Volume 21, Issue 1
1
The Financial Bulletin
FROM THE EDITOR
Money Matters Club IBS,Hyderabad Established—2005
Dear Readers
Editorial Enquiries Contact Money Matters Club Contact No +919948564613, +919573462013 Advisor Dr V Narendra Faculty Co-ordinator Dr. S Vijayalaxmi Student Co-ordinator & Editor Kanchan Kumar Roy Advertising Contacts Vikas Singh +9573462013
We congratulate the winner of the “Article of the month” award, Sanket Narkhede from MET’s Institute of Management ,Mumbai for his article “Buy and Hold is eternal” .
In this edition of February 2013, we have included a wide variety of topics. We looked into the present status of the Indian Economy and how to put it back on track. Also, there is a discussion on Quantitative Easing and interesting facts about it. What is Micro-insurance and what are the challenges it is facing? What is the current situation of ecommerce? We also tried to find out the answers to the question, whether investment is only about buying and holding or about other avenues too. Go through this brilliant collection of articles from the best minds of Indian B-schools and find out lots of interesting facts.
Can we help?
Newsletter Editor
Kanchan Kumar Roy
For any enquiries ,subscription and advertisement email us @ mmcnewsletter1@gmail.com You can log into http://moneymattersclub.weebly.com/
All rights reserved. Money Matters Club, The official Club of IBS Hyderabad.
Finance
Visit us at for further information.
2
The Financial Bulletin February 2013
CONTENTS 04 E-Commerce Effervescence -by Chandra Sekhar, ABV-IIITM Gwalior, M.P
06 State Of Indian Economy -by Nilaya Mitash Shankar, Department Of Management Studies, IIT Roorkee
04 E-Commerce Effervescence
10 Buy and Hold is eternal -by Sanket Narkhede- MET’s institute of Management, Mumbai
13 Steps to put Economy back on track -by Suraj Mansaram Munghate, Welingkar Institute of Management Development & Research, Mumbai
17 Challenges of Micro-insurance in 06
10
India –by Vishnupriya Sundararajan, Welingkar Institute of Management Development and Research, Mumbai
20 QUANTITATIVE EASING -by Rajat Garg, NMIMS, Mumbai
QUANTITATIVE EASING
3
20
E–Commerce effervescence Proceeding to this year, there were several hunch- business, in spite of relatively unproven gains. This es about the e-commerce effervescence finally trend has given rise to excessive competition in the portals e-commerce scene with margins thinning out, and like Taggle.com going out of business. Many feel firms being forced to compete on price. With that the e-commerce effervescence which is being customer acquisitions being done at the cost of erupting, especially with e-commerce
geared
up
expansion
with
will
excessive
pop
cash
for selling below cost price, the industry may very well go into price wars in the future. Furthermore,
one day much like the
countries
dot-com
riding on the e-commerce
efferves-
like
are
cence of 2000, while
wave
others are of the view
other capabilities like supply
that e-commerce is
chain. This may prove fatal
still the next big thing.
as the e-commerce business
One of the primary
grows
reasons
consumer mindset in these
regard
that this
many to
without
India
bigger.
enhancing
Also,
the
countries might prevent the
be
effervescence is the sky high valuations of e-commerce companies to actually realize all that e-commerce firms. Flipkart, India’s answer to they are set out to achieve, with a Big Bazaar still Amazon.com is valued at an astonishing $1 billion being overly preferred to a Flipkart. All these while having top lines of only about $10 million and factors taken together are contributing in building the company yet to break even. This over-valuation up the e-commerce effervescence. Yet, the may often give poor insights to investors as can be advantages of electronic commerce are seen from the example of US e-tailor Pets.com that undeniable. E-commerce gives a improvement on had its valuation reach astronomical heights only to the previous model of brick-and-mortar quietly collapse and expire in a few years. The companies, both on margin and reach. It has valuations can be attributed to accounting practices provided a quick and convenient way of employed by some e-commerce firms based on the exchanging goods and services both regionally and concept of future accrual of money. Thus with a globally. low cost of entry attached to the e-commerce One of the main reasons that one feels the space, more venture capitalists and private e-commerce scene would not emulate the entrepreneurs
are
funding
the
e-commerce dot-com 4
effervescence
is
the
exponential
penetration of internet into the emerging markets. It would be a constant weeding out of the weaker is now an important part of the lives of north of 50 players, especially in the aftermath of the million users in India as compared to the limited economic slowdown. Companies which have access it had back in 2000. The number of online deeper pockets might be more able and would be transactions taking place each day has increased likelier to survive. However, simply competing on many folds, and there has been a marked increase in price won’t do, as most firms would be offering its straddle, with e-commerce firms even venturing similar price ranges. The e-commerce firms that into niche categories. The e-commerce market in are able to differentiate themselves from others India is growing at an estimated 40-45% on a CAGR based on other offerings and create a brand basis vis-à -vis a global growth rate of 8-10%, and is positioning for them shall come out on top. We likely to touch Rs 50,000 crore this year. Even in the may conclude that though some weak players US, online retail sales are forecast to become more may fade away, the e-commerce industry will than half of all sales by 20131. Yet many believe the continue to thrive. The proverbial effervescence e-commerce industry to be still in the nascent stage, will not pop anytime soon. Coupled with a rapid and having a huge untapped market. The main growth rate and a transition in customer attitudes drivers of this projected growth are attributed to the towards online transactions, e-commerce is ever growing internet penetration, the fourth- poised to eventually change the way customers quarter still remaining a dominant cyber-season, the purchase things. success of flash sales sites such as Gilt, and customer trends shifting towards mobile shopping and social commerce. With startup e-commerce companies having rapidly stolen market share from traditional retailers in the past decade, many of these traditional players are being forced to deploy their own commerce websites. Hence, the future holds not only growth for pure-click companies, but also a transition from brick-and-mortar companies into the online space. Although these combined factors would only help boost the e-commerce market, there needs to be a consolidation and correction in the valuation of some of the players, so as to give a realistic estimate of future returns. The way forward for the e-commerce industry would be tricky, and even with a considerable amount of growth, there 5
Chandra Sekhar ABV - Indian Institute of Information Technology & Management, Gwalior
State Of Indian Economy India’s story in the contemporary world is nothing sort of mythology where the devil refuses to die and reappear again and again. India after independence till 1991 (i.e. In the pre - liberalization era) has witnessed protectionism, socialism, mind-bending red tape and suffocating bureaucracy. In the post liberalization period (since 1991) India has moved forward in a great way and today India is hailed as a land of rising opportunity and budding entrepreneurs. However of late this turbocharged growth has been reduced to rickshaw rate of growth of around 6% coupled with untamed inflation and alarming fiscal deficit level. The Indian rupee has been depreciated by 18% in 2012. Industry and infrastructure Infrastructure is the sum total of rail, road, transport, refining, coal, electricity, electricity, communication, cement etc. It is the base upon which growth takes place. It is the growth driving engine as infrastructure needs to be developed prior to any growth taking place. It is a dynamic concept which involves continuous improvement over the past. In other words it leaves no scope for reactive maintenance but has to be proactive maintenance. The world economic forum has ranked India at 89th position among 139 countries which indicates abysmal India infrastructure vis a vis global standard.
There is a plethora of problems such as land acquisition issues, lack of inter ministerial coordination, red-tapism, less foreign investment, environmental issue etc. Therefore the role of government becomes crucial. Unfortunately government seems to be devoid of new ideas and approaches. Time is running out and India needs innovative, out of the box solutions to the problems. The starting point would be a separate budget for infrastructure with railway clubbed into it. Public private partnership can also be a way forward. The problem has been highlighted by Manmohan Singh, prime minister of India,
“Expanding investment in infrastructure can play an important counter cyclical role. Projects and 6
Programs [are] to be reviewed in the area of
sufficiency to million of poor apart from strength-
infrastructure development, including pure
ening democracy at the grass root level. The
Public private partnerships, to ensure that
scheme came into being during UPA 1 but it failed
their implementation is expedited and does
to achieve its intended target mainly because of poor implementation, wrong design etc. The
not suffer from [the] fund crunch.�
scheme in its 2.0 reincarnation has tried to overcome Social sector Social
these
flaws
by
using
creative
destruction as now it will focus on bottom up
schemes
are
interlocked
with
any
approach and at the block level from where
economy. Its existence in India is mainly due to
demand
massive poverty. Though Indian has achieved
implemented.
admirable success in economic front but the
program of UPA 2 which is aimed at the massive
same is not true when it comes to the social
financial inclusion, providing cash directly to the
sector. In India large chunk of the population
intended beneficiary in his bank account. It will
depends upon the government spending to
obliterate
sustain themselves. Since independence many
massively on subsidies. Overall India is on right
social schemes have been implemented to uplift
track. There are some achievements such as child
the state of well being of the poor. But there has
malnutrition was reduced by 8% between 1993
always been a mismatch between outlay and
and 2005, average age increasing to 64 in 2009
outcome. In recent years the world largest
from 58 in 1990 and so on. However a lot more is
employment
been
required. One way is to give subsidy on the income
implemented in India, MNREGA, the scheme
status. This way we would also work on reducing
aimed
poverty.
at
guarantee
providing
scheme
rural
has
livelihood,
self 7
generators ADHAAR
ghost
and is
beneficiary
programs another
thus
get
flagship
will
save
Agriculture and Food Agriculture has traditionally been the backbone of Indian Economy. It employs roughly half of the labor force and accounts for around 14.7 % of GDP in 2011-12. It is the broadest economic sector demography wise and plays a major role in the overall socioeconomic development of India. Agriculture derives its importance from the fact that high agriculture growth lead to mute inflation and one rupee of contribution to GDP from farming is two times effective as other interventions in removing rural poverty. Also, strong agriculture growth leads to robust supply and demand for other sectors. The importance of this sector is highlighted in the World Bank country report 2011 for India which says ,
"‌.. it will be essential for India to build a productive, competitive, and diversified agricultural sector and facilitate rural, non-farm entrepreneurship and employment. Encouraging policies that promote competition in agricultural marketing will ensure that
Service sector After liberalization it became the main sector of the Indian economy with 58% contribution to GDP. It ranges from the IT to communication to banking to the barber. India’s service sector was resilient even during recession (grown at 10% against GDP of
8
farmers receive better prices."
6.7%) due to the introduction of sixth pay commission and increased social expenditure. It not only provides a critical contribution to the GDP but is also net earner of foreign exchange. It has attracted highest equity flow of 20.1%. Hence service sector requires unhindered growth and stability for overall growth. Overall the economic outlook of India looks satisfying. However there is a need to focus on agriculture and infrastructure building. These sectors are future of employee generation, reducing economic and
inequality
securing a place in world top nations.
Nilaya Mitash Shanker, Department Of Management Studies, IIT Roorkee
9
COVER STORY
Buy and Hold is eternal Investment is anything that is purchase today
to investors for high returns. In stock investment,
which will appreciate or give good return in the
there are many strategies employed depending
future. A quote from the legendary investor War-
on the need and investment style of each
ren Buffet , “The Stock Market is designed to
investor. The approach generally used in stock
transfer money from the Active to the Patient”. If
investment should be “buy and hold strategy”
time is given in the Stock market by holding a good
which can offer wealth in the long run.
stock , things are bound to blossom .This is the rule
Taking into consideration the benefits of Buy
of the market since its inception, It has rewarded a
and Hold strategy, it can build up the wealth to
patient investor more than a impatient trader.
investors who have not much experience in
Time frame is not the only factor which has played
stock, time to obtain the information of stock
a important role in the return of investment but
and time in trading. To apply this strategy, one
also holding the right company for the right time
should choose a good company that can be
has made the difference.
assured to generate the potential growth or profitability and then, buy the shares and hold them for long period. So, this strategy is safer for investors because the price fluctuation is not concerned. And also investors can gain from tax and commission savings. But things are changing due to volatility in the market has increased in the past decade as world stock markets has seen some big crashes which made investor loose their faith on long term investing. As due to crash in the markets stock prices had gone below
Typically this long-term investment is expected to be held for at least 10 years or through an entire
its expectation, which made the investor loose their money.
business cycle. There are various investments opportunities which investors can invest for the growth such as stock, bond, deposit, insurance,
Looking at the volatility in the recent past ,
gold etc. Mostly, the investors will invest in stock
traders have opted for short term gain method
market because it can furnish more opportunities
to achieve good amount of profit in a short span
10
of time. People do not want to stay invested in a
around 1990-91 when Sensex was around 4500
particular stock for more than few months. If you
mark and after almost 10 years in 1999-2000
do so you would be called Benjamin Graham of
Sensex was around the same mark i.e.4500-
the new era. As per the recent article people say,
4600.If to look at kind of returns did market
“Buy and hold strategy is dead”. It is no more
gave would seem to be very low as the index
widely used as the markets have turned highly
traded in a narrow range. Also there was a
volatile these days. The average holding period for
slowdown in the economic conditions. It was the
the S&P 500 SPDR (SPY) and the ETF which tracks
time when big scams like Harshad Mehta scam
the benchmark for U.S. stocks, is less than five
came forward which made the condition more
days. After three bear markets in the last decade,
difficult. But these 10 years were actually when
individual investors - especially baby boomers
people made big money. This was the time when
looking toward
people like Rakesh
retirement
-
Jhunjhunwala set a
don't have the
base to become “The
risk tolerance
legendary investor of
to be burned
India”.
once again. In
superb
markets differ-
which later turned
ent investment
out
styles
multibaggers.
go
in
By
holding
companies
to
be
and out of favour every so often, so to be a long term investor,
As it is rightly said “Time is the best
one needs a ton of patience and very thick skin.
medicine”, to overcome past memories. The same applies to markets as well. Time given to
Even when people think long term investment
good companies will help to overcome the
strategy is no more alive. Views of legendary
uncertainties or the volatility of the market.
investors like Warren Buffet ,Rakesh Jhunjhunwala
Volatility is an inseparable part of the market it
are highly respected. People stay away from long
was there in the past and it will be there in the
term investments due to volatility in the markets.
future as well because at the end it is mass
But actually long term investment helps the stocks
psychology. All people have different opinions
to overcome the volatility in the market over the
about the same subject. Likewise they have for
period of time and start a good run-up once things
markets, few prefer to buy the stock while
become a bit favourable. If to take few examples
others prefer to sell and remaining stay
in the Indian stock market .It would be the time
confused. This altogether adds up to volatility. 11
Company name
Price (Date)
Price (Date)
Wockhardt
86 - Feb2009
1738 - Nov2012
VIP Industries
135 - Nov-2009
949 - Sep 2011
Titan Industries
780 - feb-2009
4035 - June 2011
ACC
397 – Nov - 2008
1378 - Nov 2012
Tata Motors
135 - Jan-2009
1365 - Jan 2011
Below are few of the stocks which almost gave phenomenal return in just 3years, Only reason was, “good company bought at good price”. As there can be many examples which show completely opposite picture than the above but there are always some hidden reason behind it. The challenge here is not to overcome the volatile markets but to find great companies at good price and hold them for a good time which is bound to give good returns in future. Because only time has the power to overcome the past events and create new historical highs for that one needs patience and that is why “Buy and Hold is eternal”.
Sanket Narkhede MET’s Institute of Management ,Mumbai
12
affected Indian Economy. As no Economy works
ABSTRACT
in isolation, so is the case with India. Because of
The world economy is coming back on track
the Global slowdown and recession, the rate of
slowly and India seems to be the future power of
growth of Indian Economy is decreased. But,
the world economy. The eyes of the world are on
now the situation is changing. As the global
us. But we have to see ourselves that where are
market is recovering, Indian Economy is also
we? What preventive measures need to be taken
trying to regain its original position as the most
to prove ourselves in the world market? India is
attractive destination for investment. For this
having the potential and power to be the future
purpose,
nation but it has to take the necessary steps to
certain major steps are needed to be taken
travel the royal path
and
followed
efficiently.
to success.
When any company want to enter into Indian market, Indian
and
is the “Availability of Land” with necessary facilities. The
attractive
government of India has
destinations for the
made
business and the investment opportunities are
natural resources and strong fundamentals.
Current
of
question
Indian
fundamentals,
strong
remains
for
the
facilities.
So,
government must provide the required facilities
economy has been characterized by optimistic and
Economic
Investment (FDI) for the growth. But, the
macro-economic
scenario
Special
Zones (SEZ) and also allowed Foreign Direct
huge due to huge manpower base, diversified
progress
first
foremost thing that it wants
Economy
is one of the most
growth
the
as early as possible. Also government need to
macro-economic
give more than fair and long term compensation
particularly with tangible
for those who are losing their lands.
towards fiscal consolidation and a
“Infrastructure” is considered as a back-
strong balance of payments position.
bone of any Economy, especially for emerging economies like India. Higher spend on infra However, considering the current scenario
projects creates a cascading multiplier effect in
in the world market, the global slowdown has 13
the economy, driving GDP growth. In India, the
(PPP) model. Another thing is that the reversal
slower project execution and delay in recovery of receivables has resulted in an elongated working capital cycle leading to highly leveraged balance sheets. Thus, the government of India has to make pertinent efforts to remove bottlenecks
that
are
delaying
infrastructure projects in India. Positive initiatives by the government - like steps to revive investment in the country with the aim to bring GDP growth back on track, checking on subsidies on petroleum products by hiking fuel prices in the phased manner, restructuring of SEBs, direct
of interest rate cycle will help reduce costs and
monitoring of infrastructure projects by the
improve cash flow and profitability for the
PMO, and facilitating fund flow for infrastruc-
infrastructure companies. Rationalization of
ture projects are conditions providing an
interest rates is also likely to revive the slowing
additional tailwind for revival of the sector. The
economy fuelling capex cycle and improve
government has recently cleared way for setting
revenue visibility for infrastructure companies.
up of National Investment Board (NIB), now renamed as Cabinet Committee on Investments (CCI) as a window to grant necessary clearances
“Agriculture” plays a very important role
such as mining lease, forest clearances, and
in Indian Economy. The government of India
environmental management plan and land
should aim that no person should sleep hungry.
acquisition for accelerating commencement of
For that purpose “Right To Food” is important.
mining. This is expected to act as a major
Government has passed it recently. However,
accelerator for the economy. The XII th Five Year
government should aim to the following that,
plan (2012-17) envisages investments of about
for starters, the government should free the
$ 1 trillion in infrastructure projects and is look-
farmers from the tyranny of middlemen, by
ing for private sector participation to fund half
reforming the rent seeking, anti-farmer mandi
of this through Public – Private Partnership
system, at least in states governed by UPA 14
alliance, thereby creating a demonstration effect,
world’s largest migration may takes place over
where other states would be shamed into
the next 10 years where the people move from
following.
villages to Indian cities. So, the government must
In India, about 72 % age of population lives in the Rural area. Thus, the government must
be ready and build a regulatory infrastructure to oversee the urbanization.
make efforts to pull out the rural people out of
“Energy” is also a very determining factor
Agriculture by giving Manufacturing Industry a
of the growth of any nation. In India, with the
policy push. Basically, Agriculture contributes
increase in population, the government is unable
about 14 % to GDP but 60 % of the Indians are
to satisfy the Energy demand of the people. So,
dependent on it. So, if manufacturing industry is
this has to be changed. The government must take efforts to ensure long term energy security. In the areas, like- Jaitapur, Maharashtra, where people are opposing Energy projects, the government must take initiatives, arrange the campaigns, to make people aware about the importance of Energy because if energy is not supplied in required amount to industrial units or household use, then it will definitely affect the performance of company which ultimately
getting a push, definitely it will attract the labour. “Entrepreneurship”
also
plays
a
result in bad performance of the economy of the
very
nation.
important role in the developing countries like
“Income Tax” helps the government to
India. So, government must take efforts, provide
get the availability of the capital. So, government
policies and encourage entrepreneurs to set up
must pass the “Goods and Services Tax Bill” to
units that serve the
ensure
tax
world,
efficiency.
The
contribute
to
GDP, and absorb the
government
surplus
also
labour.
pass
must the
“Direct Taxes Code Bill” that will end all As stated earlier
uncertainty
that about 72 % of
on
Taxes. Also, government must ensure that all the
population lives in the rural India and 60 % of the population is dependent on the Agriculture, so the 15
companies and persons, who are eligible for
taxes, should pay it within time limit and also ensure that no one plays any fraud by avoiding taxes. “Interest Rate” is the rate charged for the use of money. Most of the companies take loans from the banks for its start-up. When companies earn profit, they have to pay back the loan. So, if the interest rate is high, then they will have to pay large amount, which companies don’t want. So, the government must show respect to the global capital and cut the interest rates drastically so that financial costs don’t deter the companies from expanding and households from continuing to drive the GDP growth. “Information Technology” plays a vital role in economy. As the technology gets developed at the rapid rate, the Indian IT companies are contributing much to the economy. However, government must encourage the Indian IT companies to open their “Research & Development” (R & D) centers in India itself so that the real talent will not go outside. The economy of any nation, GDP of any nation depends upon the “Better Governance”. Unless and until you are having best people at the best place, you cannot grow further. So, government must appoint the obedient and hard-working persons and throw out the corrupted persons as well as politicians. Because of the Corruptions and scams, the image of any nation damages in the mind of our own peoples as well as in the mind of others. So, government must take serious efforts to make “Corruption” at a zero tolerance zone. “Debt Free economy” is considered to be the best economy in the world. India is having a debt of about $ 300 billion that need to be repaid. So the government must take serious efforts for the repayment of the loan to World Bank, IMF, etc. Getting out of debt is good for the economy. It frees up money to spend on new goods and services, rather than only continuously servicing loans for past purchases. So if government follows and take the serious actions immediately, then India can definitely become the future of the world market. Definitely, India is having the power and potential to become the leader in the world economy.
Suraj M Munghate. Welingkar Institute of Management Develop16
“Micro-insurance is not a specific product or
low-
product line. It is also not limited to a specific
Regulatory and Development Authority has
provider type. Micro-insurance is the provision of
come
cover
micro-insurance. There is also a regulation for
to
a
specific market
segment, i.e.,
income
up
earners,
with
the
regulation
Insurance
regarding
low-income persons.�
insurers to mandatorily cover the rural
~ IAIS Issues Paper (2007)
population as well as fulfill the social sector obligation laid down by IRDA.
Micro-insurance is specifically designed for the
India is one of the first countries to have
protection of low-income people, with affordable
come up with micro-insurance regulation.
insurance products to help them cope with and recover from common risks. It is a market-based
A very big boost to the micro-insurance sector
mechanism that promises to support sustainable
is the introduction of Rashtriya Swasthya
livelihoods by empowering people to adapt and
Bima Yojana on 1st April 2008. It is a public
withstand stress.
private partnership scheme to provide health
Over the years, micro-insurance as a concept has
insurance coverage for Below Poverty Line
evolved and today insurance companies view this
(BPL) families launched by Ministry of Labour
sector as a big potential market and are coming up
and Employment, Government of India. The
with innovative ways to tap this market.
objective of RSBY is to provide protection to BPL households from financial liabilities
The problem of the rural population as well as the
arising out of health shocks that involve
low income group is unique and they have a lot
hospitalization.
more risks. In order to protect the interest of these
Also the private insurance companies are
17
taking forward this industry, thanks to the vast
micro-insurance
potential of this market and the regulation.
Prudential Life Insurance is 154%. (Claim ratio
However this sector is not without its share of
is the total amount of claims paid divided by
challenges and problems.
premium earned). A claim ratio of more than 100%
policy
offered
by
ICICI
indicates loss to the insurer.
Designing of the products: Micro-insurance is not just a scaled down version of regular insurance. The product and processes need to be
Reaching the customers: Reaching the rural
completely
reengineered
meet
the
customer is difficult as they are scattered
of
the
across India. However it is extremely important
low-income market. It is very difficult to design
to improve accessibility to remote customers
innovative products to match the requirements
and help ease the process of premium
of the heterogeneous needs.
collection and claims payment. Hence insurers
characteristics
and
to
preferences
need to look for innovative ways of distribution Pricing:
Pricing
of
these
micro-insurance
of the products apart from the traditional
products is difficult as there is lack of enough re-
methods of tie-ups with NGOs or Micro
liable statistical data. Also the pricing should be
Finance
such that there is a fine balance between the
Insurance has launched its micro-insurance
high costs and thin margin.
product ‘Max Vijay’ and it predominantly
Institutions. For instance, Max Life
focuses on retailer network for its distribution. Low margin business: Even though there is a
e.g. telecom, grocery and retail stores.
huge market, the margins are very thin. The very
Business
nature of micro-insurance is that the insured
technology can ease this problem.
correspondents
and
use
of
cannot pay high premiums and so premiums have
to
be
very
low.
This
makes
the
Low level of literacy and lack of awareness of
micro-insurance sector unattractive. The insurers
insurance products: A big problem for the
will be able to make profits only by high vol-
insurers is the lack of financial awareness on
umes.
the part of the consumers. Not just that, the premium payment is viewed as an additional
High Claim Ratio: The micro-insurance products
expense and not a risk cover. Hence educating
typically have a high claim ratio. The frequency
the consumers and creating awareness about
of claims also tends to be higher, hence straining
the insurance products becomes essential
the profitability of the insurer. For instance, the
which in turn adds to the cost of the insurer.
claim
ratio
of
Sarv
Jan
Suraksha
a 18
Consumer Awareness by ICICI Prudential
Conclusion: The key to growth of the insurance sector is the usage of information technology in all forms of insurance including micro-insurance. The use of Aadhar cards could be a good step in bringing down the difficulties of premium collection and claim payments. Technology can help significantly reduce costs and improve the viability of micro-insurance.
Vishnupriya Sundararajan Welingkar Institute of Management Development and Research, Mumbai
19
QUANTITATIVE EASING Quantitative easing (QE) is a part of monetary
institutions.
policy used by central banks to boost the national economy when the policy of modifying the interest
Quantitative Easing and Monetary policy can be
rates becomes ineffective.
implemented where the central bank controls the
country’s
currency.
For
example,
in
The Central bank buys financial assets from the
Eurozone, the central banks of different coun-
financial institutions and banks in order to inject a
tries cannot unilaterally expand their money
fixed amount of money into the economy. This
supply as the ‘European Central Bank’ controls
results in an increase in the bank’s reserves and
the monetary policy of Eurozone countries.
since demand for assets increases their prices increase
which
What are QE1, QE2, and
lowers
QE3
their yield.
In 2010, "QE2" became a ‘Quantitative Easing’ can
"ubiquitous
be used to achieve a
referring to second round of
target level of inflation.
Quantitative Easing by cen-
The policy aims to ensure
tral banks in the United
that inflation does not fall
States. Retrospectively, the
below that level. The risks
round
of
byname"
Quantitative
involved in the implementation of QE policy are:-
Easing preceding QE2 is referred as "QE1" and
Policy being more effective than intended in acting
similarly third round of Quantitative Easing
against deflation, leading to higher inflation.
following QE2 is referred as "QE3".
Policy not being effective enough if banks do not On November 25, 2008, QE1 was announced
lend the additional reserves.
and concluded in March of 2010. In this the Fed Consider a situation where the nominal interest
cut key interest rates to near zero and
rate is close to zero. The central bank cannot lower
purchased $175 billion of agency debt securities
the rates further as it may result in a liquidity trap.
and $1.25 trillion of mortgage-backed securities
In such a situation, the central bank may perform
in addition to purchases of Treasuries. This
‘Quantitative Easing’ by purchasing limited amount
resulted in mortgage rate dropping to as low as
of bonds and other assets from the financial
5.23% from 6.33%.
20
interest rates especially mortgage rates. On Nov 3, 2010, QE2 was announced. In this
But a careful examination shows both the
Federal Reserve announced to spend a total of
arguments to be weak and the second argument
$600 billion until the end of the second quarter of
to
2011, at a pace of $75 billion per month. The initial
experiment in monetary policy.
ironically
echo
an
unfortunate
past
reaction was fall of the dollar, but this was reversed quickly. The broad market rose much less,
The premise is that QE3 will artificially increase
and “the Information Technology sector did the
the wealth. ‘Artificial’ because productive assets
worst”.
will not become productive by increase of money supply in economy. The discussion does not even
On September 13, 2012 QE3 was announced. In
hinge on an increase in inflation that might
this, the Federal Reserve of US has decided to
depress real wages, which would improve
launch a new $40 billion a month i.e. to print US
business profits and thus justify an increase in
dollars worth $40 billion every month and using
asset prices.
them for bond purchasing program of agency mortgage-backed securities and this they will continue until at least mid-2015. According to NASDAQ, this is effectively a stimulus program which allows the Federal Reserve to print $40 billion dollars a month for an unlimited amount of time. Egan-Jones, Ratings firm, said it believes the Fed’s decision “will hurt the U.S. economy and, by extension, credit quality.” As a result the firm slashed the U.S. bond rating to AA-. According to Federal Reserve’s Chairman, Ben Bernanke, the intent of QE3 is to stimulate the
Another argument for QE3 is that pushing down
economy, which has been languishing and is now
long-term interest rates (especially mortgage
slowing further under current economic policies.
rates) will help the housing market to recover and hence strengthening the economic recovery.
Two key arguments in supporting QE3 are –
But problem with this argument is that mortgage
1) It will induce an increase in asset prices that will
rates are already very low and housing sector is
induce an increase in personal consumption by
also recovering. Also doubt is, how much more
increasing personal wealth.
can the Federal Reserve push interest rates
2) It will put downward pressure on long-term
down, and how much difference will it make to 21
housing market when so many homeowners are
including crude, which would be a "negative" for
underwater and cannot sell and unemployment,
import bill for oil importing countries like India,
already above 8%, threatens to rise?
while exports are "unlikely to be boosted significantly" as the overall economic impact
Effects of Quantitative Easing Quantitative
Easing
may be limited. Higher oil prices will keep India's is
fundamentally
a regressive redistribution program that has been boosting wealth for those already engaged in the financial sector or who already own homes, but
current account deficit "elevated". To put it simply: More Quantitative Easing is not going to move the dial much on the growth meter.
passing little along to the rest of the economy. Also lowering of interest rates may actually have negative impact on the economy as people dependent on the interest income may spend less in
response to their reduced income. However,
the Federal Reserve has assumed that the ad-
Rajat Garg
vantages of the low interest rates outweigh this
MBA-Banking, NMIMS,
effect.
Mumbai
On European Union In the European Union, World Pensions Council’s financial economists have argued that QE3-induced artificially low interest rates will have an adverse impact on pension funds in EU. As under-funding condition of pension funds, as without returns that outstrip inflation, pension investors may face the real value of their savings declining rather than racketing up over the next few years.
On India India, like EU, is unlikely to benefit too much from the Federal Reserve's new asset purchase program me. QE3 is likely to boost global commodity prices, 22
To subscribe for a personal copy do write us and keep contributing your articles @ http://moneymattersclub.weebly.com/
mmcnewsletter1@gmail.com
Send feedback at feedbackfbmmc@gmail.com
MONEY MATTERS CLUB “Beyond the realms of Finance”
All Rights reserved, Money Matters Club, The official Finance Club of IBS Hyderabad
23