming Chi-

na’s monetary and financial systems.” This major decision that is a crucial step towards reforming China will be implemented from 1st Oct, 2016. From the last couple of months China has showed a slow growth rate and has projected its growth @6.5% for the next 5 years. These inclusions will not only help China to create pace again but also to solve its International liquidity problem. China Yuan will form 10.92% of the total SDR. Steps taken by China for this inclusion. Devaluation and Upward of Yuan- From the last 6 months China has struggled a lot. A weaker domestic and international demand and an excess supply.

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DIVERSIFICATION: HOW MUCH IS TOO MUCH?

On 12 August, 2015 Central People’s Bank of China has devaluated the currency by 1.9% against dollar. The intention behind this is to in- “Don’t put all your eggs crease earning from exports. in one basket”. Dropping the basket will break all the eggs. IMF had suggested Chi- Placing each egg in a differna to upward the Yuan for in- ent basket is more diversified. clusion in SDR since China’s There is more risk of losing currency was undervalued. one egg, but less risk of losing all of them. On the other On 3Nov, 2015 Central hand, having a lot of baskets People’s Bank of China had both increases costs and the upward the Yuan by 0.54% chances you will drop one. against the U.S dollar. This Some people prefer to reduce increase was the largest seen risk by taking more care of the basket. since 2005 By

Himanshu Sardana

Diversification refers to a risk management technique that mixes a wide variety of investments within a portfolio.

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The rationale behind this technique contends that

a portfolio of different kinds of investments will, on average, yield higher returns and pose a lower risk than any individual investment found within the portfolio. The problem with owning too many funds and stocks is that you can easily lose sight of the wood for the trees. You start out as an investor with an investment goal and a portfolio tailored to you and turns into a collector who has forgotten what your goals are.

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How Many Stocks You ‘Need’ Diversification seekers always want to know what the optimal number of investments is. They want to have enough holdings to moderate the volatility of their portfolios. But they don’t want too many holdings; because they think they’re diluting their possible returns and overcomplicating their investing lives. How Many Funds You ‘Need’ What about funds--how many funds do you need to have a diverse enough portfolio? To find out if more funds mute volatility the same way more stocks do, “Wide diversification M o r n i n g s t a r created hypo- is only required when in- thetical portfolios rang- vestors do not understand ing from one to 30 funds, what they are doing.” using every possible per- -Warren Buffett mutation of funds. We then calculated five-year standard deviations for each of those portfolios. Higher standard deviation can spell bigger gains or losses, while a lower number indicates a less volatile portfolio. Morningstar found that single-fund portfolios had

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the highest standard deviation, delivering either the biggest gains or the heaviest losses. So owning just one fund can be a risky bet. Add a fund and the standard deviation drops significantly. Returns are lower, but the downside is less severe, too. After seven funds, however, a portfolio’s standard deviation stays pretty much the same regardless of how many funds you add. In other words, once you own seven funds, there may be no need for more. Of course, the same caveats that apply to studies of how many stocks you need also apply here. What You Really Need: Diversification But the number of securities you own is less important than how diverse those securities are. Seven large-growth funds won’t diversify your portfolio the same way owning one large-blend fund and one small-value fund and one smallgrowth fund would. You’re looking for two things: Funds and stocks that invest in the same way, and holes in your portfolio. More than one large-growth fund or wireless stock, for example, won’t add much to your portfolio. The odds are pretty good that if you own multiple investments doing the same thing

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or you are considering investments that do the same thing, one is better than the others. Focus your money on the best choices. The bottom line: Don’t obsess over the number of securities that you own. Instead, concentrate on their diversity. By AKARSHAN BEHERA

“ETFs OR MUTUAL FUNDS?”

nvestors face a bewildering array of choices: stocks or bonds, different sectors and industries, domestic or foreign, value or growth. Deciding whether to buy a mutual fund or exchange-traded fund (ETF) may seem like a trivial consideration next to all the others, but there are key distinctions between the two types of funds that can affect how much money you make and how you make it. It’s useful, therefore, to understand the differences and how to turn them to your advantage. The Similarities FINANCIAL BULLETIN 11thEDITION MONEY MATTERS CLUB

Both mutual funds and ETFs hold portfolios of stocks and/or bonds and occasionally something more exotic, such as precious metals or commodities. They must adhere to the same regulations covering what they can own, how much can be concentrated in one or a few holdings, how much money they can borrow in relation to the portfolio size, and so on. Beyond those elements, the paths diverge. Some of the differences may seem obscure and wonky, but they can make one type of fund or the other a better fit for your needs. The Differences When you put money into a mutual fund, the transaction is with the company that manages it, either directly or through a brokerage firm. The purchase is executed at the net asset value of the fund based on its price when the market closes that day or the next if you place your order after the close of the markets. When you sell your shares, the same process occurs in reverse. But don’t be in too great a hurry. Some mutual funds assess a penalty, sometimes 1% of the shares’ value, for selling early, typically sooner than 90 days after you bought in. ETF investors don’t face that prospect. As the name suggests, ETFs trade on exchanges, just as common

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stocks do, and the other side of the trade is some other investor like you, not the fund manager. You can buy and sell at any point during a trading session at whatever the price is at the moment based on market conditions, not just at the end of the day, and there’s no minimum holding period. This is especially relevant in the case of ETFs tracking international assets, where the price of the asset hasn’t yet updated to reflect new information, but the US market’s valuation of it has. ETFs can reflect the new market reality faster than mutual funds can. Another key difference is that most ETFs are index-tracking, meaning that they try to match the returns and price movements of an index, such as the S&P 500, by assembling a portfolio that matches the index constituents as closely as possible. Mutual funds can track indexes too, but most are actively managed; in that case, the people who run them pick holdings to try to beat the index that they judge their performance against. That can get pricey. Actively managed funds must spend money on analysts, economic and industry research, company visits, and so on. That typically makes mutual funds more expensive to run — and for investors to own — than ETFs.

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Which Should You Use? Given the distinctions between the two kinds of funds which one is better for you? It depends. Each can fill certain needs. Mutual funds often make sense for investing in obscure niches, including stocks of smaller foreign companies and complex yet potentially rewarding areas like market-neutral or long/short equity funds that feature esoteric risk/reward profiles. But in most situations and for most investors who want to keep things simple, ETFs, with their combination of low costs, ease of access, and emphasis on index tracking, may hold the edge. Their ability to provide exposure to various market segments in a straightforward way makes them useful tools if your priority is to accumulate long-term wealth with a balanced, broadly diversified portfolio.

AKASH

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“What makes Oil Prices so high?”

ike many other commodities, oil prices are volatile. Unlike other commodities, they have a predictable seasonal swing, rising in the spring, and falling in autumn. That’s because future traders anticipate increased demand

for the summer vacation driving season.This explains why oil prices are lower today than they were in 2008, despite a healthier global economy and greater worldwide demand for oil. Today, there are many more outlets for investment funds. In 2008, the global markets were so risky and uncertain, investors turned from

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keep costs of imported goods constant. Oil prices started rising much sooner in 2012 than they did in 2011. The price for WTI crude oil broke above $100 a barrel on February 13, 2012, two weeks earlier than in 2011. Rising oil prices drove gas prices above $3.50 a gallon that same week. Gas prices had already breached $3.50 a gallon on the East and High oil prices are also West coasts in January. driven by a decline in the dollar. Most oil contracts By March, Brent Crude around the world are traded Oil (which is more expensive in dollars. As a result, oil-ex- than WTI) peaked at $125 porting countries usually peg a barrel. It settled down to their currency to the dollar. $95 a barrel in June, but rose When the dollar declines, $113.36 by August. Normalso do their oil revenues, but ly, oil prices drop in the fall their costs go up. Therefore, and winter. However, comOPEC must raise the price of modities futures traders were oil to maintain its profit bidding up oil prices to margins and offset what the Fedâ&#x20AC;&#x2122;s

stocks, bonds and even housing to the U.S. dollar, gold and oil. The stock market rose, the bond market was less risky, and even housing improved. Although the global market is still in slow growth mode in 2013, it is stabilizing, and that means oil prices shouldnâ&#x20AC;&#x2122;t break the peak hit in 2008.

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expansive monetary policy. They were betting the dollar would drop, which drives up oil prices. They were wrong about the dollar, but oil prices rose despite lower demand. People were concerned because gas and oil prices rose earlier than in the past. However, less and less of oil prices are due to supply and demand. More and more of it is based on the expectations of commodities markets.

By PAYAL

â&#x20AC;&#x153;Crowd fundingâ&#x20AC;?

he practice of funding a venture from the small monetary contributions from the general public i.e. crowd funding is catching up. The general public act as philanthropists, shareholders or debenture holders depending on the type of contract. Dedicated online crowd funding platforms like Lending Club and Prosper.com, Crowdcube and Seedrs have mushroomed up. Crowd funding owes its origins to independent writer/director Mark Tapio Kines who FINANCIAL BULLETIN 11thEDITION MONEY MATTERS CLUB

designed a website in 1997 for his thenunfinished first feature film Foreign correspondents. By early 1999, he had raised more than US$125,000 on the Internet from at least 25 fans, providing him with the funds to complete his film. In 2002 the “Free Blender” campaign was an early software crowdfunding precursor. The campaign aimed for open-sourcing the Blender raytracer software by collecting $100,000 from the community while offering additional benefits for donating members.

By Jatin

“Chinese Crisis and its effect on global economy” Ruchir Sharma of Morgan Stanley has long predicted a Chinese crash arising out of unparalleled leverage (total debt exceeds 240% of GDP). China’s record growth lifted all commodity exporters after 2003, and China’s slowdown has now lead to a crash in other nation’s economies as well. Asian manufacturing countries used to exporting to China have also been pulled down. Europe stopped doing well in that sector a long time ago. The US is the one big power growing fairly strongly.

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FB Maybe it can act as global buyer of last resort and stave off a global recession. Pessimists can point out that major countries have already used up anti-recession ammunition in the last seven years. China is already crashing despite huge stimulation that has created bubbles in property and stocks, which are now bursting. Inter-

est rates are already close to zero in OECD countries, so monetary policy there is like a gun without bullets. Fiscal deficits remain substantial in many countries, which show little political appetite to send them soaring again. World export demand is crashing. If neither monetary policy, fiscal policy nor exports can be used to

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economies, Rajanâ&#x20AC;&#x2122;s policies have been safeguarded from many lethal changes. Optimists can reply that stock market panic is not the same It will be interesting to see as real economic trends. The where the global economy July projection of the IMF goes from here. However, if puts world GDP growth at a the exit from emerging mardecent 3.3%, and even if that kets becomes a stampede, Innow slips to 3.0% it will be dia too will get trampled. Bure well above the recession lev- din are here for some time. el (widely viewed as 2-2.5% Risk-takers can plunge into growth).Asset markets have depressed markets, hoping to long been inflated by loose make a fortune if things turn monetary policy across the around. Risk-averse investors globe. A correction is justi- had better stay in cash. fied, but does not portend reBy cessionary doom. India is the Neha best-placed emerging market to withstand the blast from China, and become the first to recover. It has a falling fiscal and trade deficit, falling inflation and high forex reserves. India with the support

stimulate what can?

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7th Pay commission This exercise takes place once

he seventh pay commission was formed by the UPA government on 28th February, 2014. It was headed by Justice Ashok Kumar Mathur. Its objective was to produce a new pay scale for the government employees.

in every 10 years. Its recommendations will affect nearly 36 lakh central government employees as well as pensioners. On November 19, 2015, 7th Pay Commission recommended 23.55% hike in pay and allowances which will be implemented from January 1, 2016.

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Why a pay commission that affects the lives of government employees should be a matter of concern for common man. The reason is that because its recommendations will affect the government finances and in the countries finance health. There are concerns that it could challenge the governmentâ&#x20AC;&#x2122;s goal of achieving a fiscal deficit of 3.5% in the year ending in March 2017, unless India can cut spending or raise revenues. According to the finance minister, the additional financial burden on central government coffers in 2016-17 will be a shade above Rs1 lakh crore, of which Rs73, 650 crore will come from the general budget, and the remaining Rs28,450 crore from the railway budget. The

recommended hike in basic salary (including dearness allowance) stands at 16%, while that in housing rent allowance, other allowances and pensions are 138.71%, 49.79% and 23.63%, respectively. Once implemented, the minimum pay will be increased from Rs6,600 to Rs18,000 per month, which is definitely good news for the government employees at the lowest rung, while the maximum pay will be hiked from Rs80,000 to Rs2.25 lakh per month, with a salary of Rs2.5 lakh having offered to the cabinet secretary. This will in turn affect Indiaâ&#x20AC;&#x2122;s credit rating. The outflow will not only limited to the Central Exchequer alone but will have an effect on the financial health of

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states also. This will affect all over growth in salaries as the private sector will also demand for a wage rise to be compatible with government employs. This will affect the financial health of private sector which is already burdened by slow growth. It is historical fact that every pay commission brings a phase of high inflation and financial mismanagement. It remains to be seen how the government will deal with such a situation which is already burden by the allegation of intolerance and a huge economic agenda. This will force Reserve Bank to hold policy rates which will effect growth. There are many good points also associated with it. The

pay commission has looked into many allowances that has become irrational in modern times like a hair-cut allowance of Rs.5 and had recommended that as many as 50 allowances should be withdrawn. This will bring more clarity in pay structure. The commission has recommended introduction of performance-related pay for all categories of central government employees, based on annual performance appraisal reports. This will increase the efficiency of government officials. This will also release a large sum of money into the economy which will hike demand and can bring more growth in the economy. Especially consumer durables can expect to benefit most

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from this pay hike. The boost in demand will give the impetus to the economy it needs to grow. The biggest concern is that the government is trying hard to put in place GST by 1st April, 2016 and it is a historically proven fact that no government in the world came back to the power were GST was implemented because the benefits of GST are reaped only in long run but in short run it brings high inflation due to high tax rate. So if the recommendations of 7th pay commission are implemented on 1st January, 2016 and GST on 1st April, 2016 then the government and the RBI will have a tough task in hand balancing the inflation, growth and the fiscal deficit. By

Recent Monetary and Liquidity Measures by RBI On the basis of an assessment of the current and evolving macroeconomic situation, it has been decided to: Keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6.75 per cent; Keep the cash reserve ratio (CRR) of scheduled banks unchanged at 4.0 per cent of net demand and time liability (NDTL); Continue to provide liquidity under overnight repos at 0.25 per cent of bankwise NDTL at the LAF repo rate and liquidity

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under 14-day term repos as well as longer term repos of up to 0.75 per cent of NDTL of the banking system through auctions; and Continue with daily variable rate repos and reverse repos to smooth liquidity. Consequently, the reverse repo rate under the LAF will remain unchanged at 5.75 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 7.75 per cent. Assessment Since the fourth bi-monthly statement of September 2015, global growth continues to be weak. Global trade has slowed further with waning demand and oversupply in several primary commodities and industrial materials. In the United States, inventory accumulation is likely to hold down growth in Q4 of 2015. Industrial production slumped in October on cutbacks in oil drilling, while exports were undermined by the strengthening US dollar. Consumer confidence was, however, supported by the diminishing slack in the labor market. In the Euro area, high frequency indicators such as retail sales, purchasing managersâ&#x20AC;&#x2122; indices and unemployment point to an uptick in a still anemic recovery, with monetary policy expected to be increasingly supportive as risks of undershooting the inflation

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target persist. In China, slowing nominal GDP growth and high debt continue to raise concerns, especially given the overcapacity in certain sectors. Other emerging market economies (EMEs) continue to face headwinds from domestic structural constraints, shrinking trade volumes and depressed commodity prices. Global financial markets began Q4 on a calmer note after the Federal Open Market Committee stayed on hold in September. Stock markets recorded modest gains in October; major currencies recouped some ground against the US dollar and crude oil traded briefly above US $ 50 per barrel for the first time since July. Markets were also boosted by the easing of monetary policy in China and indications of further stimulus in the Euro area and Japan. Following the early November release of robust US jobs data which increased the likelihood of US monetary policy starting to normalize in December, the US dollar has appreciated significantly, and US yields have hardened. Bond markets in EMEs have generally been tracking the hardening of US yields. Currency markets in EMEs have experienced selling pressures as portfolio investors continue to exit them as an asset class. Unease in investor sentiment is likely to increase ahead of the imminent divergence in advanced economy

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monetary policy stances. On the domestic front, provisional estimates of gross value added (GVA) at basic prices for Q2 of 2015-16 rose on the back of acceleration in industrial activity. Other indicators suggest the economy is in the early stages of a recovery, though with some areas of continued weakness. Value added in agriculture and allied activities picked up on the modest increase in kharif output and timely policy interventions to stem the effects of the deficient southwest monsoon. Turning to Q3, the north-east monsoon commenced on a listless note, but the subsequent cyclonic weather has improved precipitation and raised the probability of a normal monsoon as predicted by the Indian Meteorological Department. Nevertheless, the exceptionally dry start to the season affected sowing in all major rabi crops, while the excessive rains that followed may have reduced the prospects of coffee and paddy. Overall, the current outlook for agricultural growth in 2015-16 appears moderate at best at this juncture. The Index of Industrial Production picked up in the second quarter. Early results of the Reserve Bankâ&#x20AC;&#x2122;s order books, inventories and capacity utilisation survey indicate that there was robust growth in new manufacturing

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orders in the second quarter, and finished goods inventories declined while raw materials inventories increased. Not all indicators, however, are positive. While urban consumption is showing signs of a pick-up in some areas such as passenger vehicles sales, rural demand has been weakened by two consecutive deficient monsoons and slowing construction activity. Nevertheless, new project announcements as measured by the Centre for Monitoring Indian Economy grew more strongly in the second quarter. It remains to be seen whether growing public investment can crowd in private investment on a sustained basis, despite the still-low capacity utilization. Lead indicators of services sector are mixed. The services purchasing managersâ&#x20AC;&#x2122; index increased in October 2015 on account of improvement in new business orders. Commercial vehicle sales (reflecting transportation demand) and domestic civil aviation passenger traffic accelerated year-onyear. On the other hand, tourist arrivals, cargo handled at major ports, railway freight traffic, domestic and international air cargo traffic, and measures of construction such as steel consumption slowed. Recent policy initiatives relating to rail, port and road projects are likely to improve construction activity, as will the Reserve Bankâ&#x20AC;&#x2122;s countercyclical reduction of capital charges on low income housing

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loans, albeit with gestation lags. As anticipated in our previous policy, retail inflation measured by the consumer price index (CPI) increased for the third successive month in October 2015, pushed up by a surge in the monthly momentum. Food inflation rose sharply in October, driven especially by pulses. CPI inflation excluding food, fuel, petrol and diesel also rose for three consecutive months on account of price increases in respect of housing, recreation and amusement, and personal care and effects. Within this broad category, education and health services contributed most to headline inflation. Households’ inflation expectations remain elevated although they have edged lower recently, perhaps in response to lower prices of petrol and diesel. Rural wage growth, as also corporate staff costs, remain subdued. Underlying liquidity conditions tightened in October-November with the festival season draining currency from the system and some slowdown in government expenditure. In response, the Reserve Bank conducted variable rate repo and reverse repo auctions of various tenors in addition to regular 14-day variable rate repo. As a result, average net daily liquidity absorptions of ₹ 119 billion in Q2 gave way to average daily net injection of ₹ 372 billion in

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October, which scaled up to â&#x201A;š 856 billion in November. Money market rates remained around the policy repo rate â&#x20AC;&#x201C; only rising slightly in the second week of November at the height of festival currency demand. Bank credit in the form of personal loans grew strongly as did non-bank financing flows particularly through commercial paper, public equity issues and housing finance. In the external sector, exports contracted for the eleventh month in a row to October, indicative of the persisting weakness in global trade. Excluding petroleum products (PoL), however, the decline in exports was more moderate and early signs of a turnaround are visible in respect of readymade garments, drugs and pharmaceuticals and electronics. With global commodity prices, especially those of crude, softening further, both PoL and non-PoL exports continued to contract, with the latter shrinking for the fourth consecutive month. The decline in bullion imports despite the festival season helped narrow the trade deficit in October as well as over the financial year so far, moderating the current account deficit further. Net foreign direct investment (FDI), external commercial borrowings and accretions to non-resident deposits have risen in relation to last year; however, portfolio outflows from both debt and

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equity segments rose in November. During 2015-16 (up to November 20), there has been an accretion of US$ 10.8 billion to the foreign exchange reserves. Policy Stance and Rationale In the bi-monthly monetary policy statement of September, the Reserve Bank assessed that the inflation target for January 2016 at 6 per cent was within reach. Accordingly, it front-loaded its policy action in response to weak domestic and global demand that were holding back investment, while noting that structural reforms and productivity improvements would continue to provide the main impetus for sustainable growth. Since then, inflation has turned up as anticipated, and is expected to rise further until December before plateauing. Although the seasonal moderation in prices of vegetables and fruits is expected to provide some respite, the El Nino induced shortening of winter may limit this effect. The early indications of rabi sowing together with low reservoir levels suggest that astute supply management by the central government, including close coordination with State governments, is necessary to minimize any

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shortfall in the rabi crop. While oil prices, barring geopolitical shocks, are expected to remain benign for a few quarters more, the uptick of CPI inflation excluding food and fuel for two months in succession warrants vigilance. Taking all this into consideration, inflation is expected to broadly follow the path set out in the September review with risks slightly to the downside (Chart 1).

The outlook for agriculture is subdued, in view of both rabi and kharif prospects being hit by monsoon vagaries. While there are areas of robust growth in manufacturing such as capital goods and passenger cars, weak rural and external demand holds back stronger overall FINANCIAL BULLETIN 11thEDITION MONEY MATTERS CLUB

growth. Similarly, while prospects for a revival in service sector activity have been boosted by optimism on new business, pockets of lack lustre activity such as construction weigh on the overall outlook. The step-up in public capital spending and the easing stance of monetary policy provide the enabling environment for a revival in private investment demand, supported by easing input prices and improving conditions for doing business. The growth projection for 2015-16 has accordingly been kept unchanged at 7.4 per cent with a mild downside bias (Chart 2).

The Reserve Bank will follow developments on commodity prices, especially food and oil, even while tracking inflationary expectations and external FINANCIAL BULLETIN 11thEDITION MONEY MATTERS CLUB

developments. The implementation of the Pay Commission proposals, and its effect on wages and rents, will also be a factor in the Reserve Bankâ&#x20AC;&#x2122;s future deliberations, though its direct effect on aggregate demand is likely to be offset by appropriate budgetary tightening as the Government stays on the fiscal consolidation path. In the meantime, since the rate reduction cycle that commenced in January, less than half of the cumulative policy repo rate reduction of 125 bps has been transmitted by banks. The median base lending rate has declined only by 60 bps. The Reserve Bank will shortly finalise the methodology for determining the base rate based on the marginal cost of funds, which all banks will move to. The Government is examining linking small savings interest rates to market interest rates. These moves should further help transmission of policy rates into lending rates. In addition, the on-going clean-up of bank balance sheets will help create room for fresh lending. The Reserve Bank will use the space for further accommodation, when available, while keeping the economy anchored to the projected disinflation path that should take inflation down to 5 per cent by March 2017.

By Divya

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taries on the 2008 economic 9 Movies Every Investor/ meltdown and the fall of the Trader Must Watch Lehman Brothers. It’s a movie that shakes you to the core What kind of a monster and reveals some pretty undoesn’t love watching a good nerving facts. movie? So I have compiled a list There is a fair possibility Wall Street that we have missed out on This Charlie Sheen and Mia few of them so please feel chael Douglas classic is a free to add in your cinemat- movie that wakes up the ic delights to this list in the greed in all of us. A lot of you comments. should already have seen this before. And it’s a great watch Boiler Room for any day. One movie you would love watching if you have ever Capitalism: A Love Story been in the ‘broking’ or sell- A movie that talks about ing business. From the roots where our financial systems of hustling all the way to stock have brought us today. It’s a market frauds, it’s a complete good throwback and a wonpackage. derful reality check especially for the new generation. Inside Job One of the finest documen-

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Wall Street Money Never Sleep A sequel to the earlier Wall Street, this movie is the modern rendition of the classic. With Michael Douglas once again, we are sure you’ll relate to it just as much as any ferocious trader would. Rogue Trader A documentary based on Nick Leeson, the man famous behind the Barings Bank Bankruptcy in 1995. Surprisingly enough, the movie is produced by Nick Leeson himself and he also audaciously wrote a book, “Rogue Trader: How I Brought Down Barings Bank and Shook the Financial World”.

Too Big To Fail Too Big to Fail is another movie shot in the aftermath of the 2008 fallout and focuses on how key people in the government were trying to save the Lehman Brothers from collapsing. It’s an interesting, realistic take on the matter and gives a very critical bird’s eye view of the financial system. Margin Call A 24 hour fast paced run down of an impending crisis onto a trading firm, Margin call has some fine actors and great attention to detail. It has great meat for traders who have been into risk management before and otherwise is a great watch as well.

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Wolf of Wall Street This is the movie that changed the way the world looked at traders and the way it looked at Leonardo DiCaprio. Crass, brutal, abusive but explicitly honest, this is must watch.

By Archit

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